WWW.EXFILE.COM, INC. -- 888-775-4789 -- BRIDGELINE SOFTWARE, INC. -- FORM 10-K
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
(Mark
One)
x
|
ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
fiscal year ended September 30, 2009
o
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from ______________ to ______________
Commission
File Number 333-139298
Bridgeline
Software, Inc.
(Exact
name of registrant as specified in its charter)
Delaware
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52-2263942
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State
or Other Jurisdiction of Incorporation
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IRS
Employer Identification No.
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10
Sixth Road
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Woburn,
Massachusetts
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01801
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(Address
of Principal Executive Offices)
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(Zip
Code)
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(781)
376-5555
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(Issuer’s
telephone number)
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Securities
registered under Section 12(b) of the Exchange Act:
Title
of each class
|
Name
of exchange on which registered
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Common
Stock, $0.001 par value per share
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The
NASDAQ Stock Market, LLC
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Securities
registered under Section 12(g) of the Exchange Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. Yes o No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past
90 days. Yes x No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes o No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
|
|
|
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Large accelerated filer
o
|
Accelerated filer
o
|
Non-accelerated filer
o
(Do
not check if a smaller reporting company)
|
Smaller reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange
Act). Yes No x
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant was approximately $11,468,588 based on the
closing price of $1.15 of the issuer’s common stock, par value $.001 per share,
as reported by NASDAQ on March 31, 2009.
On
December 28, 2009, there were 11,182,209 shares of the registrant’s common stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE: Portions of the definitive proxy statement for our
2010 annual meeting of stockholders, which is to be filed within 120 days after
the end of the fiscal year ended September 30, 2009, are incorporated by
reference into Part III of this Form 10-K, to the extent described in Part
III.
Forward
Looking Statement
Statements
contained in this Annual Report on Form 10-K that are not based on historical
facts are “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements
may be identified by the use of forward-looking terminology such as “should,”
“could,” “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,”
“intends,” “continue,” or similar terms or variations of those terms or the
negative of those terms. These statements appear in a number of
places in this Form 10-K and include statements regarding the intent, belief or
current expectations of Bridgeline Software, Inc. Forward-looking statements are
merely our current predictions of future events. Investors are cautioned that
any such forward-looking statements are inherently uncertain, are not guaranties
of future performance and involve risks and uncertainties. Actual results may
differ materially from our predictions. Important factors that could cause
actual results to differ from our predictions include the impact of the global
financial deterioration on our business, our inability to manage our future
growth effectively or profitably, our license renewal rate, the impact of
competition and our ability to maintain margins or market share, the performance
of our products, our ability to protect our proprietary technology, the security
of our software, our ability to maintain our listing on the Nasdaq Capital
Market, our dependence on our management team and key personnel, or our ability
to hire and retain future key personnel. Although we have sought to
identify the most significant risks to our business, we cannot predict whether,
or to what extent, any of such risks may be realized, nor is there any assurance
that we have identified all possible issues which we might face. We assume no
obligation to update our forward-looking statements to reflect new information
or developments. We urge readers to review carefully the risk factors described
herein and in the other documents that we file with the Securities and Exchange
Commission. You can read these documents at www.sec.gov.
Where we
say “we,” “us,” “our,” “Company” or “Bridgeline” we mean Bridgeline Software,
Inc.
PART
I
Item
1. Business.
Overview
Bridgeline
is a developer of web application management software and award-winning
interactive technology solutions that help organizations optimize business
processes. Bridgeline’s iAPPS®
product suite combined with its interactive development capabilities assist
customers in maximizing revenue, improving customer service and loyalty,
enhancing employee knowledge, and reducing operational costs by leveraging web
based technologies.
Bridgeline’s
iAPPS®
suite of software products offers solutions that unify web Content
Management, web Analytics, eCommerce, and eMarketing capabilities deep within
the website or web applications in which they reside; enabling business users to
enhance and optimize the value of their web properties. Combined with
award-winning interactive development capabilities, Bridgeline helps customers
cost-effectively accommodate the changing needs of today’s websites, intranets,
extranets, portals, and mission-critical web applications.
The
iAPPS®
suite of software products are delivered through a SaaS (“Software as a
Service”) business model, in which we deliver our software over the Internet
while providing maintenance, daily technical operation and support. iAPPS®
provides a flexible architecture so traditional perpetual licensing options of
our software is also available.
Bridgeline’s
team of Microsoft® Gold
Certified developers specialize in end-to-end interactive technology solutions
which include web design, web application development, usability engineering,
SharePoint development, rich media development, search engine optimization and
web application hosting management.
Bridgeline
was incorporated under the laws of the State of Delaware on August 28,
2000.
Products
and Services
Products
iAPPS®
Product Suite
The
iAPPS®
product suite provides a unified common set of shared software modules that are
critical to today’s web sites, intranets, extranets, and portals.
The iAPPS®
product suite empowers companies and developers to create websites and web
applications with advanced business logic, state-of-the-art graphical user
interfaces, and improved quality – all in a shorter timeframe with less coding
than is typically required by comparable products.
The
iAPPS®
product suite unifies web Content Management, web Analytics, eCommerce, and
eMarketing capabilities deep within the website or web applications in which
they reside, enabling customers to enhance and optimize the value of their web
properties. The
iAPPS®
product suite includes:
·
|
iAPPS® Content
Manager allows non-technical users to create, edit, and
publish content via a browser-based interface. The advanced, easy-to-use
interface allows businesses to keep content and promotions fresh - whether
for a public commercial site or a company intranet. The iAPPS®
Content Manager handles the presentation of content based on a
sophisticated indexing and security scheme that includes management of
front-end access to online applications. The system provides a robust
library functionality to manage permissions, versions and organization of
different content types, including multimedia files and images.
Administrators are able to easily configure a simple or advanced
workflow. The system can accommodate the complexity of larger
companies with strict regulatory policies. The iAPPS®
Content Manager is uniquely integrated and unified with iAPPS®
Analytics, iAPPS®
Commerce, and iAPPS®
Marketier; providing our customers with precise
information, accurate results, expansion options, and stronger
user adoption.
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·
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iAPPS®
Analytics provides the ability to manage, measure and
optimize web presence by recording detailed events and subsequently mine
data within a web application for statistical analysis. Our customers have
access to information regarding where their visitors are coming from, what
content and products their viewers are most interested in, and how they
navigate through a particular web application. Through user-definable web
reports, iAPPS® Analytics
provides deep insight into areas like visitor usage, content access, age
of content, actions taken, and event triggers, and reports on both client
and server-side events. There are over 20 standard web reports that come
with iAPPS Analytics. iAPPS®
Analytics is uniquely integrated and unified with iAPPS®
Content Manager, iAPPS®
Commerce, and iAPPS®
Marketier; providing our customers with precise information, more accurate
results, expansion options, and stronger user
adoption.
|
·
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iAPPS® Commerce provides an
online eCommerce solution to assist in maximizing and managing all aspects
of commerce initiatives. The customizable dashboard provides customers
with a real-time overview of the performance of their online stores, such
as sales trends, demographics, profit margins, inventory levels, inventory
alerts, fulfillment deficiencies, average check out times, potential
production issues, and delivery times. Commerce also provides backend
access to payment and shipping gateways. In combining iAPPS® Commerce
with Analytics and Marketier, our customers can take their commerce
initiatives to a new level by personalizing their product offerings,
improving their marketing effectiveness, providing value-added
services and cross selling additional products. iAPPS®
Commerce is uniquely integrated and unified with iAPPS®
Analytics, iAPPS®
Content Manager, and iAPPS®
Marketier; providing our customers with precise information, more accurate
results, expansion options, and stronger user
adoption.
|
·
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iAPPS® Marketier (planned
release in the spring of 2010) will provide a marketing lifecycle
management tool that includes customer transaction analysis, email
management, surveys and polls, event registration and issue tracking to
measure campaign return on investment and client satisfaction. Web site
content and user profiling will be leveraged to deliver targeted campaigns
and stronger customer relationships. The email management features will
provide comprehensive reporting capabilities including success rate, and
recipient activity such as click-thrus and opt-outs. iAPPS®
Marketier will integrate with leading customer relationship management
systems (CRM’s) such as Salesforce.com and leading ad banner engines such
as Google. iAPPS®
Marketier will be uniquely integrated and unified with iAPPS®
Analytics, iAPPS®
Content Manager, and iAPPS®
Commerce;
|
|
providing
customers with precise information, accurate results, expansion options,
and stronger user adoption.
|
The
iAPPS®
product suite is available as a Software-as-a-Service (SaaS) business model,
with associated maintenance, daily technical operation, and support, or as a
commercially licensed and supported internal solution for customers preferring a
dedicated server environment (within their firewall or at one of our
facilities). Due to the flexibility of the core architecture, the
iAPPS®
product suite can also be sold as a traditional perpetual software license
arrangement with annual maintenance.
Orgitecture
TM
Orgitecture TM was
developed several years ago and provides customers with a suite of on-demand
(SaaS) Web-based tools designed to streamline Web site management and reduce web
related development costs. Orgitecture software modules include web
content management, survey tools, calendaring, email newsletters, online
registration, and ecommerce functions. The iAPPS®
product suite has replaced Orgitecture and we are in the process of migrating
Orgitecture customers to iAPPS®. Orgitecture
customers have been notified that all future development of Orgitecture has been
suspended and that we plan to sun-set the product on December 31,
2010.
Base
10 TM
Base10 TM is a
web based on-demand SaaS platform obtained through an
acquisition. Base10 provides customers with a suite of on-demand
(SaaS) Web-based tools that provides integrated content management, emarketing
management, and ecommerce. The iAPPS®
product suite has replaced Base10 and we are in the process of migrating Base10
customers to iAPPS®.
Base10 customers have been notified that all future development of Base10 has
been suspended and that we plan to sun-set the product on December 31,
2010.
PowerShop
TM
PowerShop TM is
a web based eCommerce product obtained through an acquisition.
PowerShop provides customers with ecommerce capabilities in a
coordinated set of tools and services designed to attract new customers and
deliver an overall user friendly and satisfying customer experience while
automating many required business processes for effective customer service,
merchandising and marketing, as well as inventory management, tracking, and
reporting. iAPPS®
Commerce has replaced PowerShop. We are in the process of migrating
PowerShop customers to iAPPS®
Commerce. We plan to sun-set the product on December 31,
2011.
Subscription
and Perpetual Licenses
Revenue
from sales of both on-demand SaaS web tools and perpetual licenses is reported
as Subscriptions and perpetual
licenses in the accompanying consolidated financial
statements.
Services
Web
Application Development Services
Web
Application development services address specific customer needs such as web
design and web development, usability engineering, information architecture,
rich media development, and search engine optimization.
(“SEO”). Application development engagements are often sold as part
of multiple element arrangement that includes our software products, hosting
arrangements (i.e. Managed Service Hosting) that provide for the use of certain
hardware and infrastructure at one of our co-managed network operating centers,
or retained professional services subsequent to completion of the application
development.
Usability
Engineering
By
integrating usability into traditional Web development life cycles, we believe
our usability engineers can significantly enhance a user
experience. Our usability professionals provide the following
services: usability audits, information architecture, process
analysis and optimization, interface design and user testing. Our
systematic and user-centered approach to application development focuses on
developing Web applications that are intuitive,
accessible,
engaging, and effective. Our goal is to produce a net effect of increased
traffic, improved visitor retention, increased user productivity, reduced user
error, lower support cost, and reduced long-term development cost.
Information
Architecture
Information
Architecture is a design methodology focused on structuring information to
ensure that users can find the appropriate data and can complete their desired
transactions within a Web site or application. Understanding users
and the context in which users will be initiating with a Web application is
central to information architecture. Information architects try to
put themselves in the position of a typical user of an application to better
understand a user’s characteristics, behaviors, intentions and
motivations. At the same time, the information architect develops an
understanding of a Web application’s functionality and data
structures. The understanding of these components enables the
architect to make customer centric decisions about the end user and then
translate those decisions into site maps, wire frames and clickable
prototypes.
Information
architecture forms the foundation of a Web application’s
usability. The extent to which a Web application is user-friendly and
is widely adopted by a user base is primarily dependent on the success of the
information architecture. Information architecture defines how well
users can navigate through a Web site or application and how easily they can
find the desired information or function. As Web application
development becomes more standard and commoditized, information architecture
will increase as a differentiator for application developers.
Rich
Media Development
Traditional
web sites or web applications use simple graphics, static images, mainstream
text and picture formats. As technologies advanced and internet speeds
have dramatically improved a new internet media referred to as Rich Media or
Rich Internet Applications (RIA) has emerged. RIA’s are web applications
that integrate 3D animation, audio, and streaming video into the interface of a
web site or web application. RIA’s can change the way in which
Company’s engage and interacts with customers and site visitors. RIA’s can
dramatically enhance a Company’s identity, improve site stickiness, and provide
increased response rates. Bridgeline developers uses AJAX, Flash, and
JavaScript to deliver compelling RIA solutions.
Search
Engine Optimization (“SEO”)
Bridgeline
helps customers
maximize the effectiveness of their online marketing activities to ensure that
their web applications can be exposed to the potential customers that use search
engines to locate products and services. Bridgeline’s SEO services include
competitive analysis, website review, keyword generation, proprietary leading
page technology, ongoing registration, monthly reports, and
monitoring.
Revenue
from Web Application Development Services
Revenue
from all web application development services is reported as Web Application Development
Services in the accompanying consolidated financial
statements.
Managed
Service Hosting
Some of
our customers hire us to host and manage the applications we develop.
Bridgeline provides a complete outsourcing solution through our fully managed
hosting services. Through our partnerships with Savvis and Internap,
we offer co-location services in state-of-the-art data centers. We
provide 24/7 application monitoring, emergency response, version control, load
balancing, managed firewall security, and virus protection
services. We provide shared hosting, dedicated hosting, and SaaS
hosting for our customers.
Revenue
from Managed Service Hosting
Revenue
from Managed Service Hosting is reported as Managed Service Hosting in
the accompanying consolidated financial statements.
Sales
and Marketing
Overview
Bridgeline
employs a direct sales force and each sale takes on average 30 to 180 days to
complete. Our direct sales force focuses its efforts selling to
medium-sized and large companies. These companies are generally categorized in
the following vertical markets: (i) financial services, (ii) health
services and life sciences, (iii) high technology, (software and hardware), (iv)
professional sports (teams and individuals), (v) transportation and
storage, and (vi) associations, foundation, and non-profit
organizations.
We have
seven geographic locations in the United States with full-time professional
direct sales personnel. Our geographic locations are in the
metropolitan Atlanta, Boston, Chicago, Cleveland, Denver, New York and
Washington DC areas.
Engagement
methodology
We use an
accountable, strategic engagement process developed specifically for target
companies that require a technology based professional approach. We
believe it is critical to qualify each opportunity and to assure our skill set
and tools match up well with customer’s needs. As an essential part
of every engagement, we believe our engagement methodology streamlines our
customer qualification process, strengthens our customer relationships, ensures
our skill set and tools match the customer’s needs, and results in the
submission of targeted proposals.
Organic
growth from existing customer base
We have
specific proactive programs that consistently market our iAPPS®
product suite and interactive development capabilities. Our business development
professionals seek ongoing business opportunities within our existing customer
base and within other operating divisions or subsidiaries of our existing
customer base.
New
customer acquisition
We
identify target customers within our vertical expertise (financial services,
health services and life sciences, high technology, professional sports
management, transportation and storage, associations, foundations and non-profit
organizations). Our business development professionals develop an annual
territory plan identifying various strategies to engage our target
customers.
Customer
retention programs
We use
email marketing capabilities when marketing to our customer base. We email
internally generated whitepapers, user case studies, or Company related
announcements to our customers on a bimonthly basis. We also host educational
on-line or face to face seminars on a quarterly basis.
