As
filed with the Securities and Exchange Commission on April 2,
2007
Registration
No. 333-139298
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form
SB-2
AMENDMENT
NO. 2
TO
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
Bridgeline
Software, Inc.
(Name
of small business issuer in its charter)
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Delaware
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7372
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52-2263942
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(State
or other jurisdiction of
incorporation
or organization)
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(Primary
Standard Industrial
Classification
Code Number)
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(IRS
Employer
Identification
Number)
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10
Sixth Road
Woburn,
Massachusetts 01801
(781)
376-5555
(Address
and telephone number of principal executive offices and principal place of
business)
Thomas
Massie
President
and Chief Executive Officer
10
Sixth Road
Woburn,
Massachusetts 01801
(781)
376-5555
(Name,
address and telephone number of agent for service)
Copy
of all communications to:
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Carl
F. Barnes, Esq.
Joseph
C. Marrow, Esq.
Morse,
Barnes-Brown & Pendleton, P.C.
1601
Trapelo Road
Waltham,
Massachusetts 02451
(781)
622-5930
(781)
622-5933 (fax)
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Ralph
V. De Martino, Esq.
F.
Alec Orudjev, Esq.
Cozen
O’Connor
1627
I Street, N.W., Suite 1100
Washington,
D.C. 20006
(202) 912-4800
(202) 912-4830
(fax)
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Approximate
date of commencement of proposed sale to the public:
As soon
as practicable after the effective date of this registration
statement.
If
any of
the securities being registered on this form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. þ
If
this
Form is filed to register additional securities for an offering pursuant
to
Rule 462(b) under the Securities Act, please check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the
same
offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement or the same
offering. o
If
delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. o
The
Registrant hereby amends this Registration Statement on such date or dates
as
may be necessary to delay its effective date until the Registrant shall file
a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act, as amended, or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
EXPLANATORY
NOTE:
This
registration statement contains two forms of prospectus: one for use in
our
underwritten initial public offering, and one for use by selling shareholders
after completion of the underwritten initial public offering. The two
prospectuses are identical in all respects except for differences noted
in the
selling shareholder prospectus, which are labeled “Selling Shareholder
Prospectus.”
The
information in this prospectus is not complete and may be changed. We may
not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. The prospectus is not an offer to sell
these securities and it is not soliciting an offer to buy these securities
in
any state where the offer or sale is not permitted.
Notice
to California Investors: This offering is limited to
suitable investors only. Each purchaser of shares in California must meet
one of
the following suitability standards: a minimum annual gross income of at
least
$65,000 and a minimum net worth of at least $250,000, or, in the alternative,
minimum net worth of at least $500,000, regardless of annual gross income.
In
addition, the investor’s purchase may not exceed 10% of his or her net worth.
Net worth in both instances is exclusive of the investor’s equity in his or her
home, home furnishings and automobile.
SUBJECT
TO COMPLETION, DATED APRIL 2, 2007
PROSPECTUS
Bridgeline
Software, Inc.
3,000,000
shares of Common Stock
This
is a
firm commitment initial public offering of 3,000,000 shares of our common
stock.
This is our initial public offering and no public market currently exists
for
our common stock. The initial public offering price for the shares offered
hereby is estimated to be between $5.00 and $6.00 per share.
We
have
applied for listing of our common stock on the Nasdaq Capital Market and
the
Boston Stock Exchange under the symbols “BLSW” and “BLS”,
respectively.
Investing
in our common stock involves risks. See “Risk Factors” beginning on page 10
for a discussion of certain factors that should be considered by prospective
purchasers of our shares.
Commencing
six months after the date of this prospectus, certain selling shareholders
may
offer and sell up to 542,000 additional shares they have the right to acquire
upon the exercise of certain warrants. This prospectus does not
relate to those shares.
These
securities have not been approved or disapproved by the Securities and Exchange
Commission or any state securities commission, nor has the Securities and
Exchange Commission or any state securities commission passed upon the accuracy
or adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
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Price
to the Public
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Underwriting
Discounts
and
Commissions
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Proceeds,
Before
Expenses,
to
the Company
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Per
Share
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$
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$
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$
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Total
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We
have
granted the underwriters a 45-day option to purchase up to an additional
450,000
shares to cover over-allotments, if any. The shares are being offered by
the
underwriters named herein, subject to prior sale, when, as and if accepted
by
them and subject to certain conditions.
Joseph
Gunnar & Co., LLC
The
date
of this prospectus is
,
2007.
Below
are
two screen shots of Web Applications developed by Bridgeline Software Inc.,
a
developer of Web applications and Web software tools.
Below
is
a screen shot of our netEDITORproTM Content
Management
software tool, which
provides
Content Management capabilities to multiple users of multiple Web sites,
and our
OrgitectureTM
platform,
an integrated suite of on-demand Web-based Web site
development tools.
2
PROSPECTUS
SUMMARY
This
summary highlights information contained elsewhere in this prospectus and
does
not contain all of the information you should consider in making your investment
decision. You should read this summary together with the more detailed
information, including our financial statements and the related notes,
elsewhere
in this prospectus. You should carefully consider, among other things,
the
matters discussed in “Risk Factors” on page 10. In addition, some of the
statements made in this prospectus discuss future events and developments,
including our future business strategy and our ability to generate revenue,
income and cash flow. These forward-looking statements involve risks and
uncertainties which could cause actual results to differ materially from
those
contemplated in these forward-looking statements. See “Cautionary
Note Regarding Forward-Looking Statements” on page
20.
Unless
the context indicates otherwise, the terms “our,” “we,” “us,” and “Bridgeline”
refer to Bridgeline Software, Inc.
Bridgeline
Software
Bridgeline
Software is a developer of on-demand Web software tools and a developer
of
award-winning Web applications that assist our customers to optimize business
processes utilizing Web-based technologies. Our solutions can improve the
effectiveness of our customers by assisting them:
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·
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To
increase sales by developing Web applications such as on-line
ordering
systems and proactive integrated marketing tools with lead generation
capabilities.
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·
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To
improve customer service and customer loyalty by developing Web
applications that provide self-service portals that automate
interactions
between the customers and their partners. These types of portals
reduce
their administrative and operational
costs.
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·
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To
enhance employee communication and training by developing on-line
training
applications allowing our customers to create topic-based training
programs such as orientation training for new hires and new policy
rollout
training for current employees. These types of on-line training
applications reduce their administrative and operational
costs.
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Our
proprietary framework enables companies to add functionality on a per module
basis, providing expandability and scalability. We have
developed an on-demand Web software tools framework that provides the
following:
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·
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Content
Management
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eCommerce
Management
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Relationship
Management
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·
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eMarketing
Management
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·
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Grants
Management
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Recent
innovations in information technology have created opportunities to deliver
software applications directly to users over the Internet in a
subscription-based, on-demand business model. This model is made possible
by the
proliferation of high-speed, broadband Internet connectivity, open standards
for
application integration and advances in network availability and security.
For
the user, on-demand software eliminates the need for expensive hardware,
software and internal IT support.
Our
on-demand Web management tools are delivered through a “software as a service”
business model, in which we deliver our software over the
Internet while providing maintenance, daily technical operation and
support.
3
In
addition to our on-demand Web management software tools, we develop award
winning Web applications utilizing our tools for use over the Internet
as well
as for customers’ intranets and extranets. Our in-house team of
Microsoft®-certified
developers specializes in:
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User
experience development
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·
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Web
application development
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·
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Search
engine optimization
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A
description of our Web software tools and Web services can be found beginning
on
page 54 of this prospectus.
As
of
December 31, 2006, we have more than 90 active customers of which we had
one
customer generating 21% of revenue and no other customer generating more
than
10%. As of September 30, 2006 our customers included Nomura Securities,
The Bank of New York, Pfizer, Depository Trust & Clearing Corporation and
John Hancock, which each comprised approximately 22%, 7%, 6%, 6% and 6%
of our
revenues, respectively, during the fiscal year ended September 30,
2006.
We
have
received multiple industry awards, including Web Awards from the Web Marketing
Association; MITX Awards from the Massachusetts Innovation & Technology
Exchange; Axiem Awards; and One Show Interactive Awards. A
description of these awards can be found on page 48
of this prospectus.
Market
Opportunity
We
believe the Web application development market is growing and is
fragmented. We believe there is an opportunity for us to acquire
multiple companies that specialize in Web application development and are
based
in other large North American cities, thereby potentially creating one
of the
largest interactive technology companies in North America. We believe that
established yet small Web application development companies have the ability
to
market, sell and install Web-based software tools in their local metropolitan
markets. In addition, we believe that these companies also have a
customer base and a niche presence in the local markets in which they operate.
We believe that by acquiring certain of these companies and applying our
business practices and efficiencies, we can dramatically accelerate our
time to
market in areas other than those in which we currently
operate.
We
estimate, based on our experience in having made such acquisitions, that
compounded annual revenue growth rates of at least 20% per year for each
acquired entity may be possible. We target certain established Web application
development companies that we believe have:
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the complementary technical ability to market, sell and deliver Web-based software tools in their particular metropolitan market areas;
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the desire to improve their profit margins by licensing our web software tools to their customer base;
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an established base of customers with local market presence that can potentially accelerate our time to market in geographic areas where we do not currently operate;
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the desire reduce development costs by leveraging our Bangalore, India development center; and
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the desire to leverage certain centralized cost centers such as finance, human resources, legal, and marketing.
4
Acquisitions
Since
our
inception, we have consummated the acquisition of four Web application
development companies:
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·
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In
December 2000, we acquired Streamline Communications, a Boston,
Massachusetts-based company.
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·
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In
February 2002, we acquired Lead Dog Digital, Inc., a New York,
New
York-based company.
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·
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In
December 2004, we acquired Interactive Applications Group, Inc.
(“iapps”®),
a
Washington, D.C.-based company.
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·
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In
April 2006, we acquired New Tilt, Inc. (“New Tilt”), a Cambridge,
Massachusetts-based company.
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In
addition, on December 7, 2006, we signed a definitive agreement to acquire
all
outstanding capital stock of Objectware, Inc., an Atlanta, Georgia-based
Web
application development company. The consideration for the acquisition
of
Objectware will be paid to Objectware’s sole stockholder, Erez M. Katz, and will
consist of (i) $2,500,000 in cash, (ii) shares of our common stock having
a
value (based on the initial public offering price of our shares in this
offering) of $2,700,000 and (iii) deferred consideration of up to $1,800,000,
payable in cash and stock quarterly over the three years after we acquire
Objectware, contingent upon Objectware generating positive earnings before
interest, taxes and depreciation and amortization of at least $250,000
per
calendar quarter during the 12 consecutive calendar quarters following
this
offering. A
portion
of the deferred purchase price will be paid if Objectware generates positive
earnings before interest, taxes, and depreciation and amortization of at
least
$225,000 but less than $250,000 in any such calendar quarter. In
no
event, however, will we issue shares to Mr. Katz in connection with this
acquisition which would result in ownership by Mr. Katz of more than 19.9%
of
the total issued and outstanding shares of our common stock without the
prior
approval of our shareholders.
The
acquisition of Objectware will
close in escrow shortly before the completion of this offering. Prior to
the
completion of this offering all closing documentation other than the cash
and
stock consideration will be deposited with the escrow agent. Once this
offering
is completed, we will deposit the cash and stock consideration with the
escrow
agent, and the acquisition will be considered to have been completed, subject
only to the conditions that, within five business days after the registration
statement has been declared effective by the Commission and our stock has
commenced trading, and within one hour after our receipt of net proceeds
of at
least $10,000,000 from this offering, we are required to transfer the $2,500,000
of cash consideration to the escrow agent and we are required to deliver
certificates representing the stock consideration to the escrow agent by
overnight mail. Upon receipt of the cash and stock consideration the escrow
agent will release all closing materials to the appropriate parties, and
will
release the cash and stock consideration to Objectware’s sole shareholder, in
accordance with the terms of the escrow agreement. See “Business –
Pending Acquisition – Objectware – Terms of the Acquisition” on page 64 of this
prospectus.
Summary
Risk Factors
Our
business is subject to various risks and challenges, including (without
limitation or any specific order):
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our
limited operating history on which to evaluate our
operations;
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we
have suffered losses since inception which may recur in the future
as we
expand;
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our
licenses are renewable on a monthly basis and a reduction in our
license
renewal rate could significantly reduce our revenues;
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our
inability to manage our future growth efficiently or
profitably;
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our
inability to complete the Objectware acquisition or to efficiently
integrate Objectware into our operations;
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if
our products fail to perform properly due to undetected errors
or similar
problems, our business
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5
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could
suffer, and we could face product liability
exposure;
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if
the security of our software, in particular the hosted Internet
solutions
products we have developed, is breached, our business and reputation
could
suffer;
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·
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if
we undertake future business combinations and acquisitions, they
may be
difficult to integrate into our existing operations, may disrupt
our
business, dilute stockholder value or divert management’s
attention;
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·
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our
external auditors have identified material weaknesses in our internal
controls;
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·
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our
dependence on our management team and key personnel and the loss
or
inability to retain these individuals could harm our business;
and
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·
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intense
and growing competition, which could result in price reductions,
reduced
operating margins and loss of market
share.
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For
a
detailed description of these and additional risk factors, please refer to
“Risk
Factors” beginning at page 10.
Corporate
Information
Our
principal executive offices are located at 10 Sixth Road, Woburn, Massachusetts
01801, and our telephone number is (781) 376-5555. We maintain offices in
New
York, New York and in Washington, D.C., as well as a development center in
Bangalore, India. We maintain a website at www.bridgelinesw.com. The information
on our website is not part of this prospectus.
THE
OFFERING
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Securities
Offered
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3,000,000
shares of our common stock.
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Over-Allotment
Option
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450,000
shares of our common stock.
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Common
Stock to be Outstanding After This Offering
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7,273,833
shares (7,723,833 shares if the over-allotment option is exercised
in full
by the underwriters), of which 3,000,000 shares or approximately
41.2%
would be held by persons purchasing in this offering (3,450,000
shares or
approximately 44.7%, if the over-allotment option is exercised
in full by
the underwriters).
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Use
of Proceeds
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We
intend to use the net proceeds from this offering as follows:
·
Approximately $2,800,000 to repay all of our
indebtedness;
·
Approximately $2,955,000 to pay the cash portion of
the acquisition
of Objectware, together with expenses associated with that
acquisition;
·
Approximately $2,000,000 over the next four years to
complete
future acquisitions; and
·
$6,426,000 for general corporate purposes, including
working
capital. See “Use of Proceeds” for additional
information.
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Trading
Symbols
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We
have applied for listing of our common stock on the Nasdaq
Capital Market
and the Boston Stock Exchange under the symbols “BLSW” and “BLS,”
respectively.
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Risk
Factors
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You
should consider carefully all of the information set forth
in this
prospectus, and, in particular, the specific factors set forth
under “Risk
Factors” beginning at page 10, before deciding whether to invest in
our
shares.
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6
The
number of shares of common stock to be outstanding after the offering is
based
on 4,273,833 shares outstanding as of February 28, 2007 and
excludes:
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·
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490,909
shares issuable upon the acquisition of Objectware and an indeterminate
number of additional shares we may issue quarterly over three
years after
we acquire Objectware, the issuance of which is contingent upon
the
achievement by Objectware of certain operating results;
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903,606
shares issuable upon the exercise of outstanding options at a
weighted
average price of $3.13 per
share;
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578,269
shares issuable upon the exercise of outstanding warrants;
and
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150,000
shares issuable upon exercise of underwriters’ warrants at a price equal
to 125% of the offering price of the
shares.
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We
are
registering 3,992,000 shares, which, on a pro forma basis, would represent
approximately 42% of our outstanding securities as of February 28, 2007
calculated as a fully-diluted basis, assuming the exercise of the over-allotment
option granted to the underwriters.
Unless
otherwise indicated, all
information in this prospectus assumes no exercise of the over-allotment
option
granted to the underwriters.
_______________________
“Bridgeline,”
“Bridgeline Software,” “iapps,” “netEDITOR,” “netEDITOR-pro” and “Orgitecture”
are our trademarks and service marks. We have registered the trademarks
“Bridgeline,” “iapps” and “netEDITOR” with the United States Patent and
Trademark Office, and have filed applications to register “netEDITOR-pro” and
“Orgitecture,” and claim common law rights in such marks. This prospectus refers
to the trade names, service marks and trademarks of other companies. These
references are made with due recognition of the rights of these companies
and
without any intent to misappropriate these names or marks.
SUMMARY
FINANCIAL DATA
In
accordance with Article 11 of Regulation S-X under the Securities Act
of 1933, as amended, a condensed pro forma balance sheet as of December
31, 2006
and condensed pro forma statements of operations for the three months ended
December 31, 2006 and the fiscal year ended September 30, 2006 have been
prepared. For additional information, please refer to the complete
pro forma disclosures beginning on page F-3 of our financial
statements.
The
following tables present our summary statements of operations data for the
three
months ended December 31, 2006 and 2005 and for the years ended September
30, 2006 and 2005, and our summary historical and pro forma balance sheet
data as of December 31, 2006. The summary statements of operations data for
the
years ended September 30, 2006 and 2005 are derived from our audited
financial statements as of and for the years ended September 30, 2006
and 2005, respectively. The summary statements of operations data for the
three months ended December 31, 2006 and 2005 and the selected balance
sheet data as of December 31, 2006 have been derived from our unaudited
financial statements included elsewhere in this prospectus. Our unaudited
financial statements have been prepared on the same basis as the audited
financial statements and notes thereto, which include, in the opinion of
our
management, all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the information for the unaudited interim
period. Our historical results for prior interim periods are not necessarily
indicative of results to be expected for a full fiscal year or for any future
period. You should read this data together with our financial statements
and
related notes included elsewhere in this prospectus and the information under
“Selected Financial Data” and “Management’s Discussion and
Analysis.”
The
following unaudited financial data should be read in conjunction with the
audited and unaudited historical financial statements of our company, New
Tilt,
Inc. and Objectware, Inc. and the unaudited pro forma combined consolidated
financial information, including the notes thereto, appearing elsewhere
in this
prospectus. The unaudited pro forma condensed combined information is presented
for illustrative purposes only and is not
7
necessarily
indicative of the results of operations or financial position that would
have
occurred if the transactions had been completed at the dates
indicated.
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Unaudited
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Three
Months Ended December 31,
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Year
Ended September 30,
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2006
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2005
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2006
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2005
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Historical
Statements of Operations Data:
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Revenue
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$ |
2,309,000
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$ |
1,713,000
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$ |
8,235,000
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$ |
5,769,000
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Cost
of revenue
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1,141,000
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867,000
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3,809,000
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3,113,000
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Gross
profit
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1,168,000
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846,000
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4,426,000
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2,656,000
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Operating
loss
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(285,000 | ) | (147,000 | ) | (810,000 | ) | (461,000 | ) | ||||||||
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Net
loss
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(630,000 | ) | (174,000 | ) | (1,448,000 | ) | (517,000 | ) | ||||||||
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Basic
and diluted loss per share
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$ | (0.15 | ) | $ | (0.04 | ) | $ | (0.36 | ) | $ | (0.14 | ) | ||||
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Weighted
average shares
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4,273,833
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3,903,833
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4,046,278
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3,804,527
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Three
Months Ended
December
31, 2006
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Year
Ended
September
30, 2006 (a)
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Unaudited
Proforma Statements of Operations Data:
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Revenue
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$ |
3,423.000
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$ |
13,056,000
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Cost
of revenue
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1,684,000
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6,653,000
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Gross
profit
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1,739,000
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6,403,000
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Operating
income (loss)
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(32,000 | ) |
54,000
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Net
income (loss)
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(34,000 | ) |
48,000
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Earnings
(loss) per share:
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Basic
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$ |
0.00
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$ |
0.01
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Diluted
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$ |
0.00
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$ |
0.01
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Weighted
average shares:
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||||||||
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Basic
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7,764,742
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8,039,409
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Diluted
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7,764,742
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8,638,387
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As
of December 31, 2006
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Historical
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Pro
Forma (b)
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|||||||
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Balance
Sheet Data:
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Working
capital
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$ | (2,660,000 | ) | $ |
9,646,000
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Total
assets
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$ |
9,810,000
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$ |
24,146,000
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Total
liabilities
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$ |
4,717,000
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$ |
2,503,000
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Total
shareholders’ equity
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$ |
5,093,000
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$ |
21,643,000
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Non-GAAP
Financial Measures and Reconciliation
We
use
earnings before interest, taxes, depreciation and amortization (“EBITDA”) in
this prospectus as a supplemental measure of our performance that is not
required by, or presented in accordance with, generally accepted accounting
principles in the United States (“GAAP”). We define EBITDA as net income
before interest, taxes, depreciation and amortization. We present EBITDA
because we consider it an important supplemental
8
measure
of our performance by adjusting net income or loss primarily for the
non-recurring charges included in interest expense that relate to the
amortization of the fair value of warrants issued pursuant to the private
debt
offering in April 2006, which will be fully amortized through interest expense
at the time of this offering, which charges do not relate directly to our
operating performance. Because the use of EBITDA facilitates comparisons
of our
historical operating performance on a more consistent basis, we use this
measure
for business planning and analysis purposes, in assessing acquisition
opportunities and in determining how potential external financing sources
are
likely to evaluate our business. In addition, we believe this measure provides
the investor with an accurate measure of our ability to meet our future cash
flow requirements.
EBITDA
is not a measurement of our financial performance under GAAP and should not
be
considered as an alternative to net income, operating income or any other
performance measure derived in accordance with GAAP, as an alternative to
cash
flow from operating activities or as a measure of our liquidity. You should
not
assume that the EBITDA amounts shown in this prospectus are comparable to
EBITDA
amounts disclosed by other companies. In evaluating EBITDA, you should be
aware
that it excludes expenses that we will incur in the future on a recurring
basis.
EBITDA
has limitations as an analytical tool, and you should not consider it in
isolation. Some of its limitations are:
|
·
|
it
does not reflect cash expenditures for capital asset
purchases
|
|
·
|
it
does not reflect the non-cash impact of stock compensation
expenses
|
|
·
|
it
does not reflect the cash impact of changes in deferred
revenues
|
|
·
|
it
does not reflect the cash impact of the changes in deferred assets
and
liabilities
|
We
compensate for these limitations by relying primarily on our GAAP results
and
using EBITDA only supplementally. EBITDA is not intended to supersede or
replace our GAAP results. For more information,
see our consolidated financial statements and the notes to those statements
included elsewhere in this prospectus. The following table reconciles our
net
income to our EBITDA on a historical and pro forma basis as of the dates
shown:
|
|
Unaudited
|
|
|
|||||||||||||
|
|
Three
Months Ended December 31,
|
Year
Ended September 30,
|
||||||||||||||
|
Other
Financial Data:
|
2006
|
2005
|
2006
|
2005
|
||||||||||||
|
Net loss
|
$ | (630,000 | ) | $ | (174,000 | ) | $ | (1,448,000 | ) | $ | (517,000 | ) | ||||
|
Interest
expense
|
345,000
|
27,000
|
638,000
|
56
,000
|
||||||||||||
|
Depreciation
|
48,000
|
23,000
|
186,000
|
106,000
|
||||||||||||
|
Amortization
of intangibles
|
32,000
|
28,000
|
119,000
|
94
,000
|
||||||||||||
|
EBITDA
|
$ | (205,000 | ) | $ | (96,000 | ) | $ | (505,000 | ) | $ | (261,000 | ) | ||||
|
Other
Unaudited Proforma Financial Data:
|
Three
Months Ended
December
31, 2006 (b)
|
Year
Ended
September
30, 2006 (a)
|
||||||
|
Net
income
|
$ | (34,000 | ) | $ |
48,000
|
|||
|
Income
tax provision
|
16,000
|
57,000
|
||||||
|
Interest
expense
|
5,000
|
17,000
|
||||||
|
Depreciation
|
55,000
|
166,000
|
||||||
|
Amortization
of intangibles
|
33,000
|
212,000
|
||||||
|
EBITDA
|
$ |
75,000
|
$ |
500,000
|
||||
Notes
to Summary Historical and Pro Forma Financial Data
|
(a)
|
On
April 24, 2006 and December 15, 2004 we acquired New Tilt and iapps®,
respectively. The results of operations of New Tilt and iapps are
included in our consolidated financial statements from the dates
of the
acquisitions. Subsequent to the sale of 3,000,000 shares of our common
stock in this offering, we intend to acquire Objectware. A portion
of the
proceeds of this offering will be used to retire indebtedness. The
accompanying summary financial data reflect the effect of these
transactions as if they occurred at the beginning of the most recent
fiscal year on October 1, 2005.
|
|
(b)
|
Subsequent
to the sale of 3,000,000 shares of our common stock in this offering,
we
intend to acquire Objectware. A portion of the proceeds of this
offering
will be used to retire indebtedness. The accompanying summary financial
data reflect the effect of these transactions as if they occurred
at the
beginning of the fiscal year on October 1,
2006.
|
You
should carefully consider and evaluate all of the information contained in
this
prospectus, including the following risk factors, before deciding to invest
in
our securities. Any of these risks could materially and adversely affect our
business, financial condition and results of operations, which in turn could
adversely affect the price of our common stock.
Risks
Related to our Business
There
is substantial doubt about our ability to continue as a going concern.
We
have
incurred annual losses since commencement of operations in 2000 and have
used a
significant amount of cash to fund our operations over the last several
years.
As a result, we have a working capital deficit of $2,660,000 and an accumulated
deficit of $4,793,000 at December 31, 2006. Our revenues have not grown
sufficiently to satisfy our increases in debt service, principally relating
to
the $2,800,000 senior notes payable described in Note 7 to the financial
statements, capital expenditures and operating activities and to generate
sufficient cash flows to maintain operations. We have issued various
equity and debt securities to satisfy our capital requirements and have
taken
significant steps to streamline our operations over the last several years
and
will continue to do so as circumstances warrant. Overall, we have experienced
an
increase in both headcount and operating expenses as a result of our
acquisitions. During the same period, we have taken significant steps
to control our administrative costs. To date, these steps have
included reducing or maintaining existing administrative headcount and
limiting
infrastructure, operating and capital expenditures where appropriate. We
must
increase revenue from current levels to achieve profitability and generate
future positive cash flow. In order to increase revenue, we have expanded
our
sales force through our acquisition of New Tilt in April 2006, while reducing
headcount in other areas, and have expanded into the healthcare and education
sectors of the industry. Long-term cash requirements, other than for normal
operating expenses and for commitments described in Note 8 to the financial
statements, will be required for the development of new software products,
enhancements of existing products, and the possible acquisition of other
companies, products, or technologies complementary to our business. We
continue
to monitor cash flow and have developed a contingency plan to effect further
reductions to headcount, infrastructure and capital expenditures, as necessary,
to fund on-going operations. Except for the scheduled repayment of
the senior notes payable described below, we believe that based on current
revenue projections that cash flow from operations should be sufficient
to meet
our cash requirements and allow us to continue as a going concern through
September 30, 2007. We expect that the proceeds from the planned public
offering
will be sufficient to repay the senior notes payable, to provide additional
working capital to fund current operations and to fund the long term cash
requirements described above.
Since
our
initial public offering is not expected to be completed by the April 2007
maturity date of the senior notes payable, we have obtained an extension
from
the note holders extending the maturity of these notes to July
2007. If the offering is not completed by the extended maturity date,
we would need to seek either a further extension of the maturity date or
seek
additional financing to repay the senior notes payable and related interest.
There can be no assurances that we will complete this offering by July 2007
or
that, if we do not, that we will be able if necessary to obtain a further
extension of the senior notes payable or additional financing under acceptable
terms and conditions, or at all.
The
circumstances discussed above raise substantial doubt about our ability to
continue as a going concern in the normal course of business. The recovery
of a
major portion of the recorded asset amounts shown in the accompanying
consolidated balance sheets are dependent upon our continued operations,
which
in turn are dependent upon our ability to maintain or increase revenue, succeed
in our future operations, and complete our planned public offering or obtain
other sources of cash to repay the senior notes payable. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the
classifications and amount of liabilities that might be necessary should
we be
unable to continue operations. See Use of Proceeds on page 21 of this
prospectus.
10
We
have a limited operating history on which to evaluate our operations and may
again incur losses in the future as we expand.
During
the most recent four years of operations, in 2003, 2004, 2005 and 2006, we
had
revenues of approximately $4.2 million, $4.9 million, $5.8 million and $8.2
million, respectively, and net losses of $750,000, $178,000, $517,000 and
$1,448,000, respectively. We have a limited operating history on which to base
an evaluation of our business and prospects. Since 2003, we have funded
operations through operating cash flows, when available, sales of equity
securities, issuances of debt and lines of credit. Any investment in our company
should be considered a high risk investment because you will be placing funds
at
risk in an unseasoned early stage company with unforeseen costs, expenses,
competition and other problems to which such companies are often subject. Our
revenues and operating results are difficult to forecast and our projected
growth is dependent, in part, on our ability to complete future acquisitions
of
prospective target companies and the future revenues and operating results
of
such acquired companies. We therefore believe that period-to-period comparisons
of our operating results thus far should not be relied upon as an indication
of
future performance.
As
we have a limited operating history, we may be unable to accurately predict
our
future operating expenses, which could cause us to experience cash shortfalls
in
future periods.
The
proceeds of this offering will be used to repay indebtedness in the aggregate
principal amount of $2,800,000, together with accrued interest, to pay the
$2,500,000 cash portion of the Objectware, Inc. purchase price, for general
corporate purposes, including other acquisitions, as well as for general working
capital purposes. In addition, in order to substantially grow our business
both
organically and through additional acquisitions, we may, from time to time,
require additional funding. There can be no assurance that we will be able
to
raise any additionally needed funds on acceptable terms or at all. The
procurement of any such additional financing may result in the dilution of
your
ownership interest in our company.
Because
most of our licenses are renewable on a monthly basis, a reduction in our
license renewal rate could reduce our revenues.
Our
customers have no obligation to renew their monthly 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 revenues to decline which would have a material
adverse effect on our operations.
Only
a few customers account for a substantial portion of our revenues, and if
we
lose any of these customer accounts, our net sales could substantially
suffer.
We
derive
a significant portion of our revenues from a small number of customers. For
the
fiscal year ended September 30, 2006, approximately 22% of our revenues were
generated from Nomura Securities, 7% of our revenues were generated
from The Bank of New York, and 6% of our revenues were individually
generated from Pfizer, Depository Trust & Clearing Corporation and John
Hancock. For the three months ended December 31, 2006, Nomura
Securities generated 21% of our revenues. The loss of business from any of
these
customers could substantially reduce our net sales and results of operations
and
could seriously harm our business.
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 be required to address
potential market opportunities. For example, we will need to expand the size
of
our research and development, sales, corporate finance and operations staff.
There can be no assurance that our infrastructure will be sufficiently
11
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.
If
we are unable to complete our acquisition of Objectware, our projected growth
and pro forma results of operations will be reduced
significantly.
On
December 7, 2006, we signed a definitive merger agreement. Under this agreement,
we expect to acquire Objectware, Inc. shortly before we complete this offering.
The closing of our acquisition of Objectware is subject to several conditions
customary to the acquisitions of this nature, including completion of
satisfactory due diligence analysis. In addition, the closing of our acquisition
of Objectware is subject to the conditions that, within five business days
after
the registration statement has been declared effective by the Commission
and our
stock has commenced trading, and within one hour after our receipt of net
proceeds of at least $10,000,000 from this offering, we transfer $2,500,000
of
cash consideration to the escrow agent and deliver certificates representing
the
stock consideration to the escrow agent by overnight mail. We cannot assure
you
that we will be able to satisfy the conditions to closing of the acquisition.
If
the acquisition of Objectware does not occur, our pro-forma revenue and earnings
before interest and taxes at the initial public offering will be reduced
significantly. For further discussion, please refer to page 22
of this prospectus.
You
will incur ownership dilution of between $3.89 and approximately $4.08 as
a
result of our proposed acquisition of
Objectware.
The
purchase price for Objectware consists of cash and shares of our common stock.
Upon the closing of the acquisition and the release of the escrowed materials,
we will issue to Objectware’s sole stockholder, Mr. Erez M. Katz, cash and
shares of our common stock valued at (based on the initial public offering
price
of our shares in this offering) $2,700,000. These shares may not be sold
or
otherwise disposed of during a lock-up period of up to one year from the
date of
this prospectus. We have also agreed to pay Mr. Katz a deferred purchase
price,
contingent on Objectware’s future financial performance, payable in cash and
stock quarterly over the three years after we acquire Objectware. See “Business
- Growth and Expansion Strategy - Pending Acquisition - Objectware” at page 63.
As a result of the issuance of shares of our common stock upon the closing
of
the acquisition, and the shares, if any, that we may issue to Mr. Katz in
the
future in payment of any deferred purchase price, you will experience ownership
dilution. Assuming the issuance of 490,909 shares of our common stock
(having a value, at the estimated initial public offering price of $5.50
per
share, of $2,700,000), upon the acquisition of Objectware, the immediate
additional dilution of net tangible book value will be $4.08 per share to
purchasers of common stock in this offering. See “Dilution.” In addition, we may
be required to issue additional shares (to be determined at the offering
price)
at the closing resulting from a purchase price adjustment computation should
Objectware’s working capital as defined in the merger agreement, exceed
$750,000. Any additional potential consideration to be paid will be
in the form of cash (60%) and common stock (40%), however we are unable to
determine whether such adjustment will be required until the closing. We
may
also be required to issue additional shares on a quarterly basis for three
years
after the acquisition of Objectware as contingent consideration to the purchase
price. The maximum number of shares we will be obligated to issue for contingent
consideration will have a value of not more than $800,000. At the estimated
initial public offering price of $5.50 per share, therefore, we may be required
to issue up to 145,454 additional shares. If all such shares are ultimately
issued, the additional dilution of net tangible book value will be $0.04
per
share to purchasers of common stock in this offering. For further
discussion, please refer to page 43
of this prospectus.
12
Our
acquisition of Objectware involves other risks, including our inability to
integrate successfully its business and our assumption of
liabilities.
We
may
not be able to integrate successfully Objectware’s business into our existing
business. We cannot assure you that we will be able to market the services
provided by Objectware with the other services we provide to customers. Further,
integrating Objectware’s business may involve significant diversion of our
management time and resources and be costly. Our acquisition of Objectware
also
involves the risks that the business acquired may prove to be less valuable
than
we expected and/or that Objectware may have unknown or unexpected liabilities,
costs and problems. In entering into the Objectware definitive merger agreement,
we relied on limited representations and warranties of Objectware’s sole
stockholder. Although we have contractual and other legal remedies for losses
that we may incur as a result of breaches of his agreements, representations
and
warranties, we cannot assure you that our remedies will adequately cover any
losses that we incur.
If
we undertake additional business combinations and acquisitions, they may be
difficult to integrate into our existing operations, may disrupt our business,
dilute stockholder value or divert management’s
attention.
During
the course of our history, we have acquired four businesses, and on December
7,
2006 we signed a definitive merger agreement with Objectware. Under this
agreement, we intend to acquire all outstanding capital stock of Objectware.
A
key element of our growth strategy is the pursuit of additional acquisitions
in
the fragmented Web development/services 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. Each
of
these risks exists in connection with our acquisition of
Objectware. As of the date of this prospectus, we have no
commitments, proposals or arrangements to acquire any other
business.
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.
Complex
applications software we sell 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:
|
·
|
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
13
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 revenues. 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
presently we are not 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
14
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.
We
have shifted a significant portion of our software development operations
to
India, which poses significant economic, political and security
risks.
A
significant portion of our software development activities are conducted
by our
Bridgeline Software, Pvt. Ltd. subsidiary in Bangalore, India, in order to
take
advantage of cost efficiencies associated with India’s lower wage scale.
However, we may not continue to achieve the cost savings and other benefits
we
currently receive from these operations and we may not be able to find
sufficient numbers of developers with the necessary skill sets in India to
meet
our needs as we grow. Due to our activities in India, we are exposed to risks
related to changes in the economic, security and political conditions of
India.
Economic and political instability, military actions and other unforeseen
occurrences in India could impair our ability to continue our software
development in a timely manner, which could put our products at a competitive
disadvantage.
Our
costs will increase significantly as a result of operating as a public Exchange
Act reporting company, and our management will be required to devote substantial
time to complying with public company rules and regulations. As a result
of
these costs, our net earnings may be reduced and we may not be able to devote
sufficient attention to achieving our business
objectives.
Following
this offering, as a public company, we will incur significant legal, financial,
accounting and other costs and expenses that we did not incur as a private
company. In addition, the Sarbanes-Oxley Act of 2002 (SOX) and rules and
regulations of the Securities and Exchange Commission and various exchanges,
including the Nasdaq Stock Market, have imposed various requirements on public
companies, including changes in corporate governance practices and disclosures.
Our management and other personnel will need to devote a substantial amount
of
time to ensure ongoing compliance with these new requirements.
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
15
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 the management and auditor reports
on
internal controls as part of our annual report for the fiscal year ending
September 30, 2008, 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.
Our
auditors identified material weaknesses in our internal control over financial
reporting as of September 30, 2006. Failure to achieve and maintain
effective internal control over financial reporting could result in our failure
to accurately report our financial results.
In
connection with its audit of our financial statements, our external auditors,
UHY LLP, advised us that they were concerned that as of and for the year
ended
September 30, 2006, our accounting resources did not include enough people
with
the detailed knowledge, experience and training in the selection and application
of certain accounting principles generally accepted in the United States
of
America (GAAP) to meet our financial reporting needs. This control deficiency
contributed to material weaknesses in internal control with respect to
accounting for revenue recognition, equity and acquisitions. A “material
weakness” is a control deficiency or combination of control deficiencies that
results in more than a remote likelihood that a material misstatement in
the
financial statements or related disclosures will not be prevented or detected.
In preparation for this offering, we engaged a consultant experienced in
accounting and financial reporting who assisted us in preparing our financial
statements. We have begun the process of identifying candidates to assume
newly
created positions in our company, one of which will be at the vice-president
level, with specific responsibilities for external financial reporting, internal
control, revenue recognition and purchase accounting. We intend to have these
resources in place sometime during the third quarter of fiscal year
2007. We estimate that the annual cost of the new positions referred
to above will be between $250,000 and $350,000. In addition, we
expect to incur significant additional costs in the future. While we expect
to
complete the process of bringing our internal control documentation into
compliance with SOX Section 404 as quickly as possible, we cannot at this
time
estimate how long it will take to complete the process or its ultimate
cost. We expect such costs to be
significant.
Risks
Related to Our Industry
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.
16
The
market for our products, i.e., Web development services, content
management products, asset management products, e-Training products, foundations
management products, and Web analytics are competitive and rapidly changing,
and
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 primary public company competitors
are Website Pros, Filenet, aQuantive, Vignette and WebSideStory. We also
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. See
“Business - Competition” on page 65 of this prospectus.
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:
|
·
|
user
privacy;
|
|
·
|
the
pricing and taxation of goods and services offered over the
Internet;
|
|
·
|
the
content of Websites;
|
|
·
|
copyrights;
|
|
·
|
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.
|
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
17
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.
Risks
Related to this Offering
There
is no prior public market for our common stock and our stock price could be
volatile and could decline following this offering, resulting in a substantial
loss in your investment.
Prior
to
this offering, there has not been a public market for our common stock. An
active trading market for our common stock may never develop or if it develops
it may not be sustained, which could affect your ability to sell your shares
and
could depress the market price of your shares. In addition, the initial public
offering price of the shares has been determined through negotiations between
us
and the representatives of the underwriters and may bear no relationship to
the
price at which the shares will trade upon completion of this offering. The
stock
market can be highly volatile. As a result, the market price of our common
stock
can be similarly volatile, and investors in our common stock may experience
a
decrease in the value of their stock, including decreases unrelated to our
operating performance or prospects. The market price of our common stock after
the offering will likely vary from the initial offering price and is likely
to
be highly volatile and subject to wide fluctuations in response to various
factors, many of which are beyond our control. These factors
include:
|
·
|
variations
in our operating results;
|
|
·
|
changes
in the general economy and in the local economies in which we
operate;
|
|
·
|
the
departure of any of our key executive officers and
directors;
|
|
·
|
the
level and quality of securities analysts’ coverage for our common
stock;
|
|
·
|
announcements
by us or our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital
commitments;
|
|
·
|
changes
in the federal, state, and local laws and regulations to which we
are
subject; and
|
|
·
|
future
sales of our common stock.
|
Shares
of common stock that are issuable pursuant to our stock option plan and our
outstanding warrants could result in dilution to existing shareholders and
could
cause the market price of our common stock to fall.
We
have
reserved 1,400,000 shares of common stock that are issuable pursuant
to our Amended and Restated Stock Incentive Plan. As of the date of this
prospectus, we have issued 903,606 options under the plan. In addition, we
have
578,269 shares that are issuable pursuant to our outstanding warrants. The
existence of these options and warrants may reduce earnings per share under
U.S.
generally accepted accounting principles and, to the extent they are exercised
and shares of our common stock are issued, dilute percentage
ownership of existing shareholders, which result in a decline in the market
price of our common stock. For further discussion, please refer to “Dilution”
on page 25
of this prospectus.
Future
sale of a significant number of our securities could cause a substantial decline
in the price of our securities, even if our business is doing
well.
Sales
of
a substantial number of shares of our common stock or the availability of a
substantial number of such shares for sale could result in a decline of
prevailing market price of our common stock. In particular, we are registering
the resale of up to 342,000 shares of our common stock that may be acquired
upon
the exercise of certain warrants. These shares may not be sold or otherwise
disposed of during a lock-up period of up to six months from the date of this
prospectus; thereafter, holders of those shares will be able to sell them into
the public market without restriction. In addition, we could issue other series
or classes of preferred stock having rights, preferences and powers senior
to
those of our common stock, including the right to receive dividends and
preferences upon liquidation, dissolution or winding-up in excess of, or prior
to, the rights of the holders of our common stock. This could reduce or
eliminate the
18
amounts
that would otherwise have been available to pay dividends on the common stock.
In addition, all of our directors, officers and shareholders have executed
lock-up agreements with the underwriters agreeing not to sell, transfer or
otherwise dispose of any of their shares for a period of one year from the
date
of this prospectus. The lock-up agreements are subject to customary exceptions
and may be waived by the underwriters. Sales of a substantial number of these
shares in the public market could depress the market price of our common stock
and impair our ability to raise capital through the sale of additional equity
securities.
The
results of our operations could cause our stock price to
decline.
Our
operating results in the future may be affected by a number of factors and,
as a
result, fall below expectations. Any of these events could negatively affect
our
operating results which might cause our stock price to fall:
|
·
|
Our
inability to attract new customers at a steady or increasing
rate;
|
|
·
|
Our
inability to provide and maintain customer
satisfaction;
|
|
·
|
Price
competition or higher prices in the industry;
|
|
·
|
Higher
than expected costs of operating our
business;
|
|
·
|
The
amount and timing of operating costs and capital expenditures relating
to
the expansion of our business, operations and infrastructure are
greater
and higher than expected;
|
|
·
|
Technical,
legal and regulatory difficulties with respect to our business
occur; and
|
|
·
|
General
downturn in economic conditions that are specific to our market,
such as a
decline in information technology
spending.
|
Purchasers
in this offering will experience immediate and substantial dilution in the
book
value of their investment.
The
initial public offering price of our common stock is substantially higher
than
the net tangible book value per share of our common stock immediately after
this
offering. If you purchase our shares in this offering, you will incur an
immediate dilution of $3.81 per share of common stock ($3.62 if the
over-allotment option is exercised by the underwriters) in net tangible book
value per share from the price you paid, based on an assumed initial mid-point
offering price between $5.00 and $6.00 per share. Upon the issuance of
additional shares of our common stock to Objectware’s sole stockholder in the
closing described at page 65 of this prospectus, dilution will be increased
by
$0.27 per share of common stock ($0.26 if the over-allotment option is exercised
by the underwriters) in net tangible book value per share from the price
you
paid, based on an assumed initial mid-point offering price between $5.00
and
$6.00 per share.
We
do not intend to pay dividends, which may limit the return on your
investment.
We
have
never declared or paid cash dividends or distributions to our equity owners.
We
currently intend to retain all available funds and any future earnings for
use
in the operation and expansion of our business and do not anticipate paying
any
cash dividends in the foreseeable future. You should not make this investment
in
our securities if you require dividend income from your investment. The success
of your investment will likely depend entirely upon any future appreciation
of
the market price of our common stock, which is uncertain and unpredictable.
There is no guarantee that our common stock will appreciate in value after
this
offering or even maintain the price at which you purchased your
shares.
We
have substantial discretion as to how to use the offering proceeds, and we
may
not apply the proceeds in ways that increase the value of your
investment.
While
we
currently intend to use the net proceeds of this offering as set forth in
“Use
of Proceeds” on page 21
of this prospectus, we may choose, in our sole discretion, to use the net
offering proceeds for different purposes. The effect of the offering will
be to
increase capital resources available to our management, and our management
will
allocate these capital resources as necessary to enhance shareholder
19
value.
You will be relying on the judgment of our management with regard to the
use of
the net proceeds of this offering. Our management might not be able
to yield a significant return, if any, on any investment of the net proceeds,
and you will not have the opportunity to influence our decisions on how to
use
the net proceeds.
Provisions
in our charter documents or Delaware law might discourage, delay or prevent
a
change of control of our company, which could negatively affect your
investment.
Our
Amended and Restated Certificate of Incorporation (which will become effective
shortly before the completion of this offering) and Amended and Restated By-laws
will contain provisions that could discourage, delay, or prevent a change of
control of our company or changes in our management that our shareholders may
deem advantageous. These provisions include:
|
·
|
authorizing
the issuance of preferred stock that can be created and issued by
our
Board of Directors without prior shareholder approval, commonly referred
to as “blank check” preferred stock, with rights senior to those of our
common stock;
|
|
·
|
limiting
the persons who can call special shareholder
meetings;
|
|
·
|
establishing
advance notice requirements to nominate persons for election to our
Board
of Directors or to propose matters that can be acted on by shareholders
at
shareholder meetings;
|
|
·
|
the
lack of cumulative voting in the election of
directors;
|
|
·
|
requiring
an advance notice of any shareholder business before the annual meeting
of
our shareholders;
|
|
·
|
filling
vacancies on our Board of Directors by action of a majority of the
directors and not by the
shareholders, and
|
|
·
|
the
division of our Board of Directors into three classes with each class
of
directors elected for a staggered three year term. In addition, our
organizational documents will contain a supermajority voting requirement
for any amendments of the staggered board
provisions.
|
These
and
other provisions in our organizational documents could allow our Board of
Directors to affect your rights as a shareholder in a number of ways, including
making it more difficult for shareholders to replace members of our Board
of
Directors. Because our Board of Directors is responsible for appointing members
of our management team, these provisions could in turn affect any attempt
to
replace the current management team. These provisions could also limit the
price
that investors would be willing to pay in the future for shares of our common
stock. We are also subject to the provisions of Section 203 of the Delaware
General Corporation Law, which may discourage, delay, or prevent a change
of
control of our company. See “Description of Capital Stock” on
page 81 of this prospectus.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some
of
the information in this prospectus contains forward-looking statements within
the meaning of the federal securities laws. These statements are only
predictions and you should not place undue reliance on them. Forward-looking
statements typically are identified by use of terms such as “anticipate,”
“believe,” “plan,” “expect,” “future,” “intend,” “may,” “will,” “should,”
“estimate,” “predict,” “potential,” “continue,” and similar words, although some
forward-looking statements are expressed differently. All forward-looking
statements address matters that involve risks and uncertainties. There are
many
important risks, uncertainties and other factors that could cause our actual
results, as well as trends and conditions within the markets we serve, levels
of
activity, performance, achievements and prospects to differ materially from
the
forward-looking statements contained in this prospectus. You should also
carefully consider all forward-looking statements in light of the risks and
uncertainties set forth under “Risk Factors” and elsewhere in this prospectus.
We undertake no obligation to publicly update or review any forward-looking
statements, whether as a result of new information, future developments or
otherwise.
In
light
of the significant uncertainties inherent in the forward-looking statements
made
in this prospectus, particularly in view of our early stage of operations,
the
inclusion of this information should not
20
be
regarded as a representation by us or any other person that our objectives,
future results, levels of activity, performance or plans will be
achieved.
DETERMINATION
OF OFFERING PRICE
The
offering price of our common stock was arbitrarily determined by our management
after consultation with our underwriters and was based upon consideration of
various factors including our history and prospects, the background of our
management, the pending acquisition of Objectware and current conditions in
the
securities markets. As a result, the price of our common stock does not
necessarily bear any relationship to our assets, book value, net worth or other
economic or recognized criteria of value. In no event should the offering price
of our common stock be regarded as an indicator of any future market price
of
our securities.
USE
OF PROCEEDS
Our
net
proceeds from the sale and issuance of 3,000,000 shares are estimated to
be
approximately $14,181,000 (approximately $16,390,000 if the underwriters’
over-allotment option is exercised in full), based upon an estimated initial
public offering price of $5.50 per share and after deducting the estimated
underwriting discount, the non-accountable expense allowance and the estimated
offering expenses payable by us.
We
intend
to use the net proceeds of this offering as follows:
|
Use
|
Amount
(in
thousands)
|
Percent
|
||||||
|
Repayment
of indebtedness
|
$ |
2,800
|
19.8 | % | ||||
|
Payment
of cash portion in connection with the acquisition of Objectware,
together
with expenses associated with that acquisition
|
2,955
|
20.8 | % | |||||
|
Other
potential acquisitions (approximate)
|
2,000
|
14.1 | % | |||||
|
General
corporate purposes, including working capital
|
6,426
|
45.3 | % | |||||
|
Total
|
$ |
14,181
|
100.0 | % | ||||
The
amounts and timing of our actual expenditures will depend on numerous factors,
including the results of our sales, marketing activities, competition and
the
amount of cash generated or used by our operations. For example, in the event
that we do not complete the acquisition of Objectware, we intend to use the
remainder of our net proceeds to finance our working capital needs, which
may
include (without limitation) funding research and development initiatives,
capital equipment expenditures, marketing activities and increases to sales
and
administrative staff, and for general corporate purposes. We may, however,
change these anticipated uses as we deem appropriate. Although we currently
have
no agreements or commitments to complete any acquisitions or other such
transactions other than the Objectware acquisition and have not allocated
funds
in our business plan for any specific acquisitions, we believe that the proceeds
from this offering will enable us to more effectively pursue strategic
opportunities when and as we identify them. We currently estimate that we
will
use approximately $2,000,000 of the net proceeds to make other acquisitions
that
may be identified in the future. Based on our acquisition criteria and the
portion of the purchase price of each acquisition that we expect to pay in
cash
at the closing, we believe that amount will be sufficient to fund the initial
costs of our acquisitions over the next several years, after which we believe
that cash from operations will be sufficient to fund the cash payments expected
to be made upon the closing of any subsequent acquisitions. We may find it
necessary or advisable to use the net proceeds for other purposes, and we
will
have broad discretion in the application of the balance of the net proceeds.
Pending the uses described above, we intend to invest the net proceeds in
certificates of deposit, short-term obligations of the United States government,
or other money-market instruments that are rated investment grade or its
equivalent.
21
DIVIDEND
POLICY
We
have
never paid cash dividends or distributions to our equity owners. We do not
expect to pay cash dividends on our common stock, but, instead, intend to
utilize available cash to support the development and expansion of our business.
Any future determination relating to our dividend policy will be made at the
discretion of our Board of Directors and will depend on a number of factors,
including, but not limited to, future operating results, capital requirements,
financial condition and the terms of any credit facility or other financing
arrangements we may obtain or enter into, future prospects and other factors
our
Board of Directors may deem relevant at the time such payment is considered.
There is no assurance that we will be able or will desire to pay dividends
in
the near future or, if dividends are paid, in what amount.
CAPITALIZATION
The
following table sets forth our capitalization as of December 31, 2006. You
should read this table in conjunction with “Management’s Discussion and
Analysis” beginning on page 29 and the financial statements and accompanying
notes included elsewhere in this prospectus. Such information is set forth
on
the following basis:
|
·
|
“Actual”
is based on our unaudited financial statements as of December 31,
2006.
|
|
·
|
“Adjustments”
gives the effect of the sale of shares in this offering and the
application of the net proceeds from this offering as described
under “Use
of Proceeds” on page 21 and assumes that the underwriters do not exercise
their over-allotment option and is further adjusted for issuances
of
shares and options pursuant to the completion of the acquisition
of
Objectware.
|
|
·
|
“As
Adjusted” gives the net effect of the adjustments to actual for the sale
of shares in this offering and the application of the net proceeds
from
this offering as described under “Use of Proceeds” on page
21 assuming that the underwriters do not exercise their
over-allotment option, and the effect for issuances of shares and
options
pursuant to the completion of the acquisition of
Objectware.
|
|
|
December
31, 2006
(Dollars
in thousands)
|
|||||||||||
|
|
Actual
|
Adjustments
(a)
|
As
Adjusted
|
|||||||||
|
Long-term
obligations, including current maturities
|
$ |
2,766
|
$ | (2,633 | ) | $ |
133
|
|||||
|
Shareholders’
equity:
|
||||||||||||
|
Common
stock $.001 par value: 20,000,000 shares authorized, 4,273,833 shares
issued and outstanding (actual) and 7,273,833 shares issued and
outstanding (as adjusted)
|
4
|
3
|
7
|
|||||||||
|
Preferred
stock, $.001 par value: 1,000,000 shares authorized, no shares issued
and outstanding
|
—
|
—
|
—
|
|||||||||
|
Additional
paid-in capital
|
9,882
|
16,865
|
26,747
|
|||||||||
|
Accumulated
deficit
|
(4,793 | ) | (318 | )(b) | (5,111 | ) | ||||||
|
Total
equity
|
5,093
|
16,550
|
21,643
|
|||||||||
|
|
||||||||||||
|
Total
capitalization
|
$ |
7,859
|
$ |
13,917
|
$ |
21,776
|
||||||
|
|
||||||||||||
|
(a)
|
Gives
effect to the sale of an aggregate 3,000,000 shares of common stock
in
this offering resulting in net proceeds to us of $14,181,000 net
of
underwriters discount of 10.75% and other expenses of the
offering, assuming no exercise of the underwriters’ over-allotment
option, and issuance of an additional 490,909 shares of common
stock upon
the completion of the acquisition of Objectware at an assumed price
of
$5.50 per share combined with $174,000 representing conversion
of
Objectware options to Bridgeline
options.
|
22
|
(b)
|
Includes
expensing the unamortized debt discount of $167,000 and unamortized
financing fees of $151,000.
|
UNAUDITED
CONDENSED PRO FORMA FINANCIAL DATA
In
accordance with Article 11 of Regulation S-X under the Securities Act
of 1933, as amended, a condensed pro forma balance sheet as of December 31,
2006
and condensed pro forma statements of operations for the three months ended
December 31, 2006 and the fiscal year ended September 30, 2006 have been
prepared. For additional information, please refer to the complete Pro Forma
disclosures beginning on page F-3 of our financial statements. The
summary income statement data for the years ended September 30, 2006 and
September 30, 2005 are derived from our audited financial statements as of
and
for the years ended September 30, 2006 and September 30, 2005. The summary
income statement data for the three months ended December 31, 2006 and December
31, 2005 and the selected balance sheet data as of December 31, 2006 and
2005
have been derived from our unaudited financial statements included elsewhere
in
this prospectus. Our unaudited financial statements have been prepared on
the
same basis as the audited financial statements and notes thereto, which include,
in the opinion of our management, all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the information
for
the unaudited interim period. Our historical results for prior interim periods
are not necessarily indicative of results to be expected for a full fiscal
year
or for any future period. You should read this data together with our financial
statements and related notes included elsewhere in this prospectus and the
information under “Selected Financial Data” and “Management’s Discussion and
Analysis.” These pro forma financial statements are based upon our
historical financial statements and the historical financial statements of
New
Tilt, Inc. and Objectware, Inc. included elsewhere in this prospectus and
should
be read in conjunction therewith.