New
lead generation programs
We
generate targeted leads and new business opportunities by leveraging on-line
marketing strategies. We receive leads by maximizing the search engine
optimization capabilities of our own web site. Through our web site, we provide
various educational white papers and promote upcoming on-line seminars. In
addition we pay for banner advertisements on various independent newsletters,
and paid search advertisements that are linked to our web site. We also
participate and exhibit at targeted events.
Social
Media programs
We market
Bridgeline’s upcoming events, white papers, case studies, announcements, and
related articles frequently on leading social media platforms such as Twitter,
LinkedIn, and Facebook.
Acquisitions
Bridgeline
plans to continue expanding its distribution of iAPPS® and
its interactive development capabilities throughout North
America. Due to the nature of our sales process and delivery
requirements, we believe local staff is required in order to maximize
market-share results.
We
believe the web application development market in North America is growing and
fragmented. We believe established yet small web application
development companies have the ability to market, sell and install our
iAPPS®
product suite in their local metropolitan markets. We believe these
companies also have a .Net customer base and a niche presence in the local
markets in which they operate. We believe there is an opportunity for us to
acquire companies that specialize in web application development that are based
in large North American cities in which we currently do not
operate. We also believe that we can continue to expand our customer
base by completing in-market acquisitions in certain geographic locations where
we already conduct business. We believe that by acquiring certain of
these companies and applying our business practices and efficiencies, we can
accelerate our time to market of the iAPPS®
product suite.
We did
not complete any acquisitions during the year ended September 30,
2009.
Research
and Development
We
invested approximately $1.2 million in research and development activities for
the year ended September 30, 2009 which included approximately $30 thousand in
capitalized software costs. We invested approximately $1.0 million in research
and development for the year ended September 30, 2008, which included
approximately $397 thousand of capitalized software costs.
Employees
We
employed 141 employees worldwide as of September 30,
2009. Substantially all of those employees are full time
employees.
Customers
We
primarily serve six markets that we believe have a history of investing in
information technology enhancements and initiatives as follows:
|
· Financial
services
· Health
services and life sciences
· High
technology (software and hardware)
· Transportation
and storage
· Associations,
foundations, and non profit organizations
· Professional
sports (teams and individuals)
|
We had
676 customers at September 30, 2009. For the year ended September 30,
2009, two customer generated more than 5% of our revenue. One long-term customer
generated approximately 6% of our revenue and another long-term customer
generated approximately 5% of our revenue, respectively.
Competition
The
market for our products and services, including Web application software and Web
application development services are highly competitive, fragmented, and rapidly
changing. Barriers to entry in such markets remain relatively low. The markets
are significantly affected by new product introductions and other market
activities of industry participants. With the introduction of new technologies
and market entrants, we expect competition to persist and intensify in the
future.
We
believe that we compete adequately with others and distinguish ourselves from
our competitors in a number of ways. We believe that our competitors
generally offer their Web application software without directly providing
interactive technology development services. In addition, our
competitors that offer their Web application software typically offer only
single point of entry type products (such as only content management, only
analytics, or only ecommerce) as compared to a unified approach offered with our
iAPPS®
product suite. Our ability to develop applications on multiple
platforms and the existence of our own Web application software distinguishes us
from our competition. We also believe that our products have been
designed for ease of use without substantial technical skills. Finally, we
believe the iAPPS®
product suite has a lower cost of ownership than the solutions provided by most
of our competitors.
Available
Information
This
Annual Report on Form 10-K, as well as our quarterly reports on Form 10-Q and
current reports on Form 8-K, along with any amendments to those reports, are
made available free of charge, on our website (www.bridgelinesw.com)
as soon as reasonably practicable after such material is electronically filed
with or furnished to the Securities and Exchange Commission. Copies
of the following are also available free of charge through our website on the
“About Us Investors” page under the caption “Governance” and are available in
print to any shareholder who requests it:
· Code
of Business Ethics
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· Committee
Charters for the following Board committees:
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§ Nominating
and Corporate Governance committee
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§ Audit
committee
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§ Compensation
committee
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The
public may read and copy any materials that we file with the SEC at the SEC’s
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. Information regarding the SEC’s Public Reference Room can be
obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains
an Internet site that contains reports, proxy and information statements, and
other information and can be found at (http://www.sec.gov).
Item
1A. Risk Factors
This
report contains forward-looking statements that involve risks and uncertainties,
such as statements of our objectives, expectations and intentions. The
cautionary statements made in this report are applicable to all forward-looking
statements wherever they appear in this report. Our actual results could differ
materially from those discussed herein. In addition to the risks discussed in
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” our business is subject to the risks set forth below.
The
recent financial crisis and current uncertainty in global economic conditions
could negatively affect our business, results of operations, and financial
condition.
The
recent financial crisis and the current uncertainty in global economic
conditions have resulted in a tightening in the credit markets, a low level of
liquidity in many financial markets, and extreme volatility in credit, equity
and fixed income markets.
There
could be a number of follow-on effects from these economic developments on our
business, including decreased customer demand; decreased customer confidence;
and insolvency of customers. Any of these events, or any other events
caused by the recent financial crisis, may have a material adverse effect on our
business, operating results, and financial condition.
If we are unable
to manage our future growth efficiently, our business, revenues and
profitability may suffer.
We
anticipate that continued expansion of our business will require us to address
potential market opportunities. For example, we may need to expand the size of
our research and development, sales, corporate finance or operations staff.
There can be no assurance that our infrastructure will be sufficiently flexible
and adaptable to manage our projected growth or that we will have sufficient
resources, human or otherwise, to sustain such growth. If we are unable to
adequately address these additional demands on our resources, our profitability
and growth might suffer. Also, if we continue to expand our operations,
management might not be effective in expanding our physical facilities and our
systems, procedures or controls might not be adequate to support such expansion.
Our inability to manage our growth could harm our business and decrease our
revenues.
Because most of
our licenses are renewable on an annual basis, a reduction in our license
renewal rate could reduce our revenue.
Our
customers have no obligation to renew their annual subscription licenses, and
some customers have elected not to do so. Our license renewal rates may decline
or fluctuate as a result of a number of factors, including customer
dissatisfaction with our products and services, our failure to update our
products to maintain their attractiveness in the market, or constraints or
changes in budget priorities faced by our customers. A decline in license
renewal rates could cause our revenue to decline which would have a material
adverse effect on our operations.
We
face intense and growing competition, which could result in price reductions,
reduced operating margins and loss of market share.
We
operate in a highly competitive marketplace and generally encounter intense
competition to create and maintain demand for our services and to obtain service
contracts. If we are unable to successfully compete for new business and license
renewals, our revenue growth and operating margins may decline. The market for
our iAPPS®
product suite (Content Management, Analytics, eCommerce, Marketier) and Web
development services are competitive and rapidly changing. Barriers
to entry in such markets are relatively low. With the introduction of new
technologies and market entrants, we expect competition to intensify in the
future. Some of our principal competitors offer their products at a lower price,
which may result in pricing pressures. Such pricing pressures and increased
competition generally could result in reduced sales, reduced margins or the
failure of our product and service offerings to achieve or maintain more
widespread market acceptance.
The Web
development/services market is highly fragmented with a large number of
competitors and potential competitors. Our prominent public company
competitors are Omniture, Cognizant Technology Solutions, Open Text, Digital
River, GSI Commerce, and Sapient. We face competition from customers and
potential customers who develop their own applications internally. We also face
competition from potential competitors that are substantially larger than we are
and who have significantly greater financial, technical and marketing resources,
and established direct and indirect channels of distribution. As a result, they
are able to respond more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the development,
promotion and sale of their products than we can. In addition, current and
potential competitors have established or may establish cooperative
relationships among themselves or prospective customers. Accordingly, it is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share which could reduce our market share and
decrease our revenues.
If
our products fail to perform properly due to undetected errors or similar
problems, our business could suffer, and we could face product liability
exposure.
We
develop and sell complex web application management software which may contain
undetected errors, or bugs. Such errors can be detected at any point in a
product’s life cycle, but are frequently found after introduction of new
software or enhancements to existing software. We continually introduce new
products and new versions of our products. Despite internal testing and testing
by current and potential customers, our current and future products may contain
serious defects. If we detect any errors before we ship a product, we might have
to delay product shipment for an extended period of time while we address the
problem. We might not discover software errors that
affect
our new or current products or enhancements until after they are deployed, and
we may need to provide enhancements to correct such errors. Therefore, it is
possible that, despite our testing, errors may occur in our software. These
errors could result in the following:
·
|
harm
to our reputation;
|
·
|
lost
sales;
|
·
|
delays
in commercial release;
|
·
|
product
liability claims;
|
·
|
contractual
disputes;
|
·
|
negative
publicity;
|
·
|
delays
in or loss of market acceptance of our products;
|
·
|
license
terminations or renegotiations; or
|
·
|
unexpected
expenses and diversion of resources to remedy
errors.
|
Furthermore,
our customers may use our software together with products from other companies.
As a result, when problems occur, it might be difficult to identify the source
of the problem. Even when our software does not cause these problems, the
existence of these errors might cause us to incur significant costs, divert the
attention of our technical personnel from our product development efforts;
impact our reputation or cause significant customer relations
problems.
If
we are unable to protect our proprietary technology and other intellectual
property rights, our ability to compete in the marketplace may be substantially
reduced.
If we are
unable to protect our intellectual property, our competitors could use our
intellectual property to market products similar to our products, which could
decrease demand for such products, thus decreasing our revenue. We rely on a
combination of copyright, trademark and trade secret laws, as well as licensing
agreements, third-party non-disclosure agreements and other contractual
measures, to protect our intellectual property rights. These protections may not
be adequate to prevent our competitors from copying or reverse-engineering our
products. Our competitors may independently develop technologies that are
substantially equivalent or superior to our technology. To protect our trade
secrets and other proprietary information, we require employees, consultants,
advisors and collaborators to enter into confidentiality agreements. These
agreements may not provide meaningful protection for our trade secrets, know-how
or other proprietary information in the event of any unauthorized use,
misappropriation or disclosure of such trade secrets, know-how or other
proprietary information. The protective mechanisms we include in our products
may not be sufficient to prevent unauthorized copying. Existing copyright laws
afford only limited protection for our intellectual property rights and may not
protect such rights in the event competitors independently develop similar
products. In addition, the laws of some countries in which our products are or
may be licensed do not protect our products and intellectual property rights to
the same extent as do the laws of the United States.
Policing
unauthorized use of our products is difficult, and litigation could become
necessary in the future to enforce our intellectual property rights. Any
litigation could be time consuming and expensive to prosecute or resolve, result
in substantial diversion of management attention and resources, and materially
harm our business or financial condition.
If
a third party asserts that we infringe upon its proprietary rights, we could be
required to redesign our products, pay significant royalties or enter into
license agreements.
Although
we are not presently aware of any such claims, a third party may assert that our
technology or technologies of entities we acquire violates its intellectual
property rights. As the number of software products in our markets increases and
the functionality of these products further overlap, we believe that
infringement claims will become more common. Any claims against us, regardless
of their merit, could:
·
|
be
expensive and time consuming to defend;
|
·
|
result
in negative publicity;
|
·
|
force
us to stop licensing our products that incorporate the challenged
intellectual property;
|
·
|
require
us to redesign our products;
|
·
|
divert
management’s attention and our other resources; or
|
·
|
require
us to enter into royalty or licensing agreements in order to obtain the
right to use necessary technologies, which may not be available on terms
acceptable to us, if at all.
|
We
believe that any successful challenge to our use of a trademark or domain name
could substantially diminish our ability to conduct business in a particular
market or jurisdiction and thus decrease our revenues and result in possible
losses to our business.
If the security
of our software, in particular the hosted Internet solutions products we have
developed, is breached, our business and reputation could
suffer.
Fundamental
to the use of our products is the secure collection, storage and transmission of
confidential information. Third parties may attempt to breach our security or
that of our customers and their databases. We might be liable to our customers
for any breach in such security, and any breach could harm our customers, our
business and reputation. Any imposition of liability, particularly liability
that is not covered by insurance or is in excess of insurance coverage, could
harm our reputation, business and operating results. Computers, including those
that utilize our software, are vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions, which could lead to interruptions,
delays or loss of data. We might be required to expend significant capital and
other resources to protect further against security breaches or to rectify
problems caused by any security breach, which, in turn could divert funds
available for corporate growth and expansion or future
acquisitions.
We
are dependent upon our management team, and the loss of any of these individuals
could harm our business.
We are
dependent on the efforts of our key management personnel. The loss of any of our
key management personnel, or our inability to recruit and train additional key
management and other personnel in a timely manner, could materially and
adversely affect our business, operations and future prospects. We do not
maintain a key man insurance policy covering any of our employees. In addition,
in the event that Thomas Massie, our founder, Chairman and Chief Executive
Officer, is terminated by us without cause, he is entitled to receive severance
payments equal to the greater of (a) three years’ total compensation, including
bonus amounts, or (b) $1 million. In the event we are required to pay the
severance payments to Mr. Massie, it could have a material adverse effect on our
results of operations for the fiscal quarter and year in which such payments are
made.
Because
competition for highly qualified personnel is intense, we might not be able to
attract and retain the employees we need to support our planned
growth.
We will
need to increase the size and maintain the quality of our sales force, software
development staff and professional services organization to execute our growth
plans. To meet our objectives, we must attract and retain highly qualified
personnel with specialized skill sets. Competition for qualified personnel can
be intense, and we might not be successful in attracting and retaining them. Our
ability to maintain and expand our sales, product development and professional
services teams will depend on our ability to recruit, train and retain top
quality people with advanced skills who understand sales to, and the specific
needs of, our target customers. For these reasons, we have experienced, and we
expect to again experience in the future, challenges in hiring and retaining
highly skilled employees with appropriate qualifications for our business. In
addition to hiring services personnel to meet our needs, we may also engage
additional third-party consultants as contractors, which could have a negative
impact on our financial results. If we are unable to hire or retain qualified
personnel, or if newly hired personnel fail to develop the necessary skills or
reach productivity slower than anticipated, it would be more difficult for us to
sell our products and services, and we could experience a shortfall in revenue
and not achieve our planned growth.
Future
acquisitions may be difficult to integrate into our existing operations, may
disrupt our business, dilute stockholder value or divert management’s
attention.
We have
acquired multiple businesses since our inception in 2000. A key element of our
growth and market share expansion strategy is the pursuit of additional
acquisitions in the fragmented Web application development industry in the
future. These acquisitions could be expensive, disrupt our ongoing business and
distract our management and employees. We may not be able to identify suitable
acquisition candidates, and if we do identify suitable candidates,
we may
not be able to make these acquisitions on acceptable terms or at all. If we make
an acquisition, we could have difficulty integrating the acquired technology,
employees or operations. In addition, the key personnel of the acquired
company may choose not to work for us. Acquisitions also involve the risk of
potential unknown liabilities associated with the acquired
business.
If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or prevent fraud. As a result,
current and potential shareholders could lose confidence in our financial
reporting, which would harm our business and the trading price of our
stock.
Effective
internal controls are necessary for us to provide reliable financial reports and
effectively minimize the possibility of fraud and its impact on our company. If
we cannot provide financial reports or effectively minimize the possibility of
fraud, our business reputation and operating results could be harmed. Inferior
internal controls could also cause investors to lose confidence in our reported
financial information, which could have a negative effect on the trading price
of our stock.
In
addition, we will be required to include an attestation report on the
effectiveness of our internal controls, such report to be provided by our
independent registered public accounting firm, as part of our annual report for
the fiscal year ending September 30, 2010, pursuant to SOX Section 404,
which requires, among other things, that we maintain effective internal controls
over financial reporting and effective disclosure controls and procedures. In
particular, we must perform system and process evaluation and testing of our
internal controls over financial reporting to allow management and our
independent registered public accounting firm to report on the effectiveness of
our internal controls over financial reporting, as required by Section 404. Our
compliance with Section 404 will require that we incur substantial accounting
expense and expend significant management efforts.
We cannot
be certain as to the timing of the completion of our evaluation and testing, the
timing of any remediation actions that may be required or the impact these may
have on our operations. Furthermore, there is no precedent available by which to
measure compliance adequacy. If we are not able to implement the requirements
relating to internal controls and all other provisions of Section 404 in a
timely fashion or achieve adequate compliance with these requirements or other
SOX requirements, we might become subject to sanctions or investigation by
regulatory authorities such as the Securities and Exchange Commission or any
securities exchange on which we may be trading at that time, which action may be
injurious to our reputation and affect our financial condition and decrease the
value and liquidity of our securities, including our common stock.
Increasing
government regulation could affect our business and may adversely affect our
financial condition.
We are
subject not only to regulations applicable to businesses generally, but also to
laws and regulations directly applicable to electronic commerce. Although there
are currently few such laws and regulations, state, federal and foreign
governments may adopt laws and regulations applicable to our business. Any such
legislation or regulation could dampen the growth of the Internet and decrease
its acceptance. If such a decline occurs, companies may choose in the future not
to use our products and services. Any new laws or regulations in the following
areas could affect our business:
|
·
|
the
pricing and taxation of goods and services offered over the
Internet;
|
|
·
|
the
content of Websites;
|
|
·
|
consumer
protection, including the potential application of “do not call” registry
requirements on customers and consumer backlash in general to direct
marketing efforts of customers;
|
|
·
|
the
online distribution of specific material or content over the Internet;
or
|
|
·
|
the
characteristics and quality of products and services offered over the
Internet.
|
We
may not be able to maintain our listing on the NASDAQ Capital Market if we are
unable to satisfy the minimum bid price requirements.
Our
common stock is currently listed for quotation on the NASDAQ Capital Market. We
are required to meet certain financial requirements in order to maintain our
listing on the NASDAQ Capital Market. One such requirement is that we maintain a
minimum closing bid price of at least $1.00 per share for our common stock. As
of December 22, 2009, the minimum bid price of our common stock was
$1.12. If our common stock trades below $1.00 per share for 30
consecutive business days we will receive a deficiency notice from NASDAQ
advising us that we have 180 days to regain compliance by maintaining a minimum
bid price of at least $1.00 for a minimum of ten consecutive business days. If
we fail to satisfy the NASDAQ Capital Market’s continued listing requirements,
our common stock could be delisted from the NASDAQ Capital Market. Any potential
delisting of our common stock from the NASDAQ Capital Market would make it more
difficult for our stockholders to sell our stock in the public market and would
likely result in decreased liquidity and have a negative effect on the market
price for our shares.
Item
2. Properties.
Our
corporate office is located twelve miles north of Boston, Massachusetts at 10
Sixth Road, Woburn, Massachusetts 01801.This office also houses our New England
business unit. The following table lists our offices, all of which are
leased:
Geographic
Location
|
|
Address
|
|
Size
|
Atlanta,
Georgia
|
|
5555
Triangle Parkway
Norcross,
Georgia 30092
|
|
8,547
square feet,
professional
office space
|
Bangalore,
India
|
|
71
Sona Towers, West Wing
Millers
Road, Bangalore 560 052
|
|
7,800
square feet
professional
office space
|
Boston,
Massachusetts
|
|
10
Sixth Road
Woburn,
Massachusetts 01801
|
|
9,335
square feet,
professional
office space
|
Chicago,
Illinois
|
|
30
N. LaSalle Street, 20th
Floor
Chicago,
IL 60602
|
|
4,880
square feet,
professional
office space
|
Cleveland,
Ohio
|
|
2077
East 4th
Street, 2nd
Floor
Cleveland,
OH 44115
|
|
5,705
square feet,
professional
office space
|
Denver,
Colorado
|
|
410
17th
Street, Suite 600
Denver,
CO 80202
|
|
12,270
square feet,
professional
office space
|
New
York, New York
|
|
104
West 40th
Street
New
York, NY. 10018
|
|
4,400
square feet,
professional
office space
|
Washington,
DC
|
|
4,300
Wilson Boulevard
Arlington,
VA 22203
|
|
4,801
square feet,
professional
office space
|
Item
3. Legal Proceedings.
From time
to time we are subject to ordinary routine litigation and claims incidental to
our business. As of September 30, 2009, Bridgeline was not engaged
with any material legal proceedings.
Item
4. Submission of Matters to a Vote of Security Holders.
No
matters were submitted to a vote of the stockholders during the fourth quarter
of the fiscal year.
PART
II
Item
5. Market for Common Equity, Related Stockholder Matters and Issuer
Purchase of Equity Securities.
The
following table sets forth, for the periods indicated, the range of high and low
sale prices for our common stock. Our common stock trades on the NASDAQ Capital
Market under the symbol BLSW.
Year
Ended September 30, 2009
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
$ |
1.65
|
|
|
$ |
0.80
|
|
Third
Quarter
|
|
|
1.79
|
|
|
|
0.92
|
|
Second
Quarter
|
|
|
1.52
|
|
|
|
0.36
|
|
First
Quarter
|
|
|
1.39
|
|
|
|
0.50
|
|
Year
Ended September 30, 2008
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
$ |
2.48
|
|
|
$ |
1.18
|
|
Third
Quarter
|
|
|
3.66
|
|
|
|
2.25
|
|
Second
Quarter
|
|
|
3.65
|
|
|
|
2.45
|
|
First
Quarter
|
|
|
4.34
|
|
|
|
3.00
|
|
We have
not declared or paid cash dividends on our common stock and do not plan to pay
cash dividends to our shareholders in the near future. As of December 22,
2009, our common stock was held by approximately 917
shareholders.
Recent
Sales of Unregistered Securities; Use of Proceeds From Registered
Securities
During
the year ended September 30, 2009, we issued 516,677 shares of Bridgeline common
stock as set forth below. The securities in each of the
below-referenced transactions were (i) issued without registration and
(ii) were subject to restrictions under the Securities Act and the
securities laws of certain states, in reliance on the private offering
exemptions contained in Sections 4(2), 4(6) and/or 3(b) of the Securities
Act and on Regulation D promulgated thereunder, and in reliance on similar
exemptions under applicable state laws as a transaction not involving a public
offering. No placement or underwriting fees were paid in connection
with these transactions. Proceeds from the sales of these securities were used
for general working capital purposes.
Contingent
Consideration related to Acquisitions
Objectware, Inc.-In
connection with the earnout provision of the merger agreement, we issued 374,549
shares of Bridgeline common stock to the former stockholder of Objectware as
contingent consideration payments. The former stockholder of Objectware who
received these shares is an active key member of Bridgeline’s senior management
team.
Tenth Floor, Inc.-We issued
98,764 shares of Bridgeline common stock to the former stockholders of Tenth
Floor, Inc. as contingent consideration payments based on required operational
performance. The former stockholders of Tenth Floor who received
these shares are active key members of Bridgeline’s senior management
team.
Purple Monkey, Inc.-We issued
43,364 shares of Bridgeline common stock to the former stockholders of Purple
Monkey, Inc. as contingent consideration payments based on required
operational performance.
Options
We did
not issue any shares of commons stock pursuant to stock option exercises or
grant any options during the fourth quarter ending September 30,
2009.
Item
6. Selected Financial Data.
Not
required
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
This
section contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in the forward-looking statements as a result of a variety of factors and risks
including the impact of the global financial deterioration on our
business, our inability to manage our future growth effectively or profitably,
our license renewal rate, the impact of competition and our ability to maintain
margins or market share, the performance of our products, our ability to protect
our proprietary technology, the security of our software, our ability to
maintain our listing on the Nasdaq Capital Market, our dependence on our
management team and key personnel, or our ability to hire and retain future key
personnel. These and other risks are more fully described herein and
in our other filings with the Securities and Exchange Commission.
This
section should be read in combination with the accompanying audited consolidated
financial statements and related notes prepared in accordance with United States
generally accepted accounting principles.
Overview
Bridgeline
is a developer of web application management software and award-winning
interactive technology solutions that help organizations optimize business
processes. Bridgeline’s iAPPS®
product suite combined with its interactive development capabilities
assist customers in maximizing revenue, improving customer service and loyalty,
enhancing employee knowledge, and reduce operational costs by leveraging web
based technologies.
Bridgeline’s
iAPPS®
suite of software products are solutions that unify web Content
Management, web Analytics, eCommerce, and eMarketing capabilities deep within
the website on web applications in which they reside; enabling business users to
enhance and optimize the value of their web properties. Combined with
award-winning interactive development capabilities, Bridgeline helps customers
cost-effectively accommodate the changing needs of today’s websites, intranets,
extranets, portals and mission-critical web applications. The iAPPS® suite
of software products are delivered through a SaaS (“Software as a Service”)
business model, in which we deliver our software over the Internet while
providing maintenance, daily technical operation and support. iAPPS®
provides a flexible architecture so traditional perpetual licensing of our
software is also available.
Bridgeline’s
team of Microsoft® Gold
Certified developers specialize in end-to-end interactive technology solutions
which include web design and web application development, usability engineering,
SharePoint development, rich media development, search engine optimization and
web application hosting management.
Sales
and Marketing
Bridgeline
employs a direct sales force and each sale typically takes on average 30 to 180
days to complete. Our direct sales force focuses its efforts selling
to medium to large companies. These companies are generally
categorized in the following vertical markets: (i) financial services,
(ii) health services and life sciences, (iii) high technology, (software and
hardware), (iv) professional sports (teams and individuals), (v)
transportation and storage, and (vi) associations, foundation and non-profit
organizations.
We have
seven geographic locations in the United States with full-time professional
direct sales personnel. Our geographic locations are in the
metropolitan Atlanta, Boston, Chicago, Cleveland, Denver, New York and
Washington DC areas.
Acquisitions
Bridgeline
plans to continue expanding its distribution of iAPPS® and
its application development services throughout North America. Due to
the individualized nature of our sales process and delivery requirements we
believe local staff is required in order to maximize market-share
results.
We
believe the web application development market in North America is growing and
fragmented. We believe that established yet small application development
companies have the ability to market, sell and install our iAPPS®
Framework and web application management software in their local metropolitan
markets. We believe these companies also have a customer base and a niche
presence in the local markets in which they operate. We believe there is an
opportunity for us to acquire companies that specialize in web application
development that are based in other large North American cities in which we
currently do not operate. We also believe that we can continue to
expand our customer base by completing in market acquisitions in geographic
locations where we already conduct business. We believe that by
acquiring certain of these companies and applying our business practices and
efficiencies, we can accelerate our time to market with our iAPPS®
product suite.
We did
not complete any acquisitions during the year ended September 30, 2009. During
the year ended September 30, 2008, we completed two
acquisitions. Tenth Floor, Inc. (“Tenth Floor”) in Cleveland, OH
and Indigio Group, Inc. (“Indigo”) in Denver, CO. These acquisitions
expanded our geographical presence in two key metropolitan markets the United
States.
We expect
to make additional acquisitions in the foreseeable future. We believe
these acquisitions are consistent with our iAPPS product suite distribution
strategy and growth strategy by providing Bridgeline with new geographical
distribution opportunities, an expanded customer base, an expanded sales force
and an expanded developer force. In addition, integrating acquired companies
into our existing operations allows us to consolidate the finance, human
resources, legal, marketing, research and development of the acquired businesses
with our own internal resources, hence reducing the aggregate of these expenses
for the combined businesses and resulting in improved operating
results.
Customer
Information
We had
676 customers at September 30, 2009 and of these customers 504 or 75% paid us a
monthly subscription fee or a monthly managed service
fee. Approximately 77% of our customers in fiscal 2008 continued to
be revenue generating customers in fiscal 2009, demonstrating a deep customer
traction model
Results of
Operations
For the
year ended September 30, 2009 we achieved record revenue, earnings from
operations and net income. Revenue was $23.9 million compared with
$21.3 million for the same period of 2008, a 12% increase. Net income
was $758 thousand compared with a net loss of ($10.3) million for the same
period of 2008. Diluted earnings per share was $.07 compared with
($1.09) for the same period of 2008.
The
following items affect the results of operation for the year ended September 30,
2009 as compared with the same period of 2008:
·
|
We
released iAPPS®
Content Manager in September 2008 and iAPPS®
Analytics in February 2009.
|
|
|
·
|
We
increased investments in iAPPS research and development in
2009.
|
·
|
We
did not record any impairment charges for intangible assets or goodwill in
2009. We recorded total non-cash impairment charges of $9.8
million for intangible assets and goodwill in 2008.
|
|
|
·
|
Tenth
Floor, Inc., now Bridgeline Cleveland, was acquired on January 31, 2008
and the financial impact of this acquisition was included for a full year
in fiscal 2009 as compared with only eight months for fiscal
2008.
|
·
|
Indigio
Group, Inc., now Bridgeline Denver, was acquired on July 1, 2008 and the
financial impact of this acquisition was included for a full year in
fiscal 2009 as compared with only three months in fiscal
2008.
|
We
regularly monitor a number of key metrics including revenue, gross profit
margins and expenses as a percentage of revenue. A comparison of the
years ended September 30, 2009 and 2008 follows:
|
|
Year
Ended September 30, |
|
(dollars
in thousands)
|
|
2009
|
|
|
2008
|
|
|
$
Change
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$ |
23,901 |
|
|
$ |
21,295 |
|
|
|
2,606 |
|
|
|
12 |
% |
Cost
of revenue
|
|
|
10,533 |
|
|
$ |
10,305 |
|
|
|
228 |
|
|
|
2 |
% |
Gross
profit
|
|
|
13,368 |
|
|
$ |
10,990 |
|
|
|
2,378 |
|
|
|
22 |
% |
Gross
profit margin
|
|
|
55.9 |
% |
|
|
51.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses before impairment
|
|
|
12,539 |
|
|
|
11,495 |
|
|
|
1,044 |
|
|
|
9 |
% |
Impairment
of intangible assets
|
|
|
— |
|
|
|
76 |
|
|
|
(76 |
) |
|
|
— |
|
Impairment
of goodwill
|
|
|
— |
|
|
|
9,752 |
|
|
|
(9,752 |
) |
|
|
— |
|
Total
operating expenses
|
|
|
12,539 |
|
|
|
21,323 |
|
|
|
(8,784 |
) |
|
|
(41 |
%) |
Income
(loss) from operations
|
|
|
829 |
|
|
|
(10,333 |
) |
|
|
11,162 |
|
|
|
(108 |
%) |
Other
income (expense), net
|
|
|
— |
|
|
|
85 |
|
|
|
(85
|
) |
|
|
— |
|
Interest
income (expense), net
|
|
|
(40 |
) |
|
|
(61 |
) |
|
|
21 |
|
|
|
— |
|
Income
(loss) before income taxes
|
|
|
789 |
|
|
|
(10,309 |
) |
|
|
11,098 |
|
|
|
(108 |
%) |
Income
taxes
|
|
|
31 |
|
|
|
— |
|
|
|
31 |
|
|
|
— |
|
Net
income (loss)
|
|
$ |
758 |
|
|
$ |
(10,309 |
) |
|
|
11,067 |
|
|
|
(107 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$ |
2,859 |
|
|
$ |
1,255 |
|
|
|
1,604 |
|
|
|
128 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
We also
measure our performance based on a non-GAAP measurement of earnings before
interest, taxes, depreciation, and amortization and before stock compensation
expense and impairment of goodwill and intangible assets
(“EBITDA”). We believe this measure is an indicator of cash flow
generated from operations.