The
following unaudited condensed pro forma financial data should be read in
conjunction with the audited and unaudited historical financial statements
of
our company, New Tilt, Inc. and Objectware, Inc. and the unaudited pro forma
combined consolidated financial information, including the notes thereto,
appearing elsewhere in this prospectus. The unaudited pro forma condensed
combined information is presented for illustrative purposes only and is not
necessarily indicative of the results of operations or financial position
that
would have occurred if the transactions had been completed at the dates
indicated.
Bridgeline
Software, Inc. Unaudited Condensed Pro Forma Financial
Data
|
|
Unaudited
Three Months Ended December 31,
|
Year
Ended September 30,
|
||||||||||||||||||||||
|
|
|
|
|
|
Unaudited
|
|
||||||||||||||||||
|
|
Historical
|
Pro
Forma
|
Historical
|
Historical
|
Pro
Forma
|
Historical
|
||||||||||||||||||
|
|
2006
|
2006
(b)
|
2005
|
2006
|
2006
(a)
|
2005
|
||||||||||||||||||
|
Income
Statement Data:
|
|
|
|
|
|
|
||||||||||||||||||
|
Revenues
|
$ |
2,309
|
$ |
3,423
|
$ |
1,713
|
$ |
8,235
|
$ |
13,056
|
$ |
5,769
|
||||||||||||
|
Cost
of revenue
|
1,141
|
1,684
|
867
|
3,809
|
6,653
|
3,113
|
||||||||||||||||||
|
Gross
profit
|
1,168
|
1,739
|
846
|
4,426
|
6,403
|
2,656
|
||||||||||||||||||
|
Income
(loss) from operations
|
$ | (285 | ) | $ | (32 | ) | $ | (147 | ) | $ | (810 | ) | $ |
54
|
$ | (461 | ) | |||||||
|
Net
income (loss)
|
$ | (630 | ) | $ | (34 | ) | $ | (174 | ) | $ | (1,448 | ) | $ |
48
|
$ | (517 | ) | |||||||
|
|
||||||||||||||||||||||||
|
Net
income (loss) per share:
|
||||||||||||||||||||||||
|
Basic
|
$ | (0.15 | ) | $ |
0.00
|
$ | (0.04 | ) | $ | (0.36 | ) | $ |
0.01
|
$ | (0.14 | ) | ||||||||
|
Diluted
|
$ | (0.15 | ) | $ |
0.00
|
$ | (0.04 | ) | $ | (0.36 | ) | $ |
0.01
|
$ | (0.14 | ) | ||||||||
23
|
|
Unaudited
Three Months Ended December 31,
|
Year
Ended September 30,
|
||||||||||||||||||||||
|
|
|
|
|
|
Unaudited
|
|
||||||||||||||||||
|
|
Historical
|
Pro
Forma
|
Historical
|
Historical
|
Pro
Forma
|
Historical
|
||||||||||||||||||
|
|
2006
|
2006
(b)
|
2005
|
2006
|
2006
(a)
|
2005
|
||||||||||||||||||
|
Number
of weighted average shares:
|
||||||||||||||||||||||||
|
Basic
|
4,273,833
|
7,764,742
|
3,903,833
|
4,046,278
|
8,039,409
|
3,804,527
|
||||||||||||||||||
|
Diluted
|
4,273,833
|
7,764,742
|
3,903,833
|
4,046,278
|
8,638,387
|
3,804,527
|
||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||||||
|
Current
assets
|
$ |
1,971
|
$ |
12,054
|
$ |
1,714
|
$ |
2,073
|
$ |
11,453
|
$ |
935
|
||||||||||||
|
Total
assets
|
$ |
9,810
|
$ |
24,146
|
$ |
7,592
|
$ |
9,824
|
$ |
23,729
|
$ |
6,739
|
||||||||||||
|
|
||||||||||||||||||||||||
|
Current
liabilities
|
$ |
4,631
|
$ |
2,408
|
$ |
2,106
|
$ |
4,093
|
$ |
1,948
|
$ |
1,114
|
||||||||||||
|
Total
liabilities
|
$ |
4,717
|
$ |
2,503
|
$ |
2,172
|
$ |
4,192
|
$ |
2,056
|
$ |
1,147
|
||||||||||||
|
|
||||||||||||||||||||||||
|
Total
shareholders’ equity
|
$ |
5,093
|
$ |
21,643
|
$ |
5,420
|
$ |
5,632
|
$ |
21,673
|
$ |
5,592
|
||||||||||||
|
|
||||||||||||||||||||||||
|
Total
liabilities and shareholders’ equity
|
$ |
9,810
|
$ |
24,146
|
$ |
7,592
|
$ |
9,824
|
$ |
23,729
|
$ |
6,739
|
|
|
Unaudited
Three Months Ended December 31,
|
Year
Ended September 30,
|
||||||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||
|
|
Historical
|
|
Historical
|
Historical
|
Historical
|
|||||||||||||||||||
|
|
2006
|
2005
|
2006
|
2005
|
||||||||||||||||||||
|
Cash
Flow Data:
|
||||||||||||||||||||||||
|
Net
cash (used in) provided by operating activities
|
$ | (320 | ) | $ |
302
|
$ | (733 | ) | $ | (430 | ) | |||||||||||||
|
Acquisitions,
net of cash acquired
|
$ |
—
|
$ |
—
|
$ | (553 | ) | $ | (310 | ) | ||||||||||||||
|
Net
cash used in investing activities
|
$ | (91 | ) | $ | (63 | ) | $ | (842 | ) | $ | (545 | ) | ||||||||||||
|
Proceeds
from issuance of short-term debt
|
$ |
—
|
$ |
323
|
$ |
2,434
|
$ |
—
|
||||||||||||||||
|
Net
increase (decrease) in cash for the period
|
$ | (422 | ) | $ |
518
|
$ |
453
|
$ | (818 | ) |
|
(a)
|
Reflects
the April 24, 2006
acquisition of New Tilt, the probable acquisition of Objectware and
this
offering.
|
|
(b)
|
Reflects
the probable
acquisition of Objectware and this
offering.
|
24
DILUTION
If
you
invest in our common stock, the book value of your shares will be diluted to
the
extent of the difference between the public offering price for each share of
common stock and the adjusted net tangible book value per share of our common
stock immediately following the completion of this offering.
The
net
tangible book value of our common stock as of December 31, 2006 was
$(2,211,000), or $(0.52) per share. Net tangible book value per share
before this offering has been determined by dividing net tangible book value
(book value of total assets less intangible assets, less total liabilities)
by
the number of shares of common stock outstanding as of December 31, 2006.
After
(i) giving effect to the sale of our shares in this offering at an
estimated initial public offering price of $5.50 per share and
(ii) deducting underwriting discounts and commissions, the non-accountable
expense allowance to the representatives of the underwriters and estimated
offering expenses payable by us, our net tangible book value as of December
31,
2006 would have been $12,263,000 or $1.69 per share. This represents an
immediate increase in net adjusted tangible book value of $3.39 per share
to existing holders of common stock and an immediate dilution of net tangible
book value of $3.81 per share to purchasers of common stock in this
offering. Giving effect to the release of the closing escrow related to the
acquisition of Objectware immediately after this offering, our net tangible
book
value as of December 31, 2006 would have been $11,026,000 or $1.42 per
share. This represents an immediate additional increase in net adjusted tangible
book value of $2.58 per share to existing holders of common stock and an
immediate additional dilution of net tangible book value of $4.08 per share
to purchasers of common stock in this offering, as illustrated in the following
table:
|
|
Without
giving effect
to
the release of the
closing
escrow in
connection
with the
acquisition
of
Objectware
|
After
giving effect
to
the release of the
closing
escrow in
connection
with the
acquisition
of
Objectware
|
||||||
|
Assumed
initial public offering price per share
|
$ |
5.50
|
$ |
5.50
|
||||
|
Net
tangible book value (deficit) per share before the
offering
|
(0.52 | ) | (0.52 | ) | ||||
|
Reduction
in deficit in net tangible book value per share attributable
to the
offering
|
2.21
|
2.21
|
||||||
|
Increase
in deficit in net tangible book value per share attributable
to the
acquisition of Objectware
|
—
|
(0.27
|
) | |||||
|
Pro
forma net tangible book value per share after the offering
|
1.69
|
1.42
|
||||||
|
Dilution
per share to new investors
|
$ |
3.81
|
$ |
4.08
|
||||
Assuming
the underwriters exercise their over-allotment option in full, existing
shareholders would have an immediate increase in adjusted tangible book value
of
$3.91 per share and investors in this offering would incur an immediate dilution
of $3.62 per share or 66%, without giving effect to the release of the closing
escrow in connection with the acquisition of Objectware, and existing
shareholders would have an immediate increase in adjusted tangible book value
of
$3.10 per share and investors in this offering would incur an immediate dilution
of $3.89 per share or 71%, giving effect to the release of the closing escrow
in
connection with the acquisition of Objectware.
The
following table summarizes, on a pro forma basis after the closing of this
offering, the differences in total consideration paid by persons who are
shareholders prior to completion of this offering and by persons investing
in
this offering as of February 1, 2007:
|
|
|
|
|
Consideration
|
||||||||||||||||
|
|
Shares
|
Purchased
|
Total
|
|
Price/Share
|
|||||||||||||||
|
|
Number
|
Percent
|
Amount
|
Percent
|
Average
|
|||||||||||||||
|
Officers,
directors, promoters and affiliated persons
|
2,479,216
|
32.35 | % | $ |
5,014,605
|
(1)
|
18.02 | % | $ |
2.02
|
||||||||||
|
Other
existing shareholders
|
2,184,908
|
28.51 | % |
6,313,915
|
(2)
|
22.69 | % | $ |
2.89
|
|||||||||||
|
New
Investors
|
3,000,000
|
39.14 | % |
16,500,000
|
59.29 | % | $ |
5.50
|
||||||||||||
|
Total
|
7,664,124
|
100.00 | % | $ |
27,828,520
|
100.00 | % | $ |
3.63
|
|||||||||||
|
|
||||||||||||||||||||
|
(1)
|
The
total consideration paid by officers, directors, promoters and
affiliated
persons includes: (i) $2,467,082 received in the form of stock
of companies we acquired; (ii) $1,227,919 in cash consideration
received
or which may be received upon the exercise of options or warrants
previously exercised, currently exercisable or exercisable within
60 days
after February 1, 2007; (iii) $2,600 in cash consideration received
in
return for shares of common stock issued to our founder upon our
organization; and (iv) $1,317,003 in cash consideration received
in
several private placements.
|
|
(2)
|
The
total consideration paid by all other existing shareholders
includes: (i) $3,257,125 received in the form of stock of
companies we acquired; and (ii) $3,056,790 in cash consideration
received
in several private
placements.
|
The
foregoing presentation does not give effect to the issuance of an additional
(i) 659,195 shares of common stock pursuant to the exercise of outstanding
options held by persons or entities other than officers, directors, promoters
and affiliated persons, (ii) 458,370 shares of common stock pursuant to the
exercise of outstanding warrants held by persons or entities other than
officers, directors, promoters and affiliated persons, and (iii) 470,413
shares of common stock reserved for issuance under our Amended and Restated
Stock Incentive Plan.
26
SELECTED
FINANCIAL DATA
In
accordance with Article 11 of Regulation S-X under the Securities Act of
1933,
as amended, a condensed pro forma balance sheet as of December 31, 2006 and
condensed pro forma statements of operations for the three months ended
December 31, 2006 and the fiscal year ended September 30, 2006 have been
prepared. For additional information, please refer to the complete pro forma
disclosures beginning on Page F-3 of our financial
statements.
The
summary below sets forth certain selected historical and pro forma financial
data. The financial data below should be read in conjunction with the historical
financial statements and the notes thereto of our company, New Tilt, Inc.
and
Objectware, Inc. appearing elsewhere in this prospectus. The summary income
statement data for the years ended September 30, 2006 and 2005 are derived
from
our audited financial statements as of and for the years ended September
30,
2006 and 2005, respectively. The summary income statement data for the
three months ended December 31, 2006 and 2005 and the selected balance
sheet data as of December 31, 2006 and 2005 have been derived from our unaudited
financial statements included elsewhere in this prospectus. Our unaudited
financial statements have been prepared on the same basis as the audited
financial statements and notes thereto, which include, in the opinion of
our
management, all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the information for the unaudited interim
period. Our historical results for prior interim periods are not necessarily
indicative of results to be expected for a full fiscal year or for any future
period.
When
you
read the selected financial data below, it is important that you also read
our
audited and unaudited consolidated financial statements and the notes to those
statements appearing elsewhere in this prospectus, as well as the section of
this prospectus entitled “Management’s Discussion and Analysis and Results of
Operations” and “Risk Factors.”
Bridgeline
Software, Inc.
Selected
Financial Data
(In
thousands)
|
|
Unaudited
Three Months
Ended
December 31,
|
Year
Ended September 30,
|
||||||||||||||
|
|
(in
thousands)
|
(in
thousands)
|
||||||||||||||
|
|
|
|
|
|
||||||||||||
|
|
2006
(a)
|
2005
|
2006
|
2005
|
||||||||||||
|
Income
Statement Data:
|
|
|
|
|
||||||||||||
|
Revenues
|
$ |
2,309
|
$ |
1,713
|
$ |
8,235
|
$ |
5,769
|
||||||||
|
Cost
of revenue
|
1,141
|
867
|
3,809
|
3,113
|
||||||||||||
|
Gross
profit
|
1,168
|
846
|
4,426
|
2,656
|
||||||||||||
|
Loss
from operations
|
$ | (285 | ) | $ | (147 | ) | $ | (810 | ) | $ | (461 | ) | ||||
|
|
||||||||||||||||
|
Net
loss
|
$ | (630 | ) | $ | (174 | ) | $ | (1,448 | ) | $ | (517 | ) | ||||
|
|
||||||||||||||||
|
Net
loss per share:
|
||||||||||||||||
|
Basic
and diluted
|
$ | (0.15 | ) | $ | (0.04 | ) | $ | (0.36 | ) | $ | (0.14 | ) | ||||
|
|
||||||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||
|
Current
assets
|
$ |
1,971
|
$ |
1,714
|
$ |
2,073
|
$ |
935
|
||||||||
|
Definite-lived
intangible assets, net
|
$ |
271
|
$ |
303
|
$ |
303
|
$ |
331
|
||||||||
|
Goodwill
|
$ |
6,409
|
$ |
5,122
|
$ |
6,346
|
$ |
5,097
|
||||||||
|
Total
assets
|
$ |
9,810
|
$ |
7,592
|
$ |
9,824
|
$ |
6,739
|
||||||||
|
|
||||||||||||||||
|
Senior
notes payable, net of discount
|
$ |
2,633
|
$ |
—
|
$ |
2,497
|
$ |
—
|
||||||||
|
Current
liabilities
|
$ |
4,631
|
$ |
2,106
|
$ |
4,093
|
$ |
1,114
|
||||||||
|
Total
liabilities
|
$ |
4,717
|
$ |
2,172
|
$ |
4,192
|
$ |
1,147
|
||||||||
|
|
||||||||||||||||
|
Total
shareholders’ equity
|
$ |
5,093
|
$ |
5,420
|
$ |
5,632
|
$ |
5,592
|
||||||||
|
|
||||||||||||||||
|
Total
liabilities and shareholders’ equity
|
$ |
9,810
|
$ |
7,592
|
$ |
9,824
|
$ |
6,739
|
27
Bridgeline
Software, Inc.
Selected
Proforma Financial Data
(Dollars
in thousands)
|
Actual
|
Proforma
|
|||||||||||
|
|
Unaudited
Three
|
Unaudited
Three
|
Unaudited
|
|||||||||
|
|
Months
Ended
|
Months
Ended
|
Year
Ended
|
|||||||||
|
|
December
31, 2006
|
December
31, 2006 (b)
|
September
30, 2006 (c)
|
|||||||||
|
Income
Statement Data:
|
|
|
||||||||||
|
Revenues
|
$ |
2,309
|
$ |
3,423
|
$ |
13,056
|
||||||
|
Cost
of revenue
|
1,141
|
1,684
|
6,653
|
|||||||||
|
Gross
profit
|
1,168
|
1,739
|
6,403
|
|||||||||
|
Sales
and marketing expense
|
837
|
837
|
3,304
|
|||||||||
|
Technology
development
|
155
|
155
|
176
|
|||||||||
|
General
and administrative expense
|
461
|
779
|
2,869
|
|||||||||
|
Income (loss)
from operations
|
$ | (285 | ) | $ | (32 | ) | $ |
54
|
||||
|
|
||||||||||||
|
Net
income (loss)
|
$ | (630 | ) | $ | (34 | ) | $ |
48
|
||||
|
|
||||||||||||
|
Net
income per share:
|
||||||||||||
|
Basic
|
$ | (0.15 | ) | $ |
0.00
|
$ |
0.01
|
|||||
|
Diluted
|
$ | (0.15 | ) | $ |
0.00
|
$ |
0.01
|
|||||
|
Weighted
Average Shares:
|
||||||||||||
|
Basic
|
4,273,833
|
7,764,742
|
8,039,409
|
|||||||||
|
Diluted
|
4,273,833
|
7,764,742
|
8,638,387
|
|||||||||
|
|
||||||||||||
|
Balance
Sheet Data:
|
||||||||||||
|
Current
assets
|
$ |
1,971
|
$ |
12,054
|
$ |
11,453
|
||||||
|
Definite-lived
intangible assets, net
|
$ |
271
|
$ |
680
|
$ |
712
|
||||||
|
Goodwill
|
$ |
6,409
|
$ |
10,346
|
$ |
10,386
|
||||||
|
Total
assets
|
$ |
9,810
|
$ |
24,146
|
$ |
23,729
|
||||||
|
|
||||||||||||
|
Short-term
debt, net of discount
|
$ |
2,633
|
$ |
—
|
$ |
—
|
||||||
|
Current
liabilities
|
$ |
4,631
|
$ |
2,408
|
$ |
1,948
|
||||||
|
Total
liabilities
|
$ |
4,717
|
$ |
2,503
|
$ |
2,056
|
||||||
|
|
||||||||||||
|
Total
shareholders’ equity
|
$ |
5,093
|
$ |
21,643
|
$ |
21,673
|
||||||
|
|
||||||||||||
|
Total
liabilities and shareholders’ equity
|
$ |
9,810
|
$ |
24,146
|
$ |
23,729
|
||||||
28
|
(a)
|
On
April 25, 2006, we acquired New Tilt. The operations of New Tilt
have been
included in our consolidated financial statements from the date of
acquisition.
|
|
(b)
|
Reflects
the probable acquisition of Objectware and the
offering.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS
The
following Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the historical financial
statements and other financial information appearing elsewhere in this
prospectus, including “Summary Financial Data,” “Capitalization” and “Selected
Financial Data” on pages 7, 22 and 27 of this prospectus,
respectively.
Overview
We
are
developers of on-demand Web software tools and award-winning Web applications.
Our team of Microsoft®-certified
developers specializes in user experience development,
Web application development, and search engine optimization. We have
developed our own on-demand Web software tools that provide Content Management,
Relationship Management, eCommerce management, eMarketing Management and
Grants
Management. By providing award-winning Web applications, we help our customers
to optimize business processes utilizing Web-based
technologies.
Although
our revenues have increased substantially on an annual basis since fiscal
2003, we have experienced net losses and negative cash flows from
operations in each fiscal period since inception, and as of December 31,
2006
and September 30, 2006, we had an accumulated deficit of $4,793,000 and
$4,163,000, respectively and a working capital deficit of $2,660,000 and
$2,020,000, respectively. Since inception, we have significantly increased
our
revenues through a combination of factors including (i) obtaining new
customers, (ii) expanding existing customer relationships,
(iii) acquiring complementary businesses, (iv) expanding the features
of our software tools, and (v) offering new and improved products and
services.
Sources
of Revenue
We
generate the majority of our revenue from three different sources: (a) Web
Services, (b) Managed Services, and (c) Subscriptions. We primarily enter
into Web Services engagements that are typically three to six months in
duration. Our customers pay us fees as products or services are delivered.
Revenues are recognized from our fixed fee engagements in proportion to the
extent of progress toward completion of the project and on an incurred basis
for
monthly time and materials projects. We believe labor costs are the
most appropriate measure to allocate revenue among reporting periods as they
are
the primary input to the provision of our Web Services. Our fixed fee
engagements are billed monthly or upon the completion of milestones. For
milestone based projects, since milestone pricing is based on hourly costs
and
the duration of such engagements is relatively short, we believe
this approach principally mirrors an output approach under the proportional
performance model for revenue recognition on such fixed priced engagements.
Managed Services revenue is generally recognized monthly or ratably over
the
period in which the services are provided. We also sell software licenses
under
either perpetual or fixed term subscription licenses. Revenue for perpetual
licenses is included in Web Services revenue and is generally recognized
upon
delivery of the software. Such revenues totaled $34,000, $34,000,
$71,000 and $222,000 for the three months ended December 31, 2006 and 2005
and
for the years ended September 30, 2006 and 2005, respectively. Revenue from
licensed subscription agreements is included in Subscription revenue and
is
generally recognized over the term of the agreements. We offer maintenance
and
post-
29
contract
customer support (PCS) to our customers; however the revenues from these
support services are not material to the periods presented. During the three
months ended December 31, 2006 and 2005 and for the years ended September
30,
2006 and 2005, the composition of our revenue was as follows:
|
|
|
Three
Months Ended
December 31,
|
|
Years
Ended September
30,
|
||||
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Web
Services
|
|
81.5%
|
|
77.8%
|
|
79.2%
|
|
72.5%
|
|
Managed
Services
|
|
13.3
|
|
15.6
|
|
15.1
|
|
21.6
|
|
Subscription
|
|
5.2
|
|
6.6
|
|
5.7
|
|
5.9
|
|
|
|
100.0%
|
|
100.0%
|
|
100.0%
|
|
100.0%
|
|
·
|
economic
conditions affecting the budget priorities of our
customers;
|
|
·
|
the
acquisition or cancellation of significant
clients;
|
|
·
|
worldwide
acts of terrorism effecting U.S. markets; and
|
|
·
|
seasonality.
|
For
these
and other reasons, our revenue and results of operations in quarter ended
December 31, 2006 and any prior periods may not necessarily be indicative
of
future revenues and results of operations.
We
define
our significant customers as those that generate in excess of ten percent
of
total revenues. These significant customers in aggregate generated 21%, 21%,
22%
and 31% of our revenues in the three months ended December 31, 2006 and 2005
and
the years ended September 30, 2006 and 2005, respectively. One customer
generated greater than 10% of total revenue in the three months ended December
31, 2006 and 2005 and the fiscal year ended September 30, 2006 and two customers
generated greater than 10% of total revenue in the year ended September 30,
2005.
Cost
of Revenue and Operating Expenses
Cost
of Revenue. Cost of revenue includes salaries, benefits and related
expenses of operations and database support, implementation and support services
and the amortization of intangible assets resulting from prior acquisitions.
Gross profit represents revenue less the costs of revenue for personnel directly
involved in Web development and services activities, including stock-based
compensation allocable to such personnel. Gross profit percentage is highly
dependent on individually negotiated contracts and overhead allocations.
We do
not believe that historical gross profit margins are a reliable indicator
of
future gross profit margins. As our Subscription revenue increases, we expect
our gross margins to also increase.
Sales
and Marketing Expenses. Sales and marketing expenses consist primarily of
salaries, commissions, benefits and related expenses of personnel engaged in
selling, marketing and customer service functions, as well as public relations,
advertising and promotional costs, and overhead costs of our various locations.
Sales and marketing expenses include stock-based compensation allocable to
certain personnel performing sales and marketing activities.
General
and Administrative Expenses. General and administrative expenses consist
primarily of personnel-related expenses, depreciation, legal and other
professional fees, facilities and communication expenses and expenses to
maintain our information technology infrastructure. General and administrative
expenses include stock-based compensation allocable to certain personnel
performing general and administrative activities.
30
Technology
Development. Research and development expenditures for technology
development are charged to operations as incurred. Technology development
expenses include stock-based compensation allocable to certain personnel
performing such research and development activities. Software development costs
subsequent to the establishment of technological feasibility are capitalized
and
amortized to cost of software and included in cost of sales. Based on our
product development process, technological feasibility is established upon
completion of a working model. Costs incurred between completion of a working
model and the point at which the product is ready for general release are
capitalized if significant. No software development costs have been capitalized
to date as a result of our development process.
During
our fiscal year 2005, we established a research and development center in
Bangalore, India in conjunction with our new On-demand Software Development
initiative described in the Business section of this prospectus. In
addition, on an on-going basis since our inception, we have derived technology
benefits from engagements with our customers; however we do not track or
quantify such costs separately for any periods.
Acquisitions
have been an important part of our growth and expansion to date. Our
acquisitions have enabled us to increase our product and service offerings
and
expand into other geographies. We may continue to acquire companies that provide
us with proprietary technology, access to key accounts, or personnel with
significant experience in the Web development industry. During fiscal 2005,
we
completed the acquisition of Interactive Applications Group, Inc. (“iapps”®) giving
us further
exposure and access into the foundation and non-profit industry. During fiscal
2006, we completed the acquisition of New Tilt, Inc., (“New Tilt”) expanding our
exposure and access into the life sciences segment of our industry.
We
believe these acquisitions
contribute to our business strategy by providing us with new geographical
distribution opportunities, an expanded customer base, an expanded sales
force
and an expanded developer force. In addition, integrating the acquired
businesses into our existing operations allows us to consolidate the finance,
human resources, legal and marketing and other expenses of the acquired
businesses with our own, reducing the aggregate of these expenses for the
combined businesses, and resulting in improved over-all operating
results.
From
time
to time, in connection with business acquisitions, we agree to make additional
future payments to sellers contingent upon achievement of specific
performance-based milestones by the acquired entities. Pursuant to the
provisions of SFAS No. 141, Business Combinations, and related
interpretations, such amounts are accrued and recorded by us as liabilities
when
the contingency is probable and estimatable and, hence, the additional
consideration becomes payable.
Business
Enterprise Segments
We
are
structured and operate internally as one reportable operating segment as defined
in SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information (“SFAS 131”). SFAS 131 establishes standards for the
way public business enterprises report information about operating segments
in
annual consolidated financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas and major customers. Although we had
three U.S. operating locations and an Indian subsidiary at September 30,
2006 and 2005, under the aggregation criteria set forth in SFAS 131, we operate
in only one reportable operating segment since each location has similar
economic characteristics.
Critical
Accounting Policies and Estimates
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions that affect the reported
31
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 include our valuation of accounts
receivable and long-term assets, including intangibles and deferred tax assets,
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:
|
·
|
Allowance
for doubtful accounts;
|
|
·
|
Revenue
recognition;
|
|
·
|
Accounting
for goodwill and other intangible assets; and
|
|
·
|
Accounting
for stock-based compensation.
|
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.
Revenue
Recognition. Substantially all of our revenue is generated from three
activities: Web Services, Managed Services and Software Licenses and
Subscriptions. We enter into arrangements to sell services, software licenses
or
combinations thereof. We recognize revenue in accordance with Securities
and
Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104,
Revenue Recognition in Financial Statements, Emerging Issues Task Force
(“EITF”) Issue No. 00-21, Accounting For Revenue Arrangements with Multiple
Deliverables (“EITF 00-21”), and American Institute of Certified Public
Accountants Statement of Position No. 97-2, Software Revenue Recognition
(“SOP 97-2”) and related interpretations. 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
Services
Web
Services include professional services primarily related to the our Web
development solutions that address specific customer needs such as information
architecture and usability engineering, interface configuration, Web application
development, rich media, e-Commerce, e-Learning and e-Training, search engine
optimization, and content management. Web Services are sold either on a stand
alone basis or, as described below, in multiple element arrangements with
Managed Services and/or our licensed software products.
Revenue
from stand-alone Web Services is recognized when the services are performed
using the proportional performance model using a method based on cost incurred
in relation to total estimated cost at completion. Labor costs are the most
appropriate measure to allocate revenue among reporting
32
periods,
as they are the primary input to the provision of our Web
Services. Fixed fee engagements are billed monthly or
upon the completion of milestones. For milestone based projects,
since milestone pricing is based on hourly costs and the duration of such
engagements is relatively short, this approach principally mirrors an
output approach under the proportional performance model for revenue recognition
on such fixed priced engagements.
Web
Services also include revenue from our perpetual software licenses described
below under Software Licenses and Subscriptions. Perpetual licenses
are only sold in connection with Web Services engagements; therefore, we
believe
it is appropriate to include revenue from perpetual licenses with revenue
from
Web Services. Revenues derived from such perpetual software license sales
have
been insignificant in all periods presented (representing less than 3% of
Web
Services revenues) to warrant separate classification in the statement of
operations, and is not anticipated to increase significantly in future
periods.
Managed
Services
Managed
services primarily include on-going retained professional services and may
also
include monthly hosting fees for the use of hardware and infrastructure,
generally at our network operating center. Managed Services are sold on a
stand-alone basis or, as described below, in multiple element arrangements
with
Web Services (including training and implementation services) and our licensed
software products. Stand-alone on-going retained professional services are
either 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. These arrangements do not require formal customer acceptance and do
not
grant any future right to labor hours contracted for but not used.
Revenue
from Hosting services is incidental to our Web Services activities and for
all
periods presented, the only customers under contractual hosting arrangements
have been previous Web Services customers. Hosting revenue has
historically been insignificant to both our business strategy and to our
total
revenues..
Software
Licenses and Subscriptions
As
described further below under Multiple Element Arrangements, our
licensed software products are generally sold with Web Services and Managed
Services.
We
recognize revenue from perpetual software licenses upon delivery of the software
provided as the related Web Services are not essential to the functionality of
the software. The related post-contract customer support revenue is also
recognized upon delivery of the software since PCS does not contain rights
to
unspecified upgrades, is included in the price of the multiple element
arrangement, and extends only for a period of one year or less and the cost
of
providing the PCS is deemed to be insignificant. Perpetual software
license revenue and related PCS represented approximately $34,000 and $34,000
of
revenue for the three months ended December 31, 2006 and 2005 and $71,000
and
$222,000 of revenue for the years ended September 30, 2006 and 2005,
respectively. Subsequent renewals of PCS have been
insignificant.
Subscriptions
include fixed term software and a related hosting arrangement (“Licensed
Subscription Agreements”). Licensed Subscription Agreements are accounted
for as separate units of accounting based on their respective value to the
customer on a stand-alone basis and are separately priced based either on
vendor
specific objective evidence (“VSOE”)
of fair value or
on third party evidence of fair value when VSOE of fair value is not available.
The Licensed Subscription Agreements and related hosting services are included
in Subscription revenue and recognized ratably over the term of their month
to
month subscription agreements. We have concluded that, consistent with EITF
00-3, Application of AICPA SOP 97-2, “Software Revenue Recognition”, to
Arrangements That Include the Right to Use Software Stored on Another Entity’s
Hardware, that our Licensed Subscription Agreements are outside the scope
of SOP 97-2 since the software is only accessible through a hosting arrangement
with us and the customer cannot take possession
33
of
the
software. As such, the Licensed Subscription Agreements are considered a single
unit of accounting for purposes of recognizing revenue in the multiple element
arrangements described below.
Multiple
Element Arrangements
Web
Services and Managed Services are also provided as part of multiple element
arrangements that include licensed software, post contract customer support
(“PCS”), managed services and/or a hosting arrangement. We account for these
multiple elements separately pursuant to EITF 00-21.
In
determining whether the Web Services element in a multiple element arrangement
can be accounted for separately from other elements, we consider the
availability of Web Services from other vendors and whether objective and
reliable evidence of fair value exists for the undelivered elements. Web
Services do not involve significant production, modification, or customization
of our licensed software products. The Web Services are regularly sold on
a
stand-alone basis pursuant to a price list and are not discounted. We have
also
concluded that the software element in these multiple element arrangements
is
incidental to the Web Services and is not essential to the functionality
of the
Web Services. Except when provided as a part of our Licensed Subscription
Agreements described above, hosting services, if any, are accounted for
separately as Managed Services, as those services have value to the customer
on
a stand-alone basis and are separately priced based on vendor specific objective
evidence (“VSOE”) of fair value or based on third party evidence of fair value
if VSOE of fair value is not available.
In
determining whether the Managed Services element of a multiple element
arrangement can be accounted for separately, we consider that Managed Services
have value to its customers on a stand-alone basis since those services are
regularly sold separately pursuant to standard price lists which are not
discounted. The hosting services are considered to have stand-alone value
to the
customer and are separately priced based on third party evidence of fair
value.
In
accordance with EITF 00-21, we recognize revenue pursuant to multiple element
arrangements using the residual method whereby the value ascribed to the
delivered element (generally the Web Services) is equal to the total
consideration less the VSOE of fair value or third party evidence of fair
value
of the undelivered elements.
Customer
Payment Terms
Our
payment terms with customers typically are “due upon receipt” or “net 30 days
from invoice”. Payments terms may vary by customer but in all
instances do not exceed 45 days from invoice date. For Web Services,
we typically invoice project deposits of between 20% and 33% of the total
contract value which we record as deferred revenue until such time the related
services are completed. Subsequent invoicing for Web Services is
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
due
upon invoice receipt. 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 generally between 30 to 90 days from
the
completion of work. In hosting arrangements, we may 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.
34
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.
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 amounts 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) any future declines in our operating results,
(ii) a decline in the value of technology company stocks, including the
value of our common stock, (iii) 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 SFAS
No. 142, Goodwill and Other Intangible Assets (“SFAS 142”),
management has determined that there was 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.
The
results of the assessments performed to date was that the fair value of the
reporting unit exceeded its carrying amount; therefore, no impairment charges
to
the carrying value of goodwill have been recorded since inception.
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 would be 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.
35
Stock-Based
Compensation
At
December 31, 2006, we maintained two stock-based compensation plans which
are
more fully described in Note 9. Through September 30, 2006, we accounted
for
stock compensation awards under the provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation (“SFAS 123”), as amended by
SFAS No. 148, Accounting for Stock-Based
Compensation—Transition and Disclosure (“SFAS 148”). As permitted by
SFAS 123, for all periods before September 30, 2006, we measure
compensation cost in accordance with Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (“APB 25”) and
related interpretations using the intrinsic value method and follow the
disclosure-only provisions of SFAS 123.
Under
the
intrinsic value method, compensation expense is determined at the measurement
date, generally the date of grant, as the excess, if any, of the estimated
fair
value of our common stock (the “Stock Price”) and the exercise price, multiplied
by the number of options granted. Generally, we grant stock options with
exercise prices equal to the Stock Price; however, to the extent that the
Stock
Price exceeds the exercise price of stock options on the date of grant, we
record stock-based compensation expense using the graded vested attribution
method over the vesting schedule of the options, which is generally three
years.
Since
inception, there has been no public market for our common stock to observe
its
Stock Price on award grant dates. Therefore, for purposes of applying the
intrinsic value method, management estimated the stock price based on the
American Institute of Certified Public Accountants Practice Alert No. 00-1,
Accounting for Certain Equity Transactions. The estimated fair value of
the common stock on the date of grant was based on weighing a variety of
different quantitative and qualitative factors including, but not limited
to,
our financial position, an evaluation of our competition, the economic climate
in the marketplace, the illiquid nature of the common stock, contemporaneous
and
anticipated private sales of the common stock, and an internal analysis of
the
trading prices of a peer group of comparable public companies. For periods
prior
to August 1, 2005, we estimated the fair value of common stock based on
contemporaneous transactions included in private placement sales of common
stock
for cash that were executed at or near the grant dates. Since August 1, 2005,
we
have estimated the fair value of common stock based on
valuation analyses performed for applicable periods which consider several
factors including discounted cash flows, the average trading multiples of
comparable peer group public companies and the multiples derived from recent
purchase and sales transactions of comparable companies in the industry.
We
believe this approach results in a reasonable application of valuation
methodology for all periods.
Effective
October 1, 2006, we adopted SFAS No. 123R, Share-Based
Payments (“SFAS 123R”). Because we used the fair-value-based method
for disclosure under SFAS 123, we adopted SFAS 123R using the modified
prospective application. Under the modified prospective method,
compensation expense that we recognize beginning on that date will include:
(a) compensation expense for all share-based payments granted prior to, but
not yet vested as of October 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of SFAS 123, and
(b) compensation expense for all share-based payments granted on or after
October 1, 2006, based on the grant date fair value estimated in accordance
with the provisions of SFAS 123R. We have disclosed the pro forma effect
of
stock-based compensation expenses pursuant to SFAS 123R in the financial
statements and under the modified prospective transition method, the results
for
prior periods will not be restated.
We
estimate the fair value of options granted using the Black-Scholes-Merton
option
valuation model (the “Model”) and the assumptions shown in Note 1 to our
financial statements. We estimate the expected term of options granted based
on
the history of grants and exercises in our option database. We estimate the
volatility of our common stock at the date of grant based on the historical
volatility of comparable public companies consistent with SFAS 123R and
Securities and Exchange Commission Staff Accounting Bulletin No. 107,
Share Based Payment. We base the risk-free interest rate that we use in
the Model on the implied yield in effect at the time of option grant on U.S.
Treasury zero-coupon issues with equivalent remaining terms. For purposes
of
calculating the pro forma compensation we have used our actual forfeiture
rates of between 11% and 13% for all awards which we believe is a reasonable
approximation of
36
expected
future forfeitures. We have never paid any cash dividends on our common stock
and we do not anticipate paying any cash dividends in the foreseeable future.
Consequently, we use an expected dividend yield of zero in the Model. We
amortize the fair value ratably over the vesting period of the awards, which
is
typically three years. We may elect to use different assumptions under the
Model
in the future or select a different option valuation model altogether, which
could materially affect our net income or loss and net income or loss per
share
in the future. At September 30, 2006, based on the Model, there was
approximately $363,000 of total unrecognized compensation cost related to
non-vested share-based compensation arrangements granted under all equity
compensation plans. The intrinsic value of all outstanding vested and
unvested options based on the estimated initial public offering price of
$5.50
was $1,372,000 and $917,000, respectively as of December 31,
2006.
For
periods beginning in August 2005 and thereafter, we estimated the fair value
of
the stock price on the date of grant for purposes of applying the intrinsic
value method after weighing a variety of different quantitative and qualitative
factors including, but not limited to, the status of business development,
our
financial position, the composition and ability of our engineering, operations
and management team, the economic climate in the marketplace, the illiquid
nature of our common stock, contemporaneous and anticipated private sales
of our
common stock, the probability of a liquidation event such as an initial public
offering or the sale of Bridgeline, and our analysis of a peer group of
comparable public company trading prices. Since August 2005, we have estimated
the value of common stock using this combination of valuation methodologies,
including income, market and transaction approaches. We believe that its
valuation of the stock price on the date of grant represents fair value and
that
the practices and approach employed by us are consistent with the practices
recommended by the American Institute of Certified Public Accountants Audit
and
Accounting Practice Aid Series: Valuation of Privately-Held-Company Equity
Securities Issued as Compensation, issued in 2004.
As
of
December 31, 2006, we had 903,606 options outstanding ranging in option prices
between $0.003 and $3.75, of which 477,341 were
exercisable.
Results
of Operations
Comparison
of Three Fiscal Months Ended December 30, 2006 and
2005
The
following table sets forth certain
Consolidated Statements of Operations data expressed as a percentage of revenue
for the periods indicated:
|
Three
Fiscal Months Ended
December
31,
|
||||||||
|
2006
|
2005
|
|||||||
|
Revenue
|
100 | % | 100 | % | ||||
|
Cost
of revenue
|
49
|
51
|
||||||
|
Gross
profit
|
51
|
49
|
||||||
|
Operating
expenses:
|
||||||||
|
Sales
and marketing
|
36
|
40
|
||||||
|
General
and administrative
|
20
|
17
|
||||||
|
Technology
development
|
7
|
1
|
||||||
|
Loss
from operations
|
(12 | ) | (9 | ) | ||||
|
Interest
income (expense), net
|
(15 | ) | (1 | ) | ||||
|
Net
loss
|
(27 | %) | (10 | %) | ||||
37
Revenue,
Cost of Revenue and Gross Profit
The
following table presents revenue, cost of revenue and gross profit for the
fiscal three months ended December 31, 2006 and 2005:
|
|
|
|
Net
change 2006 vs. 2005
|
|||||||||||||
|
Fiscal
Three Months Ended December 31,
|
2006
|
2005
|
$
|
%
|
||||||||||||
|
Total
revenue
|
$ |
2,309,000
|
$ |
1,713,000
|
$ |
596,000
|
35 | % | ||||||||
|
Cost
of revenue
|
1,141,000
|
867,000
|
274,000
|
32
|
||||||||||||
|
Gross
profit
|
$ |
1,168,000
|
$ |
846,000
|
$ |
322,000
|
38 | % | ||||||||
Revenue.
Our revenue is generated principally by fees paid for Web Services,
Managed
Services and Subscription revenue. The following table presents revenue from
each of our revenue streams and their respective contribution to the increase
in
revenue in the three months ended December 31, 2006 and 2005:
|
|
|
|
Net
change 2006 vs. 2005
|
|||||||||||||
|
Fiscal
Three Months Ended December 31,
|
2006
|
2005
|
$
|
%
|
||||||||||||
|
Web
Services
|
$ |
1,882,000
|
$ |
1,332,000
|
$ |
550,000
|
41 | % | ||||||||
|
Managed
Services
|
308,000
|
267,000
|
41,000
|
15
|
||||||||||||
|
Subscription
|
119,000
|
114,000
|
5,000
|
4
|
||||||||||||
|
|
$ |
2,309,000
|
$ |
1,713,000
|
$ |
596,000
|
35 | % | ||||||||
Revenue
from Web Services increased 41% to $1,882,000 in 2006 from $1,332,000 in
2005.
This growth was primarily due to engagements with new customers ($556,000)
combined with increased revenue resulting from the acquisition of New Tilt
($480,000) in April 2006, partially offset by projects completed for our
customers for which we now host their websites ($351,000). The
increase in Web Services was mainly due to our increased sales increased
sales
resulting from additional sales personnel attributable to the Net Tilt
acquisition, and a rapidly expanding Web Services market.
Managed
Services revenue consists primarily of retained maintenance services agreements
(83%) and Web hosting arrangements (17%). Revenue from managed services
increased $41,000 or 15% as compared to total revenue increase of 35% mainly
due
to increased services to our existing customers.
Subscription
revenue consists primarily of continuous access to the on-demand features
of our
Orgitecture platform in the foundation and non-profit sector of our
business. Subscription revenue remained relatively flat, increasing only
$5,000 or 4%, but decreased as a percentage of total sales from 7% of revenue
in
the three months ended December 31, 2005 to 5% of revenue in the three months
ended December 31, 2006.
38
Cost
of Revenue. Our cost of revenue is generated principally by
costs associated with our various revenue categories: Web Services, Managed
Services and Subscription revenue. The following table presents cost of revenue
from each of our revenue streams in the three months ended December 31, 2006
and
2005:
|
|
|
|
Net
change 2006 vs. 2005
|
|||||||||||||
|
Fiscal
Three Months Ended December 31,
|
2006
|
2005
|
$
|
%
|
||||||||||||
|
Web
Services
|
$ |
1,052,000
|
$ |
780,000
|
$ |
272,000
|
35 | % | ||||||||
|
Managed
Services
|
82,000
|
72,000
|
10,000
|
14
|
||||||||||||
|
Subscription
|
7,000
|
15,000
|
(8,000 | ) | (53 | ) | ||||||||||
|
|
$ |
1,141,000
|
$ |
867,000
|
$ |
274,000
|
32 | % | ||||||||
Total
cost of revenue increased 32% as compared to a total 35% increase in
revenue. Cost of revenue in Managed Services increased 14% which is
proportional to the revenue increase in Managed Services of 15%. Cost
of Subscription decreased 53% as compared to an increase in subscription
revenue
of 4% equating to the fact that the costs of subscription revenue is minimal
compared to the amount of revenue generated. The cost of maintenance
of our customers’ web hosting sites decreased due to the streamlining of these
costs and the centralization of the associated computer
resources. Web Services cost of revenue increased 35% while the
revenue from Web Services increased 41% which resulted from better utilization
of our Web resources personnel due to the increased absorption of available
capacity.
Gross
Profit. The following table presents gross profit from
each of our revenue streams in the three months ended December 31, 2006 and
2005:
|
|
|
|
Net
change 2006 vs. 2005
|
|||||||||||||
|
Fiscal
Three Months Ended December 31,
|
2006
|
2005
|
$
|
%
|
||||||||||||
|
Web
Services
|
$ |
830,000
|
$ |
552,000
|
$ |
278,000
|
50 | % | ||||||||
|
Managed
Services
|
226,000
|
195,000
|
31,000
|
16
|
||||||||||||
|
Subscription
|
112,000
|
99,000
|
13,000
|
13
|
||||||||||||
|
|
$ |
1,168,000
|
$ |
846,000
|
$ |
322,000
|
38 | % | ||||||||
Gross
profit increased 38% mainly due to the 35% increase in revenue combined with
the
increased efficiencies of better utilization in Web Services and minimal
decrease in cost of revenue for Subscription combined with a 15% increase
in
Subscription revenue.
Sales
and Marketing Expenses. Sales and marketing expenses increased $152,000
from $685,000 in 2005 to $837,000 in 2006, but as a percent of revenue decreased
from 40% in 2005 to 36% in 2006. The increase in selling and marketing expenses
was primarily due to the costs associated with the three additional personnel
acquired in the New Tilt acquisition.
General
and Administrative Expenses. General and administrative expenses increased
to $461,000, or 20% of revenue, in 2006 compared to $293,000, or 17% of revenue
in 2005. The total increase resulted primarily from an increase in
professional services including accounting and legal services due to
preparation for becoming a public company of $36,000 and the adoption of
SFAS
123R of $41,000.
Technology
Development Expenses. Technology development expenses increased to
$155,000, or 7% of revenues, in 2006 compared to $15,000, or 1% of revenues,
in
2005. The increase resulted primarily from product enhancement activities
for
the netEDITOR content management product.
39
Interest
Expense. Interest expense
increased $318,000
from $27,000 in 2005 to $345,000 in 2006 and as a percentage of sales increased
from 2% to 15%, mainly due to the contractual interest on our Senior Notes
Payable issued in April 2006 of $81,000 and the amortization of debt discount
and deferred financing fees recorded in connection therewith of $249,000
partially offset by the decrease in interest pertaining to the line of credit
that was fully repaid in June 2006.
Comparison
of Fiscal Years Ended September 30, 2006 and
2005
The
following table sets forth certain Consolidated Statements of Operations
data
expressed as a percentage of revenue for the periods
indicated:
|
Fiscal
Years Ended
September
30,
|
||||||||
|
|
2006
|
2005
|
||||||
|
Revenue
|
100 | % | 100 | % | ||||
|
Cost
of revenue
|
46
|
54
|
||||||
|
Gross
profit
|
54
|
46
|
||||||
|
Operating
expenses:
|
||||||||
|
Sales
and marketing
|
39
|
36
|
||||||
|
General
and administrative
|
23
|
17
|
||||||
|
Technology
development
|
2
|
1
|
||||||
|
Loss
from operations
|
(10 | ) | (8 | ) | ||||
|
Interest
income (expense), net
|
(8 | ) | (1 | ) | ||||
|
Net
loss
|
(18 | %) | (9 | %) | ||||
Revenue,
Cost of Revenue and Gross Profit
The
following table presents revenue, cost of revenue and gross profit for the
fiscal years ended September 30, 2006 and 2005:
|
|
|
|
Net
change 2006 vs. 2005
|
|||||||||||||
|
Fiscal
Years Ended September 30,
|
2006
|
2005
|
$
|
%
|
||||||||||||
|
Total
revenue
|
$ |
8,235,000
|
$ |
5,769,000
|
$ |
2,466,000
|
43 | % | ||||||||
|
Cost
of revenue
|
3,809,000
|
3,113,000
|
696,000
|
22
|
||||||||||||
|
Gross
profit
|
$ |
4,426,000
|
$ |
2,656,000
|
$ |
1,770,000
|
67 | % | ||||||||
40
Revenue.
Our revenue is generated principally by fees paid for Web Services,
Managed
Services and Subscription revenue. The following table presents revenue from
each of our revenue streams and their respective contribution to the increase
in
revenue in the fiscal years ended September 30, 2006 and 2005:
|
|
|
|
Net
change 2006 vs. 2005
|
|||||||||||||
|
Fiscal
Years Ended September 30,
|
2006
|
2005
|
$
|
%
|
||||||||||||
|
Web
Services
|
$ |
6,525,000
|
$ |
4,182,000
|
$ |
2,343,000
|
56 | % | ||||||||
|
Managed
Services
|
1,243,000
|
1,244,000
|
(1,000 | ) |
—
|
|||||||||||
|
Subscription
|
467,000
|
343,000
|
124,000
|
36
|
||||||||||||
|
|
$ |
8,235,000
|
$ |
5,769,000
|
$ |
2,466,000
|
43 | % | ||||||||
Revenue
from Web services increased 56% to $6,525,000 in 2006 from $4,182,000 in
2005.
This growth was primarily due to engagements with new customers ($895,000)
and
new work with existing customers ($849,000), combined with increased revenues
resulting from the acquisitions of iapps ($437,000) and New Tilt ($596,000)
in
December 2004 and April 2006, respectively offset by the loss of certain
customers ($457,000). The increase in Web Services was mainly due to
our increased sales penetration with one customer, increased sales resulting
from additional sales personnel attributable to the Net Tilt acquisition,
and a
the rapidly expanding Web Services market.
Managed
Services revenue consists primarily of retained maintenance services agreements
(83%) and Web hosting (17%) arrangements. Revenues from managed services
remained relatively consistent but decreased as a percent of sales from 22%
in
2005 to 15% in 2006 due to lower revenues on retainer services with one
financial services customer.
Subscription
revenue consists primarily of continuous access to the on-demand features
of our
Orgitecture platform in the foundation and non-profit sector of our
business. Subscription revenue increased 36% to $467,000 in 2006 from
$343,000 in 2005, reflecting the additional 2.5 months of revenue from iapps
in
2006 as compared to 2005.
Cost
of Revenue. Our cost of revenue is classified similar to our revenue
classifications: Web Services, Managed Services and Subscription revenue.
The
following table presents cost of revenue from each of our revenue streams
and
their respective contribution to the increase in cost of revenue in the fiscal
years ended September 30, 2006 and 2005:
|
|
|
|
Net
change 2006 vs. 2005
|
|||||||||||||
|
Fiscal
Years Ended September 30,
|
2006
|
2005
|
$
|
%
|
||||||||||||
|
Web
Services
|
$ |
3,389,000
|
$ |
2,629,000
|
$ |
760,000
|
29 | % | ||||||||
|
Managed
Services
|
363,000
|
457,000
|
(94,000 | ) | (21 | ) | ||||||||||
|
Subscription
|
57,000
|
27,000
|
30,000
|
111
|
||||||||||||
|
|
$ |
3,809,000
|
$ |
3,113,000
|
$ |
696,000
|
22 | % | ||||||||
Cost
of
revenue in Managed Services decreased 21% while Managed services revenue
remained relatively flat.. This was due to the fact that we utilized
more internal resources instead of outsourcing the labor. Cost of
Subscription increased 111% as compared to an increase in subscription revenue
of 36% resulting from more help desk support as iapps’ operations are merged
into Bridgeline’s as well as an extra 2.5 months of iapps’ subscription revenue
as iapps was acquired in December 2004. Web Services cost of revenue
increased 29% while the revenue from Web Services increased 56% which resulted
from better utilization of internal billable labor resulting from the increased
volume.