We
achieved record EBITDA for fiscal 2009 of $2.9 million compared with $1.3
million for fiscal 2008, an improvement of $1.6 million, or 128%. A
reconciliation of net income to EBITDA follows:
|
|
Year
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Net
income (loss)
|
|
$ |
758 |
|
|
$ |
(10,309 |
) |
Add
back:
|
|
|
|
|
|
|
|
|
Taxes
|
|
|
31 |
|
|
|
— |
|
Interest
|
|
|
40 |
|
|
|
61 |
|
Impairment
of goodwill and intangible assets
|
|
|
— |
|
|
|
9,828 |
|
Amortization
of intangible assets
|
|
|
517 |
|
|
|
537 |
|
Depreciation
|
|
|
795 |
|
|
|
578 |
|
Other
amortization
|
|
|
180 |
|
|
|
135 |
|
Stock
based compensation
|
|
|
538 |
|
|
|
425 |
|
EBITDA
|
|
$ |
2,859 |
|
|
$ |
1,255 |
|
Revenue
Our
revenue is derived from three sources: (i) Web application development services
(ii) managed service hosting and (iii) subscription and perpetual
licenses. Our revenue increased $2.6 million, or 12%, for fiscal 2009
as compared with fiscal 2008. Fiscal 2009 included a full year of
revenue for Tenth Floor and Indigio acquired in January 2008 and July 2008,
respectively, while fiscal 2008 included only eight months and three months of
revenue from these acquisitions, respectively. For the year ended
September 30, 2009 one customer generated approximately 6% of total revenue and
a second customer generated approximately 5% of total revenue. For
the year ended September 30, 2008, one customer generated approximately 7% of
total revenue.
|
|
Year
Ended September 30,
|
|
(dollars
in thousands)
|
|
2009
|
|
|
2008
|
|
|
$
Change
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Web
application development
|
|
$ |
20,272 |
|
|
$ |
18,231 |
|
|
$ |
2,041 |
|
|
|
11% |
|
%
of total revenue
|
|
|
85% |
|
|
|
86% |
|
|
|
|
|
|
|
|
|
Managed
service hosting
|
|
$ |
2,202 |
|
|
$ |
2,188 |
|
|
$ |
14 |
|
|
|
1% |
|
%
of total revenue
|
|
|
9% |
|
|
|
10% |
|
|
|
|
|
|
|
|
|
Subscription
and perpetual licenses
|
|
$ |
1,427 |
|
|
$ |
876 |
|
|
$ |
551 |
|
|
|
63% |
|
%
of total revenue
|
|
|
6% |
|
|
|
4% |
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$ |
23,901 |
|
|
$ |
21,295 |
|
|
$ |
2,606 |
|
|
|
12% |
|
Web
Application Development Services
Revenue
from web application development increased $2.0 million, or 11% from
2008. Our growth came from a number of industries and
customers. The increase in revenue from web application development
services is attributable to (i) acquisitions completed during fiscal 2008
combined with (ii) additional revenue derived from new customer accounts secured
in fiscal 2009, net of customer attrition.
Managed
Service Hosting
Revenue
from managed service hosting remained relatively constant between 2009 and 2008,
increasing $14 thousand, or 1%. The increase is attributable to (i)
the full year impact in fiscal 2009 of acquisitions completed during fiscal 2008
combined with (ii) additional revenue derived from new customers, net of
customer attrition.
Subscription
and Perpetual Licenses
Revenue
from subscription and perpetual increased $551 thousand from the prior year, or
63%. Subscription and perpetual license revenue as a percentage of
total revenue increased to 6% in fiscal 2009 from 4% in fiscal 2008. This
increased revenue is attributable to increased subscription license revenue
related to our iAPPS®
product suite released at the end of fiscal 2008.
Gross
Profit
|
|
Year
Ended September 30,
|
|
(dollars
in thousands)
|
|
2009
|
|
|
2008
|
|
|
$
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Web
application development services
|
|
$ |
10,850 |
|
|
$ |
8,652 |
|
|
$ |
2,198 |
|
|
|
25% |
|
%
of web application development revenue
|
|
|
54% |
|
|
|
47% |
|
|
|
|
|
|
|
|
|
Managed
service hosting
|
|
$ |
1,607 |
|
|
$ |
1,744 |
|
|
$ |
(137 |
) |
|
|
(8% |
) |
%
of managed services hosting revenue
|
|
|
73% |
|
|
|
80% |
|
|
|
|
|
|
|
|
|
Subscriptions
and perpetual licenses
|
|
$ |
911 |
|
|
$ |
594 |
|
|
$ |
317 |
|
|
|
53% |
|
%
of subscription and perpetual license revenue
|
|
|
64% |
|
|
|
68% |
|
|
|
|
|
|
|
|
|
Total
gross profit
|
|
$ |
13,368 |
|
|
$ |
10,990 |
|
|
$ |
2,378 |
|
|
|
22% |
|
Gross
profit margin
|
|
|
55.9% |
|
|
|
51.6% |
|
|
|
|
|
|
|
4.3% |
|
Gross
Profit Margin
Gross
profit margin increased $2.4 million or 22% in fiscal 2009 as compared with
fiscal 2008. Gross profit margin as a percentage of revenue increased
to 55.9% in fiscal 2009 from 51.6% in fiscal 2008. Our margins are
impacted by several factors including (i) the cost of direct labor, which is our
largest expense and (ii) outside contractors used to supplement full time staff
from time to time. In addition, since the majority of our revenue is
currently from services, billable hours are an important metric that impacts our
gross profit margin. We use measures such as billable utilization to
monitor this metric. A discussion of gross margin by revenue source
follows.
Web
Application Development Services
Gross
profit from web application development increased by $2.2 million, or 25% in
fiscal 2009 compared with fiscal 2008. Gross profit margin increased
to 54% in fiscal 2009 from 47% in fiscal 2008. This increase in gross
margin dollars is largely attributable to the increase in
revenue. Web application development services revenue is driven by
the number of billable hours on a project. Thus, the increased
revenue will generally correspond with a similar increase in costs and
margins. Our web application development services costs are primarily
driven by salaries and wages and outside contractor costs. We
continue to seek margin improvements by utilizing our library of software code
to gain efficiencies on engagements. Margin improvements also come
from increased hourly rates at a rate greater than the increase in
costs. We use incentive plans that award personnel performing web
application development services when their billable hours exceed stated
goals. Our workforce is largely salaried and as such, increases in
billable hours do not result in significant increases to our cost
basis. Finally, we leverage the resources of our India subsidiary to
help control costs. A combination of these measures contributed to
the margin improvement in fiscal 2009.
Managed
Service Hosting
Gross
profit decreased by $137 thousand, or 8% in 2009 compared to fiscal
2008. Gross profit margin decreased to 73% in fiscal 2009 from 80% in
fiscal 2008. The primary costs associated with managed service
hosting revenue are principally (i) the direct third party costs of our
co-managed network operation centers (NOCs) and (ii) direct labor
costs. As a result of the acquisition of Tenth Floor and Indigio, our
total number of NOCs increased from two to four as of September 30,
2008. Subsequent to September 30, 2009, we consolidated two of
our NOCs and decreased the total number of NOCs to three. We are also
evaluating the feasibility of further NOC consolidation in an effort to improve
margins. Our current facilities have capacity and can be expanded
with our growth in revenue without adding substantial costs.
Perpetual
Licenses and Subscriptions
Gross
profits from perpetual licenses and subscriptions increased $317 thousand or 53%
in fiscal 2009 compared with fiscal 2008. Gross profit margin decreased to 64%
in fiscal 2009 from 68% in fiscal 2008. The decrease in gross margin
is related to (i) amortization of software costs previously capitalized (there
was no such amortization in fiscal 2008) and (ii) the full year impact of
amortization of certain intangible assets related to 2008
acquisitions. We continue to incur costs associated with maintaining
the legacy products and costs incurred from operating additional NOC
locations. We began to migrate customers to our new product platform
from our legacy products and will continue this migration into the foreseeable
future.
Operating
Expenses
The
following table sets forth the percentage change and the percentage of total
revenue for operating expenses for the years ended September 30, 2009 and 2008,
respectively.
|
|
Year
Ended September 30,
|
|
(dollars
in thousands)
|
|
2009
|
|
|
2008
|
|
|
$
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
& marketing
|
|
$ |
6,192 |
|
|
$ |
6,294 |
|
|
$ |
(102 |
) |
|
|
(2% |
) |
%
of total revenue
|
|
|
26% |
|
|
|
29% |
|
|
|
|
|
|
|
|
|
General
& administrative
|
|
$ |
4,001 |
|
|
$ |
3,531 |
|
|
$ |
470 |
|
|
|
13% |
|
%
of total revenue
|
|
|
17% |
|
|
|
17% |
|
|
|
|
|
|
|
|
|
Research
& development
|
|
$ |
1,124 |
|
|
$ |
619 |
|
|
$ |
505 |
|
|
|
82% |
|
%
of total revenue
|
|
|
4% |
|
|
|
3% |
|
|
|
|
|
|
|
|
|
Depreciation
& amortization
|
|
$ |
1,222 |
|
|
$ |
1,051 |
|
|
$ |
171 |
|
|
|
16% |
|
%
of total revenue
|
|
|
5% |
|
|
|
5% |
|
|
|
|
|
|
|
|
|
Impairment
of intangible assets
|
|
$ |
— |
|
|
$ |
76 |
|
|
$ |
(76 |
) |
|
|
(100% |
) |
%
of total revenue
|
|
|
|
|
|
|
0% |
|
|
|
|
|
|
|
|
|
Impairment
of goodwill
|
|
$ |
— |
|
|
$ |
9,752 |
|
|
$ |
(9,752 |
) |
|
|
(100% |
) |
%
of total revenue
|
|
|
|
|
|
|
46% |
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
$ |
12,539 |
|
|
$ |
21,323 |
|
|
$ |
(8,784 |
) |
|
|
(41% |
) |
%
of total revenue
|
|
|
52% |
|
|
|
100% |
|
|
|
|
|
|
|
|
|
Sales
and Marketing Expenses
Sales and
marketing expenses decreased to $6.2 million for fiscal 2009, from $6.3 million
in fiscal 2008, or by 2%. Sales and marketing expenses represented
26% of total revenue in fiscal 2009, compared to 29% in fiscal
2008. This decrease is primarily attributable to (i) a reduction in
staff effective in December 2008 and (ii) a reduction in variable compensation
expenses. We have established incentives and goals for each
salesperson to encourage revenue generation behavior. The decreases
above were offset by increases in costs related to seminars and lead generation
activity which added to marketing expense in fiscal 2009 when
compared to fiscal 2008.
General
and Administrative Expenses
General
and administrative expenses increased to $4.0 million for fiscal 2009 from $3.5
million in fiscal 2008, or by 13%. General and administrative expense
represented 17% of revenue in both fiscal years. The increase in the
amount of general and administrative expense is primarily due to (i) increases
in personnel, recruiting, consulting and professional fees associated with
systems enhancement for improved internal and public reporting and (ii)
increases in stock-based compensation expense.
Research
and Development
Research
and development expense increased to $1.1 million in fiscal 2009 from $619
thousand in fiscal 2008, or by 82%, exclusive of capitalized software
costs. Such costs were $30 thousand for fiscal 2009 and $397 thousand
for fiscal 2008. Inclusive of the capitalized costs, research and
development spending totaled $1.2 million in fiscal 2009 compared to $1.0
million in fiscal 2008, an increase of $138 thousand or 14%. The
increase in cost is related to the relocation of R&D personnel to our
corporate offices in Woburn, MA from our subsidiary in India to continue
developing our new on-demand software products, iAPPS Framework, iAPPS Content
Manager, iAPPS Analytics and iAPPS eCommerce. We will continue to
invest in enhancements for our on demand software products in fiscal
2010.
Depreciation
and Amortization
Depreciation
and amortization expense increased to $1.2 million in fiscal 2009 from $1.1
million in fiscal 2008, or by 16%. These increases are primarily attributable to
(i) additional amortization expense for intangible assets resulting from
acquisitions consummated subsequent to December 31, 2007, and (ii) additional
amortization charges on leasehold improvements related to office facilities in
Illinois and Virginia that commenced in the quarters ending September 30, 2008
and December 31, 2008, respectively. These increases are offset by an
adjustment to amortization expense for intangibles assets recorded in the
quarter ended March 31, 2009 related to the final purchase price allocation for
Indigio completed by an independent third party valuation firm.
Impairment
of Intangible Assets and Goodwill
For the
year ended September 30, 2009, the Company did not record any impairment charges
for intangible assets or goodwill. For the year ended September 30,
2008, the Company recorded an impairment charge for intangible assets in the
amount of $76 thousand and an impairment charge for goodwill in the amount of
$9.8 million. This impairment charge resulted from (i) economic
factors impacting our business (ii) an overall decline in organic revenue growth
in the second half of fiscal 2008, and (iii) a material decline in our stock
price since September 30, 2007. The impairment charge was estimated at September
30, 2008 and finalized during the quarter ended March 31, 2009 resulting in no
change from the original estimate.
In
evaluating goodwill impairment, the Company considers a number of factors such
as market capitalization value, discounted cash flow projections, guideline
public company comparisons and acquisition transactions of comparable third
party companies. Evaluating the potential impairment of goodwill is highly
subjective and requires management to make significant estimates and judgment at
many points during the analysis, especially with regard to the Company’s future
cash flows.
Income
Tax Expense
Income
tax expense was $31 thousand for fiscal 2009 compared with $ -0- for fiscal
2008. Income tax expense for fiscal 2009 represents the estimated
federal tax expense for alternative minimum taxes owed by the Company plus state
income taxes in states where the Company does business. Income tax
expense for alternative minimum tax is based on the effect of temporary
differences derived from alternative treatments of items for tax and accounting
purposes, reduced by alternative minimum tax net operating loss carryforwards to
the extent allowed. Net operating loss carryforwards are estimated to
be sufficient to offset additional federal taxable income for all periods
presented.
Income
(Loss) from Operations
Net
income (loss) increased to $758 thousand in fiscal 2009 from ($10.3) million in
fiscal 2008, or by $11.1 million. The improvement in income from
operations is principally a result of an increase in revenue and gross profits,
a reduction in operating expenses before impairment charges and the fact that no
impairment charges were recorded for intangible assets and goodwill, as compared
with $9.8 million of impairment charges in fiscal 2008.
Liquidity
and Capital Resources
Overview
We have
historically funded our operations primarily through issuances of short-term
debt and equity. In fiscal 2009 we generated positive cash flow from
operations. We believe that our operations will continue to generate positive
cash flows as our revenue increases. The Company’s cash and cash equivalents
were $3.1 million and $1.9 million at September 30, 2009 and 2008,
respectively.
Working
Capital
We had
working capital of $3.0 million at September 30, 2009 compared with working
capital of $2.5 million for the same period of the prior year. We
define working capital as current assets less current liabilities. We
had accounts receivable of $3.4 million at September 30, 2009 compared with $4.5
million for the same period of the prior year. Unbilled receivables
decreased to $349 thousand from $1.6 million or by $1.2 million at
September 30, 2009 from September 30, 2008. This decrease in unbilled
receivables resulted from the timing of billings in accordance with stated
contracted terms and a decrease in unbilled receivables related to companies
acquired in 2008.
Cash
Flows
Operating
Activities
Cash
provided from operating activities was $3.0 million for the year ended
Septembers 30, 2009 compared with cash used in operating activities of ($387)
thousand for the same period of 2008, an increase of $3.4
million. The increase is primarily attributable to an increase in net
income and favorable changes in working capital.
Investing
Activities
Cash used
in investing activities was $1.7 million for the year ended September 30, 2009
compared with $3.7 million for the same period of 2008. In fiscal 2009, we
continued to invest in our network operation center which supports our iAPPS
software as a service business. Expenditures for fiscal 2009 related to
equipment and improvements were $453 thousand. In addition, in fiscal
2009 capitalized software development costs were $30 thousand and contingent
acquisition payments (earnouts) were $1.2 million. In fiscal 2008 we
made expenditures for equipment and improvements of $980 thousand, capitalized
software development costs of $397 thousand and contingent acquisition payments
of $528 thousand. In fiscal 2008, we also completed two acquisitions
for a cash use of $1.8 million.
As of
September 30, 2009, we had remaining contingent acquisition obligations to
former owners of acquired companies, subject to the achievement of certain
defined operating metrics. Such metrics are based primarily on revenue and
EBITDA targets. The total maximum amount of potential payments are $1.9 million,
$793 thousand and $585 thousand for the fiscal years ending September 30, 2010,
2011 and 2012, respectively, provided that the contingent results are
achieved.
Financing
Activities
Net cash
used in financing activities was $105 thousand for the year ended September 30,
2009, compared to cash provided by financing activities of $798 thousand for the
same period in 2008. The Company received proceeds
from the
bank line of credit of $4.3 million, repaid the bank credit line of $4.3 million
and repaid obligations under capital equipment leases of $105 in fiscal 2009.
Cash flows from financing activities in fiscal 2008 were primarily attributable
to proceeds from the bank line of credit of $1.0 million and the repayment of
capital lease obligations of $200 thousand.
In
September 2009, we received cash proceeds of $1.0 million from our bank line of
credit, which was repaid in full in October 2009. In November 2009, the
bank line of credit was amended to extend the maturity date to March 31,
2010.
Capital
Resources and Liquidity Outlook
We
believe that our cash flows from operating activities will generate cash flows
sufficient to cover of operating cash needs, requirements for capital
expenditures and potential earnouts during fiscal 2010. We believe
that cash requirements for capital expenditures will be approximately $400
thousand during fiscal 2010, and maximum earnout obligations are $1.9
million. We also believe that cash flows from operating
activities will be sufficient to cover our implementation of Sarbanes Oxley
requirements. Funds required for acquisitions, if any, and
investments in research and development will be funded from the remaining cash
flows from operations and our bank line of credit.
Inflation
Inflationary
increases can cause pressure on wages and the cost of benefits offered to
employees. We believe that the relatively moderate rates of inflation
in recent years have not had a significant impact on our
operations.
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements, financings or other relationships with
unconsolidated entities or other persons, other than our operating leases and
contingent acquisition payments disclosed below.
We
currently do not have any variable interest entities. We do not have any
relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special purpose entities,
which would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes. Therefore,
we are not materially exposed to any financing, liquidity, market or credit risk
that could arise if we had engaged in such relationships.
Contractual
Obligations
The
following summarizes our long-term contractual obligations as of
September 30, 2009:
|
|
For
the Year Ending September 30,
|
|
(in
thousands)
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
Total
|
|
Payment
obligations by year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
line of credit
|
|
$ |
1,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,000 |
|
Capital
leases
|
|
|
90 |
|
|
|
55 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
156 |
|
Operating
leases (a)
|
|
|
1,113 |
|
|
|
998 |
|
|
|
640 |
|
|
|
333 |
|
|
|
130 |
|
|
|
— |
|
|
|
3,214 |
|
Contingent
acquisition payments (b)
|
|
|
1,900 |
|
|
|
793 |
|
|
|
585 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,278 |
|
Total
|
|
$ |
4,103 |
|
|
$ |
1,846 |
|
|
$ |
1,236 |
|
|
$ |
333 |
|
|
$ |
130 |
|
|
$ |
— |
|
|
$ |
7,648 |
|
|
(a)
|
Net
of sublease income
|
|
(b)
|
The
contingent acquisition payments are maximum potential earn-out
consideration payable to former owners of acquired
companies. Amounts actually paid may be
less.
|
Critical
Accounting Policies
The
Company’s significant accounting policies are described in Note 2 of the
Consolidated Financial Statements, that were prepared in accordance with
accounting principles generally accepted in the United States of America (“US
GAAP”). Effective for interim and annual periods ending after September 15,
2009, The Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification™ (the“Codification”) became single source of authoritative
nongovernmental U.S. generally accepted accounting principles (US
GAAP). The company adopted the Codification during the quarter ending
September 30, 2009. The adoption had no effect on the Company's
consolidated financial statements.
The
preparation of financial statements in accordance US GAAP requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses in the reporting period. We regularly make
estimates and assumptions that affect the reported amounts of assets and
liabilities. The most significant estimates included in our financial statements
are the valuation of accounts receivable and long-term assets, including
intangibles, goodwill and deferred tax assets, stock-based compensation, amounts
of revenue to be recognized on service contracts in progress, unbilled
receivables, and deferred revenue. We base our estimates and assumptions on
current facts, historical experience and various other factors that we
believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities and the accrual of costs and expenses that are not readily
apparent from other sources. The actual results experienced by us may differ
materially and adversely from our estimates. To the extent there are
material differences between our estimates and the actual results, our future
results of operations will be affected.
We
consider the following accounting policies to be both those most important to
the portrayal of our financial condition and those that require the most
subjective judgment:
·
|
Revenue
recognition;
|
·
|
Allowance
for doubtful accounts;
|
·
|
Accounting
for cost of computer software to be sold, leased or otherwise
marketed;
|
·
|
Accounting
for goodwill and other intangible assets; and
|
·
|
Accounting
for stock-based compensation.
|
Revenue
Recognition
Overview
The
Company enters into arrangements to sell web application development services
(professional services), software licenses or combinations
thereof. Revenue is categorized into (i) Web Application Development
Services (ii) Managed Service Hosting, and (iii) Subscriptions and Perpetual
Licenses.
The
Company recognizes revenue as required by the Revenue Recognition Topic of
the Codification. Revenue is recognized when all of the following
conditions are satisfied: (1) there is persuasive evidence of an arrangement;
(2) delivery has occurred or the services have been provided to the customer;
(3) the amount of fees to be paid by the customer is fixed or determinable; and
(4) the collection of the fees is reasonably assured. Billings made or payments
received in advance of providing services are deferred until the period these
services are provided.
Web
Application Development Services
Web
application development services include professional services primarily related
to the Company’s Web development solutions that address specific customer needs
such as information architecture and usability engineering, interface
configuration, application development, rich media, e-Commerce, e-Learning and
e-Training, search engine optimization, and content management.
Web
application development services are contracted for on either a fixed price or
time and materials basis. For its fixed price engagements, the Company
applies the proportional performance model to recognize revenue based on cost
incurred in relation to total estimated cost at completion. The Company has
determined that labor costs are the most appropriate measure to allocate revenue
among reporting periods, as they are the primary input when providing
application development services. Customers are invoiced monthly or upon the
completion of milestones. For milestone based projects, since milestone pricing
is based on expected hourly costs and the duration of such engagements is
relatively short, this input approach principally mirrors an output approach
under the proportional performance model for revenue recognition on such fixed
priced engagements. For time and materials contracts, revenues are
recognized as the services are provided.
Web
application development services also include retained professional services
contracted for on an “on call” basis or for a certain amount of hours each
month. Such arrangements generally provide for a guaranteed availability of a
number of professional services hours each month on a “use it or lose it”
basis. For retained professional services sold on a stand-alone
we recognize revenue as the services are delivered or over the term of the
contractual retainer period. These arrangements do not require formal
customer acceptance and do not grant any future right to labor hours contracted
for but not used.
Application
development services are often sold as part of multiple element arrangements
wherein perpetual licenses for the Company’s software products, retained
professional services, hosting and/or subscriptions are provided in connection
with application development services engagements. The Company’s
revenue recognition policy with respect to these multiple element arrangements
is described further below under the caption “Multiple Element
Arrangements.”
Managed
Service Hosting
Managed
service hosting includes hosting arrangements that provide for the use of
certain hardware and infrastructure, generally at the Company’s network
operating centers. The majority of the customers under contractual
hosting arrangements have been previous application development services
customers. Set-up costs associated with hosting arrangements are not significant
and when charged are recognized ratably over the expected period of performance,
generally twenty-four months. Hosting agreements are either
annual or month-to-month arrangements that provide for termination for
convenience by either party generally upon 30-days notice. Revenue is
recognized monthly as the hosting services are delivered. As
described below, hosting revenue associated with the Company’s subscriptions are
included in subscription and perpetual license revenue.
Hosting
services are typically sold in connection with application development services
but also may be sold on a stand-alone basis. The Company’s
revenue recognition policy with respect to multiple element arrangements is
described further below under the caption “Multiple Element
Arrangements.”
Subscriptionand Perpetual
Licenses
The
Company licenses its software on a perpetual and subscription basis. Customers
who license the software on a perpetual basis receive rights to use the software
for an indefinite time period. For arrangements that consist of a
perpetual license and PCS, the PCS revenue is recognized ratably on a
straight-line basis over the period of performance and the perpetual license is
recognized on a residual basis. Under the residual method, the fair
value of the undelivered elements are deferred and the remaining portion of the
arrangement fee is allocated to the delivered elements and recognized as
revenue, assuming all other revenue recognition criteria have been
met. Revenue
recognition
for perpetual licenses sold as part of a multiple element arrangement is
described further below under the caption “Multiple Element
Arrangements.”
Customers
also license the software on a subscription basis, which can be described as
“Software as a Service” or “SaaS”. SaaS is a model of software
deployment where an application is hosted as a service provided to customers
across the Internet. Subscription agreements include access to the
Company’s software application via an internet connection, the related hosting
of the application, and PCS. Customers receive automatic updates and
upgrades, and new releases of the products as soon as they become
available. Subscription agreements are either annual or
month-to-month arrangements that provide for termination for convenience by
either party upon 30 to 45 days notice. Revenue is recognized monthly
as the services are delivered. Any up front set-up fees are amortized over 24
months. We have concluded that our Subscription Agreements should be
accounted for differently from software sales since the software is only
accessible through a hosting arrangement with us and the customer cannot take
possession of the software. Revenue recognition for Subscriptions
sold as part of a multiple element arrangement is described further below under
the caption “Multiple Element Arrangements.
Subscription
and perpetual licenses also include PCS includes a provision for unspecified
product upgrades, error or bug fixes, and telephone and online support during
the Company’s normal business hours. Revenue for PCS sold separately
is recognized ratably on a straight-line basis over the period of performance,
typically twelve months. Vendor specific objective evidence (“VSOE”)
is established for PCS and is based on the price of PCS when sold separately,
which has been established via annual renewal rates and is a consistent
percentage of the stipulated software license fee. Revenue
recognition for PCS sold as part of a multiple element arrangement is described
further below under the caption “Multiple Element Arrangements.”
Multiple
Element Arrangements
As
described above, application development services are often sold as part of
multiple element arrangements. Such arrangements may include delivery
of a perpetual license for the Company’s software products at the commencement
of an application development services engagement or delivery of retained
professional services, hosting services and/or subscriptions subsequent to
completion of such engagement, or combinations thereof. In accounting
for these multiple element arrangements, we follow either Codification
Topic 605-985 Revenue
Recognition Software or Codification Topic 605-25 Revenue Recognition Multiple Element
Arrangements, as applicable. As described further below, the Company has
concluded that each element can be treated as a separate unit of accounting when
following Codification Topic 605-25.
As
permitted by Codification Topic 605-25-65-1, the Company adopted on a
retrospective basis Accounting Standards Update No. 2009-13, Revenue Recognition: Multiple
Deliverable Arrangements. This adoption had no impact on previously
reported financial information
When the
Company licenses its software on a perpetual basis in a multiple element
arrangement that also includes application development services and PCS, VSOE of
each element is considered. VSOE is established for PCS and is based
on the price of PCS when sold separately, which has been established via annual
renewal rates. Revenue recognition for perpetual licenses sold with
application development services are considered on a case by case
basis. The Company has not established VSOE for perpetual licenses or
fixed price development services and therefore in accordance with ASC Section
605-985, when perpetual licenses are sold in a multiple element arrangements
including application development services where VSOE for the services has
not been established, the license revenue is deferred and recognized under the
proportional performance model along with the associated application development
services. For the year ended September 30, 2009, the Company has
recognized revenue of $304 thousand for perpetual
licenses. In determining VSOE for the application
development services element, the separability of the application development
services from the software license and the value of the services when sold on a
standalone basis is considered. The Company also considers the
categorization of the services, the timing of when the services contract was
signed in relation to the signing of the perpetual license contract and delivery
of the software, and whether the services can be performed by
others. The Company has concluded that its application development
services are not required for the customer to use the product but, rather
enhance the benefits that the software can bring to the customer. In
addition, the services provided do not result in significant customization or
modification of the software and are not essential to its
functionality, and can also be performed by the customer or a third
party. If an application development services arrangement does
qualify for separate accounting, the Company
recognizes
the perpetual license on a residual basis. If a application
development services arrangement does not qualify for separate accounting, the
Company recognizes the perpetual license under the proportional performance
model as described above.
When
subscription arrangements are sold with application development services, the
Company follows Codification Topic 605-25 Revenue Recognition Multiple Element
Arrangements and have concluded that each element can be treated as a
separate unit of accounting. In determining separability, the timing
of the commencement of the subscription period to the services delivery is
considered.
If the
subscription period begins after the services delivery then the Company
generally recognizes the services as delivered and then commences revenue
recognition for the subscription after the services have been
delivered. To date, all subscription periods have commenced after the
services delivery. If the application development services
arrangement does not qualify for separate accounting, the application
development services revenue and related costs are deferred and recognized over
the subscription period. Subscriptions also include a PCS component,
and the Company has determined that the two elements cannot be separated and
must be recognized as one unit over the applicable service period.
Customer
Payment Terms
Payment
terms with customers typically require payment 30 days from invoice date.
Payments terms may vary by customer but generally do not exceed 45 days from
invoice date. Invoicing for Application Development Services are either
monthly or upon achievement of milestones and payment terms for such
billings are within the standard terms described above. Invoicing for
subscriptions and hosting are typically issued monthly and are generally in
the month of service.
Our
agreements with customers do not provide for any refunds for services or
products and therefore no specific reserve for such is maintained. In the
infrequent instances where customers raise concerns over delivered products
or services, we have endeavored to remedy the concern and all costs related
to such matters have been insignificant in all periods presented.
Warranty
Certain
arrangements include a warranty period of 30 days from the completion of work.
In hosting arrangements, we provide warranties of up-time reliability. We
continue to monitor the conditions that are subject to the warranties to
identify if a warranty claim may arise. If we determine that a warranty claim is
probable, then any related cost to satisfy the warranty obligation is
estimated and accrued. Warranty claims to date have been
immaterial.
Reimbursable
Expenses
In
connection with certain arrangements, reimbursable expenses are incurred and
billed to customers and such amounts are recognized as both revenue and
cost of revenue.
Allowance for Doubtful
Accounts
We
maintain an allowance for doubtful accounts which represents estimated losses
resulting from the inability, failure or refusal of our clients to make
required payments.
We
analyze historical percentages of uncollectible accounts and changes in
payment history when evaluating the adequacy of the allowance for doubtful
accounts. We use an internal collection effort, which may include our sales
and services groups as we deem appropriate. Although we believe that
our allowances are adequate, if the financial condition of our clients
deteriorates, resulting in an impairment of their ability to make payments,
or if we underestimate the allowances required, additional allowances may be
necessary, resulting in increased expense in the period in which such
determination is made.
Accounting for
Cost of Computer Software to be Sold, Leased or Otherwise Marketed
We charge
research and development expenditures for technology development to operations
as incurred. However, in accordance with Codification 985-20 Costs of Software to be Sold Leased
or Otherwise Marketed, we capitalize certain software development costs
subsequent to the establishment of technological feasibility. Based
on our product development process, technological feasibility is established
upon completion of a working model. Certain
costs
incurred between completion of a working model and the point at which the
product is ready for general release are capitalized if significant. Once the
product is available for general release, the capitalized costs are amortized in
cost of sales.