41
Gross
Profit. Our gross profit is generated principally from our
revenue less cost of revenue associated with our various revenue categories:
Web
Services, Managed Services and Subscription revenue. The following table
presents gross profit from each of our revenue streams in the fiscal years
ended
September 30, 2006 and 2005:
|
|
|
|
Net
change 2006 vs. 2005
|
|||||||||||||
|
Fiscal
Years Ended September 30,
|
2006
|
2005
|
$
|
%
|
||||||||||||
|
Web
Services
|
$ |
3,136,000
|
$ |
1,553,000
|
$ |
1,583,000
|
102 | % | ||||||||
|
Managed
Services
|
880,000
|
787,000
|
93,000
|
12
|
% | |||||||||||
|
Subscription
|
410,000
|
316,000
|
94,000
|
30
|
% | |||||||||||
|
|
$ |
4,426,000
|
$ |
2,656,000
|
$ |
1,770,000
|
67 | % | ||||||||
Gross
profit increased 67% mainly due to the 30% increase in revenue combined with
the
increased efficiencies of better utilization in Web services and minimal
decrease in cost of revenue for Subscription combined with a 36% increase
in
Subscription revenue to $467,000 in 2006 from $343,000 in 2005 reflecting
the
extra 2.5 months of iapps revenue as iapps was acquired in December
2004.
Sales
and Marketing Expenses. Sales and marketing expenses increased $1,167,000
from $2,060,000 in 2005 to $3,227,000 in 2006 and as a percent of revenue
increased to 39% in 2006 from 36% in 2005. The increase in selling and marketing
expenses was primarily due to the costs associated with additional personnel
hired and the four and three additional personnel acquired in the iapps and
New
Tilt acquisitions, respectively, which occurred in December 2004 and April
2006,
respectively.
General
and Administrative Expenses. General and administrative expenses increased
to $1,833,000, or 23% of revenue, in 2006 compared to $1,014,000, or 17%
of
revenue in 2005. The total increase resulted primarily from an increase of
$650,000 in consulting and accounting services related to preparation for
becoming a public company, $98,000 attributed to an increase in headcount
resulting from an additional hire and $57,000 related to bonuses granted
to
employees.
Technology
Development Expenses. Technology development expenses increased to
$176,000, or 2% of revenues, in 2006 compared to $43,000, or 1% of revenues,
in
2005. The increase resulted primarily from product enhancement activities for
the netEDITOR content management product.
Interest
Expense. Interest expense increased $582,000 from $56,000 in 2005 to
$638,000 in 2006 and as a percentage of sales increased from 1% to 8% mainly
due
to the contractual interest of $123,000 on our senior notes payable issued
in
April 2006 and the amortization of debt discount and deferred financing fees
recorded in connection therewith of $610,000 partially offset by the interest
paid on the line of credit which was fully repaid in June
2006.
Liquidity
and Capital Resources
We
have
historically funded our operations principally through issuances of short-term
debt and private equity. In April 2006, we completed a private placement
financing in the amount of $2,800,000 and received net proceeds of $2,434,000
after financing fees. In connection with this debt, we issued 280,000 warrants
exercisable at $0.001 (the “Debt Warrants”) and 112,000 warrants
exercisable at the initial public offering price of our shares in this offering.
These warrants have been valued at $646,000 and are recorded as a debt discount
and deferred financing fees, respectively. This debt carries an interest rate
of
10% per annum for the first six months and 12% per annum thereafter. The
effective interest rate, considering the amortization of the debt discount
and
other debt issuance costs, is 47%. The debt was subordinated to certain debt
that was retired in July 2006. The debt carries default provisions including:
(1) failure to pay principal or accrued interest when due, (2) failure to
observe or perform various positive and negative covenants as set forth in
the
loan document, (3) failure to complete our initial public offering by the
42
maturity
date and (4) the occurrence of a bankruptcy or similar event. In the event
of
loan default, the interest rate will increase to 15% per annum and in case
of
default in payment of the principal, the interest rate would increase to
18% per
annum. This debt carries a one-year term and will be retired upon the successful
completion of this offering. Since this offering is not expected to be completed
by the maturity date, we have received an extension on the debt to July
2007. In accordance with the terms of the extension, the interest rate from
April 1, 2007 to the extended maturity date will be at a rate of 15% per
annum.
In the event that the notes are not paid by the extended maturity date, the
interest rate will increase to a rate of 18% per annum subject to the terms
and
provisions of the notes. Interest will accrue, but no payments of principal
or
interest will be required to be made prior to the extended maturity
date.
In
November 2006, the terms of the Debt Warrants were amended to eliminate a
certain provision, included in the Debt Warrants in error during the drafting
of
the Debt Warrant documents, which provision resulted in a contingent obligation
to redeem the Debt Warrants in the event that an initial public offering
of our
common stock does not occur prior to the April 2011 expiration date of the
Debt
Warrants. As a result of the amendment correcting this error, we have accounted
for the Debt Warrants in shareholder’s equity as additional paid in capital
since the date of issuance. Had this amendment not been executed, the
value of the Debt Warrants would have been recorded as a liability and such
value would have been subject to future adjustment based on changes in the
value
of our common stock.
We
have
incurred annual losses since commencement of operations in 2000 and have
used a
significant amount of cash to fund our operations over the last several years.
As a result, we have a working capital deficit of $2,660,000 and an accumulated
deficit of $4,793,000 at December 31, 2006. Our revenues have not grown
sufficiently to satisfy our increases in debt service, principally
relating to the $2,800,000 senior notes payable described in Note 7 to the
financial statements, capital expenditures and operating activities and to
generate sufficient cash flows to maintain operations. We have issued
various equity and debt securities to satisfy our capital
requirements and have taken significant steps to streamline our operations
over
the last several years and will continue to do so as circumstances warrant.
Overall, we have experienced an increase in both headcount and operating
expenses as a result of our acquisitions. During the same period, we have
taken
significant steps to control our administrative costs. To date, these steps
have
included reducing or maintaining existing administrative headcount and
limiting infrastructure, operating and capital expenditures where
appropriate. We must increase revenue from current levels to
achieve profitability and generate future positive cash flow. In order to
increase revenue, we have expanded our sales force through our acquisition
of
New Tilt in April 2006, while reducing headcount in other areas, and have
expanded into the healthcare and education sectors of the industry. Long-term
cash requirements, other than for normal operating expenses and for commitments
described in Note 8 to the financial statements, will be required for the
development of new software products, enhancements of existing products,
and the
possible acquisition of other companies, products, or technologies complementary
to our business. We continue to monitor cash flow and have developed a
contingency plan to effect further reductions to headcount, infrastructure
and
capital expenditures, as necessary, to fund on-going
operations. Except for the scheduled repayment of the senior notes
payable described below, we believe that based on current revenue projections
that cash flow from operations should be sufficient to meet our cash
requirements and allow us to continue as a going concern through September
30,
2007. We expect that the proceeds from the planned public offering will be
sufficient to repay the senior notes payable and will also provide additional
working capital to fund current operations and to fund the long term cash
requirements described above.
If
we
complete the acquisition of Objectware, we may be required to pay contingent
consideration in the form of additional purchase price of up to $1,800,000,
of
which up to $1,000,000 will be payable in cash and $800,000 will be payable
in
common stock. The contingent consideration, if earned, will be
payable quarterly over the three years subsequent to the closing of this
acquisition. The shares of common stock issued pursuant to contingent
consideration will be valued at the closing price of our common stock on
the
final business day of each quarter to which such payment
applies. These payments are contingent upon Objectware generating
positive earnings before interest, taxes and depreciation and amortization
(“Post-Merger EBITDA”) as defined in the acquisition agreement, of at least
$225,000 per calendar quarter during the 12 consecutive calendar quarters
following the acquisition. For example, if the Post-Merger EBITDA in any
quarter
is at least equal to $250,000, our cash payment to Objectware’s former
shareholder with respect to that quarter will be $83,333 and we will be required
to issue a number of shares of our common stock equal to $66,667, priced
as
described above. Furthermore, if the Post-Merger EBITDA in any quarter is
less
than $250,000 but at least equal to $225,000, our cash payment with respect
to
that quarter will be reduced to $41,667 and we will be required to issue
a
number of shares of our common stock equal to $33,333.
43
As
of
December 31, 2006, as part of both the iapps and New Tilt acquisitions, we
have
remaining contingent acquisition obligations to both of these prior entities’
shareholders which are to be paid in cash up to a maximum of $262,500 $325,000
and $240,000 for the fiscal years ending September 30, 2007, 2008, and 2009,
respectively provided that the contingent results are
achieved. The contingent acquisition obligations of iapps and
New Tilt are based on the achievement of positive EBITDA, as defined in the
acquisition agreements.
Cash
Flows
Operating
Activities
Our
net
cash provided by (used in) operating activities was ($320,000), $302,000,
($733,000) and ($430,000) for the three months ended
December 31, 2006 and 2005 and the fiscal years ended September 30, 2006
and
2005, respectively. The increase in cash used in operating activities
corresponds to the increase in net loss during the periods as well as the
increased working capital needs due to the increased volume of sales and
the
costs associated with becoming a public company.
At
December 31, 2006, we had a working capital deficit of $2,660,000 compared
to a working capital deficit of $392,000, $2,020,000 and $179,000 at December
31, 2005 and September 30, 2006 and 2005, respectively. The increase as of
December 31, 2006 and September 30, 2006 was primarily a result of the
$2,800,000 private placement completed in April 2006, offset by cash used
in the
acquisition of New Tilt, expenses of our initial public offering and net
operating losses.
At
December 31, 2006, we had receivables of $1,759,000. This
compares to $1,045,000, $1,443,000 and $772,000 in receivables at
December 31, 2005 and September 30, 2006 and 2005, respectively. The level
of trade receivables at December 31, 2006 and 2005 and September 30, 2006
and 2005 represented approximately 54, 42, 36 and 38 days of revenues,
respectively. We typically require 30-day terms from our customers. Our
receivables can vary dramatically due to overall sales volumes, the timing
of
implementation of services, receipts from large customers, and other contract
payments. Unbilled receivables at December 31, 2006 increased $124,000 from
December 31, 2005 principally due to the timing of billing in accordance
with
stated contract terms. The decrease of $245,000 from September 30, 2006
resulted from billing in arrears on services completed at month
end.
Investing
Activities
Net
cash
used in investing activities was $91,000, $63,000, $842,000 and $545,000
for the
three fiscal months ended December 31, 2006 and 2005 and for the fiscal years
ended September 30, 2006 and 2005. The major expenditures in the fiscal
year periods were for cash payments for our acquisitions of iapps ($310,000)
in
December 2004 and New Tilt ($553,000) in April 2006. In addition to our cash
payments for our acquisitions, we also incurred $63,000, $25,000, $126,000
and
$113,000 in contingent consideration for these acquisitions for the three
months
ended December 31, 2006 and 2005 and for the years ended September 30, 2006
and
2005. We expect to incur more costs for future acquisitions and
capital expenditures as well as contingent earn-out related to our prior
acquisitions payments in the aggregate amount of $828,000 to be paid $262,000,
$335,000, and $231,000 in our fiscal years ending September 30, 2007, 2008
and
2009, respectively. We expect to fund the investing activities described
above,
as well as future acquisitions from the proceeds of the offering. If the
offering is not completed, we expect to fund these activities through a
combination of private equity financings and through private and commercial
debt.
Financing
Activities
During
the three fiscal months ended December 31, 2005 and the fiscal year ended
September 30, 2005, we financed our working capital requirements primarily
through short-term debt. In March 2005, we entered into a short term credit
facility with a private commercial lender whereby we pledged certain receivables
and received an 80% advance against these receivables with the additional
20%
being received
44
upon
collection of the receivable. This credit facility carried 1.7% interest
per
month and certain fees and was terminated subsequent to the successful
completion of the April 2006 private placement financing, proceeds of which
were
used to finance our working capital requirements for the fiscal three months
ended December 31, 2006 and the fiscal year ended September 30, 2006 as well
as
finance our costs of becoming a public company.
Net
cash
provided by (used in) financing activities was ($11,000), $279,000, $2,028,000
and $157,000 for the three months ended December 31, 2006 and 2005 and the
years ended September 30, 2006 and 2005. The cash provided by
financing activities in the year ended September 30, 2006 was primarily provided
by the private placement of short-term debt of $2,800,000 described above,
offset by $366,000 in associated fees. The net cash provided by financing
activities for the three months ended December 31, 2005 and the fiscal year
ended September 30, 2005 of $279,000 and $157,000, respectively, was primarily
provided by the private commercial lending facility described
above.
The
short-term notes have a one-year term, the maturity which has been extended
to
July 20, 2007. If we are unsuccessful in completing this offering and we
are
unable to further extend the maturity of these obligations, we may be forced
to
raise additional funds to pay them through the issuance of additional debt
or
equity securities. Particularly in light of our limited operating history
and
losses incurred, there can be no assurance that we will be able to obtain
the
necessary additional capital on a timely basis, on acceptable terms or at
all.
In any of such events, our business prospects, financial condition and results
of operations would be materially and adversely affected. As a result of
any
such financing, the holders of our common stock may experience substantial
dilution.
If
we are
unable to increase our revenues and decrease our expenses, we will need to
raise
additional funds to finance our future capital needs. We may need additional
financing earlier than we anticipate.
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. We are,
therefore, not materially exposed to any financing, liquidity, market or credit
risk that could arise if we had engaged in such relationships.
Capital
Resources and Liquidity Outlook
We
have
been dependent upon raising private capital for short and long-term cash needs.
In March 2005, we obtained a $500,000 credit line under which we could borrow
up
to 80% of our eligible outstanding accounts receivable. In connection with
this
credit line, the lender obtained a first priority security interest in all
of
our assets. This line of credit was increased to $750,000 on September 12,
2005
and was terminated on June 30, 2006 with the proceeds of the April 2006 private
placement financing described above.
Material
Weakness
In
connection with the audit of our financial statements, our external auditors
advised us that they were concerned that as of and for the years ended September
30, 2006 and 2005, our accounting resources did not include enough people
with
the detailed knowledge, experience and training in the selection and application
of certain accounting principles generally accepted in the United States
of
America (GAAP) to meet our financial reporting needs. This control deficiency
contributed to material weaknesses in internal control with respect to
accounting for revenue recognition, equity and acquisitions. A “material
weakness” is a control deficiency or combination of control deficiencies that
results in more than a remote likelihood that a material misstatement in
the
financial statements or related disclosures will not be prevented or
detected.
45
In
preparation for this offering, we engaged a consultant experienced in accounting
and financial reporting who assisted us in preparing our financial statements.
We have initiated the process of identifying candidates to assume newly created
positions in our company, one of which will be at the vice-president level,
with
specific responsibilities for external financial reporting, internal control,
revenue recognition and purchase accounting. Prior to preparing for the
offering, our infrastructure was not conducive to external reporting in either
the necessary systems or personnel. We intend to have these resources in
place
sometime during the third quarter of fiscal year 2007. The annual
cost of these new positions and systems improvements is estimated to be between
$250,000 and $350,000. In addition, the costs to bring our internal control
documentation into compliance with SOX Section 404 are expected to be
significant. During the process of implementing new systems,
procedures and hiring personnel, we intend to mitigate the potential adverse
affects of this material weakness by engaging with financial consultants
and
temporary staff to supplement our internal personnel
requirements.
Inflation
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.
Contractual
Obligations
Our
other
contractual obligations include certain equipment acquired under capitalized
lease agreements that begin to expire in fiscal year 2009. We have no
contractual obligations extending beyond five years.
The
following summarizes our long-term contractual obligations as of
December 31, 2006:
(in
thousands)
|
Payment
Obligations by Year
|
FY
07
|
FY
08
|
FY
09
|
FY
10
|
FY
11
|
Totals
|
||||||||||||||||||
|
Operating
leases
|
$ |
365
|
$ |
309
|
$ |
239
|
$ |
230
|
$ |
—
|
$ |
1,143
|
||||||||||||
|
Capital
lease obligations
|
50
|
65
|
40
|
13
|
1
|
169
|
||||||||||||||||||
|
Contingent
acquisition payments (A)
|
263
|
325
|
240
|
—
|
828
|
|||||||||||||||||||
|
Short-term
debt (including interest)
|
2,912
|
—
|
—
|
—
|
—
|
2,912
|
||||||||||||||||||
|
Total
|
$ |
3,590
|
$ |
699
|
$ |
519
|
$ |
243
|
$ |
1
|
$ |
5,052
|
||||||||||||
|
(A)
|
The
contingent acquisition payments are maximum potential earn-out
consideration payable to the former owners of iapps and New
Tilt. Amounts actually paid may be
less.
|
46
Recent
Accounting Requirements
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”), which defines fair value, establishes a framework for measuring
fair value in accounting principles generally accepted in the United State
of
America, and expands disclosures about fair value measurements. SFAS 157
prioritizes the inputs to valuation techniques used to measure fair value into
a
hierarchy containing three broad levels. The fair value hierarchy gives the
highest priority to quoted prices (unadjusted) in active markets for identical
assets and liabilities (Level 1) and the lowest priority to unobservable inputs
(Level 3). In some cases, the inputs used to measure fair value might fall
in
different levels of the fair value hierarchy. The level in the fair value
hierarchy within which the fair value measurement in its entirety falls shall
be
determined on the lowest level input that is significant to the fair value
measurement in its entirety. Assessing the significance of a particular input
to
the fair value measurement in its entirety requires judgment, considering
factors specific to the asset or liability. SFAS No. 157 is effective for
interim and annual financial statements for fiscal years beginning after
November 15, 2007. Upon initial adoption of SFAS 157, differences between the
carrying value and the fair value of those instruments shall be recognized
as a
cumulative-effect adjustment to the opening balance of retained earnings for
that fiscal year, and the effect of subsequent adjustments resulting from
recurring fair value measurements shall be recognized in earnings for the
period. We are currently evaluating the impact of SFAS 157 on the
consolidated financial statements.
In
June
2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes — an Interpretation of FASB Statement
No. 109 (“FIN 48”), which clarifies the accounting for
uncertainty in tax positions. FIN No. 48 requires that we recognize
the impact of a tax position in the financial statements, if that position
is
more likely than not to be sustained on audit, based on the technical merits
of
the position. The provisions of FIN 48 are effective for fiscal years
beginning after December 15, 2006, with the cumulative effect, if any, of the
change in accounting principle recorded as an adjustment to opening retained
earnings. We have evaluated FIN 48 and believes its adoption will not materially
impact the consolidated financial statements.
In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS 159”). SFAS 159 provides companies
with an option to report selected financial assets and liabilities at fair
value
and establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes
for
similar types of assets and liabilities. SFAS 159 is effective for fiscal
years
beginning after November 15, 2007. We are in the process of evaluating
the
impact of the adoption of this statement on our results of operations and
financial condition.
Quantitative
and Qualitative Disclosure about Market Risk
We
do not
use derivative financial instruments. We place our cash and cash equivalents
in
institutions that meet high credit quality standards. Our cash and cash
equivalents are not subject to significant interest risks due to the short-term
maturities of these instruments. As of December 31, 2006 and 2005 and September
30, 2006 and 2005, the carrying value of our cash and cash equivalents
approximated fair value and we have concluded that there is no material market
risk exposure. Therefore, no quantitative tabular disclosures are
required.
47
BUSINESS
Overview
Bridgeline
Software is a developer of on-demand Web software tools and a developer
of
award-winning Web applications that assist our customers to optimize business
processes utilizing Web-based technologies. As a result, our solutions
can
improve the effectiveness of our customers by assisting them to increase
sales,
enhance compliance requirements, reduce administrative and operational
expenses,
improve customer loyalty, and enhance internal employee
communication.
Our
proprietary framework enables companies to add functionality on a per module
bases, providing expandability and scalability. We have
developed on-demand Web software tools framework that provides the
following:
|
·
|
Content
Management
|
|
·
|
eCommerce
Management
|
|
·
|
Relationship
Management
|
|
·
|
eMarketing
Management
|
|
·
|
Grants
Management
|
Recent
innovations in information technology have created opportunities to deliver
software applications directly to users over the Internet in a
subscription-based, on-demand business model. This model is made possible
by the
proliferation of high-speed, broadband Internet connectivity, open standards
for
application integration and advances in network availability and security.
For
the user, on-demand software eliminates the need for expensive hardware,
software and internal IT support.
Our
on-demand Web management tools are delivered through a “software as a
service” business model in which we deliver our software over the Internet while
providing maintenance, daily technical operation and support.
In
addition to our on-demand Web management software tools and we develop
award
winning Web applications utilizing our tools for use over the Internet
as well
as for customers’ intranets and extranets. Our in-house team of
Microsoft®-certified
developers specializes in:
|
·
|
User
experience development
|
|
·
|
Web
application development
|
|
·
|
Search
engine optimization
|
As
of
December 31, 2006, we have more than 90 active customers of which we had
one
customer generating 21% of revenue and no other customer generating more
than
10%. As of September 30, 2006 our customers included Nomura Securities,
The Bank of New York, Pfizer, Depository Trust & Clearing Corporation and
John Hancock, which each comprised approximately 22%, 7%, 6%, 6% and 6%
of our
revenues, respectively, during the fiscal year ended September 30,
2006.
We
have
received multiple industry related awards. Awards and similar
recognition we have achieved since 2002 include:
|
·
|
a
Standard of Excellence Award and Outstanding Website Awards in
the Web
Marking Association’s WebAward Competition, an annual competition that
names the best Web applications in 96
industries;
|
|
·
|
being
selected as a finalist for numerous MITX Awards from the Massachusetts
Innovation & Technology Exchange, which acknowledge the best creative
and technological accomplishments in interactive technology emerging
from
New England;
|
48
|
·
|
being
among the winners of several Axiem Awards, an international award
program
created to honor those who produce the best in all forms of interactive
technology; and
|
|
·
|
winning
Bronze and Merit Awards at the One Show Interactive Awards from
The One
Club for Art and Copy, Inc., which honor creativity and effectiveness
in
global communications in the area of interactive
technology.
|
Market
Opportunity
Based
on
industry data provided by Harte-Hanks (a data intelligence firm), we believe
that the professional Web development market is fragmented. Consequently,
we
believe there is an opportunity for us to acquire many such companies,
grow the
acquired businesses under the Bridgeline Software name and thereby potentially
create one of the largest interactive technology companies in North America.
We
believe that established yet small Web application development companies
have
the ability to market, sell and install Web-based software tools in their
local
metropolitan markets. In addition, we believe that these companies also
have
customer bases and a niche presence in the local markets in which they
operate. We believe that by acquiring certain of these companies and
applying our business practices and efficiencies, we can dramatically accelerate
our time to market in areas other than those in which we now
operate.
We
estimate, based on our experience in having made such acquisitions, that
compounded annual revenue growth rates of at least 20% per year for each
acquired entity may be possible. We target certain established Web application
development companies that we believe have:
|
·
|
the
complementary technical ability to market, sell and deliver
Web-based
software tools in their particular metropolitan market
areas;
|
|
·
|
the
desire to improve their profit margins by licensing our web
software tools
to their customer
base;
|
|
·
|
an
established base of customers with local market presence
that can
potentially accelerate our time to market in geographic areas
where we do
not currently
operate;
|
|
·
|
the
desire reduce development costs by leveraging our Bangalore,
India
development center;
and
|
|
·
|
the
desire to leverage certain centralized cost centers such
as finance, human
resources, legal, and
marketing.
|
|
Acquisitions
|
Since
our
inception, we have consummated the acquisitions of four Web application
development companies:
|
·
|
In
December 2000, we acquired Streamline Communications, a Boston,
Massachusetts-based company.
|
|
·
|
In
February 2002, we acquired Lead Dog Digital, Inc., a New York,
New
York-based company.
|
|
·
|
In
December 2004, we acquired Interactive Applications, Inc.,
a Washington,
D.C.-based company.
|
|
·
|
In
April 2006, we acquired New Tilt, Inc., a Cambridge, Massachusetts-based
company.
|
We
believe these acquisitions contribute to our business strategy by providing
us
with new geographical distribution opportunities, an expanded customer
base, an
expanded sales force and an expanded developer force. In addition, integrating
the acquired businesses into our existing operations allowed us to consolidate
the finance, human resources, legal and marketing and other expenses of
the
acquired businesses with our own, reducing the aggregate of these expenses
for
the combined businesses, and resulting in improved over-all operating
results.
In
addition, on December 7, 2006, we signed a definitive merger agreement. Under
this agreement, we intend to acquire all outstanding capital stock of
Objectware, Inc., an Atlanta, Georgia-based Web application development company.
The terms of the proposed acquisition of Objectware, Inc. are described further
under “Growth and Expansion Strategy” beginning on page 61 of this
prospectus.
49
The
Web Services and Web Tools Marketplace
Web
Services Market
The
word
“Web” is shorthand for the TCP/IP (or Transmission Control Protocol / Internet
Protocol) standard that carries Internet traffic around the world and also
the
networking standard for the integration of the corporate enterprise, from
the
manufacturing floor and sales office to the boardroom and across the global
span
of the enterprise’s manufacturing, sales, and service locations. Web design and
development is no longer just about creating attractive and functional Web
sites; it has evolved to bear a very practical, commercial importance to
many
companies.
We
believe that several ongoing developments have contributed to the complexity
of
the Web. Existing client-server applications with connections to resources
-
mainframes, minicomputers, and legacy data sources - have been redesigned
using
Web technology. ERP (enterprise resource planning), CRM (customer relationship
management), SCM (supply chain management) and other enterprise-scale
applications have been reconfigured as enterprise wide application services
(Web
services) with custom portals for each of the various corporate
departments.
We
believe that Web properties and Web applications will continue to increase
in
number and complexity. In order to differentiate themselves from competitors,
we
expect many companies to increase the use of sophisticated technologies in
their
Web sites in order to provide users with an enhanced experience, either with
content that is graphically enhanced with motion video or with user interfaces
that provide the look and feel of a desktop application without constant
interaction with servers. We believe the trend toward increases in the use
of
sophisticated technology could accelerate if companies have access to tools
that
make the development of such client user interfaces easier and make Web site
development an integral part of the broader information technology (“IT”)
development life cycle.
International
Data Corporation (“IDC”)
estimates that
the number of Internet users continues to grow substantially, especially
in
emerging economies. According to IDC estimates, in the next four years, 400
million new users will come online and commerce will double. By the end of
2006,
IDC estimates that 50% of Internet households will be broadband and less
than 5%
of total commerce will be conducted online.
IDC
estimates spending on Web services software was $2.33 billion in 2004, more
than
doubling from the prior year. With application developers continuing to enable
and introduce more native Web service solutions, and a market for hosted
services unfolding, IDC believes that applications will continue to represent
a
significant growth area for years to come.
Annual
investments in Web services-based technologies are increasing. IDC’s Web
Services Total Opportunity Model estimates that worldwide companies spent
approximately $4.11 billion on Web services software in 2005, nearly double
the
amount spent in the prior year. Because Web services still represent an
emerging
market, growth rates appear high, but this volume represented only 2% of
the
total worldwide software market in 2005. The model further forecasts that
worldwide spending will reach close to $15 billion by 2009. The chart below
represents IDC’s 2004 to 2009 projections for Web services revenue in North
America; IDC estimates that the North American market share consistently
remains
greater than 54% of the world wide spending.
50
IDC
identifies the following trends influencing the level of spending for Web
services technology:
|
·
|
Many
of the existing Web applications were developed from 1999 to 2003,
utilizing older Web development technologies such as HTML. The
Web
applications developed were limited and did not provide significant
operational efficiencies. Since 1999, there have been technological
advancements in dynamic Web logic, open source standards, and broadband
technologies. We believe these technological advancements combined
with a
resurgence in information technology spending will fuel strong
investments
towards redeveloping legacy Web
applications.
|
|
·
|
Many
organizations will likely continue to experiment and expand their
use of
Web services by utilizing their existing base of technologies until
volume
and levels of complexity force review and investment, in particular
for
service-oriented management
solutions.
|
|
·
|
A
heavy influence on the timing and amounts of when organizations
may
determine to invest relates to the waves of major versions released
by key
vendors. For example, organizations may determine to wait until
Microsoft
meets market commitments on its Longhorn releases, and SAP customers
may
be interested in investing as prior versions of software are retired
from
support.
|
|
·
|
The
conversion of software pricing models from traditional license
models to
more subscription-oriented methods will influence the rate of growth
and
overall size of the market, especially in the context of hosted
applications and service, creating a normalizing
effect.
|
According
to IDC, one of the larger trends in the North American Web services market
is
the resurrection of the application service provider (“ASP”) model, empowered
and enhanced via Web services standards and technologies. Our subscription-based
OrgitectureTM
Web platform provides customers with an integrated suite of on-demand Web-based
tools designed to maximize organizational effectiveness, streamline Web
site
management and reduce operating costs. See “Products and Services -
OrgitectureTM - Modular
On-Demand Web Tools,” below.
According
to IDC, the Web services applications marketplace is expected to show the
most
significant growth during the next three years, originating from the least
of
the three primary software markets, to reach $5.13 billion by 2009. In 2005,
this specialized marketplace represented less than 1% of the worldwide
applications software market. Yet by 2009, it is expected to increase to
more
than 5% of the worldwide applications software market. The
51
chart
below represents IDC’s 2004 to 2009 projections for total Web services
worldwide primary category. IDC estimates that the North American
market share will consistently remain greater than 54% of the worldwide
spending.
The
Content Management Market
An
organization’s Web properties (Internet, intranet, and extranets) can be among
its most valuable assets. To maintain the value of these assets, the content
within the sites must be current, accurate and dynamic. Product features,
prices, investor information, press releases, customer communications, employee
communications, and other content need frequent updating. These ongoing editing
requirements can be time-consuming and costly. As a result, many organizations
fall behind on content updates, greatly reducing the effectiveness of their
Web
properties. We believe that the combination of these critical communications
requirements with heightened compliance requirements will result in a high
demand for powerful, easy-to-use Web content management systems that have
integrated work flow controls.
During
the economic downturn in 2000, many companies de-emphasized Web content
management for their Web properties, and, instead, focused their attention
on
cost containment and internal efficiency. We believe, however, that companies
are again turning to Web content management to support their growth strategies,
such as selling products via the Web and creating or supporting new products
and
services through the delivery of content.
During
the downturn, we believe many chief information officers interested in Web
content management decided their custom-built Web sites were sufficient to
meet
their business objectives and postponed replacing them with Web content
management systems. Based on information provided in a report released by
Forrester Research in February 2006, we believe many chief information officers
and architecture groups are revisiting their past enterprise content management
strategies and are planning to replace their custom Web sites with Web content
management systems during the next 18 months.
We
believe many of the new systems being planned will be second-generation Web
sites, i.e., they will support and synchronize complex Web environments
consisting of multiple Web sites housed in difference physical locations.
The
newer systems will be required to manage changes to code and to distribute
content and code from multiple Web content management vendors within a network
of Web sites.
The
chart
below projects the North American revenues derived from licensed Web content
management systems. The projections exclude other service revenue that can
also
be derived from training, consulting, and system integration.
52
N.
American Content Management Software Forecast
Source:
IDC, May 2006
We
believe that a new class of applications is now expanding that combines
data and
content in support of business processes or new content-related products,
and,
accordingly, a growing number of companies have now prototyped or piloted
these
applications and are looking to expand them. Examples of content-related
applications include a restaurant that plans to use digital content instead
of
traditional photographs to show food items, a hotel that uses its Web site
as an
extension of its concierge service, or an automotive manufacturer that
uses its
Web site for customers to buy, service, maintain, and track payments for
their
vehicles.
IDC
reports that a growing number of companies are turning their attention to
digital assets such as digital photographs, graphics, and logos. In certain
cases, organizations need a specialized digital asset management product
to
support high volumes of digital assets, searching for assets based on the
content itself - in addition to metadata, displaying thumbnails, and managing
video and audio. IDC states that a number of companies are using their Web
content management systems to manage digital assets rather than buying a
specialized digital asset management product and expects this trend to
increase in 2006 and beyond.
The
Web Analytics Tool Market
Web
analytics, the measurement of the behavior of visitors to a website, generally
focus on a single Web site or an individual visiting a single Web site rather
than the surfing habits of individuals as they move from site to
site.
Site-independent
analytics can be used to build a file of total surfing behavior for panels
of
known or anonymous individuals for marketing personalization. Web analytics
provide real-time, actionable reporting that measures the effectiveness of
Web
sites and on-line marketing initiatives. Web analytics tools identify and
track
the factors that uniquely affect a Web sites success, providing insight needed
to optimize marketing efforts and drive company online business
success.
We
believe that over the past five years Web sites have evolved from being
brochure-ware type Web sites to highly functional Web applications.
Increasingly, organizations are demanding statistical data from their Web
applications fueling a growing Web analytics market.
According
to IDC, on-demand Web analytics constitute an increasing proportion of new
business among the larger vendors. We believe that this growth constitutes
penetration into previously installation-only verticals, such as
53
financial
institutions. In addition, we believe that the on-demand implementation short
circuits much of the negotiation process that marketers would otherwise have
to
conduct with their IT departments. An interesting side effect of the on-demand
business model is the ability to glean information on actual adoption and
feature usage far beyond the limits of focus groups, labs, and survey
questionnaires.
According
to IDC, the Web analytics market is a growing market expected to reach more
than
$600 million by the end of 2010. (See chart below.)
Worldwide
Web Analytics Software Applications Forecast
Source:
IDC, June
2006
We
are
currently developing an on-demand Web analytics software tool. We currently
expect to launch and introduce this native .NET on-Demand Web analytics
product
to our customer base in early calendar 2007.
Products
and Services
Web
Development Services
We
provide an explanation of each term below. By providing scalable Web software
tools with award-winning Web application development capabilities, we provide
our customers with complete solutions that optimize business processes
through
Web-based technologies.
We
believe this strategy results in a stronger relationship with our customer
base,
creating and maintaining a repeatable business model.
Web
Application Development
Our
in-house team of Microsoft®-certified
developers develops award-winning custom Web applications. These Web
applications include business-to-business Web properties such as broker-dealer
extranets, employee intranets, case management systems, eRecruiting
applications, on-line performance evaluation systems, and dynamic eCommerce
sites. Our development teams utilize programming tools such as ASP,
.NET, HTML, XML, Cold Fusion, Java Script, CGI/Perl, and Flash. Our
Web development expertise includes:
|
·
|
Internet
sites
|
|
·
|
Intranet
sites
|
|
·
|
Extranet
sites
|
|
·
|
eCommerce
|
54
|
·
|
Database
development
|
Our
developers are proficient in C, C++, J2EE and Microsoft .NET development
frameworks for back-end integration. We use these and other tools to integrate
with back-end databases (SQL, Oracle, DB/2, mySQL), application servers
(IIS/MTS, Oracle, WebSphere, Apache/Tomcat, J2EE servers, Sun), Web services
and
legacy systems. While our front-end design teams provide the appropriate
look
and feel for the display of the data, it is the job of the back-end teams
to
ensure that the data is available to the front-end systems. Depending on
business requirements and goals for the Web application, our technical
design
teams employ data caching, parallelism, threading and other techniques
to ensure
that the data is made available to the front-end in the most efficient
and
reliable manner.
We
develop Web applications utilizing our own Web software tools such as
netEDITOR® or
OrgitectureTM,
providing a complete end to end Web-based solution.
Information
Architecture
Information
architecture is a design methodology focused on structuring information
to
ensure that users can find the appropriate data and complete their desired
transactions within a Web site or a Web application. Understanding
users and the context in which they will be using a Web application is
core to
Information Architecture. Information architects try to put
themselves in the position of a typical application’s user 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 more educated 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.
We
provide information architecture for most of the Web applications we
develop.
Usability
Engineering
The
Web
was originally conceived as a “hypertextual” information space, in which users
could store data through computer programs that allow other users to create
and
link fields of information at will and to retrieve the data nonsequentially.
The
development of increasingly sophisticated user interfaces and applications,
however, has fostered the Web’s use as a remote software interface. This dual
nature has led to much confusion, as user experience has been mixed. Today,
usability engineering is a critical component towards developing any successful
Web-based application.
We
believe that a majority of Internet users leave a Web site after viewing
the
first page. A Web property (Internet Web site, intranet site, or extranet
site)
has one chance to make a first impression on a potential user. 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:
|
·
|
Usability
audits
|
|
·
|
Information
architecture
|
|
·
|
Process
analysis and optimization
|
|
·
|
Interface
design
|
|
·
|
User
testing
|
55
Our
systematic and user-centered approach to Web development focuses on developing
Web properties 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.
Rich
Media Development
Rich
media is a combination of interactive digital media such as video, audio,
and
animation that often includes user interaction. Rich media with its
movement, sound and emotive quality provides designers with a tool set more
powerful than text and graphics alone. Its dynamic movement and sound
is compelling and engaging to users. The more emotive a message, the more
appropriate rich media is for communicating it.
Rich
media impact on the Web is much wider than online advertising. E-learning
applications often use animations to convey processes more effectively
than text
and diagrams. Rich media content and rich media interactions are becoming
more
common in Web applications user interfaces and when used appropriately
provide a
richer user experience.
We
develop custom rich media applications such as sales training, product
launches,
and enhanced corporate communication via the web.
e-Training
Applications
We
believe e-Training is both a valuable tool for employee development and
to
enhance and extend relationships with customers. We believe effective e-Training
solutions must go beyond formatting existing content to fit on a computer
screen. Our experience in developing e-Training applications helps to improve
user comprehension and retention.
Our
e-Training applications combine video, audio, animation, and interactive
quiz
elements, all supported by a strong technical back-end, allowing customers
to
enjoy benefits such as:
|
·
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Flexibility:
accessibility via Internet, intranet, or
extranets
|
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·
|
Savings:
reduced training costs and related
expenses
|
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·
|
Convenience:
24/7 availability at the user’s
discretion
|
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·
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Longevity:
post-learning usage of updatable
resources
|
On-Demand
Web Tools - OrgitectureTM
Our
OrgitectureTM
platform provides customers with an integrated suite of on-demand Web-based
tools designed to maximize organizational effectiveness, streamline Web site
management and reduce operating costs. Orgitecture offers the stability,
reliability and economies of scale of a subscription-based service, along
with
the flexibility of a fully customized enterprise solution.
Developed
on open source standards, Orgitecture facilitates the development and deployment
of complex Web properties. Web solutions developed on Orgitecture are modular
by
design, so customers can add functionality as their needs evolve. Every
Orgitecture Web site is customized by our developers to meet the unique needs
of
its end users. Software modules include: Web content
management, logic-based survey tools, discussion boards,
resource libraries, calendaring, email newsletters, user management, and
online
registration.
56
Relationship
Management Module: We believe that the more a customer
knows about the history of its relationships with those involved in its business
operations, the more effective its communications will be. Orgitecture’s
relationship management module enables organizations to capture, track, manage
and analyze key constituent information, including contact and demographic
data,
billing records, professional interests, event attendance, and other relevant
data. The relationship management module can also be integrated with
Orgitecture’s content management module to drive the delivery of personalized
content.
Web
Content Management Module: A Web site can be among an
organization’s most valuable assets. In order to properly maintain the value of
that asset, the content within the site must be current and
accurate. Program updates, policy alerts, press releases, member
communications, donor communication and other content require frequent updating.
Orgitecture is a browser-based content management module that gives a customer
control over its site without requiring coding or technical expertise. A
customer needs only a standard Web browser to change site content quickly,
eliminating reliance on a dedicated technical webmaster. With built-in support
for workflow processes, image management, document management and group
security, Orgitecture’s Content Management Module allows the responsibility for
site management to be distributed as needed to a customer’s program,
communications and to administrative or executive staff.
eSurvey
Module: We believe the Internet is the
single most effective way to capture information and metrics regarding key
constituents. With Orgitecture’s highly configurable eSurvey module, customers
can capture, measure and analyze time-sensitive information gleaned from
their
target audiences. Online surveys can be created, modified and
deployed within minutes – all using a simple Web interface.
eNewsletter
Module: We believe that effective email outreach and eNewsletters
can significantly increase the traffic to a customer’s Web site. Our eNewsletter
module allows for the dissemination of information from customer Web sites.
The
module can be seamlessly integrated with Orgitecture’s content and relationship
management modules, so that customers can send targeted newsletters to key
constituents – by region, interest area, membership status and other criteria.
eNewsletter templates are aligned with the look and feel of a customer’s Web
site and linked directly to its content to ensure a consistent user
experience.
eCommerce
Module: We believe that the amount spent
purchasing products on-line or making on-line donations has more than doubled
over the past few years. We believe organizations that have well executed
online
initiatives can encourage their customers or contributors to purchase products
online or make online donations. Orgitecture’s eCommerce module
contains sophisticated shopping cart tools and provides customers with secure
transaction capabilities, reliable order processing and fulfillment, receipt
generation and inventory control.
Event
Registration Module: We believe that face-to-face
events deliver the greatest return on investment in marketing, while
strengthening customer and vendor relationships. The cost of managing and
organizing events can be significantly reduced through effective online event
management tools. Customers have the ability to streamline administrative
processes with Orgitecture’s Event Registration Management module. Customers set
up either free or paid events using a secure portal that integrates with
a
customer’s Internet merchant account. Through this module,
57
customers
can track registrations, request RSVPs, send reminders and manage attendance.
This module can also be seamlessly integrated with Orgitecture’s Relationship
Management system to pre-populate registrants’ data and track
attendance.
Integrated
Grants Management Module: Using the Web for
grants management can significantly reduce workload, minimize redundancy
and
streamline key business processes. For grantmaking foundations, the Orgitecture
platform supports integrated grants management – from eligibility screening and
online application processing to grantee reporting. We can help
organizations and foundations capture data on the Web and integrate it with
their existing grants management systems. Similarly, we can integrate a
customer’s internal systems with its Web site to ensure that relevant and timely
grants data is easily accessible and searchable online.
Web
Content Management Software-
netEDITOR®
Most
companies outsource Web development, while content such as text, graphics,
and
rich media is generally developed in-house. However, our experience suggests
that most organizations are not adept at Web content publishing and Web
content
managing. Content management and content publishing can be very complex
and
costly when there is a large volume of content produced by multiple contributors
throughout an organization. We believe that for many companies,
developing internal support for Web content publishing is challenging and
without proper management and centralization of Web production, these companies
may encounter production delays and increased costs.
Furthermore,
the volume of content changes on a Web site can be variable, causing
unpredictable variances in the workload for Web resources, often resulting
in
serious bottlenecks in content publishing. We believe that regardless of
whether
the content is managed internally or outsourced, the total cost of ownership
for
Web applications will continue to increase.
We
have developed a software solution to the content management challenge.
Our
proprietary content management software solutions, netEDITOR® and
netEDITOR-proTM,
provide
non-technical users the ability to create, edit, and publish content via
an easy
to use, browser-based interface at a lower cost than most commercial
solutions. These products are suitable for both simple and complex
content management requirements.
The
image
below is a sample screen shot of the netEDITOR-pro’s easy to use
interface.
Workflow
is an important feature of netEDITOR®. Multiple
levels of
approval ensure that content is always reviewed and approved before it
gets
published. Customers can easily build either serial or parallel custom
workflow
processes within the system for individuals or groups in order to meet
specific
organizational needs. E-mail helps facilitate this process by
notifying participants of any pending action that is
required.
58
Anyone
with basic computer knowledge should easily be able to configure the workflow
within netEDITOR for a complex, larger organization that has strict regulatory
policies or a simple, single person environment.
The
following workflow and user/group rights can be implemented out of the
box using
netEDITOR®
:
|
·
|
Editors:
Have rights to contribute content in identified areas of the
site.
|
|
·
|
Approvers:
Responsible for reviewing and either approving or rejecting content
for
particular areas of the site.
|
|
·
|
Publishers:
Ultimately responsible for final review and publishing of
content. These users can post content to the live
site.
|
|
·
|
Administrators:
Responsible for administration of the system. Administrators
have the
ability to add/modify/delete users, groups, permissions, content
sections,
site structure, and content
workflow.
|
The
chart
below shows an example of author, approver and publisher roles as the building
blocks of any workflow:
Our
netEDITOR product offers core functionality that we believe many companies
need in a content management system that is easy to implement and
maintain. We believe we have eliminated the complexity of web content
management. We offer netEDITOR to mid-market and larger
companies.
Research
and
Development
During
our fiscal year 2005, we established a research and development center
in
Bangalore, India in conjunction with our new On-demand Software Development
initiative described below. For the periods ending September 30, 2006
and 2005 expenses related to technology development activities were $176,000
and
$43,000, respectively. In addition, on an on-going basis since our
inception, we have derived technology benefits from engagements with our
customers; however it is not possible to track and quantify such costs
separately for any periods.
New
On-demand Software Development Initiative
Our
current on-demand software platform, OrgitectureTM has
been developed
in Cold Fusion and has limited scalability. We have begun to develop
a new on-demand software product platform in ASP.NET 2.0 that we believe
will
provide significant enhancements and scalability.
Business
processes, regardless of industry or vertical market, fall into common
categories. For example, all companies must deal with issues surrounding
security, workflow, version control and user management. While the
processes of individual entities may vary they can generally be classified
in
their simplest form as mentioned above. We are creating an ASP.NET
2.0-based application development framework based on these common
classifications.
59
This
development framework will include software components to support security,
workflow, version control and user management, and will empower companies
or
developers to create Internet-based applications with advanced business logic,
state-of-the-art graphical user interfaces and improved quality all in a
shorter
timeframe with less coding that was is now typically required.
The
development framework will allow us to build custom Web applications based
on
analyzing and optimizing our customer’s business processes and then map the
results to a common software component solution. While we believe
that is a very powerful concept by itself, the real synergies come together
when
we launch our product suite built on this framework. To support our
customer base’s Web related initiatives, the product suites in development will
include:
|
·
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Content
management
|
|
·
|
Web
analytics
|
|
·
|
Online
marketing
|
|
·
|
Digital
asset management
|
|
·
|
E-Commerce
|
|
·
|
Grants
management
|
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·
|
E-Training
|
While
each product suite will be used as a stand-alone solution, each product will
utilize our common underlying framework. This means once a customer has a
product suite installed (which requires that the entire framework be installed
as well), any of the other product suites could be integrated quickly,
efficiently, and cost effectively.
Recent
innovations in information technology have created opportunities to deliver
software applications directly to users over the Internet in a
subscription-based, on-demand business model. This model is made possible
by the
proliferation of high-speed, broadband Internet connectivity, open standards
for
application integration and advances in network availability and security.
For
the user, on-demand software eliminates the need for expensive hardware,
software and internal IT support.
The
newly
developed on-demand Web software tools will be delivered through a software
as a
service business model, in which we deliver our software
over the Internet while providing maintenance, daily technical operation
and
support. In addition if larger customers desire, we plan to provide
the framework and product suites as a stand-alone system (i.e.,
installed at a client site).
We
expect
to release the new platform and our on-demand Web product suites in mid
2007.
Development
Center in Bangalore, India
In
2003,
we formed a wholly owned subsidiary, Bridgeline Software, Pvt. Ltd., as our
software development center located in Bangalore, India. Bangalore, India
is an
emerging global center for software development activities and IT services.
This
technologically rich region allows us to hire talented Web application
developers and software engineers at comparatively lower compensation rates.
This offshore development center reduces our Web application development
cost,
improves development productivity, increases profit margins and our overall
competitiveness in the area of Web services. By working with our own employees
in India rather than outsourcing the software development work, we have greater
control over the quality of work and are able to set the priorities of the
group.
In
addition to assembling a quality Web Services programming team, our India
operation has a dedicated research and development team of engineers that
focuses exclusively on the continued development of the netEDITOR®, OrgitectureTM,
and future native
.Net Web software tools.
60
Customers
We
primarily serve five vertical markets that we believe have a history of
investing in IT enhancements and initiatives. These vertical markets
are:
|
·
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Financial
services
|
|
·
|
Life
sciences
|
|
·
|
High
technology
|
|
·
|
Foundations
and non profit organizations
|
|
·
|
Federal
and state government agencies
|
Our
business development teams and marketing resources focus our efforts on middle
market and large organizations (i.e., $100 million and higher in annual
revenues, or organizations that have over 500 full-time employees).
We
have
more than 90 active customers including companies such as Nomura Securities,
The
Bank of New York, Pfizer, Depository Trust & Clearing Corporation and John
Hancock, comprising approximately 22%, 7%, 6%, 6% and 6% of our revenues,
respectively, for the fiscal year ended September 30, 2006.
The
loss
of business from any of these customers, and in particular Nomura Securities,
could substantially reduce our net sales and results of operations and
could
seriously harm our business. See “Risk Factors – Only a few customers account
for a substantial portion of our revenues, and the loss of any of these
customers could substantially reduce our net sales.” Nomura Securities has been
a customer since 2002. Our relationship with Nomura Securities is non-exclusive
and may be terminated by either party with 30 days written notice. Our
Bridgeline Software Pvt. Ltd. subsidiary has an independent relationship
with
Nomura Securities under which it provides Nomura Securities with software
development services on a non-exclusive basis. That relationship may also
be
terminated by either party with 30 days written notice.
Growth
and Expansion Strategy
We
believe that the Web services/Web tools industry is a rapidly growing fragmented
marketplace that presents significant consolidation opportunities. According
to
Harte-Hanks (a data intelligence firm), there are over 2,000 Web development
companies in North America. Many of these entities are profitable, with annual
revenues between $1 million and $5 million.
As
we
develop additional Web-based scalable product solutions, we believe our North
America geographical expansion will allow us to leverage our products, rapidly
increase our customer base, and enhance our market position. We currently
have
sales and implementation teams in Boston, Massachusetts, New York, New York,
and
Washington, D.C. (with Atlanta, Georgia pending). We believe each major
metropolitan market selected is poised to grow. We plan to implement two
expansion initiatives over the next several years:
Organic
Growth - Over the last three years, our current locations have
experienced 26% organic growth on average each year. Based on this experience,
we project our organic revenue growth on average will be at least 20% per
year
in our geographical regions once we are established in each such geographical
region. No assurance can be given, however, that we will be able to
maintain this level of, or any, organic growth. Many of the risks identified
elsewhere in this prospectus could materially and adversely affect our
ability
to grow organically as well as our business, financial condition and results
of
operations as a whole. See “Risk Factors.”
We
have
defined sales and marketing activities to help enhance organic growth
opportunities. Some of these activities are:
Four
phase selling system: We use an accountable, strategic engagement process
developed specifically for target companies that require a mature professional
approach. We believe it is critical to qualify each opportunity and to assure
our skill set and tools match up well with the customer’s needs. An essential
part of every engagement, we believe our Four Phase Engagement
Process:
61
|
·
|
streamlines
our customer qualification process
|
|
·
|
strengthens
our relationship with our customer
|
|
·
|
ensures
our skill set and tools match the customer’s needs
|
|
·
|
results
in the submission of accurate
proposals
|
Organic
growth from existing customer base: We have specific programs that
consistently market Bridgeline Software’s brand, services, and web software
tools. Our business development professionals seek ongoing business
opportunities within our customer base and within other operating divisions
or
subsidiaries of our existing customer base each month.
New
customer acquisition: In the geographies we operate, we identify target
customers within our vertical expertise (financial services, life sciences,
high
technology, foundations, and government). Our business development professionals
develop an annual territory plan identifying various strategies to engage
our
target customers.
Customer
retention programs: We use our own email marketing capabilities when
marketing to our customer base. We email eNewsletters, internally generated
whitepapers, and company announcements to our customers, in addition we host
educational on-line seminars on a regular basis.
New
lead generation programs: We generate targeted leads and new business
opportunities by leveraging a combination of on-line marketing and third
party
telemarketing services. We receive leads by maximizing our search engine
optimization of our web site. Through our web site, we provide various
educational white papers and promote upcoming on-line seminars. We also pay
for
banner advertisements on various independent newsletters, linked to our web
site. We also participate and exhibit at targeted events to generate new
leads.
Acquisitions
- We plan to continue to acquire small, established Web development
companies in various geographical locations in North America. We expect that
each of the acquired companies will have the same core development expertise
as
we do, will have a complementary customer base to market our Web software
tools,
and will be a profitably run business. We anticipate that this strategy will
enhance our time to market and our customer base, and will reduce local market
entry risk.
We
target
profitable Web development companies with annual revenues of at least $2.5
million. We believe that by merging with us, these companies could benefit
from:
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·
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Differentiation
by marketing our content management software, netEDITOR®
|
|
·
|
Differentiation
by marketing our on-demand Web tools from the OrgitectureTM
platform
|
|
·
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Improved
margins by selling and licensing our Web software tools mentioned
above
|
|
·
|
Improved
margins by utilizing our development center in Bangalore,
India
|
|
·
|
Improved
sales by being a part of a larger company
|
|
·
|
Improved
sales by adopting our 4-phase sales
methodology
|
|
·
|
Improved
internal reporting and communications
|
|
·
|
Reduced
expense (centralized G&A, R&D, HR, legal, and
marketing)
|
|
·
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Liquidity
for their shareholders
|
Our
proposed strategy is to acquire an entity at a discount to public company
trading multiples at a purchase price consisting of cash at closing, contingent
earn-out payments payable upon the attainment of post-closing performance
milestones, and our common stock.
Historical
Acquisitions
Streamline
Communications, Inc. - A Boston, Massachusetts-based Web application
development company, acquired in December 2000.
62
Lead
Dog Digital, Inc. - A New York, New York-based Web application
development company, acquired in February 2002.
Interactive
Applications Group, Inc. (“iapps”®)
-
A Washington, D.C.-based Web application development company, acquired in
December 2004.
New
Tilt, Inc. - A Cambridge, Massachusetts-based Web application
development company, acquired in April 2006.
Pending
Acquisition - Objectware
On
December 7, 2006, we signed a definitive merger agreement, under which we
intend
to acquire all outstanding capital stock of Objectware, Inc., an Atlanta,
Georgia-based company that specializes in Web application development, Web
design, wireless application development, search engine optimization and
providing managed Web services to customers.
We
believe that Objectware meets all of the criteria we have established for
strategic acquisitions. Objectware is a leader in marketing, selling and
installing Web-based software tools in the Atlanta metropolitan area. Objectware
has an established base of customers, which may benefit from our Web software
tools and services. We also believe that Objectware will be able to enhance
its
operating margins over time by leveraging our Bangalore, India development
center and consolidating its marketing, general and administrative functions
at
our corporate headquarters.
Objectware’s
Customers
Objectware
has over 75 active customers.
Objectware’s
Services
Web
Application Development. Objectware’s Web applications include
business-to-business Web properties such as eCommerce sites, Web-based handheld
applications, and corporate Web sites. Objectware’s development teams use
programming tools such as .NET, Java, ASP, HTML, and XML. Objectware’s Web
development expertise includes the development of Internet, Intranet, Extranet,
and eCommerce web applications.
Custom
Wireless Applications. Objectware is addressing what it believes to be is a
developing trend in wireless telecommunications: Internet connectivity and
database interaction through handheld devices. Through strategic relationships
with Palm, Symbol, Synchrologic and Microsoft, Objectware’s mobile computing
projects include:
|
·
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Handheld
medical applications that assist doctors in selecting necessary
procedures
to comply with insurance carrier policies;
|
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·
|
A
courier order processing system with proof-of-delivery software
running on
handheld devices;
|
|
·
|
Integrating
Palm’s Web Clipping technology into online billing software;
and
|
|
·
|
Web-based
software that delivers information from the Web to Web-compatible
phones.
|
Search
Engine Optimization (SEO). Objectware’s helps customers maximize the
effectiveness of their online marketing activities to ensure that their sites
can be exposed to the potential customers that use search engines to locate
products and services. Objectware’s SEO services include:
|
·
|
Competitive
Analysis - Performing searches to determine what Web sites in the
customer’s industry are in the top positions of search engines and
determining how to position its customer’s Web sites ahead of
them;
|
|
·
|
Website
Review - Reviewing and restructuring its customer’s Web site’s
graphics, content and architecture
|
63
|
|
to
ensure proper configuration for search
engines;
|
|
·
|
Keyword
Generation - Developing keyword phrases based on information gathered
during client surveys and competitive analysis;
|
|
·
|
Proprietary
Leading Page Technology - Employing proprietary techniques to improve
its customers’ visibility on the
Web;
|
|
·
|
Ongoing
Registration - Performing initial registrations and routine
re-registrations with multiple search engines and
directories;
|
|
·
|
Monthly
Reports - Providing customers with monthly reports detailing and
explaining their traffic and rankings with the major search engines;
and
|
|
·
|
Maintenance
and Monitoring - Performing continual monthly reviews and adjustments
to keep customers’ Web sites at the top of the search
engines.
|
Managed
Service
Objectware
provides fully managed hosting services for its customers’ Web applications.
Objectware’s hosting facility includes dedicated in-house production and
development servers, as well as a dedicated 24-hour monitored co-location
facility for mission critical applications. Objectware believes that it provides
its customers’ applications with a highly secure, climate-controlled
environment, with multiple power sources, redundant Internet connectivity
and
24-hour monitoring and management.
Objectware’s
Web Software Tools
Content
Management System. Objectware offers an integrated content management
system (CMS) that allows businesses and organizations to maintain a more
dynamic, up-to-date Web presence without relying on outside Web services
vendors
or their internal IT personnel. Using CMS, customers can publish content,
images, documents, product information, service descriptions, press releases,
e-newsletters, event calendars, surveys and other information on their Web
sites. CMS is designed for non-technical users so that Web site content can
be
developed and maintained by sales, marketing, human resources or other
personnel.
Custom
eCommerce. Objectware offers solutions to customers that sell products and
services over the Internet to allow them to personalize product offerings,
improve their marketing effectiveness and offer value-added services to their
own clients. Objectware’s solutions are custom-designed for each
client.
eMail
Marketing and Management Tool. Objectware’s email marketing services tool
allows customers to expand their client base and provide a cost-effective
method
of communicating with existing clients, partners and associates. The tool
allows
companies to:
Objectware’s
Intellectual Property
Objectware
claims common law trademark rights in the name and logo “Objectware” and has
registered the trademark “Projectware” with the United States Patent and
Trademark Office. Objectware currently holds no patents. Objectware owns
the
domain name “Objectwareinc.com.” In addition, Objectware’s intellectual property
consists of proprietary software, licensed software and know-how.
Objectware’s
Competition
Objectware
targets and services the same markets that we do. Accordingly, Objectware
encounters the same intensely competitive environment in which we operate.
See
“Competition” below.
Terms
of the Acquisition
We
intend
to acquire Objectware shortly before completing this offering. The consideration
for the acquisition of Objectware will be paid to Objectware’s sole stockholder,
Erez M. Katz, and will consist of (i) $2,500,000 in
64
cash,
(ii) shares of our common stock having a value (based on the initial public
offering price of our shares in this offering) of $2,700,000 and (iii)
deferred
purchase price of up to $1,800,000, payable in cash and stock quarterly
over the
three years after we acquire Objectware, contingent upon Objectware generating
positive earnings before interest, taxes and depreciation and amortization
of at
least $250,000 per calendar quarter during the 12 consecutive calendar
quarters
following this offering. A portion of the deferred purchase price will
be paid
if Objectware generates positive earnings before interest, taxes and
depreciation and amortization of at least $225,000 but less than $250,000
in any
such calendar quarter. In no event, however, will we issue shares to Mr.
Katz in
connection with this acquisition which would result in ownership by Mr.
Katz of
more than 19.9% of the total issued and outstanding shares of our common
stock
without the prior approval of our shareholders.
The
acquisition of Objectware will close in escrow shortly before the completion
of
this offering. On the business day preceding the date we intend to request
that
the Securities and Exchange Commission declare the registration statement
of
which this prospectus is a part effective, all of the acquisition closing
documentation and other deliverables other than the cash and stock consideration
will be deposited with the escrow agent, and the acquisition will be considered
to have been completed, subject only to the conditions that, within five
business days after the registration statement has been declared effective
by
the Commission and our stock has commenced trading, and within one hour
after
our receipt of net proceeds of at least $10,000,000 from this offering,
we are
required to transfer the $2,500,000 of cash consideration to the escrow
agent
and we are required to deliver certificates representing the stock consideration
to the escrow agent by overnight mail. Upon receipt of the cash and stock
consideration the escrow agent will release all closing materials to the
appropriate parties, and will release the cash and stock consideration
to
Objectware’s sole shareholder, in accordance with the terms of the escrow
agreement.
By
closing in escrow, as described above, the acquisition will be deemed to
have
been completed, subject only to the condition that we subsequently deliver
the
acquisition consideration. Neither we nor Objectware have the right to
terminate
or unwind the acquisition after the closing in escrow unless the registration
statement has not been declared effective by the Commission on or before
the
ninth business day following the closing in escrow, in which case the
acquisition agreement will be null and void, and we will be required to
pay to
Objectware a termination fee equal to the sum of $200,000 plus Objectware’s
reasonable expenses actually incurred relating to the transactions contemplated
by acquisition agreement.
Although
the closing the acquisition of Objectware in escrow is not a condition
to the
closing of this offering, we will not request the Commission to declare
our
registration statement effective until after we close that acquisition
in escrow
as described above. Although we bear the risk that the Commission will
not
declare the registration statement effective within nine business days
after our
request, we believe that possibility to be remote.
We
expect
that all current employees of Objectware will continue as employees after
its
acquisition by us. As a condition to closing, Mr. Katz will enter into an
employment agreement with us under which he agrees, among other things, not
to
compete with our business for a period of up to 12 months after he ceases
to be
employed by us. See “Management - Employment Agreements.” Our merger agreement
with Objectware separately prohibits Mr. Katz from competing with us for
a
period of three years after the closing of the acquisition. In addition each
of
Objectware’s employees will be requested to sign our standard confidentiality
and noncompete agreement, which would prevent them from competing with our
business for a period of 12 months after they cease to be employed by us.
The
agreement also contains certain additional provisions that are customary
to the
agreements of this nature.
In
connection with the acquisition, Mr. Katz and Objectware have agreed to
cooperate with us and the underwriters in completing this public offering,
including assisting us with, and providing any materials necessary in, the
preparation of the registration statement of which this prospectus forms
a part.
Mr. Katz and we have agreed to indemnify each other for any losses incurred
as a
result of breaches by the other of any of its/his agreements, representations
or
warranties, subject to certain exceptions and limitations.
Competition
The
market for our products and services, including Web application development
services and web software tools is highly competitive 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.
65
With
the
introduction of new technologies and market entrants, we expect competition
to
persist and intensify in the future. Our competition includes in-house
web
application development efforts by our customers and potential customers,
as
well as other independent web application development companies. In
addition our competition includes other software developers that directly
address web software tools such as content management systems, ecommerce
systems, web analytics systems, and on-line marketing
systems.
We
believe there are multiple areas in which we compete with various competitors
in
our industry, including product/service range, pricing, ease of implementation,
expandability, customization flexibility, and reliability. Most
existing developers of Web software tools offer their software tools without
directly providing Web application development services and conversely
existing
Web applications developers do not provide internally develop Web software
tools. To distinguish ourselves from the competition, we offer both
Web application development services and related web software tools to
enhance
the likelihood of the customer receiving a functional, scalable, expandable,
and
integrated web application from one source. We believe that the
foregoing combination brings enhanced value to our customers and provides
us
with a competitive advantage in this highly competitive industry.
Many
of
our competitors have longer operating histories and significantly greater
financial, technical, marketing and other resources than we do and thus
may be
able to respond more quickly to new or changing opportunities, technologies
and
customer requirements. Also, many current and potential competitors
have wider name recognition and more extensive customer bases that could
be
leveraged, thereby gaining market share to our detriment. Such
competitors may be able to undertake more extensive promotional activities,
adopt more aggressive pricing policies, and offer more attractive terms
to
purchasers than we can.
We
compete with a diverse group of companies in our industry. The
companies listed below are a representative sample of the competitive landscape
we are facing.
|
·
|
Website
Pros, Inc. - Provides web development to medium-sized
enterprises. Website Pros on-demand platform directly competes
to our on-demand platform Orgitecture.
|
|
·
|
FileNet
Corp. - Develops content management systems that directly
compete
with our content management
systems.
|
|
·
|
aQuantive,
Inc. – A large division of aQuantive named RazorFish provides
web
application development services directly competing with our
web
application development services.
|
|
·
|
Vignette
Corp. - Develops content management systems
that
directly compete with our content management systems, and they
provide web
application development services that directly compete with our
web
application development
services.
|
|
·
|
WebSideStory,
Inc. – Develops web analytic software tools that directly compete
with our planed web analytic tool and they developed a web content
management system that directly competes with our content management
systems.
|
|
·
|
Agency.com
Ltd. - Provides web application development services directly
competing to our Web application development
services.
|
Intellectual
Property
We
have
no issued patents and have not applied for patent protection in any
jurisdictions. We rely upon copyrights, trademarks, trade secrets,
confidentiality agreements, proprietary know-how and continuing technological
innovation to remain competitive. We require all employees and consultants
to
execute a non-disclosure, non-compete and technology transfer agreement upon
hire. We continue to seek ways to protect our proprietary technology and
trade
secrets.
We
have
registered the trademarks “Bridgeline,” “iapps” and “netEDITOR” with the United
States Patent and Trademark Office. We claim common law rights in the trademark
“Orgitecture” and “netEDITOR-pro.”
66
Properties
Our
headquarters are located twelve miles north of Boston, Massachusetts at 10
Sixth
Road, Woburn, Massachusetts 01801. This office also serves as our New England
business unit. The following table lists our offices, all of which are
leased:
|
Location
|
|
Address
|
|
Size
|
|
Woburn,
Massachusetts
|
|
10
Sixth Road
Woburn,
Massachusetts 01801
|
|
9,335
square feet,
professional
office space
|
|
New
York, New York
|
|
104
West 40th
Street
New
York, New York 10018
|
|
4,400
square feet,
professional
office space
|
|
Washington,
D.C.
|
|
2639
Connecticut Ave., NW
Washington,
D.C. 20008
|
|
9,383
square feet,
professional
office space
|
|
Bangalore,
India
|
|
71
Sona Towers, West Wing
Millers
Rd., Bangalore 560 052
|
|
7,800
square feet,
professional
office space
|
|
Norcross,
Georgia*
|
|
5555
Triangle Parkway
Norcross,
Georgia 30092
|
|
7,068
square feet,
professional
office space
|
|
Reston,
Virginia*
|
|
11440
Commerce Park Drive,
Suite
502, Reston, VA 20191
|
|
1,413
square feet,
professional
office space
|
*assuming
that we complete the acquisition of Objectware, Inc.
We
also
assumed a lease in conjunction with the acquisition of New Tilt in April
2006 in
Cambridge, Massachusetts but operations were consolidated with our Woburn,
Massachusetts facility and we are subleasing this facility effective January
15,
2007.
Employees
We
have
85 full-time employees, of whom 39 are employed by Bridgeline Software
Pvt.
Ltd., our software development center in India. We have no unionized
employees. The full-time employees include 62 that are in Web
application/product development, eight in sales and marketing, and 15 in
general and administrative departments. We consider our relations with
our
employees, independent contractors and vendors to be good.
Assuming
that we complete the acquisition of Objectware, we would have an additional
26
full-time employees, none which are unionized employees, including 22 in
Web
application/product development, two in sales and marketing, and two in
general
and administrative departments.
Legal
Proceedings
In
the
normal course of business, we are subject to ordinary routine litigation
and
claims incidental to our business. We monitor and assess the merits and
risks of
pending legal proceedings. While the results of litigation and claims cannot
be
predicted with certainty, based upon our current assessment, we believe
that the
final outcome of any existing legal proceeding will not have a materially
adverse effect, individually or in the aggregate, on our consolidated results
of
operations or financial condition.
67
MANAGEMENT
The following table sets forth information regarding our directors and executive
officers:
|
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
|
|
Thomas
Massie
|
|
45
|
|
Chairman,
Chief Executive Officer and President
|
|
|
|
|
|
|
|
William
Coldrick
|
|
65
|
|
Director
(1)(2)(3)(4)
|
|
|
|
|
|
|
|
Kenneth
Galaznik
|
|
55
|
|
Director
(1)(3)(4)
|
|
|
|
|
|
|
|
Robert
Hegarty
|
|
44
|
|
Director(1)(2)(3)(4)
|
|
|
|
|
|
|
|
Gary
Cebula
|
|
48
|
|
Executive
Vice President, Treasurer, Corporate Secretary and Chief
Financial
Officer
|
|
|
|
|
|
|
|
Brett
Zucker
|
|
35
|
|
Executive
Vice President and Chief Technical
Officer
|
|
(1)
|
Member
of the Audit Committee.
|
|
(2)
|
Member
of the Compensation Committee.
|
|
(3)
|
Member
of the Nominating and Governance Committee.
|
|
(4)
|
Independent
director.
|
The
following table sets forth information regarding certain of our key
employees:
|
Michael
Matteo
|
|
42
|
|
Executive
Vice President & General Manager, New York
|
|
|
|
|
|
|
|
Michelle
Chambers
|
|
49
|
|
Executive
Vice President and General Manager, New England
|
|
|
|
|
|
|
|
Babu
Subramanian
|
|
50
|
|
Executive
Vice President and General Manager, Bridgeline India
|
|
|
|
|
|
|
|
Miles
Fawcett
|
|
37
|
|
President
of iapps®
|
|
|
|
|
|
|
|
Peter
“Pip” Winslow
|
|
47
|
|
Executive
Vice President of Human Resources
|
|
|
|
|
|
|
|
Donna
Tramontozzi
|
|
53
|
|
Executive
Vice President of Business Strategy
|
|
|
|
|
|
|
|
Robert
Seeger
|
|
33
|
|
Senior
Vice President of Business Development, New York
|
|
|
|
|
|
|
|
David
Goldsmith
|
|
45
|
|
Vice
President of Business Development,
iapps
|
68
|
|
|
|
|
|
|
Jenny
Quinn
|
|
43
|
|
Senior
Vice President of Business Development, New England
|
|
|
|
|
|
|
|
William
Matteson
|
|
61
|
|
Vice
President of Merger
Integration
|
Board
of Directors
Our
Board
of Directors oversees our business affairs and monitors the performance of
our
management. Our Board of Directors currently consists of four members who
are
divided into three classes. Each year shareholders elect the members of one
of
the three classes to three year staggered terms. The terms of our Class I
Director (Mr. Hegarty), Class II Director (Mr. Galaznik) and
Class III Directors (Messrs. Massie and Coldrick) expire in 2007, 2008 and
2009, respectively. Each director and executive officer will hold office
until
his successor is duly elected and qualified, until his resignation or until
he
shall be removed in the manner provided by our Amended and Restated By-laws.
All
officers serve at the discretion of the Board and are elected annually at
the
annual meeting of our Board held after each annual meeting of shareholders.
Our
Board of directors has determined that all directors (other than Mr. Massie)
are
independent as defined under the rules of the Nasdaq Stock
Market.
Below
are
descriptions of the backgrounds of our executive officers and directors and
their principal occupation for at least the last five years:
Thomas
Massie Mr. Massie has served as our Chairman, President and Chief
Executive Officer since our inception in late 2000. Prior
to founding Bridgeline, Mr. Massie founded and took public two technology
companies. From 1991 to 2000, Mr. Massie was the founder, Chairman of the
Board
and Chief Executive Officer of Focus Enhancements, a publicly held developer
of
proprietary video conversion ASIC chip technology that had global distribution
and technology alliances with companies such as Intel, Microsoft, Apple
Computer, Thompson, Philips, SONY, Nokia, and Zenith. Mr. Massie led Focus
Enhancements from concept to a public market capitalization of $230 million.
From 1986 to 1991, Mr. Massie was the founder and Chairman of the Board of
Mass
Microsystems, a publicly held developer of proprietary multimedia products.
Mr.
Massie led Mass Microsystems from inception to a public market capitalization
in
excess of $75 million. Since 2002, Mr. Massie has been a member of the Board
of
Directors of MapInfo Corporation, a publicly held global company that develops
location intelligence software solutions, for which he is the Chairman of
its
Corporate Governance Committee and a member of its Audit and Compensation
Committees. From 1997 to 2005, Mr. Massie was a co-owner and a member of
the
Board of Directors of The Hockey Academy, a private hockey-program management
company. Mr. Massie was a decorated non-commissioned officer in the U.S.
Army,
101st Airborne Division.
William
Coldrick Mr. Coldrick has served as a Director since our inception. He
is also a principal of Enterprise Development Partners, a consulting firm
he
founded in 1998 that serves emerging growth companies. Since 1993, Mr. Coldrick
has served as Vice Chairman of the Board of Focus Enhancements. Since 1996
he
has been a director of Advanced Electronics Support Products. From 1996 to
1998,
he was Vice President and General Manager of Worldwide Channel Operations
for
the Computer Systems Division of Unisys Corp. From 1982 to 1991, Mr. Coldrick
held several senior management positions at Apple Computer. In his last position
at Apple as Senior Vice President of U.S. Sales, he was responsible for managing
all sales, support, service, distribution and channel activities for the
United
States. Before joining Apple, Mr. Coldrick spent fourteen years with Honeywell
Information Systems, where he held several positions, including regional
marketing director. He holds a B.A. degree in marketing from Iona College
in New
Rochelle, New York.
Kenneth
Galaznik Mr. Galaznik began serving as a Director in August 2006. Since
February 2005, Mr. Galaznik has been the Senior Vice President, Chief Financial
Officer and Treasurer of American Science and Engineering, Inc., a publicly
held
supplier of X-ray inspection and screening systems. From November 2001
until
August 2002, he was self-employed as a consultant. From August 2002 until
February 2005, Mr. Galaznik was Vice President of Finance of American Science
and Engineering, Inc. Prior to joining that company, from March 1999 to
September 2001, he served as Vice President of Finance at Spectro Analytical
Instruments, Inc. and has more than 25 years of experience in accounting
and
finance positions in
69
manufacturing
and real estate development entities. Mr. Galaznik holds a B.B.A. degree
in
accounting from The University of Houston.
Robert
Hegarty Mr.
Hegarty began serving as a Director in September 2006. Since 1999, Mr.
Hegarty
has been Managing Director of TowerGroup Securities & Investments Group, a
capital markets and investment and wealth management firm owned by MasterCard
International. Before joining TowerGroup in 1999, Mr. Hegarty was vice
president
of trading systems at Putnam Investments in Boston, Massachusetts and was
employed by Fidelity Investments in Boston
for eight years,
during which he served as vice president of technology of the institutional
broker-dealer arm of Fidelity Investments and Fidelity Capital Markets.
Mr.
Hegarty holds an M.B.A. degree in finance and marketing from Babson College
and
a B.S. degree in computer science from North Adams State
College.
Gary
Cebula Mr. Cebula has served as our Executive Vice President, Chief
Financial Officer, Treasurer, and Corporate
Secretary since our inception. From 1998 to 2000, Mr.
Cebula was Vice President of Finance, Administration and Treasurer of Focus
Enhancements, a publicly held developer of proprietary video conversion ASIC
chip technology that had global distribution and technology alliances with
companies such as Intel, Microsoft, Apple Computer, Thompson, Philips, SONY,
Nokia, and Zenith. Mr. Cebula was a key contributor to Focus’ strategic
initiatives, spurring a market capitalization growth from $45 million to
$230
million during his tenure. Focus merged with Silicon Valley-based Videonics
in
2000. From 1996 to 1998, Mr. Cebula was Chief Financial Officer of Hanold
Holding Corporation, a manufacturer and distributor of educational products
and
services. From 1986 to 1996 he was Corporate Controller of Continental
Resources, then a $125 million value-added reseller of computer peripherals
and
system integration services. A graduate of General Electric’s Financial
Management Program, Mr. Cebula earned a B.S. degree in accounting and an
M.S.
degree in taxation from Bentley College.
Brett
Zucker Mr. Zucker was the Director of Development and Delivery for Lead
Dog Digital, Inc., a custom Web development company we acquired in February
2002, and has served as our Executive Vice President and General Manager,
New
York, and since January 1, 2006, as our Chief Technical Officer. Prior to
joining Lead Dog Digital in September 2000, Mr. Zucker served as Senior Producer
at AppNet, where he was responsible for managing a team of project managers
working on a wide range of custom development projects. Mr. Zucker holds
a B.S.
degree in Electrical Engineering from Cornell University and an M.B.A. degree
from Harvard Business School.
Below
are
descriptions of the backgrounds of certain of our key employees:
Michael
Matteo Mr. Matteo has served as our Executive Vice President and
General Manager for our New York region since September 2006. From our February
2002 acquisition of Lead Dog Digital to April 2005, Mr. Matteo served as
our
Senior Vice President, operating out of our New York City office. In addition,
Mr. Matteo was a member of our Board of Directors from February 2002 until
December 2006. From May 2005 until October 2006, Mr. Matteo was the Chief
Operating Officer of Telecom Infrastructure Corp., a privately held firm
headquartered in New York City. Prior to our February 2002 acquisition, Mr.
Matteo served as Lead Dog Digital’s Chief Executive Officer. Prior to joining
Lead Dog Digital, most of Mr. Matteo’s career was spent working for AT&T in
strategy, development, deployment and maintenance of complex information
systems. Mr. Matteo earned an M.B.A. degree from the Wharton Business School
and
a B.A. degree in both Computer Science and Management Science from the State
University of New York.
Michelle
Chambers Ms. Chambers has served as our Executive Vice President and
General Manager for the New England region since April 2006. Prior to joining
our company, Ms. Chambers was President and co-founder of New Tilt, a Web
application development and Internet strategy company, where she was responsible
for sales and marketing as well as the strategic direction of the company.
We
acquired New Tilt in April 2006. Ms. Chambers earned a B.A. degree in Journalism
and English from Michigan State University.
Babu
Subramanian Mr. Subramanian has served as our Executive Vice President
and General Manager of our Bridgeline Software, Pvt. Ltd. subsidiary in
Bangalore, India since 2006. Prior to joining Bridgeline, Mr. Subramanian
was
the co-founder and Managing Director of Merindus, the Indian arm of Indus
Consultancy Services, NJ from 2002 until 2006. Prior to joining Merindus,
from
2000 until 2002 Mr. Subramanian was Director-
70
Projects
in Lisle Technology Partners, Bangalore, India, where he was responsible
for
building technology for companies in the United States and India. Prior to
joining Lisle, from 1998 until 2000 Mr. Subramanian was Group Head in Sonata
Software Limited, Bangalore, where he was responsible for delivery of projects
in Groupware, Mobile computing and eBusiness. Prior to Sonata, Mr. Subramanian
was Center Head of the India center of the Netherlands-based Wisdom Information
Consultants, which specialized in Internet and intranet applications. Mr.
Subramanian holds a Master of Technology degree with specialization in Computer
Science from Indian Institute of Science in Bangalore, India and a Bachelor
of
Engineering degree in Electronics and Communication from Regional Engineering
College, now known as National Institute of Technology, in Tiruchirappalli,
India.
Miles
Fawcett Miles Fawcett founded Interactive Applications Group, Inc.
(iapps®) in
1994, a company which develops and offers nonprofit organizations a new
generation of communication tools, and which we acquired in 2004. As President
of our iapps division, Mr. Fawcett oversees its direction, including strategic
planning, and operational management. In addition Mr. Fawcett is a member
of our
Executive Committee and Product Development Committee. Mr. Fawcett serves
on the
board of Men Can Stop Rape and is a judge in the Nonprofit and Government
category for the Computerworld Smithsonian Awards. Mr. Fawcett graduated
from
the Park School of Communications at Ithaca College, and served two years
on the
faculty of American University Graduate School of Communications.
Peter
Winslow Mr. Winslow is our Executive Vice President of Human Resources.
From 2003 to July 2006, Mr. Winslow was our Vice President of Marketing.
From
2001 to 2003 Mr. Winslow was a principal of Top Gun Arena Management, Inc.,
a
sports facility development and management company. From 1990 to 2001 Mr.
Winslow was the New England Regional Business Manager for The Orvis Company,
Inc. Mr. Winslow graduated from the School for the Museum of Fine Arts and
holds
a B.A. degree from Tufts University.
Donna
Tramontozzi Ms. Tramontozzi is our Executive Vice President of Business
Strategy. Prior to joining our company, Ms. Tramontozzi was co-founder and
Chief
Strategy Officer of New Tilt, where she was responsible for providing vision
and
thought leadership to the planning, design and delivery teams. We acquired
New
Tilt April 2006. Ms. Tramontozzi received a B.A. degree in English and Secondary
Education from Boston College.
Robert
Seeger Mr. Seeger is Senior Vice President of Business Development for
our New York region. Mr. Seeger was the Vice President of Business Development
for Lead Dog Digital, a custom Web development company that we acquired in
February 2002. Prior to joining Lead Dog Digital, Mr. Seeger worked for Western
Industries, Inc. where he was commissioned with opening their New York Office.
Mr. Seeger is a graduate of Rutgers University where he majored in Business
and
was captain of The Rutgers University football team.
David
Goldsmith As Vice President of Business Development for our iapps
division, Mr. Goldsmith oversees iapps’ business strategy, including business
development and strategic partnerships. Mr. Goldsmith also consults with
iapps
customers on knowledge management, community building and online communications
strategies. Mr. Goldsmith joined iapps in April 1997 after seven years with
HandsNet, the first online network in the United States designed exclusively for
nonprofit organizations working on issues of social and economic justice.
Mr.
Goldsmith holds a B.A. degree in Political Ecology from Huxley College of
Environmental Studies at Western Washington University.
Jenny
Quinn Ms. Quinn is Senior Vice President of Business Development, for
our New England region. Ms. Quinn has over 20 years experience as an account
manager or sales executive for technology solutions and services firms. Prior
to
joining our company, Ms. Quinn was responsible for New Tilt’s business
development. We acquired New Tilt in April 2006. Ms. Quinn holds a B.A. degree
from Dartmouth College.
William
Matteson Mr. Matteson is our Vice President of Merger Integration, and
is responsible for the integration of new companies that we acquire. Prior
to
his current position, he was our Vice President of Business Development for
New
England, having joined our company at its inception. From 1995 to 2000, Mr.
Matteson was President, chief executive officer and co-founder of Streamline
Communications, a Boston-based Web development company that we acquired in
2000.
Mr. Matteson received a B.A. degree in English from Brown
University.
71
All
of
our executive officers and key employees devote their full-time attention
to our
business. No director or executive officer is related to any other of our
directors or executive officers, and there are no arrangements or understandings
between a director and any other person that such person will be elected
as a
director. There are no material proceedings to which any director, director
nominee, executive officer or affiliate of our company, any owner of record
or
beneficially of more than five percent of any class of voting securities
of our
subsidiaries or our company, or any associate of any such director, officer,
affiliate or security holder is a party adverse to us.
Directors’
and Officers’ Insurance
Though
we
do not maintain directors’ and officers’ liability insurance as of the date of
this prospectus, we expect to obtain such a policy, with limits of
$3 million, shortly after the completion of this offering.
Board
Committees
Our
Board
has designated three standing committees: the Audit Committee, the Compensation
Committee and the Nominating and Governance Committee.
Audit
Committee. The Audit Committee assists the Board in the oversight of the
audit of our consolidated financial statements and the quality and integrity
of
its accounting, auditing and financial reporting processes. The Audit Committee
is responsible for making recommendations to the Board concerning the selection
and engagement of independent registered public accountants and for reviewing
the scope of the annual audit, audit fees, results of the audit and auditor
independence. The Audit Committee also reviews and discusses with management
and
the Board such matters as accounting policies, internal accounting controls
and
procedures for preparation of financial statements. Our Audit Committee is
comprised of Messrs. Galaznik (Chair), Coldrick and Hegarty. Our Board has
determined that each of the members of the Audit Committee meets the criteria
for independence under the standards provided by the Nasdaq Stock Market.
A copy
of the Audit Committee Charter is filed as an exhibit to the registration
statement of which this prospectus is a part.
Audit
Committee Financial Expert. Our Board has also determined that
Mr. Galaznik qualifies as an “audit committee financial expert” as defined
under Item 407(d)(5) of Regulation S-B. Mr. Galaznik is
“independent” under Rule 10A-3 under the Securities Act. A copy of the
Audit Committee Charter is filed as an exhibit to the registration statement
of
which this prospectus is a part.
Compensation
Committee. The Compensation Committee evaluates the performance of our
senior executives, considers the design and competitiveness of our compensation
plans, reviews and approves senior executive compensation and administers
our
equity compensation plans. In addition, the Committee also conducts reviews
of
executive compensation to ensure compliance with Section 162(m) of the
Internal Revenue Code of 1986, as amended. Our Compensation Committee is
comprised of Messrs. Hegarty (Chair) and Coldrick, both of whom are independent
directors. A copy of the Compensation Committee Charter is filed as an exhibit
to the registration statement of which this prospectus is a part.
Nominating
and Governance Committee. The Nominating and Governance Committee
identifies candidates for future Board membership and proposes criteria for
Board candidates and candidates to fill Board vacancies, as well as a slate
of
directors for election by the shareholders at each annual meeting. The
Nominating and Governance Committee also annually assesses and reports to
the
Board on Board and Board Committee performance and effectiveness and reviews
and
makes recommendations to the Board concerning the composition, size and
structure of the Board and its committees. Messrs. Coldrick (Chair), Galaznik
and Hegarty, all of whom are independent directors, are the members of the
Nominating and Governance Committee. A copy of
the Nominating and Governance Committee Charter is filed as an exhibit to
the registration statement of which this prospectus is a part.
Code
of Ethics
Our
Board
has adopted a Code of Ethics within the meaning of Item 406(b) of
Regulation S-B of the Securities Act that applies to all of our officers
and employees, including our principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing
similar functions. Our Code of Ethics
72
codifies
the business and ethical principles that govern our business. A copy of the
Code
of Ethics is filed as an exhibit to the registration statement of which this
prospectus is a part.
The
Code
of Ethics is designed to deter wrongdoing and to promote:
|
·
|
Honest
and ethical conduct, including the ethical handling of actual or
apparent
conflicts of interest between personal and professional
relationships;
|
|
·
|
Full,
fair, accurate, timely, and understandable disclosure in reports
and
documents that we file with, or submit to, the SEC and in other
public
communications made by us;
|
|
·
|
Compliance
with applicable governmental laws, rules and
regulations;
|
|
·
|
The
prompt internal reporting of violations of the ethics code to an
appropriate person or persons identified in the
code; and
|
|
·
|
Accountability
for adherence to the Code of
Ethics.
|
None
of
our executive officers served:
|
·
|
as
a member of the compensation committee of another entity which
has had an
executive officer who has served on our compensation
committee;
|
|
·
|
as
a director of another entity which has had an executive officer
who has
served on our compensation
committee; or
|
|
·
|
as
a member of the compensation committee of another entity which
has had an
executive officer who has served as one of our
directors.
|
Underwriters’
Board Rights
Pursuant
to the underwriting agreement relating to this offering, we have agreed,
for a
period of no less than two years, to engage a designee of the
representative of the underwriters, mutually agreed upon by us and the
underwriters, as an advisor to the Board. This advisor may attend Board
meetings, receive all notices and other correspondence and communications
sent
by us to members of our Board and receive compensation equal to the highest
compensation of our non-employee directors, excluding the chairs of our standing
committees. In addition, the advisor is entitled to receive reimbursement
for
all costs incurred in attending Board or committee meetings including food,
lodging and transportation. The advisor will have none of the duties, rights
or
powers of a director. Stephan Stein, Chief Operating Officer of Joseph Gunnar
& Co., LLC, has been appointed as the designee.
Director
Compensation
In
the
last fiscal year, none of our existing directors were compensated for their
Board service.
Our
Board
recently adopted the following compensation policy for our non-management
directors:
Stock
Grants. Outside directors will each receive annual grants of options to
purchase 10,000 shares of our common stock at an exercise price equal to
the
fair market value of the shares on the date of grant. The options will be
granted in each year on the date of the annual meeting of stockholders. The
options shall vest over three years in equal installments on the anniversary
of
grant. Each of the two new directors received options to purchase 25,000
shares
of our common stock at $3.75 per share upon election to the Board.
Cash
Compensation. Each outside directors will be compensated $1,500 for
each meeting such director attends, whether in person or by telephone conference
call.
Committee
Chair Bonus. The Chair of our Audit Committee will receive an additional
annual fee of $5,000. The Chairs of our Compensation Committee and Nominating
and Corporate Governance Committee will each receive an
73
additional
annual fee of $2,500. These fees will be payable in lump sums in advance.
Other
directors who serve on our standing committees will not receive additional
compensation for their committee services.
Travel
Expenses. All directors will be reimbursed for their reasonable out of
pocket expenses associated with attending meetings. For domestic travel,
only
coach airfare will be reimbursed; for international travel we will reimburse
for
business class.
Indemnification
and Limitation of Director and Officer Liability
Our
organizational documents contain provisions indemnifying our directors and
officers to the fullest extent permitted by law.
In
addition, as permitted by Delaware law, our Amended and Restated Certificate
of
Incorporation (which will become effective shortly before the completion
of this
offering) will provide that no director will be liable to us or our shareholders
for monetary damages for breach of certain fiduciary duties as a director.
The
effect of this provision will be to restrict our rights and the rights of
our
shareholders in derivative suits to recover monetary damages
against a director for breach of certain fiduciary duties as a director,
except
that a director will be personally liable for:
|
·
|
any
breach of the director’s duty of loyalty to us or our
shareholders;
|
|
·
|
acts
or omissions not in good faith or which involve intentional misconduct
or
a knowing violation of law;
|
|
·
|
the
payment of dividends or the redemption or purchase of stock in
violation
of Delaware law; or
|
|
·
|
any
transaction from which the director derived an improper personal
benefit.
|
At
present, there is no pending litigation or proceeding involving any of our
directors, officers, employees or agents where indemnification will be required
under Delaware law. We are not aware of any threatened litigation or proceeding
that might result in a claim for such indemnification.
Commission
Position on Indemnification for Securities Act Liabilities
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons pursuant to
the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore,
unenforceable.
74
EXECUTIVE
COMPENSATION
The
following table and discussions summarize all plan and non-plan compensation
earned by or paid to our Chief Executive Officer and our three other most
highly
compensated executive officers for our last three completed fiscal years
(the
“named executive officers”).
SUMMARY
COMPENSATION TABLE
|
Long
Term Compensation
|
|||||||||||||||||||||
|
Annual
Compensation
|
Awards
|
||||||||||||||||||||
|
Restricted
|
Securities | ||||||||||||||||||||
|
Other
Annual
|
Stock
|
Underlying | |||||||||||||||||||
|
Salary
|
Bonus
|
Compensation
|
Award(s)
|
Options/SARs | |||||||||||||||||
|
Name
and Principal Position
|
Year
|
($)
|
($)
|
($)
|
($)
|
($)
|
|||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
|
Thomas
Massie
|
2006
|
150,000
|
50,000
|
20,272
|
(1) |
|
|||||||||||||||
|
|
2005
|
150,000
|
76,333
|
24,242
|
(1) |
|
|||||||||||||||
|
|
2004
|
123,167
|
15,000
|
12,121
|
(1) |
|
|||||||||||||||
|
Gary
Cebula
|
2006
|
122,083
|
45,000
|
|
|||||||||||||||||
|
|
2005
|
120,000
|
10,000
|
100,000
|
|||||||||||||||||
|
|
2004
|
123,167
|
20,000
|
||||||||||||||||||
|
Brett
Zucker
|
2006
|
144,000
|
52,000
|
||||||||||||||||||
|
|
2005
|
133,358
|
21,366
|
100,000
|
|||||||||||||||||
|
|
2004
|
125,716
|
69,419
|
||||||||||||||||||
|
Robert
Seeger
|
2006
|
119,375
|
254,085
|
||||||||||||||||||
|
|
2005
|
123,333
|
157,748
|
50,000
|
|||||||||||||||||
|
|
2004
|
101,375
|
212,290
|
||||||||||||||||||
|
(1)
Represents life insurance premiums.
|
No
executive officer received perquisites or other personal benefits which,
in the
aggregate, exceeded the lesser of either $50,000 or 10% of the total of annual
salary and bonus paid during the fiscal year.
The
following table summarizes information related to grants of stock options
(whether or not in tandem with Stock Appreciation Rights (“SARs”)) and
freestanding SARs made during the fiscal year ended September 30, 2006 to
each
of the named executive officers specified below:
OPTIONS/
SAR GRANTS IN THE LAST FISCAL YEAR
(INDIVIDUAL
GRANTS)
|
Name
|
Number
of
Securities
Underlying
Options/SARs
Granted
|
%
of Total
Options/SARs
Granted
to
Employees
in
Fiscal
Year
|
Exercise
or
Base
Price
($/Share)
|
Expiration
Date
|
||||||||||||
|
Thomas
Massie
|
—
|
—
|
—
|
—
|
||||||||||||
|
Gary
Cebula
|
100,000
|
24.4
|
$ |
3.75
|
06/01/15
|
|||||||||||
|
Brett
Zucker
|
100,000
|
24.4
|
$ |
3.75
|
06/01/15
|
|||||||||||
|
Robert
Seeger
|
50,000
|
12.2
|
$ |
3.75
|
06/01/15
|
|||||||||||
75
The
following table sets forth certain information concerning the number and
value
of unexercised options held by each of the named executive officers at September
30, 2006.
AGGREGATED
OPTION EXERCISES IN LAST FISCAL YEAR AND OPTION VALUES
|
|
|
Value
of Unexercised
|
||||||||||||||
|
|
Number
of Securities Underlying
|
“in
the Money”
|
||||||||||||||
|
|
Unexercised
Options at
|
Options
at
|
||||||||||||||
|
|
September
30, 2006
|
September
30, 2006 (1)
|
||||||||||||||
|
|
Exercisable
|
Unexercisable
|
Exercisable
|
Unexercisable
|
||||||||||||
|
Thomas
Massie
|
40,000
|
—
|
$ |
119,981
|
$ |
-
0
-
|
||||||||||
|
Gary
Cebula
|
65,000
|
66,667
|
$ |
157,481
|
$ |
116,667
|
||||||||||
|
Brett
Zucker
|
82,283
|
66,667
|
$ |
225,410
|
$ |
116,667
|
||||||||||
|
Robert
Seeger
|
68,164
|
33,333
|
$ |
197,390
|
$ |
58,333
|
||||||||||
|
(1)
|
Options
are “in the money” if the market value of the shares covered thereby is
greater than the option exercise price. There was no public trading
market
for our common stock as of September 30, 2006. The value of unexercised
“in the money” options at September 30, 2006 are determined by multiplying
the number of shares underlying the options by the difference between
the
initial public offering price of $5.50 per share and the per share
option
exercise price.
|
Employment
Agreements, Termination of Employment and Change-In-Control
Arrangements
Thomas
Massie
We
have
entered into an employment agreement with Thomas Massie, our Chief Executive
Officer, to provide executive management services. The agreement had an initial
term of three years commencing on October 1, 2001 and was renewed in 2004
for
another three-year term. The term of the agreement is automatically extended
so
that it always has an effective period of three years. For all services rendered
to us, Mr. Massie is compensated in the form of initial base salary in the
amount of $150,000 and an annual contingent bonus of at least $50,000, payable
based upon goals mutually agreed upon by Mr. Massie and our Board of Directors.
Both the annual salary and bonus are subject to periodic review and adjustment
by our Board.
This
agreement may be terminated by (i) us, in the event of Mr. Massie’s death,
resignation, retirement or disability, or for or without cause, or (ii) Mr.
Massie for good reason. In the event that Mr. Massie is terminated by us
without
cause or Mr. Massie resigns for good reason, he is entitled to receive severance
payments equal to the greater of: (a) three years’ total compensation, including
bonus amounts, or (b) $1 million.
Named
Executive Officers and Key Employees
We
have
entered into an employment agreement with each of our named executive officers
and certain of our key employees, each for an initial term of one year. The
term
of each agreement automatically renews for successive periods of one year
each
unless terminated under the agreement. Each agreement sets forth the officer’s
or employee’s initial base salary and annual contingent bonus.
Each
agreement may be terminated by (i) us, in the event of the officer’s or
employee’s death, resignation, retirement, or disability, or for or without
cause, or (ii) by the officer officer’s or employee for good reason. In the
event that the officer or employee is terminated by us without cause or if
the
officer or employee terminates his employment for good reason, he is entitled
to
receive severance payments equal to six months’ salary plus the quarterly bonus
paid to him for the two quarters immediately prior to the
termination.
76
Each
of
these employment agreements also contains non-competition, confidentiality,
indemnification and other terms and provisions customary for agreements of
this
nature. The foregoing is a summary of the material terms and provisions of
the
employment agreements with our named executive officers and key employee’s.
Copies of the agreements with our named executive officers are filed as exhibits
to the registration statement of which this prospectus is a part.
Proposed
Employment Agreement with Erez M. Katz
Upon
closing of the Objectware acquisition, we intend to enter into an employment
agreement with Mr. Katz, the sole shareholder of Objectware, pursuant to
which
Mr. Katz will serve as our as Executive Vice President and General Manager
for
our Atlanta business unit. The initial term of the agreement will be for
one
year and will automatically renew for successive periods of one year each
unless
terminated under the agreement. The agreement sets forth Mr. Katz’ initial base
salary of $150,000 and annual contingent bonus of up to $100,000.
The
agreement may be terminated by (i) us, in the event of Mr. Katz’ death,
resignation, retirement, or disability, or for or without cause, or (ii)
by Mr.
Katz for good reason. In the event that Mr. Katz’ employment is terminated by us
without cause or if Mr. Katz terminates his employment for good reason, (i)
prior to the completion of three years from the initial date of the employment
agreement, he is entitled to a severance payment of $750,000, or (ii) after
the
completion of three years from the initial date of the employment agreement,
he
is entitled to receive severance payments equal to twelve months’ salary plus
the quarterly bonus paid to him for the four quarters immediately prior to
the
termination.
This
employment agreement also contains non-competition, confidentiality,
indemnification and other terms and provisions customary for agreements of
this
nature. The foregoing is a summary of the material terms and provisions of
the
employment agreement with Mr. Katz. A copy of this agreement is filed as
an
exhibit to the registration statement of which this prospectus is a
part.
Amended
and Restated Stock Incentive Plan
Our
Amended and Restated Stock Incentive Plan, originally adopted in 2000 and
amended and restated in August 2006, allows us to grant options and other
forms
of stock-based compensation to our officers, directors, employees and outside
consultants and advisors. We have developed this Plan to align the interests
of
(i) employees, (ii) non-employee Board members, and
(iii) consultants and key advisors with the interests of our shareholders
and to provide incentives for these persons to exert maximum efforts for
our
success and to encourage them to contribute materially to our
growth.
The
Plan
is not subject to the provisions of the Employment Retirement Income Security
Act, as amended (“ERISA”), and is not a “qualified plan” within the meaning of
Section 401 of the Internal Revenue Code, as amended (the “Code”). The Plan
is administered by our Compensation Committee which has exclusive discretion
to
select the participants who will receive awards under the Plan and to determine
the type, size and terms of each award.
Shares
Subject to the Plan. We may issue up to 1,400,000 shares under the
Plan, subject to adjustment to prevent dilution from stock dividends, stock
splits, recapitalization or similar transactions.
Administration
of the Plan. The Plan is administered by the Compensation Committee. Except
for certain non-discretionary option grants to certain of our directors
described below, the Compensation Committee selects the individuals to whom
options and awards are granted and determines the option exercise price and
other terms of each award, subject to the provisions of the Plan.
Awards
under the Plan. Under the Plan, the Compensation Committee may grant awards
in the form of incentive stock options, as defined in Section 422 of the
Code, options which do not so qualify, stock awards, performance share awards
and stock appreciation rights.
77
Options.
The duration of any option shall be within the sole discretion of the
Compensation Committee; provided, however, that any incentive stock option
granted to a 10% or less stockholder or any nonqualified stock option shall,
by
its terms, be exercised within 10 years after the date the option is
granted and any incentive stock option granted to a greater than 10% stockholder
shall, by its terms, be exercised within five years after the date the option
is
granted. The exercise price of all options will be determined by the
Compensation Committee; provided, however, that the exercise price of an
option
(including incentive stock options or nonqualified stock options) will be
equal
to, or greater than, the fair market value of a share of our stock on the
date
the option is granted and further provided that incentive stock options may
not
be granted to an employee who, at the time of grant, owns stock possessing
more
than 10% of the total combined voting power of all classes of our stock or
any
parent or subsidiary, as defined in section 424 of the Code, unless the
price per share is not less than 110% of the fair market value of our stock
on
the date of grant.
The
Plan
provides that each director who is not an employee of Bridgeline, on the
date of
each annual meeting or special meeting in lieu thereof, shall automatically
receive a grant of a non-statutory option for the purchase of 10,000 shares
of
Common Stock. Such option shall vest over three years on the anniversary
of the
date of grant at a rate of 33.33% per year until fully vested.
Termination
or Amendment of the Plan. Our Board of Directors may at any time terminate
the Plan or make such amendments thereto as it deems advisable, without action
on the part of our shareholders unless their approval is required under the
law.
However, no termination or amendment will, without the consent of the individual
to whom any option has been granted, affect or impair the rights of such
individual. Under Section 422(b)(2) of the Code, no incentive stock option
may be granted under the Plan more than ten years from the date the Plan
was
amended and restated or the date such amendment and restatement was approved
by
our shareholders, whichever is earlier.
As
part
of our acquisition of Lead Dog Digital, Inc. in February 2002, we assumed
the
Lead Dog Digital, Inc. 2001 Stock Option Plan. There are currently options
to
purchase a total of 98,731 shares of our common stock outstanding under this
plan. We are not granting new options under this plan.
The
Lead
Dog Digital plan is not subject to the provisions of ERISA and is not a
“qualified plan” within the meaning of Section 401 of the Code. The plan is
administered by our Compensation Committee which has exclusive discretion
to
select the participants who will receive awards under the plan and to determine
the type, size and terms of each award.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Loan
Agreements
All
future affiliated transactions and loans entered into will be on terms
that are
no less favorable to us than were obtained from unaffiliated third parties.
In
addition, a majority of all disinterested and independent directors will
approve
future affiliated transactions and loans, and any forgiveness of such
loans.
In
September 2002, we issued two convertible term notes to Thomas Massie, our
President and Chief Executive Officer, in the aggregate principal amount
of
$312,000, pursuant to which we borrowed money from Mr. Massie from time to
time.
Our obligations under these notes were terminated as of September 7, 2006,
and
we have no
78
further
obligations to Mr. Massie under these notes. A security agreement pursuant
to which we granted Mr. Massie a security interest in certain assets to secure
repayment of these notes has also been terminated.
Participation
in Private Placement
Mr.
Massie and Mr. Coldrick each purchased one unit in our April 2006 private
placement for $100,000. Mr. Seeger purchased one-half of one unit in our
April
2006 private placement for $50,000. The terms of these transactions were
identical to the terms on which all other investors participated.
Based
on
its services as placement agent for our April 2006 private placement, Joseph
Gunnar & Co., LLC (“Gunnar”) received the cash and equity compensation
described below:
|
Private
Placement
|
Cash
Fee
|
Number
of
Warrants
|
Exercise
Price
|
|||||||||
|
April
2006 Private Placement
|
$ | 280,000 | (1) |
112,000
|
$ |
(2)
|
||||||
|
(1)
|
Does
not include amounts paid by us to Gunnar as reimbursement for
out-of-pocket expenses in connection with the 2006 private placement
or
for fees of Gunnar’s counsel.
|
|
(2)
|
Exercise
price is equal to the offering price of our common stock in this
offering.
|
We
have
entered into a Business Combination Services Agreement effective October
1, 2005
with Gunnar, pursuant to which Gunnar provides us with certain advisory services
concerning potential acquisitions and transactions. The term of the agreement
is
for one year with automatic one-year renewals until either party elects not
to
renew and provides 90 days’ written notice prior to the commencement of the next
renewal period or after the consummation of two business combinations during
any
term. During the term and any renewal periods, we are required to pay cash
advances against success fees in the initial amount of $7,500 per month,
which
amount increased to $10,000 per month in May 2006, and will increase to $15,000
per month upon the completion of this offering. As compensation for its
services, we are obligated to pay Gunnar, at the closing of a business
combination (i.e., a merger, acquisition, sale or joint venture), a
success fee equal to six percent of the total value of all cash, securities
or
other property paid in connection with the transaction. The success fee for
each
business combination consummated during the initial term or a renewal period
is
a minimum of $125,000 and a maximum of $375,000, net of the cash advances
paid
to Gunnar during the applicable period. We are also obligated to reimburse
Gunnar for reasonable expenses incurred in connection with providing the
advisory services. This agreement also contains exclusivity, indemnification
and
other terms and provisions customary for agreements of this nature. The
foregoing is a summary of the material terms and provisions of this agreement,
a
copy of which is filed as an exhibit to the registration statement of which
this
prospectus is a part.
The
following table sets forth as of February 1, 2007, the beneficial ownership
of
our common stock, as adjusted for this offering, by (i) each person or
group of persons known to us to beneficially own more than 5% of the outstanding
shares of our common stock, (ii) each of our directors and named executive
officers and (iii) all of our executive officers and directors as a
group.
Except
as
indicated in the footnotes to the table below, each shareholder named in
the
table has sole voting and investment power with respect to the shares shown
as
beneficially owned by such shareholder.
Beneficial
ownership is determined in accordance with Rule 13d-3 under the Securities
Exchange Act of 1934, as amended. In computing the number of shares beneficially
owned by a person or a group and the percentage ownership of that person
or
group, shares of our common stock subject to options or warrants currently
exercisable or exercisable within 60 days after February 1, 2007 are deemed
outstanding, but are not deemed outstanding for the purpose of computing
the
percentage ownership of any other person. The following table assumes (i)
7,273,833 shares of common stock are outstanding after closing of this offering
based on shares of our common stock
79
outstanding
as of the date of this prospectus as calculated above, and (ii) no exercise
of the over-allotment option. Unless otherwise indicated, the address of
each
individual named below is our address, 10 Sixth Road, Woburn, Massachusetts
01801.
|
|
Number
of
Shares
|
Percentage
of
Outstanding
Shares Owned
|
|||||||||||
|
|
of
Common
Stock
|
|
|
||||||||||
|
Name
and Address of
Beneficial
Owner
|
Beneficially
Owned
|
Before
Offering
|
After
Offering
(1)
|
||||||||||
|
Thomas
Massie
|
916,667 | (2) | 21.2% | 12.2% | |||||||||
|
William
Coldrick
|
57,223 | (3) | 1.3% | 0.8% | |||||||||
|
Kenneth
Galaznik
|
0
|
—
|
—
|
||||||||||
|
Robert
Hegarty
|
0
|
—
|
—
|
||||||||||
|
Gary
Cebula
|
164,999 | (4) | 3.8% | 2.2% | |||||||||
|
Brett
Zucker
|
164,786 | (5) | 3.8% | 2.2% | |||||||||
|
Robert
Seeger
|
220,188 | (6) | 5.1% | 2.9% | |||||||||
|
Miles
Fawcett
|
489,445 | (7) | 11.4% | 6.5% | |||||||||
|
Peter
L. Winslow
|
472,297 | (8) | 10.8% | 6.3% | |||||||||
|
Fin
Net, LLC
|
367,398 | (9) | 8.6% | 4.8% | |||||||||
|
All
executive officers and directors as a group
(7 persons)
|
1,523,863 | (10) | 33.4% | 19.6% | |||||||||
|
(1)
|
The
percentages assume the issuance of 150,000 shares of common stock
upon the
exercise of the Underwriters’ Warrants which would be issued upon the sale
of the shares in this
offering.
|
|
(2)
|
Includes
options to purchase 6,667 shares of common stock at an exercise
price of
$0.003 per share and 33,333 shares of common stock at an exercise
price of
$3.00 per share. Includes a warrant to purchase 10,000 shares of
common
stock at an exercise price of $.001 per
share.
|
|
(3)
|
Includes
an option to purchase 5,556 shares of common stock at an exercise
price of
$3.75 per share.
|
|
(4)
|
Includes
options to purchase 6,667 shares of common stock at an exercise
price of
$0.003 per share, 25,000 shares of common stock at an exercise
price of
$3.00 per share and 33,333 shares of common stock at an exercise
price of
$3.75 per share.
|
|
(5)
|
Includes
options to purchase 1,820 shares of common stock at an exercise
price of
$0.3573 per share, 16,797 shares of common stock at an exercise
price of
$1.0797 per share, 33,333 shares of common stock at an exercise
price of
$3.00 per share, and 33,333 shares of common stock at an exercise
price of
$3.75 per share.
|
|
(6)
|
Includes
options to purchase 4,167 shares of common stock at an exercise
price of
$0.003 per share, 13,997 shares of common stock at an exercise
price of
$1.0716 per share, 33,333 shares of common stock at an exercise
price of
$3.00 per share and 16,667 shares of common stock at an exercise
price of
$3.75 per share. Includes a warrant to purchase 5,000 shares of
common
stock at an exercise price of $.001 per
share.
|
|
(7)
|
Includes
options to purchase 12,778 shares of common stock at an exercise
price of
$3.75 per share.
|
|
(8)
|
Includes
warrants to purchase 104,899 shares of common stock at an exercise
price
of $3.75 per share (the vested portion of one warrant grant to
purchase
31,667 shares) and $4.68 per share (the vested portion of two
warrant
grants to purchase 73,232 shares). Includes 367,398 shares held by
Fin Net, LLC, as to which Mr. Winslow disclaims beneficial
ownership. Mr. Winslow is Chairman and Managing Director of Fin
Net, LLC.
|
|
(9)
|
Fin
Net, LLC’s address is 33 Broad Street, Boston, MA
02114.
|
|
(10)
|
Includes
options to purchase 276,781 shares of common
stock.
|
80
DESCRIPTION
OF CAPITAL STOCK
The
following is a description of our capital stock as set forth in our proposed
Amended and Restated Certificate of Incorporation and Amended and Restated
By-laws, which have been filed with the SEC as exhibits to the registration
statement of which this prospectus is a part. Our Amended and Restated
Certificate of Incorporation will become effective shortly before the completion
of this offering. The description below assumes that the Amended and Restated
Certificate of Incorporation has become effective.