Accounting
for Goodwill and Other Intangible Assets
Goodwill
and other intangible assets require us to make estimates and judgments about the
value and recoverability of those assets. We have made several acquisitions
of businesses that resulted in both goodwill and intangible assets being
recorded in our financial statements.
Goodwill
is recorded as the difference, if any, between the aggregate consideration paid
for an acquisition and the fair value of the net tangible and intangible
assets acquired. The amount and useful lives assigned to other intangible assets
impact the amount and timing of future amortization, and the amount
assigned to in-process research and development is expensed immediately.
The value of our intangible assets, including goodwill, could be impacted by
future adverse changes such as: (i) future declines in our operating results,
(ii) a decline in the value of technology company stocks, (iii) a decline
in the value of our common stock and (iv) any failure to meet the
performance projections included in our forecasts of future operating
results.
We evaluate
goodwill and other intangible assets deemed to have indefinite lives on an
annual basis in the quarter ended September 30, or more frequently if we
believe indicators of impairment exist. Application of the goodwill impairment
test requires judgment including the identification of reporting units,
assigning assets and liabilities to reporting units, assigning goodwill to
reporting units and determining the fair value of each reporting unit. In
accordance with the Intangibles-Goodwill and
Other Topic of the Codification, management has determined that there is
only one reporting unit to be tested.
The
goodwill impairment test compares the implied fair value of the reporting
unit with the carrying value of the reporting unit. The implied fair value
of goodwill is determined in the same manner as in a business combination.
Determining the fair value of the implied goodwill is judgmental in nature
and often involves the use of significant estimates and assumptions. These
estimates and assumptions could have a significant impact on whether or not
an impairment charge is recognized and also the magnitude of any such
charge. Estimates of fair value are primarily determined using discounted cash
flows and market comparisons. These approaches use significant estimates
and assumptions, including projection and timing of future cash flows, discount
rates reflecting the risk inherent in future cash flows, perpetual growth
rates, determination of appropriate market comparables, and determination
of whether a premium or discount should be applied to comparables. It is
reasonably possible that the plans and estimates used to value these assets
may be incorrect. If our actual results, or the plans and estimates used in
future impairment analyses, are lower than the original estimates used to
assess the recoverability of these assets, we could incur
additional impairment charges.
We also
assess the impairment of our long-lived assets, including definite-lived
intangible assets and equipment and improvements when events or changes in
circumstances indicate that an asset’s carrying value may not be recoverable.
An impairment charge is recognized when the sum of the expected future
undiscounted net cash flows is less than the carrying value of the asset.
Any impairment charge is measured by comparing the amount by which the carrying
value exceeds the fair value of the asset being evaluated for impairment.
Any resulting impairment charge could have an adverse impact on our
results of operations.
We
performed our annual impairment test of goodwill as of the fourth quarter of
fiscal 2009. Based on the results of this test we determined that there was no
impairment of goodwill or other intangible assets.
We also
performed our annual impairment test of goodwill during the fourth quarter of
fiscal 2008. As a result of (i) the present economic environment impacting our
business and results, (ii) an overall decline in organic revenue growth in
the fourth quarter of fiscal 2008, and (iii) a material decline in the
trading price of our common stock since June 30, 2008, we determined that an
impairment triggering event had been identified. Therefore, we engaged an
independent third party to assist us in the review of the carrying value of
goodwill and our definite-lived intangible asset balances for possible
impairment in accordance with the Intangibles-Goodwill and
Other Topic and the Property, Plant and Equipment
Topic of the Codification, respectively.
In our
review of the carrying value of the goodwill and intangible assets we determined
the fair value of our single reporting unit using (i) the Income Approach, or
more specifically the Discounted Cash Flow Method, (ii) the Market Approach,
utilizing both the Guideline Company Method and the Comparable Transaction
Method, and (iii) the Direct Market Data Method, determining the fair value
based on active market data at September 30, 2008. The review for
impairment indicated that the carrying value of both the goodwill and intangible
assets was impaired at September 30, 2008). In accordance with the
Fair Value Measurements and
Disclosures Topic of the Codification, our evaluation considered inputs
from all three levels of hierarchy (Level 1, Level 2 and Level 3). We
placed significant weighting in our evaluation of fair value derived using the
Direct Market Data Method (i.e. market capitalization) as it involves the use of
a Level 1 input – the value of our stock in an active market, and therefore is
afforded the highest consideration. Accordingly, the fair values
derived utilizing the other three methods based on Level 2 and Level 3 inputs
were allocated significantly less weighting. We also considered the
impact of the current economic recession on our fourth quarter revenue and the
52% decline in our stock price since June 30, 2008. Based upon the
results of the valuation techniques utilized, we recognized an impairment charge
of $9.8 million for the fiscal year ended September 30, 2008 related to carrying
value of goodwill.
As a
final requirement of the goodwill impairment evaluation, the amount of
impairment should be allocated to the assets and liabilities of the entity based
on the implied fair value. We completed the fiscal 2008 analysis
during the second fiscal quarter of 2009.
Accounting
for Stock-Based Compensation
At
September 30, 2009, we maintained two stock-based compensation plans more fully
described in Note 10 to the Consolidated Financial Statements.
The
Company accounts for stock compensation awards in accordance with the Compensation-Stock
Compensation Topic of the Codification. Share-based payments
(to the extent they are compensatory) are recognized in our consolidated
statements of operations based on their fair values.
We
recognize stock-based compensation expense for share-based payments issued or
assumed after October 1, 2006 that are expected to vest on a straight-line basis
over the service period of the award, which is generally four
years. We recognize the fair value of the unvested portion of
share-based payments granted prior to October 1, 2006 over the remaining
service period, net of estimated forfeitures. In determining whether an
award is expected to vest, we use an estimated, forward-looking forfeiture rate
based upon our historical forfeiture rate and reduce the expense over the
recognition period. Estimated forfeiture rates are updated for actual
forfeitures quarterly. We also consider, each quarter, whether there have
been any significant changes in facts and circumstances that would affect our
forfeiture rate. Although we estimate forfeitures based on historical
experience, actual forfeitures in the future may differ. In addition, to
the extent our actual forfeitures are different than our estimates, we record a
true-up for the difference in the period that the awards vest, and such true-ups
could materially affect our operating results.
We
estimate the fair value of employee stock options using the
Black-Scholes-Merton option valuation model. The fair value of an
award is affected by our stock price on the date of grant as well as other
assumptions including the estimated volatility of our stock price over the term
of the awards and the estimated period of time that we expect employees to hold
their stock options. The risk-free interest rate assumption we use is
based upon United States treasury interest rates appropriate for the expected
life of the awards. We use the historical volatility of our publicly
traded options in order to estimate future stock price trends. In order to
determine the estimated period of time that we expect employees to hold their
stock options, we have used historical rates of employee turnover by job
classification. Our expected dividend rate is zero since we do not
currently pay cash dividends on our common stock and do not anticipate doing so
in the foreseeable future. The aforementioned inputs entered into the option
valuation model we use to fair value our stock awards are subjective estimates
and changes to these estimates will cause the fair value of our stock awards and
related stock-based compensation expense we record to vary.
We record
deferred tax assets for stock-based awards that result in deductions on our
income tax returns, based on the amount of stock-based compensation recognized
and the statutory tax rate in the jurisdiction in which we will receive a tax
deduction.
Because
the deferred tax assets we record are based upon the stock-based compensation
expenses in a particular jurisdiction, the aforementioned inputs that affect the
fair value of our stock awards also indirectly affect our income tax
expense. In addition, differences between the deferred tax assets
recognized for financial reporting purposes and the actual tax deduction
reported on our income tax returns are recorded in additional paid-in capital.
If the tax deduction is less than the deferred tax asset, such shortfalls reduce
our pool of excess tax benefits. If the pool of excess tax benefits is
reduced to zero, then subsequent shortfalls would increase our income tax
expense. Our pool of excess tax benefits is computed in accordance with
the alternative transition method. To the extent we change the terms of our
employee stock-based compensation programs or refine different assumptions in
future periods such as forfeiture rates that differ from our estimates, the
stock-based compensation expense that we record in future periods and the tax
benefits that we realize may differ significantly from what we have recorded in
previous reporting periods.
Stock
Options Activity (Repricing Plan)
In
October 2008, the Board of Directors approved the Repricing Plan which totaled
approximately 1.6 million shares. The effect of the modification was
to adjust the exercise price of the applicable options to the fair value of the
underlying common stock on the date of modification. In addition, the
vesting period on the applicable options was reset to the standard three year
term set forth in our incentive stock option plan.
We
estimated the fair value of the stock option modifications using the
Black-Scholes-Merton option model and are recording additional stock-based
compensation of approximately $300 thousand over the three year vesting
period. While we believe that our estimates are based on outcomes
that are reasonably likely to occur, if actual results differ significantly from
those estimated or if future changes are made to our assumptions, the amount of
recognized compensation expense could change significantly. For
additional information refer to Footnote 10 of the Consolidated Financial
Statements.
Recent
Accounting Pronouncements
The Business Combination Topic of
the Codification requires the Company to record separately and expense the
direct costs of an acquisition. These costs were previously included
in the total allocated cost of the acquisition. This Codification
Topic also requires the Company to recognize as an asset or liability at fair
value certain contingencies, either contractual or non-contractual, if certain
criteria are met. Finally, this Codification Topic requires that the
Company recognize contingent consideration at the date of acquisition, based on
the fair value at that date. These Codification Topic changes are
effective and will impact any acquisitions completed by the Company after
September 30, 2009.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk.
Not
required.
Item
8. Financial Statements and Supplementary Data.
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors of
Bridgeline
Software, Inc:
We have
audited the consolidated balance sheets of Bridgeline Software, Inc. (the
“Company”) as of September 30, 2009 and 2008, and the related consolidated
statements of operations, changes in stockholders’ equity, and cash flows
for the years then ended. These financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Bridgeline Software, Inc. as
of September 30, 2009 and 2008, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ UHY
LLP
December
28, 2009
Boston,
Massachusetts
BRIDGELINE
SOFTWARE, INC.
CONSOLIDATED
BALANCE SHEETS
(Dollars
in thousands, except share and per share data)
ASSETS
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,060
|
|
|
$
|
1,911
|
|
Accounts
receivable and unbilled receivables, net
|
|
|
3,468
|
|
|
|
5,662
|
|
Prepaid
expenses and other current assets
|
|
|
320
|
|
|
|
467
|
|
Total
current assets
|
|
|
6,848
|
|
|
|
8,040
|
|
Equipment
and improvements, net
|
|
|
1,448
|
|
|
|
1,763
|
|
Intangible
assets, net
|
|
|
1.490
|
|
|
|
2,980
|
|
Goodwill,
net
|
|
|
13,899
|
|
|
|
10,725
|
|
Other
assets
|
|
|
570
|
|
|
|
751
|
|
Total
assets
|
|
$
|
24,255
|
|
|
$
|
24,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
714
|
|
|
$
|
1,770
|
|
Accrued
liabilities
|
|
|
1,194
|
|
|
|
1,529
|
|
Line
of credit
|
|
|
1,000
|
|
|
|
1,000
|
|
Capital
lease obligations, current
|
|
|
77
|
|
|
|
105
|
|
Deferred
revenue
|
|
|
890
|
|
|
|
1,176
|
|
Total
current liabilities
|
|
|
3,875
|
|
|
|
5,580
|
|
Capital
lease obligations, net of current portion
|
|
|
62
|
|
|
|
139
|
|
Other
long term liabilities
|
|
|
414
|
|
|
|
350
|
|
Total
liabilities
|
|
|
4,351
|
|
|
|
6,069
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
C Preferred
stock - $0.001 par value; 1,000,000 shares authorized; none
issued
and
outstanding
|
|
|
—
|
|
|
|
—
|
|
Common
stock -$0.001 par value; 20,000,000 shares authorized;11,182,209
and
10,665,553
shares issued and outstanding, respectively
|
|
|
11
|
|
|
|
11
|
|
Additional
paid-in capital
|
|
|
35,620
|
|
|
|
34,647
|
|
Accumulated
deficit
|
|
|
(15,611
|
)
|
|
|
(16,369
|
)
|
Accumulated
other comprehensive income
|
|
|
(116
|
)
|
|
|
(99
|
)
|
Total
stockholders’ equity
|
|
|
19,904
|
|
|
|
18,190
|
|
Total liabilities and stockholders’ equity
|
|
$
|
24,255
|
|
|
$
|
24,259
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
BRIDGELINE
SOFTWARE, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Dollars
in thousands, except share and per share data)
|
|
Year
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Revenue:
|
|
|
|
|
|
|
Web
application development services
|
|
$
|
20,272
|
|
|
$
|
18,231
|
|
Managed
service hosting
|
|
|
2,202
|
|
|
|
2,188
|
|
Subscription
and perpetual licenses
|
|
|
1,427
|
|
|
|
876
|
|
Total
revenue
|
|
|
23,901
|
|
|
|
21,295
|
|
Cost
of revenue:
|
|
|
|
|
|
|
|
|
Web
application development services
|
|
|
9,422
|
|
|
|
9,579
|
|
Managed
service hosting
|
|
|
595
|
|
|
|
444
|
|
Subscription
and perpetual licenses
|
|
|
516
|
|
|
|
282
|
|
Total
cost of revenue
|
|
|
10,533
|
|
|
|
10,305
|
|
Gross
profit
|
|
|
13,368
|
|
|
|
10,990
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
6,192
|
|
|
|
6,294
|
|
General
and administrative
|
|
|
4,001
|
|
|
|
3,531
|
|
Research
and development
|
|
|
1,124
|
|
|
|
619
|
|
Depreciation
and amortization
|
|
|
1,222
|
|
|
|
1,051
|
|
Impairment
of intangible assets
|
|
|
—
|
|
|
|
76
|
|
Impairment
of goodwill
|
|
|
—
|
|
|
|
9,752
|
|
Total
operating expenses
|
|
|
12,539
|
|
|
|
21,323
|
|
Income
(loss) from operations
|
|
|
829
|
|
|
|
(10,333
|
)
|
Other
income (expense) net
|
|
|
—
|
|
|
|
85
|
|
Interest
income (expense) net
|
|
|
(40
|
)
|
|
|
(61
|
)
|
Income
(loss) before income taxes
|
|
|
789
|
|
|
|
(10,309
|
)
|
Income
taxes
|
|
|
31
|
|
|
|
—
|
|
Net
income (loss)
|
|
$
|
758
|
|
|
$
|
(10,309
|
)
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.07
|
|
|
$
|
(1.09
|
)
|
Diluted
|
|
$
|
.07
|
|
|
$
|
(1.09
|
)
|
Number
of weighted average shares:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,008,879
|
|
|
|
9,473,408
|
|
Diluted
|
|
|
11,272,190
|
|
|
|
9,473,408
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
BRIDGELINE
SOFTWARE, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Common
Stock
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
Par
|
|
|
Paid in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Stockholders’
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30,
2007
|
|
|
8,648,950
|
|
|
$
|
9
|
|
|
$
|
28,908
|
|
|
$
|
(6,060
|
)
|
|
$
|
18
|
|
|
$
|
22,875
|
|
Stock
based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
425
|
|
|
|
—
|
|
|
|
—
|
|
|
|
425
|
|
Exercise
of stock options
|
|
|
6,667
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercise
of stock warrants
|
|
|
160,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Issuance
of common stock and options
for acquisitions
|
|
|
1,767,758
|
|
|
|
2
|
|
|
|
5,047
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,049
|
|
Issuance
of common stock and
options for earnouts
|
|
|
82,158
|
|
|
|
—
|
|
|
|
267
|
|
|
|
—
|
|
|
|
—
|
|
|
|
267
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10,309
|
)
|
|
|
—
|
|
|
|
(10,309
|
)
|
Foreign
currency translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(117
|
)
|
|
|
(117
|
)
|
Total
comprehensive loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10,309
|
)
|
|
|
(117
|
)
|
|
|
(10,426
|
)
|
Balance
at September 30, 2008
|
|
|
10,665,533
|
|
|
|
11
|
|
|
|
34,647
|
|
|
|
(16,369
|
)
|
|
|
(99
|
)
|
|
|
18.190
|
|
Stock
based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
538
|
|
|
|
—
|
|
|
|
—
|
|
|
|
538
|
|
Issuance
of common stock for
earnouts
|
|
|
516,676
|
|
|
|
—
|
|
|
|
435
|
|
|
|
—
|
|
|
|
—
|
|
|
|
435
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
758
|
|
|
|
—
|
|
|
|
758
|
|
Foreign currency translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(17
|
)
|
|
|
(17
|
)
|
Total
comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
758
|
|
|
|
(17
|
)
|
|
|
|
|
Balance
at September 30,
2009
|
|
|
11,182,209
|
|
|
|
11
|
|
|
|
35,620
|
|
|
|
(15,611
|
)
|
|
|
(116
|
)
|
|
|
19,904
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
BRIDGELINE
SOFTWARE, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Dollars
in thousands)
|
|
Year Ended September
30,
|
|
|
|
2009
|
|
|
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
758
|
|
|
$
|
(10,309
|
)
|
Adjustments
to reconcile net income (loss) to net cash provided by
(used
in) operating activities:
|
|
|
|
|
|
|
|
|
Impairment
of goodwill and intangible assets
|
|
|
—
|
|
|
|
9,828
|
|
Amortization
of intangible assets
|
|
|
517
|
|
|
|
537
|
|
Depreciation
|
|
|
795
|
|
|
|
578
|
|
Other
amortization
|
|
|
180
|
|
|
|
135
|
|
Stock
based compensation
|
|
|
538
|
|
|
|
425
|
|
Changes
in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
Accounts
receivable and unbilled receivables
|
|
|
1,771
|
|
|
|
(993
|
)
|
Prepaid
expenses and other assets
|
|
|
181
|
|
|
|
(560
|
)
|
Accounts
payable and accrued liabilities
|
|
|
(1,518
|
)
|
|
|
(156
|
)
|
Deferred
revenue
|
|
|
(286
|
)
|
|
|
(152
|
)
|
Other
liabilities
|
|
|
64
|
|
|
|
280
|
|
Total
adjustments
|
|
|
2,242
|
|
|
|
9,922
|
|
Net
cash provided by (used in) operating activities
|
|
|
3,000
|
|
|
|
(387
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Equipment
and improvements
|
|
|
(453
|
)
|
|
|
(980
|
)
|
Software
development
|
|
|
(30
|
)
|
|
|
(397
|
)
|
Acquisitions,
net of cash acquired
|
|
|
—
|
|
|
|
(1,812
|
)
|
Contingent
acquisition payments
|
|
|
(1,250
|
)
|
|
|
(528
|
)
|
Net
cash used in investing activities
|
|
|
(1,733
|
)
|
|
|
(3,717
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from bank line of credit
|
|
|
4,250
|
|
|
|
1,000
|
|
Principal
payments of bank line of credit
|
|
|
(4,250
|
)
|
|
|
—
|
|
Principal
payments on capital leases
|
|
|
(105
|
)
|
|
|
(202
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
(105
|
)
|
|
|
798
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
1,162
|
|
|
|
(3,306
|
)
|
Effect
of exchange rate changes on cash
|
|
|
(13
|
)
|
|
|
(2
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
1,911
|
|
|
|
5,219
|
|
Cash
and cash equivalents at end of period
|
|
$
|
3,060
|
|
|
$
|
1,911
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
59
|
|
|
$
|
54
|
|
Income
taxes
|
|
$
|
133
|
|
|
$
|
—
|
|
Non
cash activities:
|
|
|
|
|
|
|
|
|
Purchase
of equipment through capital leases
|
|
$
|
—
|
|
|
$
|
71
|
|
Equipment
and other assets included in accounts payable
|
|
$
|
31
|
|
|
$
|
—
|
|
Issuance
of common stock for acquisitions
|
|
$
|
—
|
|
|
$
|
5,049
|
|
Issuance
of common stock for contingent acquisition payments
|
|
$
|
435
|
|
|
$
|
267
|
|
Accrued
contingent consideration
|
|
$
|
408
|
|
|
$
|
327
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except share and per share data)
1.