General
Our
authorized capital stock consists of 20,000,000 shares of common stock, par
value $.001 per share, and 1,000,000 shares of preferred stock, par
value $.001 per share. As of February 1, 2007, there were 4,273,833 shares
of
common stock held by 70 shareholders of record. Upon completion of this
offering, 7,273,833 shares of common stock will be issued and outstanding
(including the 3,000,000 shares of common stock issued in this offering,
assuming no exercise of the underwriters’ over-allotment option). There are no
shares of preferred stock outstanding.
Common
Stock
Voting
Rights. The holders of common stock are entitled to one vote per share on
all matters. The common stock does not have cumulative voting rights, which
means that holders of the shares of common stock with a majority of the votes
to
be cast for the election of directors can elect all directors then being
elected.
Dividends.
Each share of common stock has an equal and ratable right to receive dividends
to be paid from our assets legally available therefore when, as and if
declared
by our Board of Directors. We do not anticipate paying cash dividends on
the
common stock in the foreseeable future. See “Dividend Policy” on page 22 of this
prospectus.
Liquidation.
In the event we dissolve, liquidate or wind up, the holders of common stock
are
entitled to share equally and ratably in the assets available for distribution
after payments are made to our creditors and to the holders
of any outstanding preferred stock we may designate and issue in the future
with
liquidation preferences greater than those of the common stock.
Other.
The holders of shares of our common stock have no preemptive, subscription
or
redemption rights and are not liable for further call or assessment. All
of the
outstanding shares of common stock are, and the shares of common stock offered
hereby will be, fully paid and nonassessable. Prior to the date of this
prospectus, there has been no established public trading market for the common
stock.
Preferred
Stock
Our
Board
of Directors is authorized, without further shareholder action, to divide
any or
all shares of our authorized preferred stock into series and to fix and
determine the designations, preferences and relative participating, optional
or
other dividend rights, liquidation preferences, redemption rights and conversion
or exchange privileges. Our Board of Directors has no plans, agreements or
understandings for the issuance of any shares of preferred stock.
Preferred stock could be issued with rights and preferences that would adversely
affect the holders of common stock. Preferred stock could be used as an
anti-takeover device.
Common
Stock Warrants
We
currently have outstanding warrants to purchase an aggregate of 578,269 shares
of our common stock at a weighted average exercise price of $2.65 per
share.
81
In
connection with our private placement of promissory notes in April 2006,
we
issued to the purchasers of those notes warrants to purchase an aggregate
of
280,000 shares of our common stock at an exercise price of $.001 per share,
of
which 230,000 are outstanding at September 30, 2006. We have authorized and
reserved for issuance the shares of common stock issuable upon exercise of
the
warrants.
In connection
with that private placement in April 2006, we issued to Joseph Gunnar & Co.,
LLC, our placement agent, warrants to purchase an aggregate of 112,000 shares
of
our common stock at an exercise price equal to the offering price of our
common
stock in this offering. The warrants have a five-year term. We have authorized
and reserved for issuance the shares of common stock issuable upon exercise
of
the warrants.
In
connection with the acquisition of iapps in December 2004 we issued warrants
to
purchase 72,527 shares of our common stock to Fin Net, LLC as compensation
for
investment banking services in connection with the acquisition of iapps.
The
warrants have an exercise price of $4.68 per share and a five-year
term.
In
connection with securing a commercial financing facility, we issued
warrants to purchase 3,200 shares of our common stock to a private commercial
lender pursuant to a financing agreement dated March 29, 2005. The warrants
have an exercise price of $4.68 per share and a five-year
term.
During
2001 through 2004, we issued to certain investment advisors warrants to purchase
160,542 shares of common stock for services rendered in connection with private
placement sales of common stock with aggregate proceeds of approximately
$4,700. The warrants are exercisable at $3.75 and $4.68 per share at any
time within five years from the grant date.
The
warrant exercise price and the number of shares of common stock purchased
upon
exercise of the warrants are subject to adjustment in the event of, among
other
events, a stock dividend on, or a subdivision, recapitalization or
reorganization of, the common stock, or the merger or consolidation of us
with
or into another corporation or business entity.
We
are
not required to issue any fractional shares of common stock upon the exercise
of
the warrants or upon the occurrence of adjustments pursuant to anti-dilution
provisions. We will pay to holders of fractional shares an amount equal to
the
cash value of such fractional shares based upon the then-current market price
of
a share of common stock.
Underwriters’
Warrants
One
underwriters’ warrant will entitle the holder to purchase one share of common
stock at an exercise price equal to 125% of the offering price of our common
stock beginning on the date which is six months after the date of this
prospectus and ending on the date which is five years after the date of
this
prospectus. The warrants will be issued pursuant to the terms of a warrant
agreement between the warrant agent, Joseph Gunnar & Co., LLC and
us. We have authorized and reserved for issuance the shares of common
stock issuable upon exercise of the warrants. The warrants are exercisable
to
purchase a total of 150,000 shares of our common stock.
The
warrant exercise price and the number of shares of common stock purchased
upon
exercise of the warrants are subject to adjustment in the event of, among
other
events, a stock dividend on, or a subdivision, recapitalization or
reorganization of, the common stock, or the merger or consolidation of us
with
or into another corporation or business entity.
We
are
not required to issue any fractional shares of common stock upon the exercise
of
warrants or upon the occurrence of adjustments pursuant to anti-dilution
provisions. We will pay to holders of fractional shares an amount equal to
the
cash value of such fractional shares based upon the then-current market price
of
a share of common stock.
The
warrants may be exercised upon surrender of the certificate representing
such
warrants on or prior to the expiration date of such warrants at the offices
of
the warrant agent with the form of “Election to Purchase” on the
82
reverse
side of the warrant certificate completed and executed as indicated, accompanied
by payment of the full exercise price in cash or by official bank or certified
check payable to the order of us for the number of warrants being exercised.
Shares of common stock issued upon exercise of warrants for which payment
has
been received in accordance with the terms of the warrants will be fully
paid
and nonassessable. The warrants do not confer on the warrant holder any voting
or other rights of our shareholders.
Registration
Rights
After
the
closing of this offering, the holders of 796,667 shares of our common stock
will
be entitled to certain piggyback registration rights with respect to the
registration of the securities being offered under the Securities Act. If
we
register any securities for public sale for the benefit of any member of
our
management team or any stockholder who acquired the shares in connection
with
the sale of their business to Bridgeline, other than for this offering or
pursuant to a registration statement on Form S-4 or S-8 relating to Bridgeline
securities issued in connection with any business combination involving
Bridgeline or shares issuable in connection with any stock option or employee
benefit plan, the holders of these shares will have the right to include
their
shares in the registration statement.
Lock-up Restrictions
All
of
our shareholders and our directors and officers who own any of our securities,
including warrants and options, have agreed in writing not to sell, transfer
or
otherwise dispose of our common stock or any securities exercisable for
or
convertible into our common stock owned by them for a period of at least
one
year after the effective date of the registration statement of which this
prospectus is a part without prior written consent or waiver from the
underwriters.
Provisions
of Delaware law and our proposed Amended and Restated Certificate of
Incorporation and Amended and Restated By-laws could make our acquisition
by
means of a tender offer, a proxy contest or otherwise, and the removal of
incumbent officers and directors, more difficult. These provisions are expected
to discourage types of coercive takeover practices and takeover bids and
to
encourage persons seeking to acquire control to first negotiate with us.
We
believe that the benefits of increased protection of our potential ability
to
negotiate with the proponent of an unfriendly or unsolicited proposal to
acquire
or restructure us outweighs the disadvantages of discouraging proposals,
including proposals that are priced above the then current market value of
our
common stock, because, among other things, negotiation of these proposals
could
result in an improvement of their terms.
Delaware
Law
We
are
subject to Section 203 of the Delaware General Corporation Law. Under this
provision, we may not engage in any business combination with any interested
shareholder for a period of three years following the date the shareholder
became an interested shareholder, unless:
|
·
|
prior
to that date our Board of Directors approved either the business
combination or the transaction that resulted in the shareholder
becoming
an interested shareholder;
|
|
·
|
upon
completion of the transaction that resulted in the shareholder
becoming an
interested shareholder, the interested shareholder owned at least
85% of
the voting stock outstanding at the time the transaction
began; or
|
|
·
|
on
or following that date the business combination is approved by
our Board
of Directors and authorized at an annual or special meeting of
shareholders, by the affirmative vote of at least two-thirds of
the
outstanding voting stock that is not owned by the interested
shareholder.
|
Section 203
defines “business combination” to include:
|
·
|
any
merger or consolidation involving the corporation and the interested
shareholder;
|
83
|
·
|
any
sale, lease, exchange, mortgage, transfer, pledge, or other disposition
of
10% or more of the assets of the corporation involving the interested
shareholder;
|
|
·
|
subject
to some exceptions, any transaction that results in the issuance
or
transfer by the corporation or any of its direct or indirect subsidiaries
of any stock of the corporation or of any such subsidiary to the
interested shareholder;
|
|
·
|
any
transaction involving the corporation or any of its direct or indirect
subsidiaries that has the effect of increasing the proportionate
share of
the stock of any class or series of the corporation or of any such
subsidiary beneficially owned by the interested shareholder;
or
|
|
·
|
the
receipt by the interested shareholder of the benefit of any loans,
advances, guarantees, pledges, or other financial benefits provided
by or
through the corporation or any direct or indirect majority-owned
subsidiary.
|
In
general, Section 203 defines an “interested shareholder” as any entity or
person who beneficially owns, or an affiliate or associate of the corporation
that at any time within three years prior to the date of determination of
interested shareholder status did beneficially own, 15% or more of the
outstanding voting stock of the corporation, and affiliates and associates
of
such person.
Certificate
of Incorporation and By-laws
Our
Amended and Restated Certificate of Incorporation and Amended and Restated
By-laws will contain provisions that could have the effect of discouraging
potential acquisition proposals or tender offers or delaying or preventing
a
change of control of our company. In particular, our Amended and Restated
Certificate of Incorporation and Amended and Restated By-laws, as applicable,
will, among other things:
|
·
|
provide
that special meetings of the shareholders may be called only by
our
Chairman of the Board, our President or our Board of
Directors;
|
|
·
|
establish
procedures with respect to shareholder proposals and shareholder
nominations, including requiring that advance written notice of
proposals
and nominations generally must be received at our principal executive
offices not less than 90 days nor more than 120 days prior to the
anniversary of the preceding annual meeting of
shareholders;
|
|
·
|
provide
that shareholders may not take actions by written consent in lieu
of an
annual or special meeting of shareholders;
|
|
·
|
do
not include a provision for cumulative voting in the election of
directors. Under cumulative voting, a minority shareholder holding
a
sufficient number of shares may be able to ensure the election
of one or
more directors. The absence of cumulative voting may have the effect
of
limiting the ability of minority shareholders to effect changes
in the
Board of Directors and, as a result, may have the effect of deterring
a
hostile takeover or delaying or preventing changes in control or
management of our company;
|
|
·
|
provide
that vacancies on our Board of Directors may be filled by a majority
of
directors in office, although less than a quorum, and not by the
shareholders;
|
|
·
|
provide
for staggered terms for the members of our Board of Directors.
The Board
of Directors is divided into three staggered classes, and each
director
serves a term of three years. At each annual shareholders’ meeting only
those directors comprising one of the three classes will have completed
their term and stand for re-election or replacement. In addition,
our
Amended and Restated Certificate of Incorporation contains a supermajority
voting requirement for any amendments of the staggered Board
provisions;
|
|
·
|
require
an advance notice of any shareholder business before the annual
meeting of
our shareholders; and
|
|
·
|
allow
us to issue without shareholder approval up to 1,000,000 shares of
preferred stock that could adversely affect the rights and powers,
including voting rights, of the holders of common stock. In some
circumstances, this issuance could have the effect of decreasing
the
market price of the common stock as well as having the anti-takeover
effect discussed above.
|
These
provisions are intended to enhance the likelihood of continuity and stability
in
the composition of our Board and in the policies formulated by them and to
discourage certain types of transactions that may involve an actual or
threatened change of control of our company. These provisions are designed
to
reduce our vulnerability to an unsolicited acquisition proposal and to
discourage certain tactics that may be used in proxy fights. However, these
provisions could have the effect of discouraging others from making tender
offers for our shares that could
84
result
from actual or rumored takeover attempts. These provisions also may have
the
effect of preventing changes in our management.
Transfer
Agent
SHARES
ELIGIBLE FOR FUTURE SALE
Upon
completion of this offering, we will have outstanding 7,273,833 shares
of common
stock (including the 3,000,000 shares of common stock issued in this offering,
and assuming no exercise of the underwriters’ over-allotment) without taking
into account any options or warrants that may be granted or exercised.
Upon
completion of this offering, we will have options outstanding to purchase
903,606 shares of common stock and warrants outstanding to purchase 728,269
shares of common stock (including warrants to purchase 150,000 shares of
our
common stock issued to the underwriters in this offering).
All
of
our shareholders and our directors and officers who own any of our securities,
including warrants and options, agreed in writing not to sell, transfer or
otherwise dispose of our common stock or any securities exercisable for or
convertible into our common stock owned by them for a period of one year
after
the effective date of the registration statement of which this prospectus
is a
part without prior written consent or waiver from the underwriters. As a
result
of these contractual restrictions, notwithstanding possible earlier eligibility
for sale under the provisions of Rules 144, 144(k) and 701, shares subject
to lock-up agreements may not be sold until such agreements expire or are
waived
by the underwriters.
Rule 144
In
general, Rule 144 allows a shareholder (or shareholders whose shares are
aggregated) who has beneficially owned our shares of common stock for at
least
one year and who files a Form 144 with the SEC to sell within any
three-month period commencing 90 days after the date of this prospectus a
number of shares of our common stock that does not exceed the greater of:
(i) 1% of the number of shares of our common stock then outstanding or
(ii) the average weekly trading volume of the shares of our common stock
during the four calendar weeks preceding the filing of the Form 144 with
respect to such sale.
Sales
under Rule 144, however, are subject to specific manner of sale provisions,
notice requirements, and the availability of current public information about
our company. We cannot estimate the number of shares our
existing shareholders will sell under Rule 144, as this will depend on
the market price for our shares, the personal circumstances of the shareholders,
and other factors.
Rule 144(k)
Under
Rule 144(k), in general, a shareholder who has beneficially owned shares of
our common stock for at least two years and who is not deemed to have been
an
affiliate of ours at any time during the immediately preceding 90 days may
sell such shares without complying with the manner of sale provisions, notice
requirements, public information requirements, or volume limitations of
Rule 144. Affiliates of our company, however, must always sell pursuant to
Rule 144, even after the otherwise applicable Rule 144(k) holding
periods have been satisfied.
Rule 701
Rule 701
generally allows a shareholder who purchased our securities pursuant to a
written compensatory plan or contract and who is not deemed to have been
an
affiliate of our company during the immediately preceding 90 days to sell
securities in reliance upon Rule 144, but without being required to comply
with the public information, holding period, volume limitation, or notice
provisions of Rule 144. Rule 701 also permits our affiliates
85
to
sell
their Rule 701 securities under Rule 144 without complying with the
holding period requirements of Rule 144.
Upon
completion of this offering, we intend to file a registration statement on
Form S-8 under the Securities Act to register shares of common stock
reserved for issuance under our Amended and Restated Stock Incentive Plan.
Persons who are not affiliates, and who receive shares that are registered
under
the Form S-8 registration statement, will be able to resell those shares in
the public market without restriction under the Securities Act. Such
registration statement will become effective immediately upon
filing.
Prior
to
this offering, there has been no public market for our securities. Trading
of
our common stock is expected to commence following the completion of this
offering. There can be no assurance that an active trading market will develop
or continue after the completion of this offering or that the market price
of
our common stock will not decline below the initial public offering price.
No
prediction can be made as to the effect, if any, that future sales of shares
of
common stock, or the availability of shares for future sale, will have on
the
market price prevailing from time to time. Sales of substantial amounts of
common stock in the public market, or the perception that such sales could
occur, could adversely affect the prevailing market price of the common stock
or
our ability to raise capital through a public offering of our equity
securities.
UNDERWRITING
Under
the
terms and subject to the conditions contained in an underwriting agreement
dated
as of
,
2007 (the “Underwriting Agreement”), the underwriters named below, for whom
Joseph Gunnar & Co., LLC is acting as representative, have severally agreed
to purchase, and we have agreed to sell to them, the number of shares of
common
stock set forth in the following table:
|
Name
|
Number
of
Shares
|
|||
|
Joseph
Gunnar & Co., LLC
|
[
]
|
|||
|
|
[
]
|
|||
|
Total
|
3,000,000
|
|||
The
underwriters are offering the shares subject to their acceptance of shares
from
us and subject to prior sale. The Underwriting Agreement provides that the
obligations of the several underwriters to pay for and accept delivery of
the
shares offered by this prospectus are subject to the approval of certain
legal
matters by their counsel and to certain other conditions. The underwriters
are
obligated to take and pay for all of the shares offered by this prospectus,
if
any such shares are taken. However, the underwriters are not required to
take or
pay for the shares covered by the underwriters’ over-allotment option described
below.
The
underwriters propose to offer the shares offered hereby to the public at
the
public offering price set forth on the cover of this prospectus. That price
should not be considered an indication of the actual value of the shares
and is
subject to change as a result of market conditions and other factors. The
underwriters may offer the shares to securities dealers at the price to the
public less a concession not in excess of
$ per share.
Securities dealers may re-allow a concession not in excess of
$ per share to
other dealers. After the shares are released for sale to the public, the
underwriters may vary this offering price and other selling terms from time
to
time. No variation in those terms will change the amount of proceeds to be
received by us as set forth on the cover page of this prospectus. The public
offering price of the shares offered hereby was negotiated between us and
the
representatives.
We
have
granted to the underwriters an option, exercisable for 45 days from the
date of this prospectus, to purchase up to an aggregate of 450,000 additional
shares at the initial public offering price listed on the cover page of this
prospectus, less underwriting discounts and commissions. The underwriters
may
exercise this option solely for the purpose of covering over-allotments, if any,
made in connection with the offering of the shares offered by
86
this
prospectus. To the extent this option is exercised, each underwriter will
become
obligated, subject to limited conditions, to purchase approximately the same
percentage of additional shares as the number listed next to the underwriter’s
name in the preceding table bears to the total number of shares listed next
to
the names of all underwriters in the preceding table. If the underwriters’
option is exercised in full, the total price to the public would be
$ , the total
underwriters’ discounts and commissions would be
$ , and total
proceeds to us would be
$ .
Underwriting
Compensation
The
underwriters will purchase the shares offered hereby at a discount of 8.5%
of
the initial public offering price (or
$ per share).
We have agreed to pay the representative of the underwriters a non-accountable
expense allowance equal to 2.0% of the gross proceeds from the sale of the
shares offered hereby. Our agreement with the underwriters also provides
that we
will pay all expenses in connection with qualifying the shares for sale under
the laws of those states as the underwriter may designate and the costs of
review by the NASD of the underwriting arrangements between the underwriters
and
us. We have paid $25,000 as an advance against the expense allowance, which
will
reduce the expense allowance payable at the closing of the offering. If this
offering is not completed, the representative will refund any portion of
the
$25,000 that exceeds their non-accountable expenses.
We
will
sell to the managing underwriter in this offering or to its designees, at
the
closing of this offering, a warrant to purchase shares of our common stock
in an
amount equal to 5% of the number of shares of common stock issued in connection
with this offering, not including the over-allotment option. The 5-year warrant
is exercisable six months following this offering, and may be exercised on
a
cashless basis. The warrant is exercisable at a price per share equal to
125% of
the initial public offering price of our shares in this offering. The warrant
will be issued pursuant to a definitive warrant agreement containing such
provisions, including anti-dilution provisions, reasonably satisfactory to
the
managing underwriter in one warrant certificate or in such allocated portion
certificates as may be requested in writing. Pursuant to NASD Conduct Rules,
this warrant may not be sold, transferred, assigned or otherwise disposed
of, or
be the subject of any short, put or call transaction, for a period of 180
days
immediately following the effectiveness of the registration statement of
which
this prospectus is a part the or commencement of sales in this
offering.
We
have
granted the representative of the underwriters the right to have a designee
present at all meetings of our Board of Directors for a period of two years
from
the date of this prospectus. The designee will be entitled to the same notice
and communications sent by us to our directors and to attend directors’ meetings
but will not have voting rights. Stephan Stein, Chief Operating Officer of
Joseph Gunnar & Co., LLC, the lead underwriter in this offering, has been
appointed as such designee. We have agreed to reimburse the underwriters’ legal
counsel’s fees in an amount not to exceed $100,000, which is deemed an item of
value under NASD Conduct Rules.
Stabilization
The
rules
of the SEC generally prohibit the underwriters from trading in our securities
on
the open market during this offering. However, the underwriters are allowed
to
engage in certain open market transactions and other activities during this
offering that may cause the market price of our shares to be above or below
that
which would otherwise prevail in the open market. These activities may include
stabilization, short sales and over-allotments, syndicate covering transactions
and penalty bids.
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·
|
Stabilizing
transactions consist of bids or purchases made by the representative
for
the purpose of preventing or slowing a decline in the market price
of our
securities while this offering is in progress.
|
|
·
|
Short
sales and over-allotments occur when the representative, on behalf
of the
underwriters, sells more of our shares than it purchases from us
in this
offering. In order to cover the resulting short position, the
representative may exercise the over-allotment option described
above or
may engage in syndicate covering transactions. There is no contractual
limit on the size of any syndicate covering transaction. The underwriters
will deliver a prospectus in connection with any such short sales.
Purchasers of shares sold short by the underwriters are entitled
to the
same remedies under the federal securities laws as any other purchaser
of
shares covered by the registration
statement.
|
87
|
·
|
Syndicate
covering transactions are bids for or purchases of our securities
on the
open market by the representative on behalf of the underwriters
in order
to reduce a short position incurred by the representative on behalf
of the
underwriters.
|
|
·
|
A
penalty bid is an arrangement permitting the representative to
reclaim the
selling concession that would otherwise accrue to an underwriter
if the
common stock originally sold by the underwriter was later repurchased
by
the representative and therefore was not effectively sold to the
public by
such underwriter.
|
If
the
underwriters commence these activities, they may discontinue them at any
time
without notice. The underwriters may carry out these transactions on Nasdaq
or
otherwise.
Indemnification
We
have
agreed to indemnify the underwriters against certain civil liabilities,
including liabilities under the Securities Act, and to contribute to payments
the underwriters may be required to make in respect of any such liabilities.
LEGAL
MATTERS
Morse,
Barnes-Brown & Pendleton, P.C., Waltham, Massachusetts, has acted as our
counsel in connection with this offering, including with respect to the validity
of the issuance of the common stock offered in this prospectus. Certain legal
matters will be passed upon for the underwriters by Cozen O’Connor,
Washington, D.C.
EXPERTS
The
consolidated financial statements of Bridgeline Software, Inc. at September
30,
2006 and 2005 and for the years then ended, the financial statements of
Objectware, Inc. at September 30, 2006 and 2005 and for the years then ended,
and the financial statements of New Tilt, Inc. at April 24, 2006 and
December 31, 2005 and for the period January 1, 2006 to April 24, 2006 and
for
the year ended December 31, 2005, included in this prospectus have been audited
by UHY, LLP, independent registered public accounting firm, as set forth
in its
reports thereon (which report for Bridgeline Software, Inc. includes an
explanatory paragraph regarding substantial doubt about Bridgeline Software,
Inc.’s ability to continue as a going concern) appearing elsewhere herein, and
are included in reliance upon such reports given on the authority of said
firm
as experts in accounting and auditing.
ADDITIONAL
INFORMATION
We
have
filed with the Securities and Exchange Commission a registration statement
on
Form SB-2 under the Securities Act for the shares offered hereby. This
prospectus, which constitutes a part of the registration statement, does
not
contain all of the information set forth in the registration statement or
the
exhibits and schedules which are part of the registration statement. For
additional information about us and our securities, we refer you to the
registration statement and the accompanying exhibits and schedules. Statements
contained in this prospectus regarding the contents of any contract or any
other
documents to which we refer are not necessarily complete. In each instance,
reference is made to the copy of the contract or document filed as an exhibit
to
the registration statement, and each statement is qualified in all respects
by
that reference. Copies of the registration statement and the accompanying
exhibits and schedules may be inspected without charge (and copies may be
obtained at prescribed rates) at the public reference facility of the SEC
at
Room 1024, 100 F Street, NE, Washington, D.C. 20549.
You
can
request copies of these documents upon payment of a duplicating fee by writing
to the Securities and Exchange Commission. You may call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information on the operation
of its public reference rooms. Our filings, including the registration
statement, will also be available to you on the Internet Web site maintained
by
the Securities and Exchange Commission at http://www.sec.gov. We intend to
furnish our shareholders with annual reports containing financial statements
audited by our independent auditors, and make available to our shareholders
quarterly reports for the first three quarters of each year containing unaudited
interim financial statements.
88
Upon
completion of this offering, we will become subject to the information and
reporting requirements of the Exchange Act. As a result, we will file periodic
reports, proxy statements and other information with the Securities and Exchange
Commission. The periodic reports, proxy statements and other information
we will
file will be available for inspection and copying at the Securities and Exchange
Commission’s public reference facilities and the Web site of the Commission
referenced to above.
89
BRIDGELINE
SOFTWARE, INC.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
Page
|
|
UNAUDITED
COMBINED PRO FORMA CONDENSED FINANCIAL STATEMENTS OF BRIDGELINE
SOFTWARE,
INC., OBJECTWARE, INC. AND NEW TILT, INC.:
|
|
|
|
|
|
|
|
Introduction
to Unaudited Combined Pro Forma Condensed Financial
Statements
|
|
F
-
3
|
|
Unaudited
Combined Pro Forma Condensed Balance Sheet at December 31,
2006
|
|
F
-
4
|
|
|
|
|
|
Unaudited
Combined Pro Forma Condensed Statement of Operations for the
three months
ended December 31, 2006
|
|
F
-
8
|
|
|
|
|
|
Unaudited
Combined Pro Forma Condensed Statement of Operations for the
year ended
September 30, 2006
|
|
F
-
11
|
|
|
|
|
|
|
|
|
|
BRIDGELINE
SOFTWARE, INC.:
|
|
|
|
|
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
F
-
15
|
|
|
|
|
|
|
Consolidated
Balance Sheets of Bridgeline Software, Inc. at December 31,
2006 and
September 30, 2006 and 2005
|
|
F
-
16
|
|
|
|
|
|
Consolidated
Statements of Operations for Bridgeline Software Inc. for the
three months
ended December 31, 2006 and 2005 and the years ended September
30, 2006
and 2005
|
|
F
-
17
|
|
|
|
|
|
Consolidated
Statements of Shareholder’s Equity for Bridgeline Software, Inc. for the
three months ended December 31, 2006 and the years ended September
30,
2006 and 2005
|
|
F
-
18
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for Bridgeline Software, Inc. for
the three
months ended December 31, 2006 and 2005 and the years ended
September 30,
2006 and 2005
|
|
F
-
19
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
F
-
20
|
F-1
BRIDGELINE
SOFTWARE, INC.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
OBJECTWARE,
INC.:
|
|
Page
|
|
|
|
|
|
REPORT
OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
|
F-48
|
|
|
|
|
|
|
Balance
Sheets for Objectware, Inc. at December 31, 2006 and September
30, 2006
and 2005
|
|
F-49
|
|
|
|
|
|
Statements
of Operations for Objectware, Inc. for the three months ended
December 31,
2006 and 2005 and the years ended September 30, 2006 and
2005
|
|
F-50
|
|
|
|
|
|
Statements
of Shareholder’s Equity for Objectware, Inc. for the three months ended
December 31, 2006 and the years ended September 30, 2006 and
2005
|
|
F-51
|
|
|
|
|
|
Statements
of Cash Flows for Objectware, Inc. for the three months ended
December 31,
2006 and 2005 and the years ended September 30, 2006 and
2005
|
|
F-52
|
|
|
|
|
|
Notes
to Financial Statements
|
|
F-53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NEW
TILT, INC.:
|
|
|
|
|
|
|
|
REPORT
OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
|
F-64
|
|
|
|
|
|
|
Balance
Sheets for New Tilt, Inc. at April 24, 2006 and at December
31, 2005
|
|
F-65
|
|
|
|
|
|
Statements
of Operations for New Tilt, Inc. for the period of January
1, 2006 to
April 24, 2006 and for the year ended December 31, 2005
|
|
F-66
|
|
|
|
|
|
Statements
of Shareholder’s Equity for New Tilt, Inc. for the period of January 1,
2006 to April 24, 2006 and for the year ended December 31,
2005
|
|
F-67
|
|
|
|
|
|
Statements
of Cash Flows for New Tilt, Inc. for the period of January
1, 2006 to
April 24, 2006 and for the year ended December 31, 2005
|
|
F-68
|
|
|
|
|
|
Notes
to Financial Statements
|
|
F-69
|
F-2
BRIDGELINE
SOFTWARE, INC.
UNAUDITED
COMBINED PRO FORMA FINANCIAL STATEMENTS
INTRODUCTION
The
following unaudited combined pro forma condensed financial statements reflect
the impact of the following transactions:
|
1.
|
The
offering of 3,000,000 shares of the Company’s common stock (the
“Offering”). The net proceeds will be used, in part, to repay short-term
Senior Notes Payable as described in “Use of Proceeds”;
|
|
2.
|
The
probable acquisition of Objectware, Inc. (“Objectware”), expected to be
consummated after the offering; and
|
|
3.
|
The
effect of the acquisition of New Tilt, Inc. (“New Tilt”) consummated on
April 24, 2006
|
The
Unaudited Combined Pro Forma Financial Statements give effect to the
receipt and application of the proceeds from the sale of securities to
be
offered in this Registration Statement pursuant to a firm underwriting
commitment as defined in Rule 170.
A
description of pro forma adjustments related to each transaction is presented
in
the notes to the unaudited combined pro forma condensed financial statements.
The unaudited combined pro forma condensed financial statements and accompanying
notes should be read in conjunction with the historical financial statements
of
the Company, New Tilt and Objectware included in this registration statement.
The unaudited combined pro forma condensed financial statements are based
on
currently available information and certain assumptions that the Company
believes are reasonable; however, the actual adjustments may materially
differ
from the pro forma adjustments presented.
A
final
determination of the purchase accounting adjustments, including the allocation
of the purchase price of the assets acquired and liabilities assumed based
on
their fair values, has not been made with respect to the probable acquisition
of
Objectware. The purchase price accounting adjustments made in connection
with
the preparation of the unaudited combined pro forma condensed financial
statements are preliminary and have been made solely for purposes of preparing
such unaudited combined pro forma condensed financial statements.
The
Company expects that the allocation of purchase price will be finalized
within
90 days of the closing of the transaction. Such purchase price adjustments
will
reflect the fair value of the assets and liabilities acquired at the
date of
closing. Subsequent to the closing, the purchase price for Objectware
will be
adjusted as necessary for contingent earn-out consideration when earned.
The
Company is not aware of any other contingencies that would affect the
allocation
of purchase price.
The
unaudited combined pro forma condensed financial statements do not purport
to
present the Company’s financial position or results of operations had the
acquisition of Objectware and New Tilt actually been completed as of the
dates
indicated, and the unaudited combined pro forma condensed financial statements
do not project the Company’s financial position or results of operations for any
future date or period.
F-3
BRIDGELINE
SOFTWARE, INC.
UNAUDITED
COMBINED PRO FORMA CONDENSED BALANCE SHEET
DECEMBER
31, 2006
(Dollars
in thousands)
The
following unaudited combined pro forma condensed balance sheet reflects
the
effect of the Offering and the probable acquisition of Objectware as
of December
31, 2006. The pro forma adjustments reflect the Use of Proceeds from
the
Offering as though it were completed on December 31, 2006 and the adjustments
to
Objectware’s historical balance sheet for the elimination of certain assets and
liabilities that will not be acquired and to reflect the acquired assets
and
liabilities at estimated fair value as if they were acquired on December
31,
2006.
|
Probable
|
Pro
Forma
|
Pro
Forma
|
||||||||||||||
|
|
Acquisition
|
Acquisition
|
Offering
|
|
||||||||||||
|
|
Historical
|
Adjustments
|
Adjustments
|
Pro
Forma
|
||||||||||||
|
Historical
|
(Note
1)
|
(Note
2)
|
(Note
3)
|
Combined
|
||||||||||||
|
ASSETS
|
||||||||||||||||
|
Cash
and cash equivalents
|
$
|
169
|
$
|
1,154
|
$
|
(3,065
|
)(a) |
$
|
11,491
|
(k) |
$
|
9,749
|
||||
|
Accounts
receivable and other current assets
|
1,802
|
506
|
(3
|
)(b)
|
—
|
2,305
|
||||||||||
|
Total
current assets
|
1,971
|
1,660
|
(3,068
|
)
|
11,491
|
12,054
|
||||||||||
|
Other
assets
|
1,159
|
431
|
(67
|
)(c)
|
(457
|
)(l)
|
1,066
|
|||||||||
|
Intangible
assets, net
|
271
|
—
|
409
|
(d) |
—
|
680
|
||||||||||
|
Goodwill
|
6,409
|
—
|
3,937
|
(e) |
—
|
10,346
|
||||||||||
|
Total
assets
|
$
|
9,810
|
$
|
2,091
|
$
|
1,211
|
$
|
11,034
|
$
|
24,146
|
||||||
|
|
||||||||||||||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||||||||||
|
|
||||||||||||||||
|
Current
liabilities:
|
||||||||||||||||
|
Short-term
debt, net of discount
|
$
|
2,633
|
$
|
—
|
$
|
—
|
$
|
(2,633
|
)(m)
|
$
|
—
|
|||||
|
Current
liabilities and accrued expenses
|
1,998
|
706
|
(296
|
)(f)
|
—
|
2,408
|
||||||||||
|
Total
current liabilities
|
4,631
|
706
|
(296
|
)
|
(2,633
|
)
|
2,408
|
|||||||||
|
Other
liabilities
|
86
|
298
|
(289
|
)(g)
|
—
|
95
|
||||||||||
|
Total
liabilities
|
4,717
|
1,004
|
(585
|
)
|
(2,633
|
)
|
2,503
|
|||||||||
|
|
||||||||||||||||
|
Shareholders’
equity:
|
||||||||||||||||
|
Common
stock
|
4
|
2
|
(2
|
)(h)
|
3
|
(n) |
7
|
|||||||||
|
Additional
paid-in capital
|
9,882
|
—
|
2,883
|
(i) |
14,288
|
(o) |
27,053
|
|||||||||
|
Accumulated
earnings (deficit)
|
(4,793
|
)
|
1,085
|
(1,085
|
)(j)
|
(624
|
)(p)
|
(5,417
|
)
|
|||||||
|
Total
shareholders’ equity
|
5,093
|
1,087
|
1,796
|
13,667
|
21,643
|
|||||||||||
|
Total
liabilities and shareholders’ equity
|
$
|
9,810
|
$
|
2,091
|
$
|
1,211
|
$
|
11,034
|
$
|
24,146
|
||||||
The
accompanying notes are an integral part of these unaudited combined pro
forma
condensed financial statements.
F-4
BRIDGELINE
SOFTWARE, INC.
NOTES
TO UNAUDITED COMBINED PRO FORMA CONDENSED BALANCE SHEET
DECEMBER
31, 2006
(Dollars
in thousands)
|
1.
|
Probable
Acquisition of Objectware
|
The
unaudited combined pro forma condensed balance sheet combines the Company’s
audited balance sheet with Objectware’s unaudited balance sheet as of December
31, 2006.
The
following table summarizes the estimated the purchase price allocation
and
estimated fair values of the assets and liabilities to be acquired at
the
closing date of the proposed Objectware acquisition:
|
|
Historical
at
December
31, 2006
|
Estimated
Fair Value
on
Acquisition Date
|
|||||
|
Net
assets acquired:
|
|
|
|||||
|
Cash
|
$
|
1,154
|
$
|
1,154
|
|||
|
Other
current assets
|
506
|
503
|
|||||
|
Equipment
|
167
|
100
|
|||||
|
Other
assets
|
264
|
264
|
|||||
|
Intangible
assets
|
—
|
409
|
|||||
|
Goodwill
|
—
|
3,937
|
|||||
|
Total
assets
|
$
|
2,091
|
6,367
|
||||
|
|
|||||||
|
Accrued
income taxes payable
|
$
|
236
|
—
|
||||
|
Current
liabilities
|
121
|
121
|
|||||
|
Deferred
revenues, current
|
349
|
289
|
|||||
|
Deferred
revenues, long-term
|
286
|
—
|
|||||
|
Deferred
tax liabilities
|
12 | 9 | |||||
|
Total
liabilities
|
1,004
|
419
|
|||||
|
Total
equity
|
1,087
|
||||||
|
Total
liabilities and equity
|
$
|
2,091
|
|||||
|
Net
assets acquired
|
$
|
5,948
|
|||||
|
|
|||||||
|
Purchase
price:
|
|||||||
|
Cash
paid
|
$
|
2,580
|
|||||
|
Equity
exchanged
|
2,700
|
||||||
|
Options
exchanged
|
183
|
||||||
|
Closing
costs and fees
|
485
|
||||||
|
Total
purchase price consideration
|
$
|
5,948
|
F-5
BRIDGELINE
SOFTWARE, INC.
NOTES
TO UNAUDITED COMBINED PRO FORMA CONDENSED BALANCE
SHEET
DECEMBER
31, 2006
(Dollars
in thousands)
If
the
acquisition of Objectware is completed, the Company may be required to
pay
additional consideration and contingent consideration in accordance with
the
terms of the acquisition agreement. In addition, we may be required to
pay
additional consideration and issue additional shares (to be determined
at the
offering price) at the closing resulting from a purchase price adjustment
computation should Objectware’s working capital as defined in the acquisition
agreement, exceed $750. Any additional potential consideration to be
paid will
be in the form of cash (60%) and common stock (40%, valued at the offering
price), however the Company is unable to determine whether such adjustment
will
be required until the closing.
The
Company may also be required to pay additional contingent consideration
up to
$1,800 in the form of additional purchase price of which up to $800 will
be
payable in cash, quarterly over the three years subsequent to the closing
of
this acquisition. These payments are contingent upon Objectware generating
positive earnings before interest, taxes and depreciation and amortization
(“EBITDA”) of at least $250 per calendar quarter during the 12 consecutive
calendar quarters following the acquisition.
The
fair
market value of the following assets are estimated in the pro forma
presentation.
Intangible
assets - The Company estimates a fair value of $409 to be assigned to
intangible
assets in its purchase price allocation. These assets are identified
as the
estimated fair value of customer relationships ($345) and the estimated
fair
value of the non-competition provision of employment agreements ($64)
as
determined using a discounted cash flow model prepared by management.
Management
estimates the useful life of these intangible assets to be five
years.
Equipment
- Based on an internal analysis of the fixed asset register provided
by
Objectware, the Company has estimated the fair value of equipment expected
to
have continuing value to the Company subsequent to the acquisition to
be
$100.
|
2.
|
Pro
Forma Acquisition
Adjustments
|
(a)
$3,065 represents cash consideration paid, including expenses, in the
Objectware acquisition.
(b)
$3
represents a net adjustment of deferred tax assets against deferred tax
liabilities (see (g) below).
(c)
based
on an internal analysis of the fixed asset register provided by Objectware,
the
Company has estimated that the fair value of such assets that will have
a
continuing value to the Company will be $100, resulting in an adjustment of
$67.
(d)
$409
represents the estimated fair value of intangible assets that will be
recognized
as an asset by the Company after the acquisition of Objectware as described
in
Note (1) above.
(e)
$3,937 represents the excess of the cost of the probable acquisition
over the
net amounts assigned to acquired assets and liabilities as detailed in
Note (1)
above.
(f)
$296
represents the total of $236 of Objectware’s income taxes payable that will be
not be assumed by the Company and $60 of current deferred revenue related
to a
service arrangement of Objectware, the performance of which has been
completed.
Objectware
has extended
the payment terms offered to a certain customer. There are no services
remaining
to be delivered in connection with this arrangement and revenue associated
with
the receivable has been deferred by Objectware. Since this deferred revenue
does
not represent a legal performance obligation of the Company at the time
of the
acquisition, it will not be recognized as a liability at the time of
acquisition
consistent with paragraph 5 of EITF 01-3, Accounting
in a Business Combination for Deferred Revenue of an Acquiree.
(g)
$289
represents $286 of non-current deferred revenue related to service arrangements
of Objectware, the performance of which has been completed (see (d) above)
and $3 net adjustment of deferred tax assets against deferred tax
liabilities.
F-6
BRIDGELINE
SOFTWARE, INC.
NOTES
TO UNAUDITED COMBINED PRO FORMA CONDENSED BALANCE
SHEET
DECEMBER
31, 2006
(Dollars
in thousands)
(h)
$2
represents the effect of the elimination of Objectware’s common stock
outstanding as detailed in Note (1) above.
(i)
$2,883 represents the effect of the issuance of the Company’s common stock in
connection with the probable acquisition of Objectware as detailed in
Note (1)
above.
(j)
$1,085 represents the effect of the elimination of Objectware’s accumulated
earnings (see (a) above).
|
3.
|
Pro
Forma offering
Adjustments
|
The
Unaudited Combined Pro Forma Financial Statements give effect to the
receipt and application of the proceeds from the sale of securities to
be
offered in this Registration Statement pursuant to a firm underwriting
commitment as defined in Rule 170.
(k)
$11,491 represents cash received in the offering adjusted for the probable
acquisition of Objectware and all other amounts paid as described in
the Use of
Proceeds.
(l)
$457
represents the total of $151 of unamortized debt fees incurred in connection
with issuance of the Senior Notes Payable that will be amortized in accordance
with APB 26, Early
Extinguishment of Debt,
when
the notes are paid from the Proceeds of the offering as discussed in
the Use of
Proceeds, and $306 of deferred costs associated with the offering that
will be
charged to additional paid in capital when the offering is completed.
Deferred
offering costs consist of accounting, underwriter and legal fees directly
related to the offering.
(m)
$2,633 represents the net of $2,800 Senior Notes Payable that will be
paid with
the proceeds of the offering as discussed in Use of Proceeds, and $167
unamortized discount on debt that will be amortized in full when the
notes are
paid in accordance with APB 26, Early
Extinguishment of Debt.
(n)
$3
represents the effect of the expected issuance of the Company’s common stock in
connection with the offering.
(o)
$14,288 represents the effect of the issuance of the Company’s common stock in
connection with the offering.
(p)
$624
represents the effect of $457 and $167 of costs to be fully amortized
as
discussed above in (k) and (l), respectively.
F-7
BRIDGELINE
SOFTWARE, INC.
UNAUDITED
COMBINED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR
THE THREE MONTHS ENDED DECEMBER 31, 2006
(Dollars
in thousands, except per share amounts)
The
following unaudited combined pro forma condensed statement of operations
for the
three months ended December 31, 2006 reflects adjustments related to
the effects
of the Offering, the probable acquisition of Objectware as if these events
occurred as of the beginning of the period on October 1, 2006.
|
Probable
|
Pro
Forma
|
Pro
Forma
|
||||||||||||||
|
|
Acquisition
|
Acquisition
|
Offering
|
|
||||||||||||
|
|
Historical
|
Adjustments
|
Adjustments
|
Pro
Forma
|
||||||||||||
|
Historical
|
(Note
1)
|
(Note
2)
|
(Note
3)
|
Combined
|
||||||||||||
|
Revenue:
|
||||||||||||||||
|
Web
services
|
$
|
1,882
|
$
|
895
|
$
|
—
|
$
|
—
|
$
|
2,777
|
||||||
|
Managed
services
|
308
|
219
|
—
|
—
|
527
|
|||||||||||
|
Subscriptions
|
119
|
—
|
—
|
—
|
119
|
|||||||||||
|
Total
revenue
|
2,309
|
1,114
|
—
|
—
|
3,423
|
|||||||||||
|
Cost
of revenue
|
1,141
|
484
|
59
|
(a) |
—
|
1,684
|
||||||||||
|
Gross
profit
|
1,168
|
630
|
(59
|
) |
—
|
1,739
|
||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Sales
and marketing
|
837
|
—
|
—
|
—
|
837
|
|||||||||||
|
Technology
development
|
155
|
—
|
—
|
—
|
155
|
|||||||||||
|
General
and administrative expenses
|
461
|
389
|
(71
|
)(b)
|
—
|
779
|
||||||||||
|
Total
operating expenses
|
1,453
|
389
|
(71
|
)
|
—
|
1,771
|
||||||||||
|
Income
(loss) from operations
|
(285
|
)
|
241
|
12
|
—
|
(32
|
)
|
|||||||||
|
Other
income (expenses):
|
||||||||||||||||
|
Other
income (expense)
|
—
|
19
|
—
|
—
|
19
|
|||||||||||
|
Interest
expense
|
(345
|
)
|
—
|
—
|
340
|
(c) |
(5
|
)
|
||||||||
|
Income
(loss) before income taxes
|
(630
|
)
|
260
|
12
|
340
|
(18
|
)
|
|||||||||
|
Provision
(benefit) for income taxes (Note 4)
|
—
|
99
|
(83
|
)
|
—
|
16
|
||||||||||
|
Net
income (loss)
|
$
|
(630
|
)
|
$
|
161
|
$
|
95
|
$
|
340
|
$
|
(34
|
)
|
||||
|
Net
income (loss) per share:
|
||||||||||||||||
|
Basic
and Diluted
|
$
|
(0.15
|
)
|
$
|
0.00
|
|||||||||||
|
Number
of weighted average shares (Note 5):
|
||||||||||||||||
|
Basic
and Diluted
|
4,273,833
|
7,764,742
|
||||||||||||||
The
accompanying notes are an integral part of these unaudited combined pro
forma
condensed financial statements.
F-8
BRIDGELINE
SOFTWARE, INC.
NOTES
TO UNAUDITED COMBINED PRO FORMA CONDENSED
STATEMENT
OF OPERATIONS
FOR
THE THREE MONTHS ENDED DECEMBER 31, 2006
(Dollars
in thousands)
1.
Probable
Acquisition of Objectware
The
amounts represent the historical operating results of Objectware for
the three
months ended December 31, 2006.
2.
Pro
Forma Acquisition Adjustments
The
following adjustments assume the transactions described above occurred
on
October 1, 2006.
(a)
The
$59
net increase in cost of revenues represents the effect of the following
items:
|
(i)
|
$20
increase in amortization and depreciation expense resulting
from the
values assigned to intangible assets and property of Objectware
upon
acquisition. In accordance with Note 1 to the Unaudited
Combined Pro Forma Condensed Balance Sheet as of December 31,
2006, the
Company estimates that $409 in purchase price will be allocated
to
intangible assets, which will be amortized over a five year
period
resulting in a Pro Forma effect of
$20.
|
|
(ii)
|
$39
increase resulting from a reclassification of overhead expenses
to cost of
sales to conform to the Company’s accounting policy. In
accordance with Objectware’s accounting policy, cost of sales consists
solely of direct labor and contract labor. The Company’s cost of sales
includes direct labor, contract labor and associated overhead
costs. The
Company intends to conform Objectware’s accounting policy to the Company’s
upon closing of the acquisition and, accordingly, an adjustment
for the
applicable overhead based on the Company’s policy has been reclassified
from general and administrative expenses to cost of sales (see
(b)(iii)
below).
|
(b) The
$71
decrease in general and administrative expenses represents the effect
of the
following items:
|
(i)
|
$23
decrease in salary for the owner of Objectware in order to
reflect the
salary at the expected contractual rate that will be in effect
after the
acquisition. Upon the closing of the Objectware acquisition,
the former
owner of Objectware will execute an employment agreement with
a stated
compensation of $250, including bonus. The pro forma adjustment
takes into
account the difference between actual compensation paid for
the three
months ending December 31, 2006 ($85) and the pro forma contractual
rate
($62) for the period.
|
|
(ii)
|
$9
decrease in depreciation expense resulting from the values
assigned to
property and equipment for Objectware. The pro forma adjustment
reflects
the difference in actual depreciation expense for the three
months ending
December 31, 2006 ($16) and the pro forma depreciation expense
computed
based upon the estimated fair value assigned to property and
equipment at
the date of acquisition in accordance with Note 1 to the Unaudited
Combined Pro Forma Condensed Balance Sheet as of December 31,
2006.
|
|
(iii)
|
$39
decrease resulting from a reclassification of overhead expenses
to cost of
sales to conform to the Company’s accounting policy (see Note (a)(ii)
above).
|
3.
Pro
Forma Offering Adjustments
The
Unaudited Combined Pro Forma Financial Statements give effect to the
receipt and application of the proceeds from the sale of securities to
be
offered in this Registration Statement pursuant to a firm underwriting
commitment as defined in Rule 170.
The
following adjustments assume the transactions described above occurred
on
October 1, 2006.
(c) The
$340
decrease in interest expense related to indebtedness incurred to finance,
in
part, the acquisition of New Tilt, such indebtedness to be repaid with the
proceeds of the offering as described in the Use of Proceeds.
4.
Income Taxes
F-9
BRIDGELINE
SOFTWARE, INC.
NOTES
TO UNAUDITED COMBINED PRO FORMA CONDENSED
STATEMENT
OF OPERATIONS
FOR
THE THREE MONTHS ENDED DECEMBER 31, 2006
(Dollars
in thousands)
The
$83
decrease in federal income tax expense is the result of combining Objectware
as
of the beginning of the period on October 1, 2006. The Company’s net operating
loss carryforwards are sufficient offsets to the taxable income of Objectware
such that no federal income tax expense would be incurred for the three
months
ended December 31, 2006.
5.
Weighted Average Shares Outstanding
The
shares expected to be issued in connection with the probable acquisition
of
Objectware are included in the computation of weighted average shares
outstanding as if these shares were issued as of the beginning of the
period on
October 1, 2006.
F-10
BRIDGELINE
SOFTWARE, INC.
UNAUDITED
COMBINED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR
THE YEAR ENDED SEPTEMBER 30, 2006
(Dollars
in thousands, except per share amounts)
The
following unaudited combined pro forma condensed statement of operations
for the
year ended September 30, 2006 reflects adjustments related to the effects
of the
Offering, the probable acquisition of Objectware, and the results of operations
of New Tilt as if these events occurred as of the beginning of the period
on
October 1, 2005.
|
Consummated
|
Pro
Forma
|
||||||||||||||||||
|
|
Acquisition
|
Probable
|
Acquisition
|
Pro
Forma
|
|||||||||||||||
|
|
Historical
|
Acquisition
|
Adjustments
|
Adjustments
|
Pro
Forma
|
||||||||||||||
|
Historical
|
(Note
1)
|
(Note
2)
|
(Note
3)
|
(Note
4)
|
Combined
|
||||||||||||||
|
Revenue:
|
|||||||||||||||||||
|
Web
services
|
$
|
6,525
|
$
|
919
|
$
|
3,120
|
$
|
—
|
$
|
—
|
$
|
10,564
|
|||||||
|
Managed
services
|
1,243
|
—
|
782
|
—
|
—
|
2,025
|
|||||||||||||
|
Subscriptions
|
467
|
—
|
—
|
—
|
—
|
467
|
|||||||||||||
|
Total
revenue
|
8,235
|
919
|
3,902
|
—
|
—
|
13,056
|
|||||||||||||
|
Cost
of revenue
|
3,809
|
851
|
1,764
|
229
|
(a) |
—
|
6,653
|
||||||||||||
|
Gross
profit
|
4,426
|
68
|
2,138
|
(229
|
)
|
—
|
6,403
|
||||||||||||
|
Operating
expenses:
|
|||||||||||||||||||
|
Sales
and marketing
|
3,227
|
77
|
—
|
—
|
—
|
3,304
|
|||||||||||||
|
Technology
development
|
176
|
—
|
—
|
—
|
—
|
176
|
|||||||||||||
|
General
and administrative expenses
|
1,833
|
301
|
1,400
|
(425
|
)(b)
|
(240
|
)(c)
|
2,869
|
|||||||||||
|
Total
operating expenses
|
5,236
|
378
|
1,400
|
(425
|
)
|
(240
|
)
|
6,349
|
|||||||||||
|
Income
(loss) from operations
|
(810
|
)
|
(310
|
)
|
738
|
196
|
240
|
54
|
|||||||||||
|
Other
income (expenses):
|
|||||||||||||||||||
|
Other
income (expense)
|
—
|
10
|
58
|
—
|
—
|
68
|
|||||||||||||
|
Interest
expense
|
(638
|
)
|
(2
|
)
|
(1
|
)
|
—
|
624
|
(d) |
(17
|
)
|
||||||||
|
Income
(loss) before income taxes
|
(1,448
|
)
|
(302
|
)
|
795
|
196
|
864
|
105
|
|||||||||||
|
Provision
(benefit) for income taxes (Note 5)
|
—
|
—
|
309
|
—
|
(252
|
)
|
57
|
||||||||||||
|
Net
income (loss)
|
$
|
(1,448
|
)
|
$
|
(302
|
)
|
$
|
486
|
$
|
196
|
$
|
1,116
|
$
|
48
|
|||||
|
Net
income (loss) per share:
|
|||||||||||||||||||
|
Basic
|
$
|
(0.36
|
)
|
$
|
0.01
|
||||||||||||||
|
Diluted
|
$
|
(0.36
|
)
|
$
|
0.01
|
||||||||||||||
|
Number
of weighted average shares (Note 6):
|
|||||||||||||||||||
|
Basic
|
4,046
|
8,039
|
|||||||||||||||||
|
Diluted
(Note 6)
|
4,046
|
8,638
|
|||||||||||||||||
The
accompanying notes are an integral part of these unaudited combined pro
forma
condensed financial statements.
F-11
BRIDGELINE
SOFTWARE, INC.
NOTES
TO UNAUDITED COMBINED PRO FORMA CONDENSED
STATEMENT
OF OPERATIONS
FOR
THE YEAR ENDED SEPTEMBER 30, 2006
(Dollars
in thousands)
1.
Acquisition
of New Tilt
The
Company acquired New Tilt on April 24, 2006. The amounts represent the
historical pre-acquisition operating results of New Tilt for the period
October
1, 2005 to December 31, 2005, which were derived from the accounting
records of
New Tilt for such period combined with New Tilt’s results of operations from
January 1, 2006 through the date of acquisition which are included in
the
audited financial statements of New Tilt appearing elsewhere in this
Registration Statement.
The
following table summarizes the purchase price allocation and fair values
assigned to the assets and liabilities acquired in the New Tilt acquisition:
|
|
Historical
at
April
24, 2006
|
Fair
Value
on
Acquisition Date
|
|||||
|
Net
assets acquired:
|
|
|
|||||
|
Cash
|
$
|
159
|
$
|
159
|
|||
|
Other
current assets
|
181
|
181
|
|||||
|
Equipment
|
61
|
56
|
|||||
|
Other
assets
|
11
|
59
|
|||||
|
Intangible
assets
|
—
|
91
|
|||||
|
Goodwill
|
—
|
1,123
|
|||||
|
Total
assets
|
$
|
412
|
1,669
|
||||
|
|
|||||||
|
Current
liabilities
|
$
|
98
|
70
|
||||
|
Deferred
tax liabilities
|
—
|
49
|
|||||
|
Total
liabilities
|
98
|
119
|
|||||
|
Total
equity
|
314
|
||||||
|
Total
liabilities and equity
|
$
|
412
|
|||||
|
Net
assets acquired
|
$
|
1,550
|
|||||
|
|
|||||||
|
Purchase
price:
|
|||||||
|
Cash
paid
|
$
|
550
|
|||||
|
Equity
exchanged
|
717
|
||||||
|
Warrants
issued and options exchanged
|
121
|
||||||
|
Closing
costs and fees
|
162
|
||||||
|
Total
purchase price consideration
|
$
|
1,550
|
F-12
BRIDGELINE
SOFTWARE, INC.
NOTES
TO UNAUDITED COMBINED PRO FORMA CONDENSED
STATEMENT
OF OPERATIONS
FOR
THE YEAR ENDED SEPTEMBER 30, 2006
(Dollars
in thousands)
In
addition to the consideration paid at closing, the Company may be required
to
pay contingent consideration in the form of additional purchase price
of up to
$750 payable in cash, quarterly over the three years subsequent to the
closing
of this acquisition. These payments are contingent upon New Tilt generating
positive earnings before interest, taxes and depreciation and amortization
(“Post-Merger EBITDA”) each calendar quarter during the 12 consecutive calendar
quarters following the acquisition. As of December 31, 2006, $82 has
been paid
as additional consideration to the former owners of New Tilt in the form
of
earn-out.
The
fair
market value of the following assets are estimated in the pro forma
presentation.
Intangible
assets - The Company allocated a fair value of $91 to intangible assets
in its
purchase price allocation. These assets are identified as the estimated
fair
value of customer relationships ($29) and the estimated fair value of
the
non-competition provision of employment agreements ($62) as determined
using a
discounted cash flow model prepared by management. Management estimates
the
useful life of these intangible assets to be five years.
Equipment
- The Company has estimated the fair value of equipment to be $56 based
on an
internal analysis of the fixed asset register provided by New Tilt. For
pro
forma presentation, the Company has utilized its fixed asset depreciation
policy
as detailed in Note 1 to the financial statements, whereby depreciation
is
computed by use of the straight-line method over the estimated useful
lives of
the related assets (three years for computer hardware and software and
five
years for office furniture and equipment).
2.
Probable
Acquisition of Objectware
The
amounts represent the historical operating results of Objectware for
the twelve
months September 30, 2006. Please refer to Note 1 of the Unaudited
Combined Pro Forma Condensed Balance Sheet as of December 31, 2006 for
the
estimated purchase price allocation of the Objectware
acquisition.
3.
Pro
Forma Acquisition Adjustments
The
following adjustments assume the transactions described above occurred
on
October 1, 2005.
(a)
The
$229
net increase in cost of revenues represents the effect of the following
items:
|
(i)
|
$93
increase in amortization expense resulting from the values
assigned to
intangible assets of New Tilt ($11) and Objectware ($82) upon
acquisition.
In accordance with Note 1 to the Unaudited
Combined Pro Forma Condensed Statement of Operations for the
year ended
September 30, 2006, the Company has allocated $91 of the New
Tilt purchase
price to intangible assets, which is amortized over a five
year period
resulting in a pro forma effect of $11. In
accordance with Note 1 to the Unaudited
Combined Pro Forma Condensed Balance Sheet as of December 31,
2006, the
Company estimates that $409 in purchase price for Objectware
will be
allocated to intangible assets, which will be amortized over
a five year
period resulting in a Pro Forma effect of
$82.
|
|
(ii)
|
$19
decrease in New Tilt’s stock-based compensation in order to conform to the
Company’s accounting policy; this pro forma adjustment is the result
of
stock compensation expenses computed pursuant to New Tilt’s accounting
policy in accordance with SFAS 123R ($19) as compared to the
stock
compensation expense that would have been recorded in accordance
with the
Company’s accounting policy under the intrinsic value method in accordance
with APB 25 ($0).
|
|
(iii)
|
$155
increase resulting from a reclassification of period expenses
to cost of
sales to conform to the Company’s accounting policy. In
accordance with Objectware’s accounting policy, cost of sales consists
solely of direct labor and contract labor. The Company’s cost of sales
includes direct labor, contract labor and associated overhead
costs. The
Company intends to conform Objectware’s accounting policy to the Company’s
upon closing of the acquisition and, accordingly, an adjustment
for the
applicable overhead based on the Company’s policy has been reclassified
from general and administrative expenses to cost of sales (see
Note
(b)(iv) below).
|
(b) The
$425
decrease in general and administrative expenses represents the effect
of the
following items:
F-13
BRIDGELINE
SOFTWARE, INC.
NOTES
TO UNAUDITED COMBINED PRO FORMA CONDENSED
STATEMENT
OF OPERATIONS
FOR
THE YEAR ENDED SEPTEMBER 30, 2006
(Dollars
in thousands)
|
(i)
|
$208
decrease in salary for the owner of Objectware in order to
reflect the
salary at the expected contractual rate that will be in effect
after the
acquisition. Upon the closing of the Objectware acquisition,
the former
owner of Objectware will execute an employment agreement with
a stated
compensation of $250, including bonus. The pro forma adjustment
takes into
account the difference between actual compensation paid for
the year ended
September 30, 2006 ($458) and the pro forma contractual rate
($250) for
the period.
|
|
(ii)
|
$41
decrease in depreciation expense resulting from the values
assigned to
property and equipment for New Tilt $(12) and iapps ($29).
The pro forma
adjustment reflects the difference in actual depreciation expense
for the
year ended September 30, 2006 for New Tilt ($24) and Objectware
($59) and
the pro forma depreciation expense computed based upon the
estimated fair
value assigned to property and equipment at the date of acquisition
in
accordance with Note 1 to the Unaudited
Combined Pro Forma Condensed Balance Sheet as of December 31,
2006.
|
|
(iii)
|
$21
decrease in New Tilt’s stock-based compensation in order to conform to the
Company’s accounting policy; this pro forma adjustment is the result
of
stock compensation expenses computed pursuant to New Tilt’s accounting
policy in accordance with SFAS 123R ($21) as compared to the
stock
compensation expense that would have been recorded in accordance
with the
Company’s accounting policy under the intrinsic value method in accordance
with APB 25 ($0).
|
|
(iv)
|
$155
decrease resulting from a reclassification of period expenses
to cost of
sales to conform to the Company’s accounting policy (see Note (a)(iii)
above).
|
4.
Pro
Forma Offering Adjustments
The
Unaudited Combined Pro Forma Financial Statements give effect to the
receipt and application of the proceeds from the sale of securities to
be
offered in this Registration Statement pursuant to a firm underwriting
commitment as defined in Rule 170.
The
following adjustments assume the transactions described above occurred
on
October 1, 2005.
(c) $240
decrease for non-recurring accounting fees for audits of the acquired
entities.
The pro forma adjustment reflects the costs associated with stand alone
audits
of New Tilt ($95) and Objectware ($145). The costs of the stand alone
audits
will not be incurred in any subsequent periods.
(d)
The
$624
decrease in interest expense related to indebtedness incurred to finance,
in
part, the acquisition of New Tilt, such indebtedness to be repaid with the
proceeds of the offering as described in the Use of Proceeds
5.
Income Taxes
The
$252
decrease in federal income tax expense is the result of combining Objectware
as
of the beginning of the period on October 1, 2005. The Company’s net operating
loss carryforwards are sufficient to off-set the taxable income of Objectware
such that no federal income tax expense would be incurred for the year
ended
September 30, 2006.
6.
Weighted Average Shares Outstanding
The
shares issued in connection with the New Tilt acquisition and expected
to be
issued in connection with the probable acquisition of Objectware are
included in
the computation of weighted average shares outstanding as if these shares
were
issued as of the beginning of the period on October 1, 2005. Diluted
weighted
average shares are calculated utilizing the treasury stock method whereby
the
basic weighted average shares of 8,039,409 are increased by the dilutive
effect
of the weighted average “in-the-money” options of 929,587 and warrants of
578,269.
F-14
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors
Bridgeline
Software, Inc.
We
have
audited the accompanying consolidated balance sheets of Bridgeline Software,
Inc. as of September 30, 2006 and 2005 and the related consolidated statements
of operations, shareholders’ equity and cash flows for the years then ended.
These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
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
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 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 consolidated financial position of Bridgeline
Software, Inc. as of September 30, 2006 and 2005 and the consolidated 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.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As described in Note 1
to the
consolidated financial statements, the Company has incurred operating
losses
since inception, has a working capital deficit of approximately $2,020,000
and accumulated deficit of approximately $4,163,000 at September 30,
2006 and
will need to repay its senior debt obligations of $2,800,000 and
related interest during fiscal year 2007. These conditions raise substantial
doubt about the ability of the Company to continue as a going concern.
Management’s plans concerning these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments that
might
result from the outcome of this uncertainty.
/s/
UHY LLP
Boston,
Massachusetts
February
5, 2007, except for the
last
paragraph of Note 11 to which
the
date is March 29, 2007
F-15
BRIDGELINE
SOFTWARE, INC.
CONSOLIDATED
BALANCE SHEETS
(Information
as of December 31, 2006 is Unaudited)
(Dollars
in thousands, except per share data)
|
ASSETS
|
December
31,
|
September
30,
|
||||||||
|
|
2006
|
2006
|
2005
|
|||||||
|
Current
assets:
|
|
|
|
|||||||
|
Cash
and cash equivalents
|
$
|
169
|
$
|
591
|
$
|
138
|
||||
|
Accounts
receivable (less allowance for doubtful accounts of $52,
$52 and $58,
respectively)
|
1,371
|
810
|
605
|
|||||||
|
Unbilled
receivables
|
388
|
633
|
167
|
|||||||
|
Prepaid
expenses and other current assets
|
43
|
39
|
25
|
|||||||
|
Total
current assets
|
1,971
|
2,073
|
935
|
|||||||
|
Equipment
and improvements, net
|
409
|
429
|
267
|
|||||||
|
Definite-lived
intangible assets, net
|
271
|
303
|
331
|
|||||||
|
Goodwill
|
6,409
|
6,346
|
5,097
|
|||||||
|
Deferred
financing fees, net
|
151
|
273
|
—
|
|||||||
|
Other
assets
|
599
|
400
|
109
|
|||||||
|
Total
assets
|
$
|
9,810
|
$
|
9,824
|
$
|
6,739
|
||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||||
|
Current
liabilities:
|
||||||||||
|
Senior notes payable
|
$
|
2,633
|
$
|
2,497
|
$
|
—
|
||||
|
Financing agreement
|
—
|
—
|
292
|
|||||||
|
Capital
lease obligations - current
|
47
|
45
|
11
|
|||||||
|
Notes payable to shareholders - current
|
—
|
—
|
85
|
|||||||
|
Accounts payable
|
774
|
581
|
272
|
|||||||
|
Deferred revenue
|
505
|
264
|
183
|
|||||||
|
Accrued liabilities
|
672
|
706
|
271
|
|||||||
|
Total
current liabilities
|
4,631
|
4,093
|
1,114
|
|||||||
|
Capital
lease obligations, less current portion
|
86
|
99
|
33
|
|||||||
|
Total
liabilities
|
4,717
|
4,192
|
1,147
|
|||||||
|
|
||||||||||
|
Commitments
and contingencies
|
||||||||||
|
|
||||||||||
|
Shareholders’
equity:
|
||||||||||
|
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:
4,273,833;
4,273,833 and 3,903,833 shares issued and
outstanding,
respectively
|
4
|
4
|
4
|
|||||||
|
Additional
paid-in capital
|
9,882
|
9,791
|
8,303
|
|||||||
|
Accumulated
deficit
|
(4,793
|
)
|
(4,163
|
)
|
(2,715
|
)
|
||||
|
Total
shareholders’ equity
|
5,093
|
5,632
|
5,592
|
|||||||
|
Total
liabilities and shareholders’ equity
|
$
|
9,810
|
$
|
9,824
|
$
|
6,739
|
||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-16
BRIDGELINE
SOFTWARE, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Information
for the Three Months Ended December 31, 2006 and 2005 is
Unaudited)
(Dollars
in thousands, except per share data)
|
|
Three
Months Ended December 31,
|
Year
Ended September 30,
|
|||||||||||
|
|
2006
|
2005
|
2006
|
2005
|
|||||||||
|
Revenue:
|
|
|
|
|
|||||||||
|
Web
services
|
$
|
1,882
|
$
|
1,332
|
$
|
6,525
|
$
|
4,182
|
|||||
|
Managed
services
|
308
|
267
|
1,243
|
1,244
|
|||||||||
|
Subscription
|
119
|
114
|
467
|
343
|
|||||||||
|
Total
revenue
|
2,309
|
1,713
|
8,235
|
5,769
|
|||||||||
|
Cost
of revenue:
|
|||||||||||||
|
Web
services
|
1,052
|
780
|
3,389
|
2,629
|
|||||||||
|
Managed
services
|
82
|
72
|
363
|
457
|
|||||||||
|
Subscription
|
7
|
15
|
57
|
27
|
|||||||||
|
Total
cost of revenue
|
1,141
|
867
|
3,809
|
3,113
|
|||||||||
|
Gross
profit
|
1,168
|
846
|
4,426
|
2,656
|
|||||||||
|
Operating
expenses:
|
|||||||||||||
|
Sales
and marketing
|
837
|
685
|
3,227
|
2,060
|
|||||||||
|
General
and administrative
|
461
|
293
|
1,833
|
1,014
|
|||||||||
|
Technology
development
|
155
|
15
|
176
|
43
|
|||||||||
|
Total
operating expenses
|
1,453
|
993
|
5,236
|
3,117
|
|||||||||
|
Loss
from operations
|
(285
|
)
|
(147
|
)
|
(810
|
)
|
(461
|
)
|
|||||
|
Interest
expense
|
(345
|
)
|
(27
|
)
|
(638
|
)
|
(56
|
)
|
|||||
|
Loss
before income taxes
|
(630
|
)
|
(174
|
)
|
(1,448
|
)
|
(517
|
)
|
|||||
|
Income
taxes
|
—
|
—
|
—
|
—
|
|||||||||
|
Net
loss
|
$
|
(630
|
)
|
$
|
(174
|
)
|
$
|
(1,448
|
)
|
$
|
(517
|
)
|
|
|
|
|||||||||||||
|
Net
loss per share:
|
|||||||||||||
|
Basic
and diluted
|
$
|
(0.15
|
)
|
$
|
(0.04
|
)
|
$
|
(0.36
|
)
|
$
|
(0.14
|
)
|
|
|
|
|||||||||||||
|
Number
of weighted average shares:
|
|||||||||||||
|
Basic
and diluted
|
4,273,833
|
3,903,833
|
4,046,278
|
3,804,527
|
|||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-17
BRIDGELINE
SOFTWARE, INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
(Information
as of December 31, 2006 and for the Three Months Ended December 31, 2006
is
Unaudited)
(Dollars
in thousands)
|
|
|
|
Additional
|
|
Total
|
|||||||||||
|
|
Common
Stock
|
Paid-in
|
Accumulated
|
Shareholders’
|
||||||||||||
|
|
Shares
|
Par
Value
|
Capital
|
Deficit
|
Equity
|
|||||||||||
|
|
|
|
|
|
|
|||||||||||
|
Balance,
September 30, 2004
|
3,427,166
|
$
|
3
|
$
|
6,069
|
$
|
(2,198
|
)
|
$
|
3,874
|
||||||
|
|
||||||||||||||||
|
Issuance
of stock and warrants for acquisition
|
476,667
|
1
|
2,218
|
—
|
2,219
|
|||||||||||
|
Issuance
of common stock warrants in connection
with financing agreement
|
—
|
—
|
8
|
—
|
8
|
|||||||||||
|
Stock
based compensation
|
—
|
—
|
8
|
—
|
8
|
|||||||||||
|
Net
loss
|
—
|
—
|
—
|
(517
|
)
|
(517
|
)
|
|||||||||
|
Balance,
September 30, 2005
|
3,903,833
|
4
|
8,303
|
(2,715
|
)
|
5,592
|
||||||||||
|
|
||||||||||||||||
|
Issuance
of stock for acquisition
|
320,000
|
—
|
838
|
—
|
838
|
|||||||||||
|
Exercise
of warrants
|
50,000
|
—
|
—
|
—
|
—
|
|||||||||||
|
Issuance
of common stock warrants in private
placement of debt
|
—
|
—
|
646
|
—
|
646
|
|||||||||||
|
Stock
based compensation
|
—
|
—
|
4
|
—
|
4
|
|||||||||||
|
Net
loss
|
—
|
—
|
—
|
(1,448
|
)
|
(1,448
|
)
|
|||||||||
|
Balance,
September 30, 2006
|
4,273,833
|
4
|
9,791
|
(4,163
|
)
|
5,632
|
||||||||||
|
Stock
based compensation
|
—
|
—
|
91
|
—
|
91
|
|||||||||||
|
Net
loss
|
—
|
—
|
—
|
(630
|
)
|
(630
|
)
|
|||||||||
|
Balance,
December 31, 2006
|
4,273,833
|
$
|
4
|
$
|
9,882
|
$
|
(4,793
|
)
|
$
|
5,093
|
||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-18
BRIDGELINE
SOFTWARE, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Information
as of December 31, 2006 and 2005 and for
the
Three Months Ended December 31, 2006 and 2005 is
Unaudited)
(Dollars
in thousands)
|
|
Three
Months Ended December 31,
|
Year
Ended September 30,
|
|||||||||||
|
Cash
flows from operating activities:
|
2006
|
2005
|
2006
|
2005
|
|||||||||
|
Net
loss
|
$
|
(630
|
)
|
$
|
(174
|
)
|
$
|
(1,448
|
)
|
$
|
(517
|
)
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|||||||||||||
|
Depreciation
|
48
|
23
|
186
|
106
|
|||||||||
|
Amortization
of intangible assets
|
32
|
28
|
119
|
94
|
|||||||||
|
Amortization
of debt discount and deferred financing fees
|
258
|
—
|
436
|
7
|
|||||||||
|
Stock
based compensation
|
91
|
1
|
4
|
8
|
|||||||||
|
Changes
in operating assets and liabilities, net of acquired
assets and liabilities:
|
|||||||||||||
|
Accounts
receivable and unbilled receivables
|
(316
|
)
|
(273
|
)
|
(498
|
)
|
245
|
||||||
|
Other
assets
|
(203
|
)
|
(56
|
)
|
(287
|
)
|
3
|
||||||
|
Accounts
payable and accrued liabilities
|
159
|
209
|
721
|
(136
|
)
|
||||||||
|
Deferred
revenue
|
241
|
544
|
34
|
(240
|
)
|
||||||||
|
Total
adjustments
|
310
|
476
|
715
|
87
|
|||||||||
|
Net
cash provided by (used in) operating activities
|
(320
|
)
|
302
|
(733
|
)
|
(430
|
)
|
||||||
|
|
|||||||||||||
|
Cash
flows from investing activities:
|
|||||||||||||
|
Acquisitions,
net of cash acquired
|
—
|
—
|
(553
|
)
|
(310
|
)
|
|||||||
|
Contingent acquisition payments
|
(63
|
)
|
(25
|
)
|
(126
|
)
|
(113
|
)
|
|||||
|
Equipment
and improvements expenditures
|
(28
|
)
|
(38
|
)
|
(163
|
)
|
(122
|
)
|
|||||
|
Net
cash used in investing activities
|
(91
|
)
|
(63
|
)
|
(842
|
)
|
(545
|
)
|
|||||
|
|
|||||||||||||
|
Cash
flows from financing activities:
|
|||||||||||||
|
Proceeds
from issuance of senior notes payable, net of
deferred costs
|
—
|
—
|
2,434
|
—
|
|||||||||
|
Proceeds
from / payments on financing agreement, net
|
—
|
323
|
(292
|
)
|
292
|
||||||||
|
Principal
payments on capital leases
|
(11
|
)
|
(4
|
)
|
(29
|
)
|
(49
|
)
|
|||||
|
Principal
payments on notes payable to shareholders
|
—
|
(40
|
)
|
(85
|
)
|
(86
|
)
|
||||||
|
Net
cash provided by (used in) financing activities
|
(11
|
)
|
279
|
2,028
|
157
|
||||||||
|
|
|||||||||||||
|
Net
increase (decrease) in cash
|
(422
|
)
|
518
|
453
|
(818
|
)
|
|||||||
|
Cash
and cash equivalents at beginning of period
|
591
|
138
|
138
|
956
|
|||||||||
|
Cash
and cash equivalents at end of period
|
$
|
169
|
$
|
656
|
$
|
591
|
$
|
138
|
|||||
|
|
|||||||||||||
|
Supplemental
disclosures of cash flow information:
|
|||||||||||||
|
Cash
paid for:
|
|||||||||||||
|
Interest
|
$
|
75
|
$
|
30
|
$
|
133
|
$
|
50
|
|||||
|
|
|||||||||||||
|
Non
cash activities:
|
|||||||||||||
|
Issuance of common stock for acquisitions
|
$
|
—
|
$
|
—
|
$
|
838
|
$
|
2,219
|
|||||
|
Warrants
issued in connection with equity and debt
transactions
|
$
|
—
|
$
|
—
|
$
|
646
|
$
|
436
|
|||||
|
Purchase
of capital equipment through capital leases
|
$
|
—
|
$
|
13
|
$
|
129
|
$
|
39
|
|||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-19
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for the Three Months Ended December 31,
2006 and
2005 is unaudited)
(Dollars
in thousands, except share and per share data)
1. Description of Business and Basis of Presentation
Description
of Business
Bridgeline
Software, Inc. (“Bridgeline” or the “Company”), was incorporated in Delaware on
August 28, 2000. Bridgeline, operating as a single segment, is a developer
of
Web service applications. In providing these services the Company has developed
the following software tools: (i) netEDITOR-proTM,
its Web
content management system, and (ii) OrgitectureTM,
its
on-demand Web based platform, which provides expandable on-demand modules
such
as Relationship Management, eSurvey, eNewsletter, Content Management, eCommerce,
Event Registration and Integrated Grants Management. The Company’s in-house team
of Microsoft®-certified
developers specializes in information architecture, usability engineering,
Web
application development, rich media Web development, e-Commerce, e-Learning,
and
database development.
The
Company’s principal executive offices are located at 10 Sixth Road, Woburn,
Massachusetts, and it maintains offices in Cambridge, Massachusetts; in
New
York, New York; and in Washington, D.C. The Company also operates a wholly
owned
subsidiary, Bridgeline Software Enterprises, Pvt. Ltd, founded in 2003,
as its
software development center located in Bangalore, India. The Company maintains
a
website at www.bridgelinesw.com.
On
April
7, 2006, the Company affected a 3 to 1 reverse stock split. The reduction
in the
number of shares as a result of the reverse stock split has been reflected
retroactively for all periods presented.
Operating
Matters and Going Concern
The
Company incurred annual losses since commencement of operations in
2000 and has
used a significant amount of cash to fund its operations over the last
several
years. As a result, the Company has a working capital deficit of $2,660 and
$2,020 and an accumulated deficit of $4,793 and $4,163 at December
31, 2006 and
September 30, 2006, respectively. The Company’s revenues have not
grown sufficiently to satisfy its increases in debt service,
principally relating to the $2,800 senior notes payable described in
Note 7 to
the financial statements, capital expenditures and operating activities
and to
generate sufficient cash flows to maintain operations. The Company
has issued various equity and debt securities to satisfy its capital
requirements and have taken significant steps to streamline its operations
over
the last several years and will continue to do so as circumstances
warrant.
Overall, the Company has experienced an increase in both headcount
and operating
expenses as a result of its acquisitions. During the same period, the
Company has taken significant steps to control its administrative
costs. To date, these steps have included reducing or maintaining
existing administrative headcount and limiting infrastructure, operating
and
capital expenditures where appropriate. The Company must increase revenue
from
current levels to achieve profitability and generate future positive
cash
flow. In order to increase revenue, the Company has expanded its
sales force through its acquisition of New Tilt in April 2006, while
reducing
headcount in other areas, and has expanded into the healthcare and
education
sectors of the industry. Long-term cash requirements, other than for
normal operating expenses and for commitments described in Note 8 to
the
financial statements, will be required for the development of new software
products, enhancements of existing products, and the possible acquisition
of
other companies, products, or technologies complementary to the its
business.
The
Company continues to monitor cash flow and has developed a contingency
plan to
effect further reductions to headcount, infrastructure and capital
expenditures,
as necessary, to fund on-going operations. Except for the scheduled
repayment of the senior notes payable described below, the Company
believes that
based on current revenue projections that cash flow from operations
should be
sufficient to meet its cash requirements and allow it to continue as
a going
concern through September 30, 2007. The Company expects that the proceeds
from
the planned public offering, will be sufficient to repay the senior
notes
payable and will also provide additional working capital to fund current
operations and to fund the long term cash requirements described
above.
Since
the
planned initial public offering is not expected to be completed by the
April
2007 maturity date of the senior notes payable, the Company has obtained
an
extension from the note holders extending the maturity of the senior
notes
payable, as described in Note 11, to July 2007. If the Offering is not
completed
by the extended maturity date, the Company would need to seek either
a further
extension to the maturity date or secure additional financing to repay
the
senior notes
F-20
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for the Three Months Ended December 31, 2006
and
2005 is unaudited)
(Dollars
in thousands, except share and per share data)
payable
and related interest. There can be no assurances that the Company will
complete
the planned initial public offering or will be able, if necessary, to
obtain
either a further extension of the senior notes payable or additional
financing
under acceptable terms and conditions, or at all.
The
circumstances discussed above raise substantial doubt about the Company’s
ability to continue as a going concern in the normal course of business.
The
recovery of a major portion of the recorded asset amounts shown in the
accompanying consolidated balance sheets are dependent upon the continued
operations of the Company, which in turn are dependent upon its ability
to
maintain or increase revenue, succeed in its future operations, and complete
its
planned initial public offering or obtain other sources of cash to repay
the senior notes payable. The consolidated financial statements do not
include any adjustments relating to the recoverability and classification
of
recorded asset amounts or the classifications and amount of liabilities
that
might be necessary should the Company be unable to continue
operations.
Unaudited
Interim Financial Information
The
accompanying interim consolidated balance sheet as of December 31, 2006,
the
consolidated statements of operations and cash flows for the three months
ended
December 31, 2006 and 2005, and the consolidated statement of shareholders’
equity for the three months ended December 31, 2006 are unaudited. The
unaudited
interim consolidated statements have been prepared in accordance with
accounting
principles generally accepted in the United States of America and in
the opinion
of the Company’s management have been prepared on the same basis as the audited
consolidated financial statements as of and for the years ended September
30,
2006 and 2005 and include all adjustments, consisting of normal recurring
adjustments and accruals, necessary for the fair presentation of the
Company’s
financial position at December 31, 2006 and its results of operations
and its
cash flows for the three months ended December 31, 2006 and 2005. The
results
for the three months ended December 31, 2006 are not necessarily indicative
of
the results to be expected for the year ending September 30,
2007.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and
its
Indian subsidiary. All significant inter-company accounts and transactions
have
been eliminated. The functional currency for the Company’s Indian
subsidiary is the U.S. dollar. Translation adjustments are not
material.
2.
Summary of Significant Accounting Policies
Revenue
Recognition
Substantially
all of the Company’s revenue is generated from three activities: Web Services,
Managed Services, and Software Licenses and Subscriptions. The Company
enters
into arrangements to sell services, software licenses or combinations
thereof.
The Company recognizes revenue in accordance with Securities and Exchange
Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104, Revenue
Recognition in Financial Statements,
Emerging Issues Task Force (“EITF”) Issue No. 00-21, Accounting
For Revenue Arrangements with Multiple Deliverables (“EITF
00-21”), and American Institute of Certified Public Accountants Statement of
Position No. 97-2, Software
Revenue Recognition (“SOP
97-2”) and related interpretations. 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.
F-21
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for the Three Months Ended December 31,
2006 and
2005 is unaudited)
(Dollars
in thousands, except share and per share data)
Web
Services
Web
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, Web application
development, rich media, e-Commerce, e-Learning and e-Training, search
engine
optimization, and content management. Web Services are sold either on a
stand
alone basis or, as described below, in multiple element arrangements with
Managed Services and/or the Company’s licensed software products.
Revenue
from stand-alone Web Services is recognized when the services are performed
using the proportional performance model using a method based on cost
incurred
in relation to total estimated cost at completion. Labor costs are the
most
appropriate measure to allocate revenue among reporting periods, as they
are the
primary input when providing our Web Services. Fixed fee engagements
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.
Web
Services also includes revenue from the Company’s perpetual software licenses
described below under Software
Licenses and Subscriptions. Perpetual licenses are only sold in connection
with Web Services engagements; therefore the Company believes it is appropriate
to include revenue from perpetual licenses with revenue from Web Services.
Revenues
derived from such perpetual software license sales have been insignificant
in
all periods presented (representing less that 3% of Web Services
revenues).
Managed
Services
Managed
services primarily include on-going retained professional services and
may also
include monthly hosting fees for the use of hardware and infrastructure,
generally at the Company’s network operating center. Managed Services are sold
on a stand-alone basis or, as described below, in multiple element arrangements
with Web Services (including training and implementation services) and
the
Company’s licensed software products. Stand-alone on-going retained professional
services are either 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. These arrangements do not require formal customer acceptance
and do not grant any future right to labor hours contracted for but not
used.
Revenue
from hosting services is incidental to the Company’s Web Services activities and
for all periods presented, the only customers under contractual hosting
arrangements have been previous Web Services customers. Hosting revenue
has
historically been insignificant to both the Company’s business strategy and to
total revenues.
Software
Licenses and Subscriptions
As
described further below under Multiple
Element Arrangements,
the
Company’s licensed software products are sold with Web Services or Managed
Services engagements.
The
Company recognizes revenue from perpetual software licenses upon delivery
of the
software because the related Web Services are not essential to the functionality
of the software. The related post-contract customer support (“PCS”) revenue is
also recognized upon delivery of the software since PCS does not contain
rights
to unspecified upgrades, is included in the price of the multiple element
arrangement, extends only for a period of one year or less and the cost
of
providing the PCS is deemed to be insignificant. Perpetual software
license revenue and related PCS represented approximately $34 and $34
of revenue
for the three months ended December 31, 2006 and 2005 and $71 and $222
of
revenue for the years ended September 30, 2006 and 2005, respectively.
Subsequent renewals of PCS have been insignificant.
Subscriptions
include fixed term software and related hosting arrangements (“Licensed
Subscription Agreements”). When sold as part of a multiple element arrangement
as described below, Licensed Subscription Agreements are
F-22
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for the Three Months Ended December 31, 2006
and
2005 is unaudited)
(Dollars
in thousands, except share and per share data)
accounted
for as separate units of accounting based on their respective value to
the
customer on a stand-alone basis and are separately priced based either
on vendor
specific objective evidence (“VSOE”) of fair value or on third party evidence of
fair value when VSOE is not available. The Licensed Subscription Agreements
and
related hosting services are included in Subscription revenue and recognized
ratably over the term of their month to month subscription agreements.
The
Company has concluded that, consistent with EITF 00-3, Application
of AICPA SOP 97-2, “Software Revenue Recognition”, to Arrangements That Include
the Right to Use Software Stored on Another Entity’s Hardware, that
its
Licensed Subscription Agreements are outside the scope of SOP 97-2 since
the
software is only accessible through a hosting arrangement with the Company
and
the customer cannot take possession of the software. As such, the Licensed
Subscription Agreements are considered a single unit of accounting for
purposes
of recognizing revenue in the multiple element arrangements described
below.
Multiple
Element Arrangements
Web
Services and Managed Services are also provided as part of multiple element
arrangements that include licensed software, PCS, managed services and/or
a
hosting arrangement. The Company accounts for these multiple elements separately
pursuant to EITF 00-21.
In
determining whether the Web Services element in a multiple element arrangement
can be accounted for separately from other elements, management considers
the
availability of Web Services from other vendors and whether objective
and
reliable evidence of fair value exists for the undelivered elements.
Web
Services do not involve significant production, modification, or customization
of the Company’s licensed software products. The Web Services are regularly sold
on a stand-alone basis pursuant to a price list and are not discounted.
The
Company has also concluded that the software element in these multiple
element
arrangements is incidental to the Web Services and is not essential to
the
functionality of the Web Services. Except when provided as a part of
the
Licensed Subscription Agreements described above, hosting services, if
any, are
accounted for separately as Managed Services, as those services have
value to
the customer on a stand-alone basis and are separately priced based on
VSOE of
fair value. Where VSOE of fair value is not attainable, the Company relies
on
third party evidence of fair value in accordance with EITF 00-21.
In
determining whether the Managed Services element of a multiple element
arrangement can be accounted for separately, management considers that
Managed
Services have value to its customers on a stand-alone basis since those
services
are regularly sold separately pursuant to standard price lists which
are not
discounted. The hosting services are considered to have stand-alone value
to the
customer and are separately priced based on standard price
lists.
Following
EITF 00-21, the Company recognizes revenue from multiple element arrangements
using the residual method whereby the value ascribed to the delivered
element
(generally the Web Services) is equal to the total consideration less
the VSOE
of fair value or third party evidence of fair value of the undelivered
elements.
Customer
Payment Terms
The
Company’s payment terms with customers typically are “due upon receipt” or “net
30 days from invoice”. Payments terms may vary by customer but in all instances
do not exceed 45 days from invoice date. For Web Services, the Company
typically
invoices project deposits of between 20% and 33% of the total contract
value
which are record as deferred revenue until such time the related services
are
completed. Subsequent invoicing for Web Services is 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 due upon invoice receipt.
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
F-23
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for the Three Months Ended December 31,
2006 and
2005 is unaudited)
(Dollars
in thousands, except share and per share data)
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 generally between 30 to 90 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.
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.
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 amounts of revenues and related expenses reported in the Company’s
financial statements. A number of internal and external factors can affect
the
Company’s estimates including efficiency variances and specification and test
requirement changes.
Segment
Information
The
Company is structured and operates internally as one reportable operating
segment as defined in Statement of Financial Accounting Standard (“SFAS”)
No. 131, Disclosures
about Segments of an Enterprise and Related Information
(“SFAS
131”). SFAS 131 establishes standards for the way public business enterprises
report information about operating segments in annual consolidated financial
statements and requires that those enterprises report selected information
about
operating segments in interim financial reports. SFAS 131 also establishes
standards for related disclosures about products and services, geographic
areas
and major customers. Although the Company had three U.S. operating locations
and
an Indian subsidiary at September 30, 2006 and 2005, under the aggregation
criteria set forth in SFAS 131, the Company operates in only one reportable
operating segment since each location has 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 high credit quality financial institutions.
In
general, the Company does not require
F-24
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for the Three Months Ended December 31,
2006 and
2005 is unaudited)
(Dollars
in thousands, except share and per share data)
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 had certain customers that individually represented 10% or more
of the
Company’s total revenue, as follows:
|
|
Three
Months Ended December 31,
|
Year
Ended September 30,
|
|||||||||||
|
|
2006
|
2005
|
2006
|
2005
|
|||||||||
|
|
|
|
|
|
|||||||||
|
Customer
#1
|
21
|
%
|
21
|
%
|
22
|
%
|
12
|
%
|
|||||
|
Customer
#2
|
*
|
*
|
*
|
19
|
%
|
||||||||
|
|
|||||||||||||
|
*
Represents less than 10%
|
|||||||||||||
The
Company had certain customers with receivables balances that individually
represented 10% or more of the Company’s total accounts receivable, as
follows:
|
December
31,
|
September
30,
|
|||||||||
|
|
2006
|
2006
|
2005
|
|||||||
|
|
|
|
|
|||||||
|
Customer
#1
|
16
|
%
|
17
|
%
|
11
|
%
|
||||
|
Customer
#2
|
*
|
*
|
22
|
%
|
||||||
|
Customer
#3
|
*
|
*
|
12
|
%
|
||||||
|
|
||||||||||
|
*
Represents less than 10%
|
||||||||||
The
Company has no significant off-balance sheet risks such as foreign exchange
contracts, interest rate swaps, option contracts or other foreign hedging
agreements.
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 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, 2006 and 2005 for loans with
similar
terms, the carrying values of capital lease obligations approximate their
fair
value.
F-25
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for the Three Months Ended December 31,
2006 and
2005 is unaudited)
(Dollars
in thousands, except share and per share data)
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. There has been no impairment loss
recorded for long-lived and intangible assets to date.
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.
Technology
Development Costs
Research
and development expenditures for technology development are charged to
operations as incurred. Pursuant to SFAS No. 86 “Accounting
for Cost of Computer Systems to be Sold, Leased or Otherwise
Marketed,” Software
development costs subsequent to the establishment of technological feasibility
are capitalized and amortized to cost of software and included in cost
of sales.
Based on the Company’s product development process, technological feasibility is
established upon completion of a working model. Costs incurred between
completion of a working model and the point at which the product is ready
for
general release are capitalized if significant. No software development
costs
have been capitalized to date as a result of the Company’s development
process.
During
our fiscal year 2005, a research and development center in Bangalore,
India was
established by the Company to manage the Company’s technology development
requirements. Since inception, the Company has derived technology benefits
from
engagements with customers; however it is not possible to track and quantify
such costs separately for any periods.
Equipment
and Improvements
The
components of equipment and improvement are stated at cost. The Company
provides
for depreciation by use of the straight-line method over the estimated
useful
lives of the related assets (three to five years). Leasehold improvements
are
amortized by use of 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.
Definite
Lived Intangible Assets
Definite-lived
intangible assets are amortized over their useful lives, generally three
to ten
years, and are subject to impairment tests as previously described under
Impairment
of Long-Lived and Intangible Assets.
Deferred
Financing Fees
The
Company incurred $481 of direct costs in connection with the issuance of
$2,800
in Senior Notes Payable and include the fair value of underwriter debt
warrants
of $115 (See Note 7). These costs are being amortized using
the straight-line method, which approximates the interest method, over the
one year term of the notes.
F-26
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for the Three Months Ended December 31,
2006 and
2005 is unaudited)
(Dollars
in thousands, except share and per share data)
Deferred Offering Costs
As
of
December 31, 2006 and September 30, 2006, the Company incurred $306 and
$116,
respectively, of direct costs in connection with the anticipated initial
public
offering of its common stock as described in Note 11. These costs are
included
in other assets and will be charged to additional paid in capital upon
a
successful closing of the initial public offering as a direct cost of
raising capital.
Contingent
Consideration
In
accordance with EITF Issue No. 95-8, Accounting
for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise
in a Purchase Business Combination,
consideration is recorded as additional purchase price if the 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 and is recorded as additional goodwill resulting from the
business combination.
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 a reporting
unit
level. The Company has determined that its operating locations can be aggregated
as a single reporting unit due to their similar economic characteristics.
For
goodwill, the impairment determination is made at the reporting unit level
and
consists of two steps. First, the Company estimates the fair value of the
reporting unit and compares 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, in accordance
with
Statement of Financial Accounting Standards No. 141, Business
Combinations (“SFAS
141”). The residual estimated fair value after this allocation is the implied
fair value of the reporting unit’s goodwill. The Company’s policy is to perform
its annual impairment testing in the fourth quarter of each fiscal
year.
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 the impairment of goodwill, the Company considers a number of
factors
such as discounted cash flow projections, market capitalization value and
acquisition transactions of comparable third party sales companies. The
process
of evaluating the potential impairment of goodwill is highly subjective
and
requires significant judgment at many points during the analysis, especially
with regard to the future cash flows of the Company. In estimating fair
value of
such, management makes estimates and judgments about the future cash flows
of
the Company. As
a
result of management’s evaluation, the Company concluded there was no impairment
of goodwill based upon its annual assessments.
Advertising
Costs
All
advertising costs are expensed when incurred. Advertising costs were
$47 and $61
for the three months ended December 31, 2006 and 2005 and $124 and $118
for the
years ended September 30, 2006 and 2005, respectively.
Stock-Based
Compensation
F-27
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for the Three Months Ended December 31,
2006 and
2005 is unaudited)
(Dollars
in thousands, except share and per share data)
At
December 31, 2006, the Company had two stock-based compensation plans
which are
more fully described in Note 9. The Company accounts for its stock compensation
awards under the provisions of FASB Statement No. 123, Accounting
for Stock-Based Compensation (“SFAS
123”), as amended by SFAS No. 148, Accounting
for Stock-Based
Compensation—Transition and Disclosure (“SFAS
148”). As permitted by SFAS 123, the Company measures compensation cost in
accordance with Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees
(“APB
25”) and related interpretations using the intrinsic value
method.
Under
the
intrinsic value method, compensation expense is determined at the measurement
date, generally the date of grant, as the excess, if any, of the estimated
fair
value of the Company’s common stock (the “Stock Price”) and the exercise price,
multiplied by the number of options granted. Generally, the Company grants
stock
options with exercise prices equal to the Stock Price; however, to the
extent
that the Stock Price exceeds the exercise price of stock options on the
date of
grant, the Company records stock-based compensation expense using the
graded
vested attribution method over the vesting schedule of the options, which
is
generally three years. The Company recognized $1 for the three months ended
December 31, 2005 and $4 and $8 in stock-based compensation expense for
the
years ended September 30, 2006 and 2005, respectively, under the intrinsic
value
method.
Since
inception, there has been no public market for the Company’s common stock to
observe its Stock Price on award grant dates. Therefore, for purposes of
applying the intrinsic value method, management estimated the stock price
based
on the American Institute of Certified Public Accountants Practice Alert
No.
00-1, Accounting
for Certain Equity Transactions.
The
estimated fair value of the common stock on the date of grant was based
on
weighing a variety of different quantitative and qualitative factors including,
but not limited to, the Company’s financial position, an evaluation of the
Company’s competition, the economic climate in the marketplace, the illiquid
nature of the common stock, contemporaneous and anticipated private sales
of the
common stock, and the Company’s analysis of the trading prices of a peer group
of comparable public companies. For periods prior to August 1, 2005, the
Company
estimated the fair value of common stock based on contemporaneous transactions
included in private placement sales of common stock for cash that were
executed
at or near the grant dates. Since August 1, 2005, the Company has estimated
the fair value of common stock based on valuation analyses performed for
applicable periods which consider several factors including discounted
cash
flows, the average trading multiples of comparable peer group public companies
and the multiples derived from recent purchase and sales transactions of
comparable companies in the industry. The Company believes its approach
results
in a reasonable application of its valuation methodology for all
periods.
The
Company granted the following stock options during the years ended September
30,
2006 and 2005:
|
|
|
Weighted
Average Per Share
|
|||||||||||
|
|
|
Weighted
|
Estimated
|
Intrinsic
|
|||||||||
|
|
|
Average
|
Fair
Value of
|
Value
|
|||||||||
|
|
Options
|
Exercise
|
Common
Stock
|
at
Grant
|
|||||||||
|
|
Granted
|
Prices
|
at
Grant Date
|
Date
|
|||||||||
|
|
|
|
|
|
|||||||||
|
Year
Ended September 30, 2006
|
204,920
|
$
|
3.75
|
$
|
2.26
|
$
|
—
|
||||||
|
|
|||||||||||||
|
Year
Ended September 30, 2005
|
429,616
|
$
|
3.44
|
$
|
3.75
|
$
|
0.31
|
||||||
Effective
October 1, 2006, the Company adopted SFAS No. 123R,
Share-Based Payments
(“SFAS
123R”). Because the Company used the fair-value-based method for disclosure
under SFAR 123, it adopted SFAS 123R using the modified prospective method.
Under the modified prospective method, compensation expense recognized
beginning
on that date will include: (a) compensation expense for all
share-
F-28
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for the Three Months Ended December 31,
2006 and
2005 is unaudited)
(Dollars
in thousands, except share and per share data)
based
payments granted prior to, but not yet vested as of October 1, 2006, based
on the grant date fair value estimated in accordance with the original
provisions of SFAS 123, and (b) compensation expense for all
share-based payments granted on or after October 1, 2006, based on the
grant date fair value estimated in accordance with the provisions of
SFAS 123R.
The pro forma effect of stock-based compensation expenses pursuant to
SFAS 123R
is disclosed in the financial statements and under the modified prospective
transition method and the results for prior periods are not be restated.
The
fair
value of options granted is determined using the Black-Scholes-Merton
option
valuation model (the “Model”). Certain assumptions were used by the Company in
the application of the Model to estimate the fair value of all stock
options
issued to employees on the grant date. The risk-free interest rate for
all stock
option grants is based on U.S. Treasury zero-coupon issues with equivalent
remaining terms. The expected life of such options has been estimated
to equal
the average of the contractual term and the vesting term. The Company
anticipates paying no cash dividends for its common stock; therefore,
the
expected dividend yield is assumed to be zero. As there was no public
market for
its common stock prior to September 30, 2006, the Company estimated the
volatility for options granted based on an analysis of reported data
for a peer
group of publicly traded companies that issued options with substantially
similar terms consistent with SFAS 123R and Securities and Exchange
Commission Staff Accounting Bulletin No. 107, Share
Based Payment.
For
purposes of calculating the pro forma compensation expense illustrated
above,
the Company used its cumulative actual forfeiture rates of between 11%
and 13%
for all awards which management believes is a reasonable approximation
of
anticipated future forfeitures. The fair value is amortized ratably over
the
vesting period of the awards, which is typically three years. The Company
may
elect to use different assumptions under the Model in the future or select
a
different option valuation model altogether, which could materially affect
its
net income or loss and net income or loss per share in the future. At
September
30, 2006, based on the Model, there was approximately $363 of total unrecognized
compensation cost related to non-vested share-based compensation arrangements
granted under all equity compensation plans. The Company recognized $91
of
expense for the three months ended December 31, 2006 subsequent to the
October
1, 2006 adoption of SFAS 123.
The
following disclosure illustrates the pro forma effect on net loss and net
loss
per share that would have been recognized in the statement of operations
if the
fair-value-based method had been applied to all awards in accordance with
SFAS
123. Under the fair value-based-method, the Company must measure the estimated
fair value of equity instruments awarded to employees at the grant date
for
which the Company is obligated to issue when employees have rendered the
requisite service and satisfied any other conditions necessary to earn
the right
to benefit from the instruments (for example, to exercise the share options).
That estimate is not re-measured in subsequent periods. The Company estimated
the fair value of stock options issued to employees using the
Black-Scholes-Merton option-pricing model (the “Model”). The Model requires
assumptions be made by management including the economic life of the option,
expected volatility, expected dividends and risk-free interest rates. The
Company believes that the Model provides a fair value estimate that is
consistent with the measurement objective and the fair-value-based method
of
SFAS 123.
F-29
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for the Three Months Ended December 31,
2006 and
2005 is unaudited)
(Dollars
in thousands, except share and per share data)
The
following table illustrates the pro forma effect on net loss per share
as if the
Company had applied the fair value recognition provisions of SFAS
123:
|
Three
Months Ended
|
Year
Ended September 30,
|
|||||||||
|
|
December
31, 2005
|
2006
|
2005
|
|||||||
|
|
|
|
|
|||||||
|
Net
loss
|
$
|
(174
|
)
|
$
|
(1,448
|
)
|
$
|
(517
|
)
|
|
|
Deduct:
Stock based employee
|
||||||||||
|
compensation
determined under
|
||||||||||
|
the
fair value based method
|
||||||||||
|
for
all awards, net of tax effect
|
(128
|
)
|
(507
|
)
|
(321
|
)
|
||||
|
Pro
forma net loss
|
$
|
(302
|
)
|
$
|
(1,955
|
)
|
$
|
(838
|
)
|
|
|
|
||||||||||
|
Pro
forma net loss per share:
|
||||||||||
|
Basic
and diluted
|
$
|
(0.08
|
)
|
$
|
(0.48
|
)
|
$
|
(0.22
|
)
|
|
|
|
||||||||||
|
As
reported net loss per share:
|
||||||||||
|
Basic
and diluted
|
$
|
(0.04
|
)
|
$
|
(0.36
|
)
|
$
|
(0.14
|
)
|
|
|
|
||||||||||
|
Weighted
average shares outstanding:
|
||||||||||
|
Basic
and diluted
|
3,903,833
|
4,046,278
|
3,804,527
|
|||||||
The
following table illustrates the assumptions used by the Company in the
application of the Model to calculate the pro forma compensation expense
in
accordance with SFAS 123 for stock options granted to employees and
directors:
|
|
Fair
Value
|
|
|
|
Expected
|
Option
|
|||||||||||||
|
|
of
Stock
|
Stock
|
Risk
Free
|
Dividend
|
Option
Life
|
Exercise
|
|||||||||||||
|
|
Prices
|
Volatility
|
Rate
of Return
|
Rate
|
in
Years
|
Prices
|
|||||||||||||
|
Year
Ended September 30,
|
|
|
|
|
|
|
|||||||||||||
|
2006
|
$
2.07 - $2.46
|
70%
|
|
4.31%
- 4.70%
|
|
0%
|
|
6.5
- 10
|
$
3.75
|
||||||||||
|
2005
|
$
3.75
|
70%
- 90%
|
|
3.26%
- 4.13%
|
|
0%
|
|
6.5
|
$
3.00 - $ 3.75
|
||||||||||
As
stock
options vest over several years, additional stock option grants are made
and
employees terminate each year, the above pro forma disclosures and related
assumptions used in the Model are not necessarily representative of pro
forma
effects on operations for future periods.
F-30
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for the Three Months Ended December 31,
2006 and
2005 is unaudited)
(Dollars
in thousands, except share and per share data)
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 in accordance
with
SFAS 123 and EITF Issue No. 96-18, Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
or
in Conjunction With Selling Goods or Services.
The
Company estimated the fair value of stock options and warrants issued to
non-employees using the Model as described more fully above. The following
table
illustrates the inputs and assumptions used by the Company in the application
of
the Model to estimate the fair value for fully vested stock options granted
to
non-employees as follows:
|
|
Year
Ended September 30,
|
|
||||
|
|
2006
|
|
2005
|
|
||
|
Options
granted to non-employees
|
|
9,227
|
|
|
—
|
|
|
Warrants
granted to non-employees
|
|
392,000
|
|
|
75,727
|
|
|
Contractual
lives in years
|
|
5
-
10
|
|
|
5
|
|
|
Estimated
fair value of common stock
|
$
|
2.07-2.46
|
|
$
|
$
3.75
|
|
|
Exercise
prices
|
$
|
0.001
- 4.68
|
|
$
|
4.68
|
|
|
Estimated
stock volatility
|
|
70
|
%
|
|
70%
- 90
|
%
|
|
Risk
free rate of return
|
|
3.70%
to 4.93
|
%
|
|
3.36%
to 3.48
|
%
|
|
Dividend
Rate
|
|
0
|
%
|
|
0
|
%
|
Employee
Benefits
As
of
January 1, 2002, the Company adopted 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 has not made any
contributions since inception.
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.
Net
Loss Per Share of Common Stock
Basic
loss per common share is computed by dividing net loss available to common
shareholders by the weighted average number of common shares outstanding.