Description of Business
Overview
Bridgeline
is a developer of web application management software and award-winning
interactive technology solutions that help organizations optimize business
processes. Bridgeline’s iAPPS®
software combined with its interactive development capabilities assist customers
in maximizing revenue, improving customer service and loyalty, enhancing
employee knowledge, and reducing operational costs by leveraging web based
technologies.
Bridgeline’s
iAPPS® product
suite offers solutions that unify web Content Management, web Analytics,
eCommerce, and eMarketing capabilities deep within the website or web
applications in which they reside; enabling business users to enhance and
optimize the value of their web properties. Combined with award-winning
interactive development capabilities, Bridgeline helps customers
cost-effectively accommodate the changing needs of today’s websites, intranets,
extranets, portals, and mission-critical web applications.
Locations
The
Company’s corporate office is located north of Boston, Massachusetts in Woburn,
Massachusetts. This office also houses the Company’s New England
business unit. The Company maintains regional offices serving the
following geographical locations: Atlanta, GA, Chicago, IL; Cleveland, OH;
Denver, CO; New York, NY; and Washington, DC. The Company has a
wholly owned subsidiary, Bridgeline Software Pvt. Ltd,, located in Bangalore,
India which serves as its .Net development center.
Other
Information
The
Company’s stock is traded on NASDAQ under the symbol BLSW. The
Company maintains its website at www.bridgelinesw.com.
2.
Summary of Significant Accounting Policies
Basis
of Presentation and Principles of Consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly-owned India subsidiary. All significant inter-company accounts and
transactions have been eliminated. Certain amounts from the prior period
financial statements have been reclassified to conform to the current
presentation.
Effective
for interim and annual periods ending after September 15, 2009, The Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification™ (the
“Codification”) became the single source of authoritative nongovernmental U.S.
generally accepted accounting principles (US GAAP). The Company
adopted the Codification during the quarter ending September 30,
2009. The adoption had no effect on the Company's consolidated financial
statements.
The
Company evaluated subsequent events through December 28, 2009 and concluded
there were no material subsequent events requiring adjustment to or
disclosure in these financial statements, other than those
disclosed.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
certain estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reported periods. The most significant estimates included in these financial
statements are the valuation of accounts receivable and long-term assets,
including intangibles, goodwill and deferred tax assets, stock-based
compensation, amounts of revenue to be recognized on service contracts in
progress, unbilled receivables, and deferred revenue. Actual results could
differ from these estimates under different assumptions or
conditions.
The
complexity of the estimation process and factors relating to assumptions, risks
and uncertainties inherent with the use of the proportional performance model
affect the amount of revenue and related expenses reported in the Company’s
financial statements. A number of internal and external factors can affect the
Company’s estimates including utilization variances and specification and test
requirement changes.
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except share and per share data)
Revenue
Recognition
The
Company enters into arrangements to sell web application development services
(professional services), software licenses or combinations
thereof. Revenue is categorized into (i) Web Application Development
Services (ii) Managed Service Hosting, and (iii) Subscription and Perpetual
Licenses.
The
Company recognizes revenue as required by the Revenue Recognition Topic of
the Codification. Revenue is recognized when all of the following
conditions are satisfied: (1) there is persuasive evidence of an arrangement;
(2) delivery has occurred or the services have been provided to the customer;
(3) the amount of fees to be paid by the customer is fixed or determinable; and
(4) the collection of the fees is reasonably assured. Billings made or payments
received in advance of providing services are deferred until the period these
services are provided.
Web
Application Development Services
Web
application development services include professional services primarily related
to the Company’s Web development solutions that address specific customer needs
such as information architecture and usability engineering, interface
configuration, application development, rich media, e-Commerce, e-Learning and
e-Training, search engine optimization, and content management.
Web
application development services are contracted for on either a fixed price or
time and materials basis. For its fixed price engagements, the Company
applies the proportional performance model to recognize revenue based on cost
incurred in relation to total estimated cost at completion. The Company has
determined that labor costs are the most appropriate measure to allocate revenue
among reporting periods, as they are the primary input when providing
application development services. Customers are invoiced monthly or upon the
completion of milestones. For milestone based projects, since milestone pricing
is based on expected hourly costs and the duration of such engagements is
relatively short, this input approach principally mirrors an output approach
under the proportional performance model for revenue recognition on such fixed
priced engagements. For time and materials contracts, revenues are
recognized as the services are provided.
Web
application development services also include retained professional services
contracted for on an “on call” basis or for a certain amount of hours each
month. Such arrangements generally provide for a guaranteed availability of a
number of professional services hours each month on a “use it or lose it”
basis. For retained professional services sold on a stand-alone
we recognize revenue as the services are delivered or over the term of the
contractual retainer period. These arrangements do not require formal
customer acceptance and do not grant any future right to labor hours contracted
for but not used.
Application
development services are often sold as part of multiple element arrangements
wherein perpetual licenses for the Company’s software products, retained
professional services, hosting and/or subscriptions are provided in connection
with application development services engagements. The Company’s
revenue recognition policy with respect to these multiple element arrangements
is described further below under the caption “Multiple Element
Arrangements.”
Managed
Service Hosting
Managed
service hosting includes hosting arrangements that provide for the use of
certain hardware and infrastructure, generally at the Company’s network
operating centers. The majority of the customers under contractual
hosting arrangements have been previous application development services
customers. Set-up costs associated with hosting arrangements are not significant
and when charged are recognized ratably over the expected period of performance,
generally twenty-four months. Hosting agreements are either annual or
month-to-month arrangements that provide for termination for convenience by
either party generally upon 30-days notice. Revenue is recognized
monthly as the hosting services are delivered. As described
below, hosting revenue associated with the Company’s subscriptions are included
in subscription and perpetual license revenue.
Hosting
services are typically sold in connection with application development services
but also may be sold on a stand-alone basis. The Company’s
revenue recognition policy with respect to multiple element arrangements is
described further below under the caption “Multiple Element
Arrangements.”
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except share and per share data)
Subscriptions and Perpetual
Licenses
The
Company licenses its software on a perpetual and subscription basis. Customers
who license the software on a perpetual basis receive rights to use the software
for an indefinite time period. For arrangements that consist of a
perpetual license and PCS, the PCS revenue is recognized ratably on a
straight-line basis over the period of performance and the perpetual license is
recognized on a residual basis. Under the residual method, the fair
value of the undelivered elements are deferred and the remaining portion of the
arrangement fee is allocated to the delivered elements and recognized as
revenue, assuming all other revenue recognition criteria have been
met. Revenue recognition for perpetual licenses sold as part of a
multiple element arrangement is described further below under the caption
“Multiple Element Arrangements.”
Customers
also license the software on a subscription basis, which can be described as
“Software as a Service” or “SaaS”. SaaS is a model of software
deployment where an application is hosted as a service provided to customers
across the Internet. Subscription agreements include access to the
Company’s software application via an internet connection, the related hosting
of the application, and PCS. Customers receive automatic updates and
upgrades, and new releases of the products as soon as they become
available. Subscription agreements are either annual or
month-to-month arrangements that provide for termination for convenience by
either party upon 30 to 45 days notice. Revenue is recognized monthly
as the services are delivered. Any up front set-up fees are amortized over 24
months. We have concluded that our Subscription Agreements should be
accounted for differently from software sales since the software is only
accessible through a hosting arrangement with us and the customer cannot take
possession of the software. Revenue recognition for Subscriptions
sold as part of a multiple element arrangement is described further below under
the caption “Multiple Element Arrangements.
Multiple
Element Arrangements
As
described above, application development services are often sold as part of
multiple element arrangements. Such arrangements may include delivery
of a perpetual license for the Company’s software products at the commencement
of an application development services engagement or delivery of retained
professional services, hosting services and/or subscriptions subsequent to
completion of such engagement, or combinations thereof. In accounting
for these multiple element arrangements, we follow either Codification
Topic 605-985 Revenue
Recognition Software or Codification Topic 605-25 Revenue Recognition Multiple Element
Arrangements, as applicable. As described further below, the Company has
concluded that each element can be treated as a separate unit of accounting when
following Codification Topic 605-25.
As
permitted by Codification Topic 605-25-65-1, the Company adopted on a
retrospective basis Accounting Standards Update No. 2009-13, Revenue
Recognition: Multiple Deliverable Arrangements. This adoption had no impact
on previously reported financial information.
When the
Company licenses its software on a perpetual basis in a multiple element
arrangement that also includes application development services and PCS, VSOE of
each element is considered. VSOE is established for PCS and is based
on the price of PCS when sold separately, which has been established via annual
renewal rates. Revenue recognition for perpetual licenses sold with
application development services are considered on a case by case
basis. The Company has not established VSOE for perpetual licenses or
fixed price development services and therefore in accordance with ASC Section
605-985, when perpetual licenses are sold in a multiple element arrangements
including application development services where VSOE for the services has
not been established, the license revenue is deferred and recognized under the
proportional performance model along with the associated
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except share and per share data)
application
development services. For the year ended September 30, 2009, the
Company has recognized revenue of $304 thousand for perpetual
licenses. In determining VSOE for the application
development services element, the separability of the application development
services from the software license and the value of the services when sold on a
standalone basis is considered. The Company also considers the
categorization of the services, the timing of when the services contract was
signed in relation to the signing of the perpetual license contract and delivery
of the software, and whether the services can be performed by
others. The Company has concluded that its application development
services are not required for the customer to use the product but, rather
enhance the benefits that the software can bring to the customer. In
addition, the services provided do not result in significant customization or
modification of the software and are not essential to its
functionality, and can also be performed by the customer or a third
party. If an application development services arrangement does
qualify for separate accounting, the Company recognizes the perpetual license on
a residual basis. If a application development services arrangement
does not qualify for separate accounting, the Company recognizes the perpetual
license under the proportional performance model as described
above.
When
subscription arrangements are sold with application development services, the
Company follows Codification Topic 605-25 Revenue Recognition Multiple Element
Arrangements and have concluded that each element can be treated as a
separate unit of accounting. In determining separability, the timing
of the commencement of the subscription period to the services delivery is
considered.
If the
subscription period begins after the services delivery then the Company
generally recognizes the services as delivered and then commences revenue
recognition for the subscription after the services have been
delivered. To date, all subscription periods have commenced after the
services delivery. If the application development services
arrangement does not qualify for separate accounting, the application
development services revenue and related costs are deferred and recognized over
the subscription period. Subscriptions also include a PCS component,
and the Company has determined that the two elements cannot be separated and
must be recognized as one unit over the applicable service period.
Customer
Payment Terms
Payment
terms with customers typically require payment 30 days from invoice date.
Payment terms may vary by customer but generally do not exceed 45 days from
invoice date. Invoicing for Application Development Services are either monthly
or upon achievement of milestones and payment terms for such billings are within
the standard terms described above. Invoices for subscriptions and hosting are
typically issued monthly and are generally due in the month of
service.
The
Company’s agreements with customers do not provide for any refunds for services
or products and therefore no specific reserve for such is maintained. In the
infrequent instances where customers raise concerns over delivered products
or services, the Company has endeavored to remedy the concern and all costs
related to such matters have been insignificant in all periods
presented.