Diluted loss per common share is computed similarly to basic loss per common
share, except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were
not
anti-dilutive. The Company has excluded all outstanding options, warrants
and
convertible debt from the calculation of diluted weighted average shares
outstanding because these securities were anti-dilutive for all periods
presented. The
F-31
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for the Three Months Ended December 31,
2006 and
2005 is unaudited)
(Dollars
in thousands, except share and per share data)
balance
of these excluded equity instruments were 1,481,875, 1,050,843, 1,507,856
and
1,034,176 at December 31, 2006 and 2005 and September 30, 2006 and 2005,
respectively.
Recent
Accounting Pronouncements
In
September 2006, the SEC staff issued Staff Accounting
Bulletin No. 108, Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements
in
Current Year Financial Statements,
(“SAB
108”). SAB 108 was issued in order to eliminate the diversity of practice
surrounding how public companies quantify financial statement misstatements.
Traditionally, there have been two widely-recognized methods for quantifying
the
effects of financial statement misstatements: the “roll-over” method and the
“iron curtain” method. The roll-over method focuses primarily on the impact of a
misstatement on the income statement — including the reversing effect of
prior year misstatements — but its use can lead to the accumulation of
misstatements in the balance sheet. The iron-curtain method, on the other
hand,
focuses primarily on the effect of correcting the period-end balance sheet
with
less emphasis on the reversing effects of prior year errors on the income
statement. In SAB 108, the SEC staff established an approach that requires
quantification of financial statement misstatements based on the effects
of the
misstatements on each of a company’s financial statements and the related
financial statement disclosures. This model is commonly referred to as
a “dual
approach” because it requires quantification of errors under both the iron
curtain and the roll-over methods. Management of the Company has evaluated
SFAS
108 and believes its adoption will not materially impact the consolidated
financial statements.
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements
(“SFAS
157”), which defines fair value, establishes a framework for measuring fair
value in accounting principles generally accepted in the United States
of
America, and expands disclosures about fair value measurements. SFAS 157
prioritizes the inputs to valuation techniques used to measure fair value
into a
hierarchy containing three broad levels. The fair value hierarchy gives
the
highest priority to quoted prices (unadjusted) in active markets for identical
assets and liabilities (Level 1) and the lowest priority to unobservable
inputs
(Level 3). In some cases, the inputs used to measure fair value might fall
in
different levels of the fair value hierarchy. The level in the fair value
hierarchy within which the fair value measurement in its entirety falls
shall be
determined on the lowest level input that is significant to the fair value
measurement in its entirety. Assessing the significance of a particular
input to
the fair value measurement in its entirety requires judgment, considering
factors specific to the asset or liability. SFAS No. 157 is effective for
interim and annual financial statements for fiscal years beginning after
November 15, 2007. Upon initial adoption of SFAS 157, differences between
the
carrying value and the fair value of those instruments shall be recognized
as a
cumulative-effect adjustment to the opening balance of retained earnings
for
that fiscal year, and the effect of subsequent adjustments resulting from
recurring fair measurements shall be recognized in earnings for the period.
The
Company has not yet adopted SFAS 157. As a result, the consolidated financial
statements do not include any adjustments relating to any potential adjustments
to the carrying value of assets and liabilities. Management of the Company
is
currently evaluating the impact of SFAS 157 on the consolidated financial
statements.
In
June
2006, the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes — an Interpretation of FASB Statement
No. 109
(“FIN 48”), which clarifies the accounting for uncertainty in tax
positions. FIN No. 48 requires that the Company recognize the impact
of a tax position in the financial statements, if that position is more
likely
than not to be sustained on audit, based on the technical merits of the
position. The provisions of FIN 48 are effective for fiscal years beginning
after December 15, 2006, with the cumulative effect, if any, of the change
in
accounting principle recorded as an adjustment to opening retained earnings.
Management of the Company has evaluated FIN 48 and believes its adoption
will not materially impact the consolidated financial statements.
In
February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 provides companies
with an option to report selected financial assets and liabilities
at fair value
and establishes presentation and disclosure requirements designed to
facilitate
comparisons between companies that choose different measurement attributes
for
similar types of assets and liabilities. SFAS 159 is effective for
fiscal years
beginning after November 15, 2007. The Company is in the process of
evaluating the impact of the adoption of this statement on the Company’s results
of operations and financial condition.
3.
Acquisitions
New
Tilt, Inc.
On
April
24, 2006, the Company acquired New Tilt, a privately held provider of Web
services. New Tilt’s results of operations have been included in the
consolidated financial statements since the date of acquisition. As a result
of
the
F-32
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for the Three Months Ended December 31,
2006 and
2005 is unaudited)
(Dollars
in thousands, except share and per share data)
acquisition,
the Company expects to expand its services in the health care and insurance
industries. The aggregate current consideration of approximately $1,550
consisted of $550 in cash, 320,000 shares of common stock valued at $717,
37,830
options for common stock valued at $121 and closing costs of $162. Additional
consideration of up to approximately $750 may be paid over a three-year
period in cash as additional consideration.
The
additional consideration described above is based upon the attainment
by the
acquired entity of defined operating objectives. At December 31, 2006, the
maximum remaining future consideration pursuant to this arrangement is
approximately $668. To date $82 was recorded as an increase to goodwill
under this arrangement.
Acquired
intangible assets of $91 were assigned as follows: $29 was assigned to
customer
relationships and $62 was assigned to non-compete agreements.
The
acquisition has been treated as a non-taxable transaction; therefore, the
intangible assets, including goodwill, are not tax deductible for the
Company.
Interactive
Applications Group, Inc.
On
December 15, 2004, the Company acquired iapps, a privately-held provider
of Web
services. iapps’ results of operations have been included in the
consolidated financial statements since the date of acquisition. As a result
of
the acquisition, the Company expects to expand its services to not-for-profit
organizations.
The
initial consideration of approximately $2,606 consisted of $355 in cash,
476,667
shares of common stock valued at $1,788, 72,527 warrants for common stock
valued
at $269, 43,764 options for common stock valued at $162 and closing costs
of
$32. Additional consideration of $300 may be paid over a three-year period
in
cash as additional consideration.
The
additional consideration described above is based upon the attainment
by the
acquired entity of defined operating objectives. At December 31, 2006, the
maximum remaining future consideration pursuant to this arrangement is
approximately $160. To date $140 was recorded as an increase to goodwill
under this arrangement.
Acquired
intangible assets of $353 were assigned as follows: $180 was assigned to
customer relationships, $58 was assigned to non-compete agreements, $95
was
assigned to the Orgitecture™ platform, $10 was assigned to domain names and $10
was assigned to trademarks.
The
acquisition has been treated as a non-taxable transaction; therefore the
intangible assets, including goodwill, are not tax deductible for the
Company.
The
Company completed the acquisition of New Tilt, Inc. (“New Tilt”) on April 24,
2006 and Interactive Applications Group, Inc. (“iapps”) on December 15, 2004.
The following table summarizes the estimated fair values of the assets
acquired
at the date of each acquisition as described further below:
F-33
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for the Three Months Ended December 31,
2006 and
2005 is unaudited)
(Dollars
in thousands, except share and per share data)
|
|
New
Tilt
|
Iapps
|
|||||
|
Net
assets acquired:
|
|
|
|||||
|
Cash
|
$
|
159
|
$
|
77
|
|||
|
Other
current assets
|
181
|
104
|
|||||
|
Equipment
|
56
|
54
|
|||||
|
Other
assets
|
59
|
202
|
|||||
|
Intangible
assets
|
91
|
353
|
|||||
|
Goodwill
|
1,123
|
2,244
|
|||||
|
Total
assets
|
1,669
|
3,034
|
|||||
|
Current
liabilities
|
70
|
246
|
|||||
|
Deferred
tax liabilities
|
49
|
182
|
|||||
|
Total
liabilities
|
119
|
428
|
|||||
|
Net
assets acquired
|
$
|
1,550
|
$
|
2,606
|
|||
|
|
|||||||
|
Purchase
price:
|
|||||||
|
Cash
paid
|
$
|
550
|
$
|
355
|
|||
|
Equity
exchanged
|
717
|
1,788
|
|||||
|
Warrants
issued and options exchanged
|
121
|
431
|
|||||
|
Closing
costs and fees
|
162
|
32
|
|||||
|
Total
purchase price
|
$
|
1,550
|
$
|
2,606
|
|||
Unaudited
Pro Forma Information
The
following unaudited pro forma information reflects the results of operations
of
the Company as though the acquisitions of New Tilt and iapps were completed
as
of October 1, 2004:
|
Pro
Forma (Unaudited)
|
|||||||
|
|
Years
Ended September 30,
|
||||||
|
|
2006
|
2005
|
|||||
|
|
|
|
|||||
|
Revenue
|
$
|
9,154
|
$
|
8,349
|
|||
|
Net
loss
|
$
|
(1,850
|
)
|
$
|
(638
|
)
|
|
|
Net
loss per share:
|
|||||||
|
Basic
and diluted
|
$
|
(0.44
|
)
|
$
|
(0.15
|
)
|
|
|
Number
of weighted average shares:
|
|||||||
|
Basic
and diluted
|
4,228,499
|
4,223,833
|
|||||
F-34
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for the Three Months Ended December 31,
2006 and
2005 is unaudited)
(Dollars
in thousands, except share and per share data)
The
results above give effect to the following pro forma adjustments related
to New
Tilt and iapps:
|
·
|
Reduction
in depreciation of $12 and $23 resulting from the fair values
assigned to
property and equipment for New Tilt and iapps at the time of
acquisition.
The pro forma adjustment reflects the difference in historical
depreciation expense for the years ended September 30, 2006
and 2005,
respectively, for New Tilt ($24) and iapps ($42) and the pro
forma
depreciation expense computed based upon the estimated fair
value assigned
to property and equipment as described above.
|
|
·
|
Increases
of $11 and $18 in amortization expense resulting from the values
assigned
to intangible assets of New Tilt and iapps upon acquisition.
As described
above,
the Company has allocated $91 of the New Tilt purchase price
and $353 of
the iapps purchase price, to intangible assets, which are amortized
over a
five year period resulting in a pro forma effect of $11 and
$18 for the
years ended September 30, 2006 and 2005, respectively.
|
|
·
|
Reduction
in stock-compensation expense of $40 and $72 for New Tilt for
the years
ended September 30, 2006 and 2005, respectively; this pro forma
adjustment
is the result of stock compensation expenses computed pursuant
New Tilt’s
accounting policy in accordance with SFAS 123 of $40 and $72,
as compared
to the stock compensation expense that would have been recorded
in
accordance with the Company’s accounting policy under the intrinsic method
in accordance with APB 25 of $0 and $0 for the years ended
September 30,
2006 and 2005, respectively.
|
|
·
|
The
effect of additional interest expense $142 and $282 that would
have been
incurred to finance a portion of the purchase price for New
Tilt for the
years ended September 30, 2006 and 2005,
respectively.
|
The
common stock used as consideration for the acquisitions is presented as
being
outstanding during the entire period for the computation of weighted average
shares outstanding used in the computation of net loss per share for all
periods
above.
The
results presented above for the year ended September 30, 2006 include the
results of the Company for that period combined with the pre-acquisition
results
of New Tilt from October 1, 2005 through April 24, 2006.
The
results presented above for the year ended September 30, 2005 include the
results of the Company for that period combined with the pre-acquisition
results
of New Tilt for its fiscal year ended December 31, 2005 and iapps from
October
1, 2004 through the day before acquisition on December 15, 2004.
4.
Equipment and Improvements
Equipment
and improvements, net consisted of the following:
|
As
of
|
||||||||||
|
December
31,
|
As
of September 30
|
|||||||||
|
2006
|
2006
|
2005
|
||||||||
|
Furniture
and fixtures
|
$
|
146
|
$
|
136
|
$
|
111
|
||||
|
Acquired
software
|
138
|
124
|
75
|
|||||||
|
Computers
and peripherals
|
633
|
629
|
365
|
|||||||
|
Leasehold
improvements
|
38
|
38
|
28
|
|||||||
|
|
955
|
927
|
579
|
|||||||
| Less accumulated depreciation | 546 |
498
|
312
|
|||||||
|
$
|
409 |
$
|
429 |
$
|
267
|
|||||
Included
above are assets acquired under capitalized leases of $207 as of December
31,
2006 and $207 and $97 as of September 30, 2006 and 2005, respectively,
with
accumulated depreciation thereon of $109, $92 and $41,
respectively.
The
Company has $206, $233 and $96 of net property and equipment at December
31,
2006 and September 30, 2006 and 2005, respectively, for use in its hosting
arrangements.
F-35
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for the Three Months Ended December 31,
2006 and
2005 is unaudited)
(Dollars
in thousands, except share and per share data)
5.
Definite Lived Intangible Assets and Goodwill
Definite
lived intangible assets and goodwill consisted of the following:
|
|
Useful
|
As
of December 31, 2006
|
|||||||||||
|
|
Lives
in
|
Gross
|
Accumulated
|
Net
|
|||||||||
|
|
Years
|
Asset
|
Amortization
|
Amount
|
|||||||||
|
Intangible
assets;
|
|
|
|
|
|||||||||
|
Domain
and trade names
|
10
|
$
|
29
|
$
|
(13
|
)
|
$
|
16
|
|||||
|
Customer
related
|
5
|
478
|
(253
|
)
|
225
|
||||||||
|
Acquired
software
|
3
|
95
|
(65
|
)
|
30
|
||||||||
|
Total
intangible assets
|
$
|
602
|
$
|
(331
|
)
|
$
|
271
|
||||||
|
|
|||||||||||||
|
Goodwill
|
$
|
6,409
|
$
|
—
|
$
|
6,409
|
|||||||
|
|
|
||||||||||||
|
|
|
As
of September 30, 2006
|
As
of September 30, 2005
|
|||||||||||||||||||
|
|
|
Gross
|
Accumulated
|
Net
|
Gross
|
Accumulated
|
Net
|
|||||||||||||||
|
|
Asset
|
Amortization
|
Amount
|
Asset
|
Amortization
|
Amount
|
||||||||||||||||
|
Intangible
assets;
|
|
|
|
|
|
|
|
|||||||||||||||
|
Domain
and trade names
|
10
|
$
|
29
|
$
|
(13
|
)
|
$
|
16
|
$
|
29
|
$
|
(10
|
)
|
$
|
19
|
|||||||
|
Customer
related
|
5
|
478
|
(229
|
)
|
249
|
387
|
(145
|
)
|
242
|
|||||||||||||
|
Acquired
software
|
3
|
95
|
(57
|
)
|
38
|
95
|
(25
|
)
|
70
|
|||||||||||||
|
Total
intangible assets
|
$
|
602
|
$
|
(299
|
)
|
$
|
303
|
$
|
511
|
$
|
(180
|
)
|
$
|
331
|
||||||||
|
|
||||||||||||||||||||||
|
Goodwill
|
$
|
6,346
|
$
|
—
|
$
|
6,346
|
$
|
5,097
|
$
|
—
|
$
|
5,097
|
||||||||||
The
aggregate amortization expense for the three months ended December 31,
2006 and
2005 and the years ended September 30, 2006 and 2005 is as
follows:
|
|
Total
|
Expense
Charge To
|
||||||||
|
|
Amortization
|
Cost
of
|
|
|||||||
|
|
Expense
|
Revenue
|
Operations
|
|||||||
|
|
|
|
|
|||||||
|
Three
Months Ended December 31, 2006
|
$
|
32
|
$
|
31
|
$
|
1
|
||||
|
Three
Months Ended December 31, 2005
|
$
|
28
|
$
|
27
|
$
|
1
|
||||
|
|
||||||||||
|
Year
Ended September 30, 2006
|
$
|
119
|
$
|
117
|
$
|
2
|
||||
|
Year
Ended September 30, 2005
|
$
|
94
|
$
|
92
|
$
|
2
|
||||
The
estimated amortization expense for fiscal years 2007, 2008, 2009, 2010,
2011 and
thereafter is $108, $70, $64, $37, $18 and $6, respectively.
F-36
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for the Three Months Ended December 31,
2006 and
2005 is unaudited)
(Dollars
in thousands, except share and per share data)
As
discussed more fully in Note 3, goodwill increased $63 in the three months
ended
December 31, 2006. Goodwill increased $1,249 and $2,244 in the years
ended
September 30, 2006 and 2005. The increase in the year ended September
30, 2006
included $1,123 as a result of the acquisition of New Tilt and $126 due
to
contingent consideration earned under the acquisition agreements with
iapps and
New Tilt. The increase in the year ended September 30, 2005 included
$2,131 as a
result of the acquisition of iapps and $113 due to contingent consideration
earned under the acquisition agreements with iapps and Lead Dog. Goodwill
at October 1, 2004 included $2,821 resulting from the 2002 acquisition
of Lead
Dog.
6.
Accrued Liabilities
Accrued
liabilities consisted of the following:
|
As
of December 31,
|
As
of September 30,
|
|||||||||
|
|
2006
|
2006
|
2005
|
|||||||
|
|
|
|
|
|||||||
|
Compensation
and benefits
|
$
|
287
|
$
|
259
|
$
|
144
|
||||
|
Subcontractors
|
47
|
58
|
31
|
|||||||
|
Deferred
rent
|
62
|
59
|
44
|
|||||||
|
Interest
|
81
|
70
|
—
|
|||||||
|
Professional
fees
|
159
|
178
|
4
|
|||||||
|
Other
|
36
|
82
|
48
|
|||||||
|
|
$
|
672
|
$
|
706
|
$
|
271
|
||||
7.
Indebtedness
The
Company’s indebtedness consisted of the following:
Senior
Notes Payable
|
As
of December
31,
|
As
of September 30,
|
|||||||||
|
|
2006
|
2006
|
2005
|
|||||||
|
|
|
|
|
|||||||
|
Senior
notes payable
|
$
|
2,800
|
$
|
2,800
|
$
|
—
|
||||
|
Discount
on senior notes payable attributable to warrants
|
(167
|
)
|
(303
|
)
|
—
|
|||||
|
|
$
|
2,633
|
$
|
2,497
|
$
|
—
|
||||
In
2006,
the Company entered into an agreement with an underwriter to execute a
private
placement of $2.8 million of senior secured notes payable and related security
agreement (the “Senior Notes”) and to underwrite an initial public offering of
the Company’s common stock.
The
Senior Notes are collateralized by all assets of the Company. The Senior
Notes were subordinated to other creditors at issuance; however, those
debts
were fully paid by the Company as of July 1, 2006. The principal amount
of the
Senior Notes is payable in full at the earlier of April 2007 or the closing
date
of an initial public offering of the Company’s securities pursuant to a
registration statement filed by the Company under the Securities Act of
1933
(the “Maturity Date”).
F-37
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for the Three Months Ended December 31,
2006 and
2005 is unaudited)
(Dollars
in thousands, except share and per share data)
Under
the
terms of the Senior Notes, the Company agreed to comply with certain restrictive
covenants so long as the notes remain outstanding, which include: (a) not
to
liquidate, dissolve or merge with another entity, excluding its wholly-owned
subsidiaries, (b) not to sell assets other than in the ordinary course
of
business, (c) not to redeem or repurchase equity securities of the Company
other
than from employees or consultants to the Company, (d) not to declare dividends,
pay any cash dividends or make distributions to the Company’s outstanding
shareholders and (e) not to engage in a merger, acquisition, reorganization,
declaration of bankruptcy or sell substantially all of its assets that
would
result in a change in voting control of the Company from its current
shareholders.
In
connection with the issuance of the Senior Notes, the Company issued 280,000
warrants to the note holders (the “Debt Warrants”) and 112,000 warrants to the
underwriter for services rendered in connection with the private placement
(the
“Underwriter’s Debt Warrants”). These warrants are exercisable into shares of
the Company’s common stock. The Debt Warrants are exercisable at $0.001 per
share at any time within five years from the date of grant. The Underwriter’s
Debt Warrants are exercisable at any time within five years from the grant
date
provided, however, that no such exercise shall take place prior to the
earlier
of the date of an initial public offering or April 21, 2008. The Underwriter’s
Debt Warrants are exercisable at $4.68 or, in the case of an initial public
offering, an amount equal to the first offering price on the first day
of an
offering. As part of the Senior Notes, the Company's investment banker
received
$280 in fees which are recorded as deferred financing fees and are being
amortized over the one-year term of the notes.
Under
the
terms of the Senior Notes, the Company is not obligated to make principal
payments until the Maturity Date, nor are there any penalties should
the notes
be repaid prior to the Maturity Date. This debt carries an interest rate
of 10%
per annum for the first six months and 12% per annum thereafter. The
effective
interest rate, considering the amortization of the debt discount and
other debt
issuance costs, is 47%. Interest expense related to this debt, including
amortization of the deferred financing fees, was $340 for the three months
ended
December 31, 2006 and $558 for the year ended September 30, 2006. The
debt was
subordinated to certain debt that was retired in July 2006. The debt
carries
default provisions including: (1) failure to pay principal or accrued
interest
when due, (2) failure to observe or perform various positive and negative
covenants as set forth in the loan document, (3) failure to complete
an initial
public offering by the maturity date and (4) the occurrence of a bankruptcy
or
similar event. In the event of loan default, the interest rate will increase
to
15% per annum and in case of default in payment of the principal, the
interest
rate would increase to 18% per annum. This debt carries a one-year term
and will
be retired upon the successful completion of an initial public
offering.
Financing
Agreement
|
As
of December
31,
|
As
of September 30,
|
|||||||||
|
|
2006
|
2006
|
2005
|
|||||||
|
|
|
|
|
|||||||
|
Financing
agreement
|
$
|
—
|
$
|
—
|
$
|
292
|
||||
Commencing
March 2005, the Company entered into a financing agreement (the “Agreement”)
with a private commercial lender (the “Lender”) providing the Company up to $500
of credit availability which was increased to $750 on September 12, 2005.
Under
the terms of the Agreement, the Company chose to deliver certain accounts
receivable to the Lender, subject to acceptance. Upon acceptance, the Lender
advanced to the Company up to 80% of the face amount of the receivable,
and the
remaining 20% was remitted to the Company when paid by the customer. In
this
Agreement, the Company assigned its right of collection to the Lender with
full
recourse rights against the Company in the event the receivable was never
paid
to the Company or the Lender directly.
F-38
The
fees
charged under the Agreement for the aggregate amounts advanced by the
Lender
included a monthly commitment fee of 1.7%, which the Company recorded
as
interest expense. The total interest expense was $0, $24, $58 and $37
for the
three months ended December 31, 2006 and 2005 and the years ended September
30,
2006 and 2005, respectively. The weighted average borrowings incurred
by the
Company under the Agreement was $0, $418, $272 and $319 for the three
months
ended December 31, 2006 and 2005 and the years ended September 30, 2006
and
2005, respectively. The Company terminated the Agreement in June
2006.
Capital
Lease Obligations
|
As
of December 31,
|
As
of September 30,
|
|||||||||
|
|
2006
|
2006
|
2005
|
|||||||
|
|
|
|
|
|||||||
|
Capital
lease obligations
|
$
|
133
|
$
|
144
|
$
|
44
|
||||
As
of
September 30, 2006, the Company had remaining the following minimum lease
payments under capitalized lease obligations:
|
Year
Ending September 30,
|
|
|||
|
2007
|
$
|
67
|
||
|
2008
|
66
|
|||
|
2009
|
40
|
|||
|
2010
|
13
|
|||
|
2011
|
1
|
|||
|
Totals
|
187
|
|||
|
Less
interest at a weighted average of 14.15%
|
43
|
|||
|
Total
capital lease obligations
|
$
|
144
|
||
Notes
Payable to Shareholders
|
As
of December 31,
|
As
of September 30,
|
|||||||||
|
|
2006
|
2006
|
2005
|
|||||||
|
|
|
|
|
|||||||
|
|
|
|
|
|||||||
|
Notes
payable to shareholders
|
$
|
—
|
$
|
—
|
$
|
85
|
||||
In
connection with the acquisition of Lead Dog Digital, Inc. (“Lead Dog”) in 2002,
the Company issued notes payable to the former shareholders of Lead Dog
totaling
$58. These notes carried an interest rate of 10% maturing on August 31,
2005 and
were convertible into the Company’s common stock at fair value ($3.00 per
share). The Company was unable to fully repay the principal and one of
the note
holders instituted the default interest rate of 15% for the period subsequent
to
August 31, 2005. Interest incurred under the notes was $0, $2, $5 and
$6 for the
three months ended December 31, 2006 and 2005 and the years ended September
30,
2006 and 2005, respectively. The amounts outstanding under these notes
were $0,
$0 and $45 at December 31, 2006 and September 30, 2006 and 2005, respectively.
In September 2005, the Company received an interest free advance from
its Chief
Executive Officer in the amount of $40 and the advance was repaid on
November 9,
2005. Imputed interest on this advance was immaterial.
F-39
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for the Three Months Ended December
31, 2006 and
2005 is unaudited)
(Dollars
in thousands, except share and per share data)
8.
Commitments and Contingencies
Guarantees
and Indemnifications
Certain
software licenses granted by the Company contain provisions that indemnify
licensees from damages and costs resulting from claims alleging that the
Company’s software infringes the intellectual property rights of a third party.
The Company has indemnification provisions in its articles of incorporation
whereby no director or officer will be liable to the Company or its shareholders
for monetary damages for breach of certain fiduciary duties as a director
or
officer. The Company has received no requests for indemnification under
these
provisions, and has not been required to make material payments pursuant
to
these provisions. Accordingly, the Company has not recorded a liability
related
to these indemnification provisions.
Litigation
In
the
normal course of business, the Company is subject to ordinary routine litigation
and claims incidental to its business. The Company monitors and assesses
the
merits and risks of pending legal proceedings. While the results of litigation
and claims cannot be predicted with certainty, based upon its current
assessment, the Company believes that the final outcome of any existing
legal
proceeding will not have a materially adverse effect, individually or in
the
aggregate, on its consolidated results of operations or financial
condition.
Operating
Lease Commitments
The
Company maintains its executive offices in Woburn, Massachusetts and operating
offices in several locations throughout the United States and India.
Future minimum rental commitments under non-cancelable operating leases
with initial or remaining terms in excess of one year at September 30,
2006 were
as follows:
|
Year
Ending September 30,
|
|
|||
|
2007
|
$
|
306
|
||
|
2008
|
338
|
|||
|
2009
|
291
|
|||
|
2010
|
239
|
|||
|
2011
|
230
|
|||
|
Total
|
$
|
1,404
|
||
Rent
expense for three months ended December 31, 2006 and 2005 was $155 and
$109 and
for the years ended September 30, 2006 and 2005 was approximately $615 and
$501, respectively, exclusive of sublease income of $17, $25, $100 and
$68 for
the three months ended December 31, 2006 and 2005 and the years ended
September
30, 2006 and 2005, respectively. The Company’s sub rental agreements expired
contemporaneous with the associated leases on November 30, 2006. The
Company has
amended this lease for only the space it utilizes for a period of two
additional
years.
F-40
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for the Three Months Ended December
31, 2006 and
2005 is unaudited)
(Dollars
in thousands, except share and per share data)
Other
Commitments
On
October 1, 2005, the Company entered into a Business Combination Services
Agreement with Joseph Gunnar & Co., LLC (“Gunnar”), pursuant to which Gunnar
provides Bridgeline with certain advisory services concerning potential
acquisitions and transactions. The term of the agreement is for one year
with
automatic one-year renewals until either party elects not to renew and
provides
90 days’ written notice prior to the commencement of the next renewal period or
after the consummation of two business combinations during any term. During
the
term and any renewal periods, the Company is required to pay cash advances
against success fees in the initial amount of $7 per month, which amount
increased to $10 per month in May 2006, and will increase to $15 per month
upon
a public stock offering. As compensation for its services, the Company
is
obligated to pay Gunnar, at the closing of a business combination (i.e.,
a
merger, acquisition, sale or joint venture), a success fee equal to six
percent
of the total value of all cash, securities or other property paid in connection
with the transaction. The success fee for each business combination consummated
during the initial term or a renewal period is a minimum of $125 and a
maximum
of $375, net of the cash advances paid to Gunnar during the applicable
period.
Success fees, less amounts paid in advance, are included in the total purchase
price of the related acquisition. Amounts paid in advance are expensed
as paid.
The Company is also obligated to reimburse Gunnar for reasonable expenses
incurred in connection with providing the advisory services. This agreement
also
contains exclusivity, indemnification and other terms and provisions customary
for agreements of this nature.
The
Company frequently warrants that the technology solutions it develops for
its
clients will operate in accordance with the project specifications without
defects for a specified warranty period, subject to certain limitations
that the
Company believes are standard in the industry. In the event that defects
are
discovered during the warranty period, and none of the limitations apply,
the
Company is obligated to remedy the defects until the solution that the
Company
provided operates within the project specifications. The Company is not
typically obligated by contract to provide its clients with any refunds
of the
fees they have paid, although a small number of its contracts provide for
the
payment of liquidated damages upon default. The Company has purchased insurance
policies covering professional errors and omissions, property damage and
general
liability that reduce its monetary exposure for warranty-related claims
and
enable it to recover a portion of any future amounts paid. The Company
typically
provides in its contracts for testing and client acceptance procedures
that are
designed to mitigate the likelihood of warranty-related claims, although
there
can be no assurance that such procedures will be effective for each project.
The
Company has never paid any material amounts with respect to the warranties
for
its solutions. The Company sometimes commits unanticipated levels of effort
to
projects to remedy defects covered by its warranties. The Company’s estimate of
its exposure related to warranties on contracts is immaterial as of
September 30, 2006 and 2005.
9.
Shareholder’s Equity
Since
its
inception in 2000, the Company has granted common stock, common stock warrants,
and common stock option awards (the “Equity Awards”) to employees, consultants,
advisors and debt holders of the Company and to former owners and employees
of
acquired companies that become employees of the Company. The following
is a
summary of the common stock reserved for issuance for stock option and
warrant
activity:
Common
Stock Warrants
During
2001 through 2004, the Company issued to certain investment advisors warrants
to
purchase 160,542 shares of common stock for services rendered in connection
with
private placement sales of common stock with aggregate proceeds of approximately
$4,700. The warrants are exercisable at $3.75 and $4.68 per share at any
time
within five years from the grant date.
In
connection with the December 2004 acquisition of iapps described in Note
3, the
Company issued 72,527 warrants to its investment advisor for services rendered
in connection with the acquisition. The warrants are exercisable $4.68 per
share at any time within five years from the grant date. The Company valued
the
warrants at $269 using the Model and assumptions as described in Note 2,
which
the Company recorded as a direct cost of the acquisition.
In
March
2005, the Company issued 3,200 warrants in connection with the $500 financing
agreement described in Note 7. The warrants are exercisable at $4.68 per
share
at any time within five years from the date of grant. The Company valued
the
warrants at $8 using the Model and assumptions as described in Note 2,
which the Company charged to deferred financing fees and amortized the
cost over
the expected life of the agreement. The fees were fully amortized when
the
financing agreement was terminated in 2006.
F-41
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for the Three Months Ended December
31, 2006 and
2005 is unaudited)
(Dollars
in thousands, except share and per share data)
The
Debt
Warrants issued in connection with the Senior Notes described in Note 7
are
exercisable at $0.001 per share at any time within five years from the
date of
grant. As of September 30, 2006, 50,000 Debt Warrants have been exercised
by
Senior Note holders. The Underwriter’s Debt Warrants issued in connection with
the Senior Notes described in Note 7 are exercisable at any time within
five
years from the grant date provided, however, that no such exercise shall
take
place prior to the earlier of the date of an initial public offering or
April
21, 2008. The Underwriter’s Debt Warrants are exercisable at $4.68 or, in the
case of an initial public offering, an amount equal to the first offering
price
on the first day of such offering. The Company valued the Debt Warrants
at $531
and the Underwriter’s Debt Warrants at $115 using the Model and assumptions as
described in Note 2. The value of the Debt Warrants was recorded as a
discount on the Senior Notes and is being amortized over the one year term
of
the Senior Notes. The value of the Underwriter’s Debt Warrants was charged to
deferred financing costs and is being amortized over the one year term
of the
Senior Notes.
Upon
successful completion of an initial public offering, the exercise price
of the
Underwriter’s Debt Warrants will be modified to an amount equal to the first
offering price on the first day of such offering in accordance with the
Agreement. As such, the modification will require the Company to re-measure
the
value assigned to the warrants using the Model (as more fully described
in Note
2). The effect of the modification, if any, will be charged to earnings
at that
time.
2000
Stock Incentive Plan
During
2000, the Company adopted the 2000 Stock Incentive Plan (the “Plan”) and
reserved 1.0 million shares of common stock for issuance thereunder. On
June 24, 2005 the Board of Directors increased the reserve for common stock
issued under the Plan to 1.2 million. The Plan authorized the award of
incentive
stock options, non-statutory stock options, restricted stock, unrestricted
stock, performance shares, stock appreciation rights and any combination
thereof
to employees, officers, directors, consultants, independent contractors
and
advisors of the Company. During 2006, the Company amended and restated
the Plan
to conform to current tax laws and to increase the number of common shares
reserved for issuance under the plan to 1.4 million. Options granted under
the
Plan may be granted with contractual lives of up to ten years. There were
470,413 options reserved for issuance under the Plan as of September 30,
2006.
2001
Lead Dog Stock Option Plan
In
connection with the Company’s merger with Lead Dog in February 2002, the Company
assumed Lead Dog’s 2001 Stock Option Plan (the “Lead Dog Plan”). Options under
the Lead Dog Plan may be granted for periods of up to ten years and at
prices no
less than the fair market value of the shares on the date of grant. Under
the
terms of the Agreement and Plan of Merger with Lead Dog, 98,731 options
of the
Lead Dog Plan were reserved for issuance to former Lead Dog employees that
remained with the Company for one year subsequent to the
merger.
A
summary
of combined option and warrant activity is as follows:
F-42
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for the Three Months Ended December 31,
2006 and
2005 is unaudited)
(Dollars
in thousands, except share and per share data)
|
|
Stock
Options
|
Stock
Warrants
|
|||||||||||
|
|
|
Weighted
|
|
Weighted
|
|||||||||
|
|
|
Average
|
|
Average
|
|||||||||
|
|
|
Exercise
|
|
Exercise
|
|||||||||
|
|
Options
|
Price
|
Warrants
|
Price
|
|||||||||
|
|
|
|
|
|
|||||||||
|
Outstanding,
September 30, 2004
|
575,055
|
$
|
2.553
|
160,542
|
$
|
4.081
|
|||||||
|
Granted
|
429,616
|
$
|
3.439
|
75,727
|
$
|
4.680
|
|||||||
|
Exercised
|
—
|
—
|
—
|
—
|
|||||||||
|
Cancelled
or expired
|
(206,764
|
)
|
$
|
2.851
|
—
|
—
|
|||||||
|
Outstanding,
September 30, 2005
|
797,907
|
$
|
2.953
|
236,269
|
$
|
4.273
|
|||||||
|
Granted
|
204,920
|
$
|
3.750
|
392,000
|
$
|
1.533
|
|||||||
|
Exercised
|
—
|
—
|
(50,000
|
)
|
$
|
0.001
|
|||||||
|
Cancelled
or expired
|
(73,240
|
)
|
$
|
3.492
|
—
|
—
|
|||||||
|
Outstanding,
September 30, 2006
|
929,587
|
3.086
|
578,269
|
$
|
2.653
|
||||||||
|
Granted
|
31,880
|
$
|
3.750
|
—
|
—
|
||||||||
|
Exercised
|
—
|
—
|
—
|
—
|
|||||||||
|
Cancelled
or expired
|
(57,861
|
)
|
$
|
2.083
|
—
|
—
|
|||||||
|
Outstanding,
December 31, 2006
|
903,606
|
$
|
3.134
|
578,269
|
$
|
2.653
|
|||||||
A
summary
of options outstanding and options exercisable at September 30,
2006:
|
|
Options
Outstanding
|
Options
Exercisable
|
||||||||||||||
|
|
|
Weighted
|
|
|
|
|||||||||||
|
|
|
Average
|
|
|
|
|||||||||||
|
|
|
Remaining
|
Aggregate
|
Number
of
|
Aggregate
|
|||||||||||
|
Exercise
|
Number
of
|
Contractual
|
Intrinsic
|
Options
|
Intrinsic
|
|||||||||||
|
Price
|
Options
|
Life
in Years
|
Value
|
Exercisable
|
Value
|
|||||||||||
|
|
|
|
|
|
|
|||||||||||
|
$
0.003
|
24,167
|
6.00
|
$
|
41,253
|
24,167
|
$
|
41,253
|
|||||||||
|
$
0.357
|
15,397
|
6.30
|
$
|
21,454
|
15,397
|
$
|
21,454
|
|||||||||
|
$
1.072
|
63,374
|
5.42
|
$
|
2,432
|
63,374
|
$
|
2,432
|
|||||||||
|
$
1.200
|
43,764
|
8.21
|
$
|
14,444
|
43,764
|
$
|
14,444
|
|||||||||
|
$
3.000
|
257,138
|
6.50
|
$
|
—
|
231,552
|
$
|
—
|
|||||||||
|
$
3.750
|
525,747
|
8.85
|
$
|
—
|
172,202
|
$
|
—
|
|||||||||
|
|
929,587
|
550,456
|
||||||||||||||
The
aggregate intrinsic value in the table above represents the total intrinsic
value, based on the Company’s estimate of fair value of $2.46 at September 30,
2006 which would have been received by the option holders had all option
holders
exercised their options as of those dates.
A
summary
of options issued during the period from October 1, 2005 through December
31,
2006 are detailed below:
F-43
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for the Three Months Ended December
31, 2006 and
2005 is unaudited)
(Dollars
in thousands, except share and per share data)
|
Date
of Grant
|
Number
of
Options
|
Option
Exercise
Price
|
Fair
Value
|
Intrinsic
Value
|
|||||||||
|
December
2005
January
2006
February
2006
March
2006
April
2006
September
2006
October
2006
|
16,667
16,667
8,333
10,833
102,420
50,000
31,880
|
|
$3.75
3.75
3.75
3.75
3.75
3.75
3.75
|
|
$2.07
2.16
2.28
2.37
2.24
2.46
2.50
|
|
$—
—
—
—
—
—
—
|
||||||
|
236,800
|
|||||||||||||
The
fair
value of the underlying common stock using the retrospective method at
the
option grant date was determined by management as detailed in Note 2
under
Stock-Based
Compensation,
10.
Income Taxes
The
provision for income taxes differs from the amount computed by applying
the
statutory federal income tax rate to income before provision for income
taxes.
The sources and tax effects of the differences are as
follows:
|
|
Year
Ended September 30,
|
||||||
|
|
2006
|
2005
|
|||||
|
Income
tax benefit at the federal statutory rate of
34%
|
$
|
(538
|
)
|
$
|
(175
|
)
|
|
|
Permanent
differences, net
|
151
|
45
|
|||||
|
State
income benefit, net of federal benefit
|
(70
|
)
|
(20
|
)
|
|||
|
Change
in valuation allowance attributable to operations
|
464
|
150
|
|||||
|
Other
|
(7
|
)
|
—
|
||||
|
$
|
—
|
$
|
—
|
||||
As
of
September 30, 2006, the Company has net operating loss carryforwards (“NOLs”) of
approximately $3,919 for federal purposes and $3,578 for state purposes,
which
will be available to offset future taxable income. Approximately $1,164
of the
Company’s net operating losses are attributable to acquired entities. These net
operating losses were fully reserved for at the respective acquisition
dates. In
the event the Company realizes these assets in the future, the benefit
will be
recorded as a reduction of goodwill. If not used, the federal carryforwards
will
expire between 2020 and 2026 and the state carryforwards will expire between
2007 and 2026.
The
Company’s income tax provision was computed based on the federal statutory rate
and average state statutory rates, net of the related federal
benefit.
Significant
components of the Company’s deferred tax assets and liabilities are as
follows:
F-44
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for the Three Months Ended December
31, 2006 and
2005 is unaudited)
(Dollars
in thousands, except share and per share data)
|
|
As
of September 30,
|
||||||
|
Deferred
tax assets:
|
2006
|
2005
|
|||||
|
Short-term:
|
|
|
|||||
|
Contract
loss reserve
|
$
|
59
|
$
|
—
|
|||
|
|
|||||||
|
Long-term
|
|||||||
|
Net
operating loss carry forwards
|
1,551
|
1,186
|
|||||
|
|
|||||||
|
Deferred
tax liabilities:
|
|||||||
|
Current:
|
|||||||
|
Other
|
23
|
(3
|
)
|
||||
|
|
|||||||
|
Long-term:
|
|||||||
|
Intangibles
|
(122
|
)
|
(132
|
)
|
|||
|
Depreciation
|
(38
|
)
|
(57
|
)
|
|||
|
|
1,473
|
994
|
|||||
|
Valuation
allowance
|
1,473
|
994
|
|||||
|
|
$
|
-0-
|
$
|
-0-
|
|||
For
the
year ended September 30, 2006 the valuation allowance for deferred tax
assets
increased $479 which was mainly due to the operating loss incurred and
$15 due
to the acquisition of New Tilt. For the year ended September 30, 2005,
the
valuation allowance for deferred tax assets increased $15 which was mainly
due
to the operating loss incurred offset by the $135 decrease in the iapps
acquisition.,. The Company has NOLs and other deferred tax benefits that
are
available to offset future taxable income. A valuation allowance is established
if it is more likely than not that all or a portion of the deferred tax
asset
will not be realized. Accordingly, the Company has established a full valuation
allowance against its net deferred tax asset at September 30, 2006 and
2005,
respectively.
In
January 2005, the Company established Bridgeline Software Enterprises
Pvt. Ltd
in Bangalore India under the Software Technology Parks of India law.
This law
establishes a tax holiday for the first ten years of operations; therefore
the
Company has not incurred any foreign taxes. To date, the foreign taxes
not
incurred as a result of this tax holiday have not been
significant.
Undistributed
earnings of the Company’s foreign subsidiary amounted to approximately $186 and
$18 at September 30, 2006 and 2005, respectively. These earnings are considered
to be indefinitely reinvested; accordingly, no provision for US federal
and
state income taxes has been provided thereon. Upon repatriation of those
earnings, in the form of dividends or otherwise, the Company would be subject
to
both US income taxes (subject to an adjustment for foreign tax credits)
and
withholding taxes payable to the applicable foreign tax authority. Determination
of the amount of unrecognized deferred US income tax liability is not material
and detailed calculations have not been performed. As of September 30,
2006,
there would be minimal withholding taxes upon remittance of all previously
unremitted earnings.
11.
Events Subsequent to September 30, 2006
Amendment
of Warrant Agreements
In
November 2006, the terms of Debt Warrants described in Note 7 were amended
to
eliminate a certain provision, included in the Debt Warrants in error during
the
drafting of the Debt Warrant documents, which provision resulted in a contingent
obligation of the Company to redeem the Debt Warrants in the event that
an
initial public offering of the Company’s common stock does not occur prior to
the April 2011 expiration date of the Debt Warrants. As a result of the
amendment correcting this error,
F-45
BRIDGELINE
SOFTWARE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for the Three Months Ended December
31, 2006 and
2005 is unaudited)
(Dollars
in thousands, except share and per share data)
the
Company has accounted for the warrants in shareholder’s equity as additional
paid in capital since the date of issuance. Had this amendment not
been executed, the value of the Debt Warrants would have been recorded
as a
liability and such value would have been subject to adjustment based on
changes
in the value of the Company’s common stock. As of September 30, 2006, based on
the Company's estimate of the fair value of the common stock at $2.46
per share, the adjustment to the value of the Debt Warrants that would
have been
recognized had they been recorded as a liability was approximately
$60.
Probable
Acquisition of Objectware, Inc.
On
December 7, 2006, the Company signed a definitive agreement to acquire
Objectware, Inc. (“OW”) effective immediately following a successful initial
public offering, and no later than May 15, 2007. OW is an Atlanta, Georgia-based
company that specializes in Web application development, Web design,
wireless
application development, search engine optimization and providing managed
Web
services to customers. The proposed consideration for the acquisition
of OW will
consist of (i) $2,500 in cash, (ii) shares of its common stock having
a value
(based on the estimated initial public offering price of its shares)
of $2,700
and (iii) a deferred, contingent purchase price of up to $1,800, payable
in cash
and stock quarterly over the three years after the acquisition, contingent
upon
OW attaining certain operational performance benchmarks. The acquisition
of
Objectware is contingent on the Company raising at least $10 million
in its
initial public offering. On
March
29, 2007, the expiration date of the purchase agreement was extended to
June 15, 2007.
Initial
Public Offering of Common Stock
The
Company intends to undertake an initial public offering of its Common Stock,
the
net proceeds of which will be used to repay the Senior Notes described
in Note
7, to fund the cash portion of the Objectware acquisition described above
and
for general corporate purposes.
In
December 2006, the Company filed a registration statement with the Securities
and Exchange Commission for an initial public offering of its common
stock. The shares are being offered by the underwriter, Joseph Gunnar
& Co., LLC, subject to prior sale, when, as and if accepted by them and
subject to certain conditions.
Extension
of Senior Notes Payable
On
March
29, 2007, the maturity date of the Senior Notes Payable described in Note
7
was extended to the earlier of June 21, 2007 or the date the Company
closes a
firm underwritten initial public offering. The interest rate from April
1, 2007
to the extended maturity date shall be a rate of 15% per annum. In the
event
that the notes are not paid by the extended maturity date, the interest
rate
shall increase to a rate of 18% per annum subject to the terms and provisions
of
the notes. In accordance with the extension agreement, interest will
accrue, but
no payments of principal or interest will be required prior to the extended
maturity date.
F-46
Objectware,
Inc.
|
Report
of Independent Certified Public Accountants
|
F-49
|
|
|
|
|
Balance
Sheets as of December 31, 2006 and September 30, 2006 and
2005
|
F-49
|
|
|
|
|
Statements
of Operations for the three months ended December 31, 2006
and 2005 and
the years ended September 30, 2006 and 2005
|
F-50
|
|
|
|
|
Statements
of Shareholder’s Equity for the three months ended December 31, 2006 and
the years ended September 30, 2006 and 2006
|
F-51
|
|
|
|
|
Statements
of Cash Flows for the three months ended December 31, 2006
and 2005 and
the years ended September 30, 2006 and 2005
|
F-52
|
|
|
|
|
Notes
to Financial Statements
|
F-53
|
F-47
Report
of Independent Certified Public Accountants
To
the
Shareholders of
Bridgeline
Software, Inc.
and
Objectware, Inc.
We
have
audited the accompanying balance sheets of Objectware, Inc. (the “Company”) as
of September 30, 2006 and 2005, and the related statements of operations,
shareholder’s 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 auditing standards generally accepted
in
the United States of America. Those standards require that we plan and
perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis,
evidence supporting the amounts and disclosures in the financial statements.
An
audit also includes 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 financial statements referred to above present fairly, in
all
material respects, the financial position of Objectware, Inc. as of September
30, 2006 and 2005, 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
Boston,
Massachusetts
February
5, 2007
F-48
OBJECTWARE,
INC.
BALANCE
SHEETS
(Information
as of December 31, 2006 is Unaudited)
(Dollars
in thousands, except share amounts)
|
|
December
31,
|
September
30,
|
||||||||
|
ASSETS
|
2006
|
2006
|
2005
|
|||||||
|
Current
assets:
|
|
|
|
|||||||
|
Cash
and cash equivalents
|
$
|
1,154
|
$
|
976
|
$
|
530
|
||||
|
Accounts
receivable, net
|
443
|
345
|
180
|
|||||||
|
Current
portion of long-term receivable
|
60
|
60
|
37
|
|||||||
|
Due
from shareholder
|
—
|
32
|
27
|
|||||||
|
Deferred
tax asset
|
3
|
3
|
48
|
|||||||
|
Other
current assets
|
—
|
14
|
19
|
|||||||
|
Total
current assets
|
1,660
|
1,430
|
841
|
|||||||
|
Equipment
and improvements, net
|
167
|
165
|
134
|
|||||||
|
Long-term
receivable, net of current portion
|
252
|
288
|
226
|
|||||||
|
Other
assets
|
12
|
12
|
11
|
|||||||
|
Total
assets
|
$
|
2,091
|
$
|
1,895
|
$
|
1,212
|
||||
|
|
||||||||||
|
LIABILITIES
AND SHAREHOLDER’S EQUITY
|
||||||||||
|
Current
liabilities:
|
||||||||||
|
Accounts
payable
|
$
|
43
|
$
|
32
|
$
|
24
|
||||
|
Income
taxes payable
|
236
|
236
|
184
|
|||||||
|
Accrued
liabilities
|
78
|
87
|
81
|
|||||||
|
Deferred
revenue
|
349
|
293
|
238
|
|||||||
|
Total
current liabilities
|
706
|
648
|
527
|
|||||||
|
Deferred
tax liability
|
12
|
12
|
19
|
|||||||
|
Long-term
deferred revenue
|
286
|
309
|
226
|
|||||||
|
Total
liabilities
|
1,004
|
969
|
772
|
|||||||
|
|
||||||||||
|
Commitments
(Note 9)
|
||||||||||
|
|
||||||||||
|
Shareholder’s
equity:
|
||||||||||
|
Common
stock — $0.001 par value; 5,000,000 shares
authorized;
1,600,000 shares issued and outstanding
|
2
|
2
|
2
|
|||||||
|
Retained
earnings
|
1,085
|
924
|
438
|
|||||||
|
Total
shareholder’s equity
|
1,087
|
926
|
440
|
|||||||
|
Total
liabilities and shareholder’s equity
|
$
|
2,091
|
$
|
1,895
|
$
|
1,212
|
||||
The
accompanying notes are an integral part of these financial
statements.
F-49
OBJECTWARE,
INC.
STATEMENTS
OF OPERATIONS
(Information
for the Three Months Ended December 31, 2006 and 2005 is
Unaudited)
(Dollars
in thousands)
|
|
For
the Three Months Ended
|
For
the Year Ended
|
|||||||||||
|
|
December
31,
|
September
30,
|
|||||||||||
|
|
2006
|
2005
|
2006
|
2005
|
|||||||||
|
|
|
|
|
|
|||||||||
|
Revenue:
|
|
|
|
|
|||||||||
|
Web
services
|
$
|
884
|
$
|
716
|
$
|
3,101
|
$
|
2,265
|
|||||
|
Managed
services
|
219
|
154
|
782
|
474
|
|||||||||
|
Reimbursable
expense
|
11
|
1
|
19
|
23
|
|||||||||
|
Total
revenue
|
1,114
|
871
|
3,902
|
2,762
|
|||||||||
|
Cost
of revenue:
|
|||||||||||||
|
Web
services
|
451
|
400
|
1,661
|
1,395
|
|||||||||
|
Managed
services
|
33
|
20
|
103
|
48
|
|||||||||
|
Total
Cost of revenue
|
484
|
420
|
1,764
|
1,443
|
|||||||||
|
|
|||||||||||||
|
Gross
profit
|
630
|
451
|
2,138
|
1,319
|
|||||||||
|
|
|||||||||||||
|
Operating
expenses:
|
|||||||||||||
|
Selling,
general and administrative
|
373
|
208
|
1,341
|
743
|
|||||||||
|
Depreciation
|
16
|
15
|
59
|
41
|
|||||||||
|
Total
operating expenses
|
389
|
223
|
1,400
|
784
|
|||||||||
|
Income
from operations
|
241
|
228
|
738
|
535
|
|||||||||
|
Gain
on sale of investments
|
—
|
—
|
12
|
—
|
|||||||||
|
Other
income (expense), net
|
19
|
6
|
46
|
(2
|
)
|
||||||||
|
Interest
income (expense), net
|
—
|
—
|
(1
|
)
|
(5
|
)
|
|||||||
|
Income
before provision for income taxes
|
260
|
234
|
795
|
528
|
|||||||||
|
Provision
for income taxes
|
99
|
89
|
309
|
156
|
|||||||||
|
Net
income
|
$
|
161
|
$
|
145
|
$
|
486
|
$
|
372
|
|||||
The
accompanying notes are an integral part of these financial
statements.
F-50
OBJECTWARE,
INC.
STATEMENTS
OF SHAREHOLDER’S EQUITY
(Information
as of and for the three months ended December 31, 2006 is
Unaudited)
(Dollars
in thousands except share amounts)
|
|
Common
Stock
|
Retained
|
Total
Shareholder’s
|
||||||||||
|
|
Shares
|
Amount
|
Earnings
|
Equity
|
|||||||||
|
Balance,
September 30, 2004
|
1,600,000
|
$
|
2
|
$
|
66
|
$
|
68
|
||||||
|
Net
income
|
—
|
—
|
372
|
372
|
|||||||||
|
Balance,
September 30, 2005
|
1,600,000
|
2
|
438
|
440
|
|||||||||
|
Net
income
|
—
|
—
|
486
|
486
|
|||||||||
|
Balance,
September 30, 2006
|
1,600,000
|
2
|
924
|
926
|
|||||||||
|
Net
income
|
—
|
—
|
161
|
161
|
|||||||||
|
Balance,
December 31, 2006
|
1,600,000
|
$
|
2
|
$
|
1,085
|
$
|
1,087
|
||||||
The
accompanying notes are an integral part of these financial
statements.
F-51
OBJECTWARE,
INC.