Warranty
Certain
arrangements include a warranty period of 30 days from the completion of work.
In hosting arrangements, the Company may provide warranties of up-time
reliability. The Company continues to monitor the conditions that are subject to
the warranties to identify if a warranty claim may arise. If the Company
determines that a warranty claim is probable, then any related cost to satisfy
the warranty obligation is estimated and accrued. Warranty claims to date have
been immaterial.
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except share and per share data)
Reimbursable
Expenses
In
connection with certain arrangements, reimbursable expenses are incurred and
billed to customers and such amounts are recognized as both revenue and cost of
revenue.
Cash
and Cash Equivalents
The
Company considers all highly liquid instruments with original maturity of three
months or less from the date of purchase to be cash equivalents. Cash
equivalents primarily consist of money market mutual funds.
Fair
Value of Financial Instruments
The
carrying amounts of financial instruments, including cash and cash equivalents,
receivables, accounts payable, bank line of credit and senior notes payable
approximate their fair value because of the short-term maturity of these
instruments. Based on rates available to the Company at September 30, 2009 and
2008 for loans with similar terms, the carrying values of capital lease
obligations approximate their fair value.
Allowance
for Doubtful Accounts
The
Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. For all
customers, the Company recognizes allowances for doubtful accounts based on the
length of time that the receivables are past due, current business environment
and its historical experience. If the financial condition of the Company’s
customers were to deteriorate, resulting in impairment of their ability to make
payments, additional allowances may be required.
Equipment
and Improvements
The
components of equipment and improvements are stated at cost and depreciated
using the straight-line method over the estimated useful lives of the related
assets (three to five years). Leasehold improvements are amortized using the
straight-line method over the lesser of the estimated useful life of the asset
or the lease term. Repairs and maintenance costs are expensed as
incurred.
Internal
Use Software
Cost
incurred in the preliminary stages of development are expensed as incurred. Once
an application has reached the development stage, internal and external costs,
if direct and incremental, are capitalized until the software is substantially
complete and ready for its intended use. Capitalization ceases upon completion
of all substantial testing. The Company also capitalizes costs related to
specific upgrades and enhancements when it is probable the expenditures will
result in additional functionality. Capitalized costs are recorded as part of
equipment and improvements. Training costs are expensed as incurred.
Internal use software is amortized on a straight-line basis over its estimated
useful life, generally three years.
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except share and per share data)
Intangible
Assets
Intangible
assets with definite –lives are amortized over their useful lives, generally
three to ten years, and are subject to impairment tests as described
below under Impairment of
Long-Lived and Intangible Assets.
Impairment
of Long-Lived and Intangible Assets
Long-lived
assets to be held and used, which primarily consist of equipment and
improvements and intangible assets with finite lives, are recorded at cost.
Management reviews long-lived assets (other than goodwill) for impairment
whenever events or changes in circumstances indicate the carrying amount of such
assets is less than the undiscounted expected cash flows from such assets, or
whenever changes or business circumstances indicate that the carrying value of
the assets may not be fully recoverable or that the useful lives of those assets
are no longer appropriate. Recoverability of these assets is assessed using a
number of factors including operating results, business plans, budgets, economic
projections and undiscounted cash flows.
In
addition, the Company’s evaluation considers non-financial data such as market
trends, product development cycles and changes in management’s market emphasis.
For the definite-lived intangible asset impairment review, the carrying value of
the intangible assets is compared against the estimated undiscounted cash flows
to be generated over the remaining life of the intangible assets.
Goodwill
The
excess of the cost of an acquired entity over the amounts assigned to acquired
assets and liabilities is recognized as goodwill. Goodwill is tested for
impairment annually and more frequently if events and circumstances indicate
that the asset might be impaired. An impairment loss is recognized to the extent
that the carrying amount exceeds the fair value calculated at the reporting unit
level. The Company aggregates its operating locations as a single reporting unit
due to their similar economic characteristics.
The
goodwill impairment test consists of two steps. First, the estimated fair value
of the reporting unit is compared it to its carrying amount. Second,
if the carrying amount of the reporting unit exceeds its fair value, an
impairment loss is recognized for any excess of the carrying amount of the
reporting unit’s goodwill over the implied fair value of that goodwill. The
implied fair value of goodwill is estimated by allocating the estimated fair
value of the reporting unit in a manner similar to a purchase price
allocation.
The
factors the Company considers important that could indicate impairment include
significant under performance relative to prior operating results, change in
projections, significant changes in the manner of the Company’s use of assets or
the strategy for the Company’s overall business, and significant negative
industry or economic trends.
In
evaluating goodwill impairment, the Company considers a number of factors such
as market capitalization value, discounted cash flow projections, guideline
public company comparisons and acquisition transactions of comparable third
party companies. Evaluating the potential impairment of goodwill is highly
subjective and requires management to make significant estimates and judgment at
many points during the analysis, especially with regard to the Company’s future
cash flows.
The
Company evaluates goodwill for impairment on an annual basis during the fourth
fiscal quarter of each year. Management places significant weighting
in its evaluation on the fair value derived using the Direct Market Data Method
or market capitalization value as this Level 1 input to valuation is afforded
the highest consideration as it is based upon quoted prices of the Company’s
common stock in the active market.
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except share and per share data)
Contingent
Consideration
For all
acquisitions completed before September 30, 2009, the Company records contingent
consideration as additional purchase price and goodwill when
paid. Such contingent consideration is unrelated to continuing
employment with the Company and meets all other relevant criteria. Such
consideration is paid when the contingency is resolved subsequent to
acquisition.
Research
and Development Costs
Research
and development expenditures for technology development are charged to
operations as incurred. Certain software development costs incurred
subsequent to the establishment of technological feasibility are capitalized and
amortized to cost of sales. Based on the Company’s product
development process, technological feasibility is established upon completion of
a working model. Certain costs incurred between completion of a working model
and the point at which the product is ready for general release are capitalized
if significant. The Company capitalized $30 thousand and $397 thousand of costs
in 2009 and 2008, respectively.
Advertising
Costs
Advertising
costs are expensed when incurred. Such costs were $302 thousand and $258
thousand for the years ended September 30, 2009 and 2008,
respectively.
Stock-Based
Compensation
The
Company accounts for stock compensation awards in accordance with the Compensation-Stock
Compensation Topic of the Codification. Share-based payments
(to the extent they are compensatory) are recognized in the consolidated
statements of operations based on their fair values.
Valuation
of Options and Warrants Issued to Non-Employees
The
Company measures expense for non-employee stock-based compensation and the
estimated fair value of options exchanged in business combinations and warrants
issued for services using the fair value method for services received or the
equity instruments issued, whichever is more readily measured. The
Company estimated the fair value of stock options and warrants issued to
non-employees using the Black-Scholes-Merton option valuation model (the
“Model”).
Employee
Benefits
The
Company sponsors a contributory 401(k) plan covering all full-time employees who
meet prescribed service requirements. The Company is not required to make
matching contributions, although the plan provides for discretionary
contributions by the Company. The Company made no contributions in either fiscal
2009 or 2008.
Income
Taxes
Deferred
income taxes are recognized based on temporary differences between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the temporary differences are expected to reverse.
Valuation allowances are provided if, based upon the weight of available
evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized.
The
Company does not provide for U.S. income taxes on the undistributed earnings of
its Indian subsidiary, which the Company considers to be permanent
investments.
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except share and per share data)
Net
Income (Loss) Per Share
Basic net
income (loss) per share is computed by dividing net income (loss) available to
common shareholders by the weighted average number of common shares
outstanding. Diluted net income per share is computed using the
weighted average number of common shares outstanding during the period plus the
dilutive effect of outstanding stock options and warrants using the “treasury
stock” method. The computation of diluted earnings per share does not
include the effect of outstanding stock options and warrants that are
anti-dilutive. The Company has excluded 316,750 and 1,908,018 of equity
instruments from the calculation of diluted weighted average shares outstanding
as of September 30, 2009 and 2008, respectively, with exercise prices less than
market values because these securities were anti-dilutive.
Segment
Information
The
Company operates internally as one reportable operating segment because all of
the Company’s locations have similar economic characteristics.
Concentration
of Credit Risk, Significant Customers and Off-Balance Sheet Risk
Financial
instruments that potentially subject the Company to concentrations of credit
risk consist primarily of cash and cash equivalents, to the extent these exceed
federal insurance limits, and accounts receivable. Risks associated with cash
and cash equivalents are mitigated by the Company’s investment policy, which
limits the Company’s investing of excess cash into only money market mutual
funds. The Company limits its exposure to credit loss by placing its cash and
cash equivalents and investments with financial institutions it believes to be
of higher quality. In general, the Company does not require
collateral on its arrangements with customers. The Company has accounts
receivable related to monthly fees as well as service and licensing fees, which
typically provide for credit terms of 30-60 days.
The
Company did not have any customer that individually represented 10% or more of
the Company’s total revenue for the year ended September 30, 2009 and
2008.. The Company did not have any customer with an accounts
receivable balance that individually represented 10% or more of the
Company’s total accounts receivable at September 30, 2009 and 2008.
The
Company has no significant off-balance sheet risks such as foreign exchange
contracts, interest rate swaps, option contracts or other foreign hedging
agreements.
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except share and per share data)
Recent Accounting
Pronouncements
The Business Combination Topic of
the Codification requires the Company to record separately and expense the
direct costs of an acquisition. These costs were previously included
in the total allocated cost of the acquisition. This Codification
Topic also requires the Company to recognize as an asset or liability at fair
value certain contingencies, either contractual or non-contractual, if certain
criteria are met. Finally, this Codification Topic requires that the
Company recognize contingent consideration at the date of acquisition, based on
the fair value at that date. These Codification Topic changes are
effective and will impact any acquisitions completed by the Company after
September 30, 2009.
3.
Accounts Receivable and Unbilled Receivables
Accounts
and unbilled receivables consists of the following:
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
Accounts
receivable
|
|
$ |
3,399 |
|
|
$ |
4,466 |
|
Unbilled
receivables
|
|
|
349 |
|
|
|
1,576 |
|
Subtotal
|
|
|
3,748 |
|
|
|
6,042 |
|
Allowance
for doubtful accounts
|
|
|
(280
|
) |
|
|
(380 |
) |
Accounts
and unbilled receivables, net
|
|
$ |
3,468 |
|
|
$ |
5,662 |
|
4.
Equipment and Improvements
Equipment
and improvements consists of the following:
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
Furniture
and fixtures
|
|
$
|
647
|
|
|
$
|
590
|
|
Purchased
software
|
|
|
731
|
|
|
|
551
|
|
Computers
and peripherals
|
|
|
1,556
|
|
|
|
1,527
|
|
Leasehold
improvements
|
|
|
585
|
|
|
|
375
|
|
Total
cost
|
|
|
3,519
|
|
|
|
3,043
|
|
Less
accumulated depreciation
|
|
|
(2,071
|
)
|
|
|
(1,280
|
)
|
Equipment
and improvements, net
|
|
$
|
1,448
|
|
|
$
|
1,763
|
|
Included
above are assets acquired under capitalized leases of $511 thousand at both
September 30, 2009 and 2008, respectively, with accumulated depreciation thereon
of $442 thousand and $295 thousand, respectively.
The
Company has $344 thousand and $501 thousand of net property and equipment at
September 30, 2009 and 2008, respectively, for use in its hosting and SaaS
subscription arrangements.
5.
Acquisitions
Indigio
Group, Inc.
On July
1, 2008, the Company acquired all the outstanding stock of Indigio Group, Inc.
(“Indigio”), a Denver, Colorado-based web development company that provided web
application development, web design, usability, and search engine optimization
services. Consideration for the acquisition consisted of (i) $600,000
in cash, (ii) 1,127,810 shares of Bridgeline common stock, (iii) the
payment of $195,000 of indebtedness owed by Indigio, and (iv) contingent
consideration of up to $2.1 million in cash payable quarterly over 14 calendar
quarters after the acquisition based upon the achievement of certain defined
operating metrics. The Company accounts for contingent payments as
additional purchase price which is allocated to goodwill. For the
years ended September 30, 2009 and 2008, $278 thousand and $-0-, respectively,
were recorded as an increase to goodwill under this arrangement. At September
30, 2009, the maximum remaining future consideration payable is approximately
$1.8 million.
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except share and per share data)
Tenth
Floor, Inc.
On
January 31, 2008, the Company acquired all the outstanding stock of Tenth Floor,
Inc. (“Tenth Floor”), a Cleveland, Ohio based web application development
company that developed its own SaaS-based web application management software
product named BASE-10. Tenth Floor was acquired for approximately $4 million,
which included the purchase of approximately $650,000 of net working capital
(cash and accounts receivable less certain liabilities). Consideration consisted
of (i) $504,000 in cash, (ii) $96,000 of indebtedness owed by Tenth Floor, (ii)
640,000 shares of Bridgeline common stock, and (iv) contingent
consideration of up to up to $1.2 million in cash payable quarterly over 12
calendar quarters after the acquisition based on the achievement of certain
defined operating metrics. For the years ended September 30, 2009 and
2008, $400 thousand and $267 thousand, respectively, were recorded as an
increase to goodwill under this arrangement. At September 30, 2009,
the maximum remaining future consideration is approximately
$533 thousand.
Indigio
and Tenth Floor Net Assets Acquired
The
estimated fair value of net assets acquired from the acquisitions of Tenth Floor
and Indigio are summarized as follows:
Net
assets acquired:
|
|
Amount
|
|
Cash
|
|
$ |
38 |
|
Other
current assets
|
|
|
1,399 |
|
Equipment
|
|
|
314 |
|
Other
assets
|
|
|
88 |
|
Intangible
assets
|
|
|
1,179 |
|
Goodwill
|
|
|
5,617 |
|
Total
assets
|
|
|
8,635 |
|
Current
liabilities
|
|
|
1,547 |
|
Capital
lease obligations
|
|
|
189 |
|
Total
liabilities assumed
|
|
|
1,736 |
|
Net
assets acquired
|
|
$ |
6,899 |
|
|
|
|
|
|
Purchase
price:
|
|
|
|
|
Cash
paid
|
|
$ |
1,430 |
|
Equity
exchanged
|
|
|
4,992 |
|
Options
issued and exchanged
|
|
|
81 |
|
Closing
costs and fees
|
|
|
396 |
|
Total
purchase price
|
|
$ |
6,899 |
|
Of the
$1.2 million in intangible assets, $737 thousand was assigned to customer
relationships with an average useful life of five years, $175 thousand was
assigned to noncompetition agreements with an average estimated life of five
years and $267 thousand was assigned to acquired technology with an average
estimated life of three years.
Other
Acquisitions
The
Company is obligated to pay contingent consideration in the form of earn-outs to
former shareholders of companies acquired prior to fiscal 2008, based upon the
achievement of certain defined operating metrics. The Company
accounts for such contingent payments as additional purchase price which is
allocated to goodwill. For the year ended September 30, 2009, $1.1 million was
recorded as goodwill under these arrangements. At September 30, 2009, the
maximum remaining future consideration payable for these acquisitions is
approximately $935 thousand.
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except share and per share data)
6.
Intangible Assets and Goodwill
Intangible
Assets
Changes
in the carrying amount of intangible assets follows:
|
|
At
September 30, 2009
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Impairment
|
|
|
Net
|
|
|
|
Asset
|
|
|
Amortization
|
|
|
(a)
|
|
|
Amount
|
|
Intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
Domain
and trade names
|
|
$
|
39
|
|
|
$
|
(26
|
)
|
|
$
|
(13
|
)
|
|
$
|
|
|
Customer
related (b)
|
|
|
2,676
|
|
|
|
(1,242
|
)
|
|
|
(63
|
)
|
|
|
1,371
|
|
Acquired
software
|
|
|
362< |