STATEMENTS
OF CASH FLOWS
(Information
for the Three Months Ended December 31, 2006 and 2005 is
unaudited)
(Dollars
in thousands)
|
|
For
the Three Months Ended
|
For
the Year Ended
|
|||||||||||
|
|
December
31,
|
September
30,
|
|||||||||||
|
|
2006
|
2005
|
2006
|
2005
|
|||||||||
|
Cash
flows from operating activities:
|
|
|
|
|
|||||||||
|
Net
income
|
$
|
161
|
$
|
145
|
$
|
486
|
$
|
372
|
|||||
|
Adjustments
to reconcile income from operations to net cash provided by
operating activities:
|
|||||||||||||
|
Depreciation
|
16
|
15
|
59
|
40
|
|||||||||
|
Loss
on disposal of fixed assets
|
—
|
—
|
—
|
2
|
|||||||||
|
Gain
on sale of investments
|
—
|
—
|
(12
|
)
|
—
|
||||||||
|
Deferred
tax expense (benefit)
|
—
|
—
|
38
|
(29
|
)
|
||||||||
|
Changes
in operating assets and liabilities:
|
|||||||||||||
|
Accounts
receivable
|
(98
|
)
|
(5
|
)
|
(165
|
)
|
(42
|
)
|
|||||
|
Long
term receivable
|
36
|
(54
|
)
|
(85
|
)
|
(263
|
)
|
||||||
|
Prepaid
expenses
|
14
|
9
|
4
|
(12
|
)
|
||||||||
|
Accounts
payable
|
11
|
(6
|
)
|
8
|
(6
|
)
|
|||||||
|
Income
taxes payable
|
—
|
60
|
52
|
179
|
|||||||||
|
Accrued
liabilities
|
(9
|
)
|
27
|
6
|
26
|
||||||||
|
Deferred
revenue
|
33
|
49
|
138
|
243
|
|||||||||
|
Net
cash provided by operating activities
|
164
|
240
|
529
|
510
|
|||||||||
|
Cash
flows from investing activities:
|
|||||||||||||
|
Capital
expenditures
|
(18
|
)
|
—
|
(90
|
)
|
(88
|
)
|
||||||
|
Purchases
of investments
|
—
|
—
|
(449
|
—
|
|||||||||
|
Proceeds
from the sale of investments
|
—
|
—
|
461
|
—
|
|||||||||
|
Net
cash used in investing activities
|
(18
|
)
|
—
|
(78
|
)
|
(88
|
)
|
||||||
|
Cash
flows from financing activities:
|
|||||||||||||
|
Advances
(to) from shareholder, net
|
32
|
(43
|
)
|
(5
|
)
|
(103
|
)
|
||||||
|
Net
cash provided by (used in) financing activities
|
32
|
(43
|
)
|
(5
|
)
|
(103
|
)
|
||||||
|
Net
increase in cash and cash equivalents
|
178
|
197
|
446
|
319
|
|||||||||
|
Cash
and cash equivalents, beginning of period
|
976
|
530
|
530
|
211
|
|||||||||
|
Cash
and cash equivalents, end of period
|
$
|
1,154
|
$
|
727
|
$
|
976
|
$
|
530
|
|||||
|
Supplemental
cash flow information:
|
|||||||||||||
|
Cash
paid for interest
|
$
|
—
|
$
|
—
|
$
|
1
|
$
|
5
|
|||||
|
Cash
paid for income taxes
|
$
|
99
|
$
|
—
|
$
|
219
|
$
|
6
|
|||||
The
accompanying notes are an integral part of these financial
statements.
F-52
OBJECTWARE,
INC.
NOTES
TO FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for
the
Three Months Ended December 31, 2006 and 2005 is
Unaudited)
(Dollars
in thousands, except share and per share data)
|
|
1.
|
Business
Description:
|
Objectware,
Inc. (the “Company”), a Georgia corporation, is a software company specializing
in the development and hosting of custom Web, mobile and wireless applications.
The Company is headquartered in Atlanta, Georgia. The Company’s customers are
primarily located in the Southeastern and Eastern United States.
The
Company’s operations are subject to certain risks and uncertainties, including
the susceptibility of the Company’s services to rapid technological change,
increased competition from existing service providers and new entrants,
and
dependence upon key members of the management team.
Unaudited
Interim Financial Information
The
accompanying interim consolidated balance sheet as of December 31, 2006,
the
consolidated statements of operations and cash flows for the three months
ended
December 31, 2006 and 2005, and the consolidated statement of shareholders’
equity for the three months ended December 31, 2006 are unaudited. The
unaudited
interim consolidated statements have been prepared in accordance with
accounting
principles generally accepted in the United States of America and in
the opinion
of the Company’s management have been prepared on the same basis as the audited
consolidated financial statements as of and for the years ended September
30,
2006 and 2005 and include all adjustments, consisting of normal recurring
adjustments and accruals, necessary for the fair presentation of the
Company’s
financial position at December 31, 2006 and its results of operations
and its
cash flows for the three months ended December 31, 2006 and 2005. The
results
for the three months ended December 31, 2006 are not necessarily indicative
of
the results to be expected for the year ending September 30,
2007.
|
|
2.
|
Summary
of Significant Accounting
Policies:
|
Revenue
Recognition
Substantially
all of the Company’s revenue is generated from two activities: Web Services and
Managed Services,. The Company recognizes revenue in accordance with
Securities
and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104,
Revenue
Recognition in Financial Statements
and
Emerging Issues Task Force (“EITF”) Issue No. 00-21, Accounting
For Revenue Arrangements with Multiple Deliverables (“EITF
00-21”). 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
Services
Web
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, Web
application
development, rich media, e-Commerce, e-Learning and e-Training, search
engine
optimization, and content management. Web Services are sold either on
a stand
alone basis or, as described below, in multiple element arrangements
with
Managed Services and/or the Company’s licensed software
products.
F-53
OBJECTWARE,
INC.
NOTES
TO FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for
the
Three Months Ended December 31, 2006 and 2005 is
Unaudited)
(Dollars
in thousands, except share and per share data)
Revenue
from stand-alone Web Services is recognized when the services are performed
using the proportional performance model using a method based on cost
incurred
in relation to total estimated cost at completion. Labor costs are the
most
appropriate measure to allocate revenue among reporting periods, as they
are the
primary input to the provision of our Web Services. Fixed fee engagements
are
invoiced monthly or upon the completion of milestones. For milestone
based
projects, since milestone pricing is based on hourly costs and the duration
of
such engagements is relatively short, this approach principally mirrors
an
output approach under the proportional performance model for revenue
recognition
on such fixed priced engagements.
Managed
Services
Managed
services primarily include on-going retained professional services and
monthly
hosting fees for the use of hardware and infrastructure, generally at
the
Company’s network operating center.. On-going retained professional services
are
either 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. These arrangements do not require formal customer acceptance and
do not
grant any future right to labor hours contracted for but not used.
Hosting
service revenues are recognized monthly as billed. Revenue from hosting
services
is incidental to the Company’s Web Services activities and for all periods
presented, the only customers under contractual hosting arrangements
have been
previous Web Services customers. Revenues from setup fees are recognized
ratably
over 24 months.
Multiple
Element Arrangements
Following
EITF 00-21, the Company recognizes revenue
from multiple element arrangements using the residual method whereby
the value
ascribed to the delivered element (generally the Web Services) is equal
to the
total consideration less the VSOE of fair value or third party evidence
of fair
value of the undelivered elements.
Warranty
Certain
arrangements include a warranty period generally up to 60 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.
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.
Customer
Payment Terms
Except
as
described in Note 6, the Company’s payment terms with customers typically are
“due upon receipt” or “net 30 days from invoice”. Payments terms may vary by
customer but in all instances do not exceed 45 days from invoice date.
For Web
Services, the Company typically invoices project deposits of between
20% and 33%
of the total contract value which are record as deferred revenue until
such time
the related services are completed. Subsequent invoicing for Web Services
is
either monthly or upon achievement of milestones and payment terms for
such
billings are within the standard terms described above. Invoices for
hosting
are issued monthly and are generally due upon receipt. 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 concerns and all costs
related to such matters have been insignificant in all periods
presented.
F-54
OBJECTWARE,
INC.
NOTES
TO FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for
the
Three Months Ended December 31, 2006 and 2005 is
Unaudited)
(Dollars
in thousands, except share and per share data)
Concentration
of Credit Risk and Significant Customers
Financial
instruments, which potentially subject the Company to concentrations of
credit
risk consist primarily of cash and cash equivalents, to the extent these
exceed
federal insurance limits, short-term investments and accounts receivable.
Risks
associated with cash and cash equivalents are mitigated by investing excess
cash
in money market funds with high credit quality financial institutions.
In
general the Company does not require collateral on its arrangements with
customers. The Company’s accounts receivable typically provide for credit terms
of 30-60 days. The Company provides reserves against accounts receivables
for
estimated losses that may result from customers’ inability to pay. The
amount of the reserve is determined by analyzing known uncollectible accounts,
aged receivables, the economic conditions in the customers’ industry, historical
losses and changes in customer creditworthiness.
The
Company had two customers who individually represented 15% and 11%, each
of the
Company’s total revenue for the three months ended December 31, 2006 and one
customer who individually represented 16% of the Company’s total revenue for the
year ended September 30, 2006 and no customers represented 10% or more
of the
Company’s total revenue for the fiscal year ended September 30,
2005.
The
Company had certain customers whose balances individually represented 10%
or
more of the total accounts receivable (excluding the long term receivable
discussed in Note 6), as follows:
|
|
|
|
|
September
30,
|
||
|
|
|
December
31, 2006
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Customer
#1
|
|
*
|
|
26%
|
|
*
|
|
Customer
#2
|
|
10%
|
|
16%
|
|
25%
|
|
Customer
#3
|
|
*
|
|
*
|
|
24%
|
|
Customer
#4
|
|
*
|
|
*
|
|
11%
|
|
Customer
#5
|
|
20%
|
|
*
|
|
*
|
|
Customer
#6
|
|
17%
|
|
*
|
|
*
|
|
Customer
#7
|
|
16%
|
|
*
|
|
*
|
|
|
|
|
|
|
|
|
|
*
Represents less than 10%
|
|
|
|
|||
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 deferred tax assets,
proportionate performance estimates, unbilled receivables and deferred
revenue.
Actual results could differ from these estimates under different assumptions
or
conditions.
F-55
OBJECTWARE,
INC.
NOTES
TO FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for
the
Three Months Ended December 31, 2006 and 2005 is
Unaudited)
(Dollars
in thousands, except share and per share data)
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 amounts of revenues and related expenses reported in the
Company’s financial statements. A number of internal and external factors
can affect the Company’s estimates including efficiency variances and
specification and test requirement changes.
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.
Marketable
Securities - Available for Sale
Investments
in marketable equity securities are classified as available for sale
and are
recorded at fair value. Unrealized gains and losses on these securities,
net of income taxes, are included in shareholder's equity as a component of
accumulated other comprehensive income. Realized gains and losses are
recorded
using cost determined on a specific identification basis. The Company
has no
investments in marketable equity securities as of December 31,
2006.
Fair
Value of Financial Instruments
The
carrying amounts of financial instruments, which include cash and cash
equivalents, accounts receivable and accounts payable approximates their
fair
value because of the short-term maturity of these instruments. As
described in
Note
6,
the Company’s long-term receivable has been recorded at a discount above the
contractual rate. The Company believes the carrying value of its long term
receivable approximates fair value.
Equipment
and Improvements
The
components of equipment and improvements are stated at cost. The Company
provides for depreciation and amortization using the straight-line method
over
the estimated useful lives of the individual assets as follows: software,
three
years; furniture and fixtures, five to ten years; and computers and equipment,
three to ten years. Leasehold improvements are amortized by use of the
straight-line method over the lesser of the estimated useful life of the
asset
or the lease term.
Maintenance
and repair costs are charged to expense as incurred. Major renewals,
betterments, and additions are capitalized.
Advertising
Costs
All
advertising costs are expensed when incurred. Advertising costs were
$23, 0, $9
and $3 for three months ended December 31, 2006 and 2005 and the years
ended
September 30, 2006 and 2005, respectively.
Stock-Based
Compensation
The
Company has a stock-based employee compensation plan that is described
more
fully in Note 9. Prior to the effective date of Statement of Financial
Accounting Standards (“SFAS”) No. 123(R), Share-Based
Payment, the
Company had elected under the provisions of SFAS No. 123, Accounting
for Stock-Based Compensation
F-56
OBJECTWARE,
INC.
NOTES
TO FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for
the
Three Months Ended December 31, 2006 and 2005 is
Unaudited)
(Dollars
in thousands, except share and per share data)
(“SFAS No. 123”),
to account for employee stock options in accordance with Accounting Principle
Board Opinion No. 25,
Accounting
for Stock Issued to Employees
(“APB
No. 25”), using the intrinsic value approach to measure
compensation expense,
if any. Companies that account for stock-based compensation arrangements
under
APB No. 25 are required by SFAS No. 123 to disclose the pro forma
effect on net income (loss) as if the fair value based method prescribed
by
SFAS No. 123 had been applied.
The
Company has not granted any options since 2001 and all options were fully
vested
in 2002, therefore no pro forma disclosure of the effect of SFAS No. 123
is
required.
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.
Recent
Accounting Pronouncements
In
September 2006, the SEC staff issued Staff Accounting Bulletin 108,
Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements
in
Current Year Financial Statements
(“SAB
108”). SAB 108 was issued in order to eliminate the diversity of practice
surrounding how public companies quantify financial statement misstatements.
Traditionally, there have been two widely-recognized methods for quantifying
the
effects of financial statement misstatements: the “roll-over” method and the
“iron curtain” method. The roll-over method focuses primarily on the impact of a
misstatement on the income statement — including the reversing effect of
prior year misstatements — but its use can lead to the accumulation of
misstatements in the balance sheet. The iron-curtain method, on the other
hand,
focuses primarily on the effect of correcting the period-end balance sheet
with
less emphasis on the reversing effects of prior year errors on the income
statement. In SAB 108, the SEC staff established an approach that requires
quantification of financial statement misstatements based on the effects
of the
misstatements on each of the company’s financial statements and the related
financial statement disclosures. This model is commonly referred to as
a “dual
approach” because it requires quantification of errors under both the iron
curtain and the roll-over methods. Management of the Company has evaluated
SAB
108 and believes its adoption will not materially impact the financial
statements.
In
September 2006, the FASB issued SFAS 157, Fair
Value Measurements
(“SFAS
157”), which defines fair value, establishes a framework for measuring fair
value in accounting principles generally accepted in the United States
and
expands disclosures about fair value measurements. SFAS 157 prioritizes
the
inputs to valuation techniques used to measure fair value into a hierarchy
containing three broad levels. The fair value hierarchy gives the highest
priority to quoted prices (unadjusted) in active markets for identical
assets
and liabilities (Level 1) and the lowest priority to unobservable inputs
(Level
3). In some cases, the inputs used to measure fair value might fall in
different
levels of the fair value hierarchy. The level in the fair value hierarchy
within
which the fair value measurement in its entirety falls shall be determined
on
the lowest level input that is significant to the fair value measurement
in its
entirety. Assessing the significance of a particular input to the fair
value
measurement in its entirety requires judgment, considering factors specific
to
the asset or liability. SFAS 157 is effective for interim and annual financial
statements for years beginning after November 15, 2007. Upon initial adoption
of
SFAS 157, differences between the carrying value and the fair value of
those
instruments shall be recognized as a cumulative-effect adjustment to the
opening
balance of retained earnings for that year, and the effect of subsequent
adjustments resulting from recurring fair value measurements shall be recognized
in earnings for the period. The Company has not yet adopted SFAS 157. As a
result, the financial statements do not include any adjustments relating
to any
potential adjustments to the carrying value of assets and liabilities.
Management of the Company is currently evaluating the impact of SFAS 157 on
the financial statements.
In
February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 provides companies
with an option to report selected financial assets and liabilities
at fair value
and establishes presentation and disclosure requirements designed to
facilitate
comparisons between companies that choose different measurement attributes
for
similar types of assets and liabilities. SFAS 159 is effective for
fiscal years
beginning after November 15, 2007. The Company is in the process of
evaluating the impact of the adoption of this statement on the Company’s results
of operations and financial condition.
F-57
OBJECTWARE,
INC.
NOTES
TO FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for
the
Three Months Ended December 31, 2006 and 2005 is
Unaudited)
(Dollars
in thousands, except share and per share data)
In
June
2006, the FASB issued FASB Interpretation 48, Accounting
for Uncertainty in Income Taxes — an Interpretation of FASB
Statement 109
(“FIN 48”), which clarifies the accounting for uncertainty in tax
positions. FIN 48 requires that the Company recognize the impact of a tax
position in the financial statements if that position is more likely
than not to
be reversed on audit, based on the technical merits of the position.
The
provisions of FIN 48 are effective for years beginning after December 15,
2006, with the cumulative effect, if any, of the change in accounting
principle
recorded as an adjustment to opening retained earnings. Management of the
Company has evaluated SFAS 48 and believes its adoption will not materially
impact the financial statements.
|
|
3.
|
Related-Party
Transactions:
|
The
Company’s sole shareholder has from time to time advanced funds to the Company
for working capital purposes and has received funds as advances from
the
Company. Outstanding balances are due on demand. The balance of the amount
due
from
the shareholder was $0, $32 and $27 as of December 31, 2006 and
September 30, 2006 and 2005, respectively. Interest paid in relation to
advances from the shareholder totaled $0, $0, $1 and $5 for the three
months
ended December 31, 2006 and 2005 and for the years ended September 30,
2006 and
2005, respectively.
|
|
4.
|
Accounts
Receivable:
|
Accounts
receivable consisted of the following as of December 31, 2006 and September
30,
2006 and 2005:
|
|
|
September
30,
|
||||||||
|
|
December
31, 2006
|
2006
|
2005
|
|||||||
|
Accounts
receivable
|
$
|
448
|
$
|
307
|
$
|
195
|
||||
|
Unbilled
accounts receivable
|
16
|
61
|
15
|
|||||||
|
Allowance
for doubtful accounts
|
(21
|
)
|
(23
|
)
|
(30
|
)
|
||||
|
Accounts
receivable, net
|
$
|
443
|
$
|
345
|
$
|
180
|
||||
|
|
5.
|
Equipment
and Improvements:
|
Equipment
and improvements, net consisted of the following as of December 31, 2006
and
September 30, 2006 and 2005:
|
|
|
September
30,
|
||||||||
|
|
December
31, 2006
|
2006
|
2005
|
|||||||
|
Computers,
software and equipment
|
$
|
400
|
$
|
381
|
$
|
296
|
||||
|
Furniture
and fixtures
|
38
|
38
|
34
|
|||||||
|
Leasehold
improvements
|
20
|
20
|
20
|
|||||||
|
|
458
|
439
|
350
|
|||||||
|
Less:
Accumulated depreciation and amortization
|
291
|
274
|
216
|
|||||||
|
Equipment
and improvements, net
|
$
|
167
|
$
|
165
|
$
|
134
|
||||
F-58
OBJECTWARE,
INC.
NOTES
TO FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for
the
Three Months Ended December 31, 2006 and 2005 is
Unaudited)
(Dollars
in thousands, except share and per share data)
|
|
6.
|
Long
Term Receivable:
|
Commencing
in the year ended September 30, 2005, the Company granted to a certain
customer
extended payment terms which provided for monthly payments of interest
and
principal. Prior to August 11, 2006, the payments were $3 monthly plus
interest
at a rate of 7%. Effective August 11, 2006, the principal payments were
increased to $5 per month and the interest rate remained at 7%. The Company
recorded a discount on the long term receivable of $47 to reflect an
imputed
estimated fair market interest rate of 12% for the remaining term. The
balance
of the outstanding principal and interest becomes due and payable on
August 31,
2010. The Company has determined that, in accordance with its revenue
recognition policy, revenue for the arrangement should be deferred and
is
recognizing revenue as payments are received. For the three months ended
December 31, 2006 and 2005 and for the years ended September 30, 2006
and 2005, respectively, the Company recognized revenue of $58, $68, $250
and $166, respectively, under this arrangement.
|
|
7.
|
Accrued
Liabilities:
|
Accrued
liabilities consisted of the following as of December 31, 2006 and September
30,
2006 and 2005:
|
|
|
September
30,
|
||||||||
|
|
December
31, 2006
|
2006
|
2005
|
|||||||
|
Deferred
rent
|
$
|
18
|
$
|
23
|
$
|
44
|
||||
|
Accrued
payroll
|
59
|
53
|
37
|
|||||||
|
Other
accruals
|
1
|
11
|
—
|
|||||||
|
Total
accrued liabilities
|
$
|
78
|
$
|
87
|
$
|
81
|
||||
|
|
8.
|
Commitments:
|
Revolving
Line of Credit
On
January 9, 2002, the Company entered into a revolving line of credit
(the
“Facility”) with a commercial lender. The Facility provides borrowings of up to
$250 and bears interest at the Wall Street Journal’s prime rate (8.25% at
December 31, 2006 and September 30, 2006 and 6.75% at September 30, 2005).
There
was no balance outstanding under the Facility for any of the periods
presented
and the Company has never had any substantial borrowings under this arrangement.
The Facility, which is guaranteed by the Company’s sole shareholder, is
renewable annually.
Operating
Leases
The
Company leases office space under non-cancelable operating leases with
various
expirations through 2008. Future minimum lease payments under all operating
leases at September 30, 2006 were as follows:
F-59
OBJECTWARE,
INC.
NOTES
TO FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for
the
Three Months Ended December 31, 2006 and 2005 is
Unaudited)
(Dollars
in thousands, except share and per share data)
|
Year
Ended September 30,:
|
|
|||
|
2007
|
$
|
164
|
||
|
2008
|
35
|
|||
Rent
expense under all operating leases was approximately $35, $34, $137 and
$135 for
the three months ended December 31, 2006 and 2005 and for the years ended
September 30, 2006 and 2005, respectively.
|
|
9.
|
Shareholder’s
Equity:
|
The
Company has a stock option plan (the “Option Plan”) under which officers and key
employees may be granted options to purchase shares of the Company’s authorized
but unissued common stock. The maximum number of shares of the Company’s common
stock available for issuance under the Option Plan is 400,000 shares. Under
the
Option Plan, the exercise price is equal to the estimated fair market value
of
the Company’s common stock at the date of grant as estimated by management.
Options currently expire no later than 10 years from the grant date and
generally vest within three months. Additional information with respect
to the
Option Plan’s stock option activity is as follows:
|
|
Options
|
Weighted
Average
Exercise
Price
|
|||||
|
Options
outstanding at September 30, 2004
|
42,500
|
1.00
|
|||||
|
Granted
|
—
|
||||||
|
Cancelled
|
—
|
||||||
|
Exercised
|
—
|
||||||
|
Options
outstanding at September 30, 2005
|
42,500
|
1.00
|
|||||
|
Granted
|
—
|
||||||
|
Cancelled
|
—
|
||||||
|
Exercised
|
—
|
||||||
|
Options
outstanding at September 30, 2006
|
42,500
|
1.00
|
|||||
|
Granted
|
—
|
||||||
|
Cancelled
|
—
|
||||||
|
Exercised
|
—
|
||||||
|
Options
outstanding at December 31, 2006
|
42,500
|
1.00
|
|||||
F-60
OBJECTWARE,
INC.
NOTES
TO FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for
the
Three Months Ended December 31, 2006 and 2005 is
Unaudited)
(Dollars
in thousands, except share and per share data)
Summarized
information about stock options outstanding at September 30, 2006 is as
follows:
|
|
|
|
|
|
|
|
|
Exercisable
|
||
|
Range
of Exercise Prices
|
|
Number
of
Options
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
Number
of
Options
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
$1.00
|
|
42,500
|
|
4.4
|
|
$1.00
|
|
42,500
|
|
4.4
|
|
|
10.
|
Retirement
Plan:
|
The
Company has established a 401(k) employee savings and profit sharing plan
(the
“401(k) Plan”) for the benefit of employees. Under the 401(k) Plan, employees
can contribute and defer taxes on a portion of their compensation. The
Company
has not made any contributions to the plan since its inception.
|
|
11.
|
Income
Taxes:
|
Deferred
tax assets or liabilities at the end of each period are determined using
the
currently enacted tax rates applied to taxable income in the period in
which the
deferred tax asset or liability is expected to be settled or realized.
Realization of deferred tax assets is dependent on future earnings, if
any, the
timing and amount of which is uncertain. In addition, we evaluate the Company’s
tax contingencies on an ongoing basis and recognize a liability when we
believe
that it is probable that a liability exists and that liability is
measurable.
|
|
September
30,
|
||||||
|
|
2006
|
2005
|
|||||
|
Deferred
tax assets:
|
|
|
|||||
|
Deferred
revenues
|
$
|
81
|
$
|
77
|
|||
|
Accounts
payable and accrued liabilities
|
45
|
40
|
|||||
|
|
|||||||
|
Deferred
tax liabilities:
|
|||||||
|
Accounts
receivable, net
|
(115
|
)
|
(69
|
)
|
|||
|
Tax
over book depreciation
|
(20
|
)
|
(19
|
)
|
|||
|
Net
deferred taxes
|
$
|
(9
|
)
|
$
|
29
|
||
|
Recorded
in balance sheet as follows:
|
|||||||
|
Current assets
|
$
|
3
|
$
|
48
|
|||
|
Long-term
liabilities
|
$
|
(12
|
)
|
$
|
(19
|
)
|
|
F-61
OBJECTWARE,
INC.
NOTES
TO FINANCIAL STATEMENTS
(Information
as of December 31, 2006 and for
the
Three Months Ended December 31, 2006 and 2005 is
Unaudited)
(Dollars
in thousands, except share and per share data)
The
components of the provision for income taxes for the years ended September
30,
2006 and 2005 are as follows:
|
|
For
the Year Ended September 30,
|
||||||
|
|
2006
|
2005
|
|||||
|
Federal
and state taxes:
|
|
|
|||||
|
Current:
|
|
|
|||||
|
Federal
|
$
|
230
|
$
|
158
|
|||
|
State
|
41
|
27
|
|||||
|
Deferred
|
38
|
(29
|
)
|
||||
|
Provision
for income taxes
|
$
|
309
|
$
|
156
|
|||
The
provision for income taxes differs from the amount computed by applying
the
statutory federal income tax to income before provision for income taxes.
The
sources and tax effects of the differences are as follows:
|
|
Fiscal
Year Ended September 30,
|
||||||
|
|
2006
|
2005
|
|||||
|
|
|
|
|||||
|
Income
tax provision at the federal statutory rate of 34%
|
$
|
270
|
$
|
180
|
|||
|
State
income expense, net of federal benefit
|
31
|
21
|
|||||
|
Change
in valuation allowance
|
—
|
(58
|
)
|
||||
|
Other
|
8
|
13
|
|||||
|
|
$
|
309
|
$
|
156
|
|||
|
|
12.
|
Events
Subsequent to September 30,
2006:
|
On
December 7, 2006, the shareholder of the Company entered into a definitive
agreement to sell the Company to Bridgeline Software, Inc. (“Bridgeline”). The
sale is contingent on Bridgeline’s successful completion of an initial public
offering (“IPO”) and the receipt of proceeds from the IPO of at least $10,000.
The Company plans to complete the sale concurrent with, or shortly after
Bridgeline’s IPO.
F-62
New
Tilt, Inc.
|
Report
of Independent Certified Public Accountants
|
|
F-64
|
|
|
|
|
|
Balance
Sheets as of April 24, 2006 and December 31, 2005
|
|
F-65
|
|
|
|
|
|
Statements
of Operations for the period January 1, 2006 thru April 24,
2006 and the
year ended December 31, 2005
|
|
F-66
|
|
|
|
|
|
Statements
of Shareholders’ Equity for the period January 1, 2006 through April 24,
2006 and the year ended December 31, 2005
|
|
F-67
|
|
|
|
|
|
Statements
of Cash Flows for the period January 1, 2006 through April
24, 2006 and
the year ended December 31, 2005
|
|
F-68
|
|
|
|
|
|
Notes
to Financial Statements
|
|
F-69
|
F-63
Report
of Independent Certified Public Accountants
To
the
Shareholders
Bridgeline
Software, Inc.
We
have
audited the accompanying balance sheets of New Tilt, Inc. (the “Company”) as of
April 24, 2006 and December 31, 2005, and the related statements of operations,
shareholders’ equity, and cash flows for the period January 1, 2006 thru April
24, 2006 and for the year ended December 31, 2005. 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 auditing standards generally
accepted in
the United States of America. Those standards require that we plan and
perform
the audit to obtain reasonable assurance about whether the financial
statements
are free of material misstatement. An audit includes examining, on a
test basis,
evidence supporting the amounts and disclosures in the financial statements.
An
audit also includes 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 financial statements referred to above present fairly, in
all
material respects, the financial position of New Tilt, Inc. as of April
24, 2006
and December 31, 2005, and the results of its operations and its cash
flows for
the period January 1, 2006 thru April 24, 2006 and the year ended December
31,
2005 in conformity with accounting principles generally accepted in the
United
States of America.
/s/
UHY
LLP
Boston,
Massachusetts
December
11, 2006
F-64
NEW
TILT, INC.
BALANCE
SHEETS
(Dollars
in thousands, except share amounts)
|
ASSETS
|
|
April
24, 2006
|
|
December
31, 2005
|
|
||
|
Current
assets:
|
|
|
|
|
|
||
|
Cash
and cash equivalents
|
|
$
|
159
|
|
$
|
148
|
|
|
Accounts
receivable
|
|
|
173
|
|
|
465
|
|
|
Prepaid
expenses
|
|
|
8
|
|
|
13
|
|
|
Total
current assets
|
|
|
340
|
|
|
626
|
|
|
Equipment
and improvements, net
|
|
|
61
|
|
|
73
|
|
|
Other
assets
|
|
|
11
|
|
|
15
|
|
|
Total
assets
|
|
$
|
412
|
|
$
|
714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Line
of credit and other debt
|
|
$
|
—
|
|
$
|
54
|
|
|
Accounts
payable
|
|
|
19
|
|
|
23
|
|
|
Deferred
revenue
|
|
|
48
|
|
|
58
|
|
|
Accrued
liabilities
|
|
|
31
|
|
|
77
|
|
|
Total
current liabilities
|
|
|
98
|
|
|
212
|
|
|
Commitments
(Note 9)
|
|
|
—
|
|
|
—
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Common
stock — $0.001 par value; 2,000,000 shares authorized; 1,200,000 shares
issued and outstanding
|
|
|
1
|
|
|
1
|
|
|
Additional
paid-in capital
|
|
|
182
|
|
|
160
|
|
|
Retained
earnings
|
|
|
131
|
|
|
341
|
|
|
Total
shareholders’ equity
|
|
|
314
|
|
|
502
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
412
|
|
$
|
714
|
|
The
accompanying notes are an integral part of these financial
statements.
F-65
NEW
TILT, INC.
STATEMENTS
OF OPERATIONS
(Dollars
in thousands)
|
|
|
Period
from
January
1, 2006
thru
April 24, 2006
|
|
For
the
Year
Ended
December
31, 2005
|
|
||
|
Revenue
|
|
$
|
404
|
|
$
|
2,304
|
|
|
Cost
of revenue
|
|
|
392
|
|
|
1,533
|
|
|
Gross
profit
|
|
|
12
|
|
|
771
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
199
|
|
|
593
|
|
|
Depreciation
|
|
|
12
|
|
|
42
|
|
|
Income
(loss) from operations
|
|
|
(199
|
)
|
|
136
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(2
|
)
|
|
(2
|
)
|
|
Miscellaneous
|
|
|
10
|
|
|
4
|
|
|
Net
income (loss)
|
|
$
|
(191
|
)
|
$
|
138
|
|
The
accompanying notes are an integral part of these financial
statements.
F-66
NEW
TILT, INC.
STATEMENTS
OF SHAREHOLDERS’ EQUITY
(Dollars
in thousands, except share amounts)
|
|
|
|
|
Additional
|
|
|
|
Total
|
|
|||||||
|
|
|
Common
Stock
|
|
Paid-in
|
|
Retained
|
|
Shareholders’
|
|
|||||||
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Earnings
|
|
Equity
|
|
|||||
|
Balance,
December 31, 2004
|
|
|
1,200,000
|
|
$
|
1
|
|
$
|
88
|
|
$
|
260
|
|
$
|
349
|
|
|
Distributions
to shareholders
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(57
|
)
|
|
(57
|
)
|
|
Stock
based compensation expense
|
|
|
—
|
|
|
—
|
|
|
72
|
|
|
—
|
|
|
72
|
|
|
Net
income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
138
|
|
|
138
|
|
|
Balance,
December 31, 2005
|
|
|
1,200,000
|
|
|
1
|
|
|
160
|
|
|
341
|
|
|
502
|
|
|
Distributions
to shareholders
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(19
|
)
|
|
(19
|
)
|
|
Stock
based compensation expense
|
|
|
—
|
|
|
—
|
|
|
22
|
|
|
—
|
|
|
22
|
|
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(191
|
)
|
|
(191
|
)
|
|
Balance,
April 24, 2006
|
|
|
1,200,000
|
|
$
|
1
|
|
$
|
182
|
|
$
|
131
|
|
$
|
314
|
|
The
accompanying notes are an integral part of these financial
statements.
F-67
NEW
TILT, INC.
STATEMENTS
OF CASH FLOWS
(Dollars
in thousands)
|
|
|
Period
from
January
1, 2006
thru
April 24, 2006
|
|
For
the Year Ended
December
31, 2005
|
|
||
|
Cash
flows from operating activities:
|
|
|
|
|
|
||
|
Net
income (loss)
|
|
$
|
(191
|
)
|
$
|
138
|
|
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
12
|
|
|
42
|
|
|
Stock
based compensation expense
|
|
|
22
|
|
|
72
|
|
|
Gain
on sale of assets
|
|
|
(9
|
)
|
|
—
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
292
|
|
|
(51
|
)
|
|
Prepaid
expenses
|
|
|
5
|
|
|
3
|
|
|
Other
assets
|
|
|
4
|
|
|
4
|
|
|
Accounts
payable
|
|
|
(4
|
)
|
|
(35
|
)
|
|
Deferred
revenue
|
|
|
(10
|
)
|
|
(38
|
)
|
|
Accrued
liabilities
|
|
|
(46
|
)
|
|
(7
|
)
|
|
Total
adjustments
|
|
|
266
|
|
|
(10
|
)
|
|
Net
cash provided by operating activities
|
|
|
75
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from sale of property
|
|
|
3
|
|
|
—
|
|
|
Equipment
and improvements expenditures
|
|
|
(3
|
)
|
|
(60
|
)
|
|
Net
cash provided by (used in) investing activities
|
|
|
—
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of long term debt
|
|
|
—
|
|
|
50
|
|
|
Payments
on debt
|
|
|
(54
|
)
|
|
(5
|
)
|
|
Cash
distributions to shareholders
|
|
|
(10
|
)
|
|
(57
|
)
|
|
Net
cash used in financing activities
|
|
|
(64
|
)
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
11
|
|
|
56
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
148
|
|
|
92
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
159
|
|
$
|
148
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
2
|
|
$
|
2
|
|
|
Additional
distribution to shareholders (see Note 3)
|
|
$
|
9
|
|
$
|
—
|
|
The
accompanying notes are an integral part of these financial
statements.
F-68
NEW
TILT, INC.
NOTES
TO FINANCIAL STATEMENTS
For
the period January 1, 2006 thru April 24, 2006 and for the year ended
December
31, 2005
(Dollars
in thousands, except share and per share amounts)
1. Business
Description:
New
Tilt,
Inc. (the “Company”), a Massachusetts Subchapter S corporation, is an internet
strategy firm that architects, designs and delivers an internet based
business
platform for competitive advantage. The Company is headquartered in Cambridge,
Massachusetts. The Company’s customers are primarily located in the Northeastern
United States. The Company was acquired by Bridgeline Software, Inc.
(“Bridgeline”) on April 24, 2006 (See Note 12).
The
results of operations for the period January 1, 2006 thru April 24, 2006
are not
necessarily indicative of the results to be expected for a full
year.
2.
Summary
of Significant Accounting Policies:
Revenue
Recognition
Substantially
all of the Company’s revenue is generated from Web services. The Company
recognizes revenue when all of the following conditions are satisfied:
(1) there
is persuasive evidence of an arrangement; (2) 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 probable. The Company
recognizes revenue using the proportional performance model. Certain
arrangements include a warranty period of between 30 to 60 days from
the
completion of work. To date, few warranty claims have been received.
Billings
made or payments received in advance of providing services are deferred
until
the period these services are provided.
Web
Services include consulting services that are related to specific customer
needs
such as information architecture and usability engineering, interface
configuration, Web application development and database and content management.
Concentration
of Credit Risk and Significant Customers
Financial
instruments which potentially subject the Company to concentrations of
credit
risk consist primarily of cash and cash equivalents to the extent these
exceed
federal insurance limits, short-term investments and accounts receivable.
Risks
associated with cash and cash equivalents are mitigated by investing
in money
market funds with high credit quality financial institutions. In general,
the
Company does not require collateral on its arrangements with customers
and
typically provides for credit terms of 30-60 days. The Company has not
provided
an allowance for doubtful accounts since its customers have a good credit
rating
and the Company has experienced minimal write-offs of its receivables
in the
past and continues to believe that its customers pose no significant
risk of
non-payment.
The
Company’s customers who comprised at least 10% of the Company’s revenue for the
period January 1, 2006 thru April 24, 2006 and the year ended December
31, 2005
or who comprised of at least 10% of the Company’s accounts receivable at April
24, 2006 or December 31, 2005 are as follows:
F-69
NEW
TILT, INC.
NOTES
TO FINANCIAL STATEMENTS
For
the period January 1, 2006 thru April 24, 2006 and for the year ended
December
31, 2005
(Dollars
in thousands, except share and per share amounts)
|
|
|
Revenue
|
|
Accounts
Receivable
|
||||
|
|
|
For
the Period
January
1, 2006
thru
April 24, 2006
|
|
For
the Year Ended
December
31, 2005
|
|
April
24, 2006
|
|
December
31, 2005
|
|
Company
A
|
|
21%
|
|
27%
|
|
13%
|
|
35%
|
|
Company
B
|
|
7
|
|
*
|
|
19
|
|
*
|
|
Company
C
|
|
5
|
|
*
|
|
11
|
|
*
|
|
Company
D
|
|
5
|
|
*
|
|
10
|
|
*
|
|
Company
E
|
|
*
|
|
12
|
|
*
|
|
8
|
*
Less
than 10%
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 related to revenue recognition.
The
complexity of the estimation process and factors relating to the assumptions,
risks and uncertainties inherent with the use of the proportional
performance model affect the amounts of revenue and related expenses
reported in the Company’s financial statements. A number of internal and
external factors can affect these estimates, including efficiency variances
and
specification and testing requirement changes.
Cash
and Cash Equivalents
The
Company considers all highly liquid instruments with original maturity from
the date of purchase of three months or less to be cash equivalents.
Cash
equivalents consist primarily of money market mutual funds.
Fair
Value of Financial Instruments
The
carrying amounts of financial instruments, which include cash and cash
equivalents, accounts receivable and accounts payable, approximate their
fair
value because of the short-term maturity of these instruments. Based
on
borrowing rates currently available to the Company for loans with similar
terms,
the carrying value of debt approximate its fair value.
Equipment
and Improvements
The
components of equipment and improvements are stated at cost. The Company
provides for depreciation by use of the straight-line method over the
estimated
useful lives of the related assets (three to
F-70
NEW
TILT, INC.
NOTES
TO FINANCIAL STATEMENTS
For
the period January 1, 2006 thru April 24, 2006 and for the year ended
December
31, 2005
(Dollars
in thousands, except share and per share amounts)
five
years). Leasehold improvements are amortized by use of 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.
Advertising
Costs
The
Company expenses advertising costs when incurred. Advertising expense
totaled $2
and $28 for the period January 1, 2006 thru April 24, 2006 and the year
ended
December 31, 2005, respectively.
Income
Taxes
The
Company, with the consent of its shareholders, has elected under Subchapter
“S”
of the Internal Revenue Code, to be treated substantially as a partnership
for
income tax purposes. As a result, the shareholders will report the entire
corporate taxable income or loss on their individual tax returns.
Stock-Based
Compensation
The
Company has adopted a long-term incentive plan which is used to attract
and
retain employees, advisors, and consultants, as applicable, subject to
certain
limitations. The exercise price of any award shall not be less than the
fair
market value of the common stock on the date of the grant. The Company’s board
of directors administers the incentive plan, with sole authority to select
participants, determine the types of awards to be granted, and all of
the terms
and conditions of the awards, including whether the grant, vesting or
settlement
of awards may be subject to the attainment of one or more performance
goals. No
awards will be granted under the plan if the grant, vesting and/or exercise
of
the awards would jeopardize the Company’s status as an S-Corp under the Internal
Revenue Code or otherwise violates the ownership and transfer restrictions
imposed under the Company’s charter. Unless determined by the Company’s board of
directors, no award granted under the long-term incentive plan will be
transferable except through the laws of descent and distribution.
In
accordance with Statement of Financial Accounting Standards (“SFAS”)
No. 123, Accounting
for Stock-Based Compensation (“SFAS
123”),
the
Company estimated the fair value of each stock option granted in 2005
and 2006
as of the date of the grant using the Black-Scholes-Merton model with
the
following assumptions:
|
|
|
Options granted during
the
period January 1, 2006
thru
April 24, 2006
|
|
Options granted
Year
2005
|
|
Risk-free
rate
|
|
4.58%
- 4.92%
|
|
3.99%
- 4.38%
|
|
Projected
future dividend yield
|
|
0.00%
|
|
0.00%
|
|
Expected
life of the options
|
|
6.5
years
|
|
6.5
years
|
|
Volatility
|
|
70%
|
|
70%
|
F-71
NEW
TILT, INC.
NOTES
TO FINANCIAL STATEMENTS
For
the period January 1, 2006 thru April 24, 2006 and for the year ended
December
31, 2005
(Dollars
in thousands, except share and per share amounts)
As
none
of the options described above have been exercised, the Company does
not have
relevant historical data on which to base an estimate of the expected
life of
the options. The expected life of such options has been estimated to equal
the average of the contractual term and the vesting term. As the Company’s
common
stock is not publicly traded, the Company does not have relevant historical
data
on which to base an estimate of volatility in the value of such
options. The volatility of such options has been estimated to equal the
average fluctuations in historical stock prices of publicly traded companies
that are otherwise similar to the Company. The Company has also historically
experienced a forfeiture rate of approximately 5%. Based on the above
assumptions, the fair value of the options granted during the period
January 1,
2006 thru April 24, 2006 and the year ended December 31, 2005 equals
approximately $45 and $41, respectively and will be amortized to compensation
expense over the vesting period. The Company has expensed $22 and $72
for the
period January 1, 2006 thru April 24, 2006 and the year ended September
30,
2005, respectively. As of April 24, 2006 the Company has $43 remaining
to be
amortized.
In
December 2004, the FASB issued SFAS No. 123(R), Share-Based
Payment (“SFAS
123R”). SFAS
123(R) requires the recognition of the fair value of stock-based compensation
in
net income. SFAS 123(R) supersedes SFAS 123, and Accounting Principles
Board
Opinion No. 25, Accounting
for Stock Issued to Employees
(“APB
25”). The Company adopted SFAS 123(R), but since the Company had previously
adopted SFAS 123, the adoption had no significant effect on the Company’s
financial position, results of operations or cash flows.
3.
Related-Party Transactions:
On
April
24, 2006, the Company sold an automobile to a shareholder of the Company
for $3
which approximated its net book value. The difference between the net
book value
and the fair market value of $12 has been recorded as an additional distribution
to shareholders.
4.
Accounts Receivable:
Included
in the Company’s accounts receivable balance at April 24, 2006 and December 31,
2005 is $22 and $8 of unbilled receivables, respectively.
5.
Equipment and Improvements:
Equipment
and improvements, net consisted of the following as of April 24, 2006
and
December 31, 2005:
|
|
|
April
24, 2006
|
|
December
31, 2005
|
|
||
|
Computers,
software and equipment
|
|
$
|
95
|
|
$
|
102
|
|
|
Furniture
and fixtures
|
|
|
36
|
|
|
36
|
|
|
Leasehold
improvements
|
|
|
9
|
|
|
9
|
|
|
Vehicle
|
|
|
—
|
|
|
24
|
|
|
|
|
|
140
|
|
|
171
|
|
|
Less
accumulated depreciation
|
|
|
79
|
|
|
98
|
|
|
Equipment
and improvements, net
|
|
$
|
61
|
|
$
|
73
|
|
F-72
NEW
TILT, INC.
NOTES
TO FINANCIAL STATEMENTS
For
the period January 1, 2006 thru April 24, 2006 and for the year ended
December
31, 2005
(Dollars
in thousands, except share and per share amounts)
During
the period January 1, 2006 thru April 24, 2006, the Company retired fully
depreciated assets whose original cost was $10 and sold a vehicle to
a
shareholder (See Note 3).
6.
Other Assets:
Other
assets consisted of the following as of April 24, 2006 and December 31,
2005:
|
|
|
April
24, 2006
|
|
December
31, 2005
|
|
||
|
Deferred
charges
|
|
$
|
—
|
|
$
|
1
|
|
|
Security
deposits
|
|
|
11
|
|
|
14
|
|
|
Total
|
|
$
|
11
|
|
$
|
15
|
|
7.
Accrued Liabilities:
Accrued
liabilities consisted of the following as of April 24, 2006 and December
31,
2005:
|
|
|
April
24, 2006
|
|
December
31, 2005
|
|
||
|
Compensation
and benefits
|
|
$
|
—
|
|
$
|
58
|
|
|
Miscellaneous
|
|
|
31
|
|
|
19
|
|
|
Total
|
|
$
|
31
|
|
$
|
77
|
|
8.
Debt:
On
November 27, 2001, the Company entered into a revolving line of credit
with a
commercial lender (the “Facility”). The Facility provides borrowings of up to
$150 and bears interest at the Wall Street Journal’s prime rate plus 1 percent
(8.75% at April 24, 2006). On February 7, 2006, the Company changed its
agreement to provide borrowings of up to $250 with interest at a variable
rate
equal to the highest prime rate published in the Wall Street Journal.
The
weighted average debt during the period January 1, 2006 thru April
24, 2006
and
for the year ended December 31, 2005 was $50 and $28, respectively, resulting
in
weighted average interest rates of 9.9% and 7.3%, respectively. Upon
the sale of
the Company on April 24, 2006 (See Note 12), the line of credit was
closed.
On
October 15, 2003, the Company entered into an automobile loan of $14
repayable
over a period of 36 months with an interest rate of 3.4%. This loan was
repaid
upon the sale of the automobile (See Note 3).
9.
Commitments:
Operating
Leases
The
Company leases office space under a non-cancelable operating lease expiring
on
March 5, 2009. Future minimum lease payments under this lease are as
follows:
F-73
NEW
TILT, INC.
NOTES
TO FINANCIAL STATEMENTS
For
the period January 1, 2006 thru April 24, 2006 and for the year ended
December
31, 2005
(Dollars
in thousands, except share and per share amounts)
|
|
|
|
|
|
|
April
25, 2006 to December 31, 2006
|
|
$
|
63
|
|
|
Year
Ended December 31, 2007
|
|
|
98
|
|
|
Year
Ended December 31, 2008
|
|
|
107
|
|
|
Year
Ended December 31, 2009
|
|
|
18
|
|
Rent
expense under all operating leases was approximately $23 and $50 for
the period
January 1, 2006 through April 24, 2006 and the year ended December 31,
2005,
respectively.
10.
Stock Options:
As
of
October 1, 2000, the Company had established an option plan approved
by the
Board of Directors, the 2000 Equity Incentive Plan of NewTilt, Inc. (the
“Plan”). The exercise price for these options is equal to the estimated fair
market value of the Company’s common stock at the date of grant, based on
management’s assessment. Options expire no later than ten years from the grant
date and generally vest as follows: 50% upon the first anniversary of
date of
grant, an additional 25% on the eighteen-month anniversary and the remaining
25%
on the second anniversary of the date of grant. A summary of option activity
is
as follows:
|
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
||
|
Options
outstanding at January 1, 2005
|
|
|
212,000
|
|
$
|
1.15
|
|
|
Granted
|
|
|
145,000
|
|
|
2.00
|
|
|
Canceled
|
|
|
(130,000
|
)
|
|
0.80
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
Options
outstanding at December 31, 2005
|
|
|
227,000
|
|
|
1.89
|
|
|
Granted
|
|
|
70,000
|
|
|
1.50
|
|
|
Canceled
|
|
|
(56,000
|
)
|
|
1.58
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
Options
outstanding at April 24, 2006
|
|
|
241,000
|
|
|
1.85
|
|
Summarized
information about stock options outstanding at April 24, 2006 is as
follows:
F-74
NEW
TILT, INC.
NOTES
TO FINANCIAL STATEMENTS
For
the period January 1, 2006 thru April 24, 2006 and for the year ended
December
31, 2005
(Dollars
in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
Exercisable
|
|
|||||||
|
Range
of Exercise Prices
|
|
Number
of
Options
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
Number
of
Options
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|||||
|
$0.50
|
|
|
1,000
|
|
|
4.67
|
|
$
|
0.50
|
|
|
1,000
|
|
|
4.67
|
|
|
1.50
|
|
|
70,000
|
|
|
9.92
|
|
|
1.50
|
|
|
30,000
|
|
|
10.00
|
|
|
2.00
|
|
|
170,000
|
|
|
9.33
|
|
|
2.00
|
|
|
149,000
|
|
|
9.42
|
|
|
|
|
|
241,000
|
|
|
9.50
|
|
|
1.91
|
|
|
180,000
|
|
|
9.50
|
|
At
April
24, 2006, options to purchase 180,000 shares at a weighted average exercise
price of $1.91 of common stock were exercisable with the remaining options
becoming exercisable at various dates through March 13, 2008 and having
expiration dates through April 21, 2016. Upon the sale of the Company
on April
25, 2006 (See Note 13), the outstanding 241,000 NewTilt options were
converted
to Bridgeline options at a conversion rate of 1:4.28 with no change to
the
original vesting schedule.
11.
Retirement Plan:
The
Company has established a 401(k) plan for the benefit of employees effective
January 1, 2004. This plan allows for employees to contribute up to 100%
of
their pay up to the IRS maximum allowable contribution per year. The
Company has
not made any contributions to the plan since its inception.
12.
Subsequent Event:
On
April
25, 2006, all of the net assets of the Company were acquired by Bridgeline
Software, Inc. (“Bridgeline”), a developer of Web applications and software
tools headquartered in Woburn, Massachusetts. Purchase consideration
was paid in
the form of $550 cash, contingent cash consideration of up to $750 to
be paid
quarterly over the next three years, and 320,000 shares of Bridgeline
common
stock.
F-75
OrgitectureTM
is our
on-demand Web-based platform which provides expandable on-demand modules
such as
Relationship Management, eSurvey, eNewsletter, Content Management,
eCommerce,
Event Registration and Integrated Grants Management.
The
graphic below displays the on-demand web modules available in
Orgitecture:
Below
are
screen shots of Orgitecture’s eCommerce module:
Below
are
screen shots of other Orgitecture related modules:
 |
||
|
eSurvey
|
eNewsletter
|
Relationship
Manager
|
|
|
|
|
|
|
|
|
|
|
|
Until
,
2007 (25 days after the date of this prospectus), all dealers
effecting transactions in the shares offered by this prospectus
whether or
not participating in the offering may be required to deliver
a copy of
this prospectus. Dealers may also be required to deliver
a copy of this
prospectus when acting as underwriters and for their unsold
allotments or
subscriptions.
|
|
|
|
|
TABLE
OF CONTENTS
Prospectus
Summary
The
Offering
Summary
Financial Data
Risk
Factors
Cautionary
Note Regarding Forward
Looking
Statements
Determination
of Offering Price
Use
of Proceeds
Dividend
Policy
Capitalization
Unaudited
Condensed Pro Forma Financial Data
Dilution
Selected
Financial Data
Management’s
Discussion and Analysis
Business
Management
Executive
Compensation
Certain
Relationships and Related
Transactions
Security
Ownership of Certain Beneficial
Owners
and Management
Description
of Capital Stock
Shares
Eligible for Future Sale
Underwriting
Legal
Matters
Experts
Additional
Information
Index
to Financial Statements
|
3
6
7
10
20
21
21
22
22
23
25
27
29
48
68
75
78
79
81
85
86
88
88
88
F-1
|
|
Bridgeline
Software,
Inc.
3,000,000
Shares
_____________
Prospectus
_____________
|
|
You
should rely only on the information contained in this prospectus.
We have
not authorized anyone to provide you with different information.
If anyone
provides you with different information, you should not rely
on it. We are
not making an offer to sell these shares in any jurisdiction
where the
offer or sale is not permitted. You should assume that the
information
contained in this prospectus is accurate only as of the date
on the front
cover of the prospectus. Our business, financial condition,
results of
operations and prospects may have changes since that
date.
|
|
Joseph
Gunnar & Co., LLC
,
2007
|
|
|
|
|
|
|
The
information in this prospectus is not complete and may be changed.
We may not
sell these securities until the registration statement filed with
the Securities
and Exchange Commission is effective. The prospectus is not an
offer to sell
these securities and it is not soliciting an offer to buy these
securities in
any state where the offer or sale is not permitted.
Notice
to California Investors: This offering is limited to
suitable investors only. Each purchaser of shares in California
must meet one of
the following suitability standards: a minimum annual gross income
of at least
$65,000 and a minimum net worth of at least $250,000, or, in the
alternative,
minimum net worth of at least $500,000, regardless of annual gross
income. In
addition, the investor’s purchase may not exceed 10% of his or her net worth.
Net worth in both instances is exclusive of the investor’s equity in his or her
home, home furnishings and automobile.
Notice
to New Jersey Investors:The securities subject to the
offering hereof may only be sold in the State of New Jersey through
a registered
broker-dealer or in reliance upon an examination from registration.
SUBJECT
TO COMPLETION, DATED APRIL 2, 2007
PROSPECTUS
Bridgeline
Software, Inc.
542,000
Shares
Common
Stock
This
prospectus covers the selling stockholders’ resale of (1) up to 392,000 shares
of common stock they now own or have the right to acquire upon
exercise of
outstanding warrants and (2) up to 150,000 shares of common stock
underlying
warrants granted to the lead underwriter in our initial public
offering. We will
not receive any proceeds from the resale of the common stock by
the selling
stockholders, but we will receive the proceeds of their warrant
exercises. The
proceeds to the selling stockholders of their resale of the common
stock will
depend on the market price at the time of sale.
We
completed our initial public offering
of shares
of common stock
on
.. Our common stock is quoted on the Nasdaq Capital Market and the
Boston Stock Exchange under the symbols “BLSW” and “BLS”,
respectively. On
, the last reported sale price of our common stock was
$ per
share.
Investing
in our common stock involves risks. See “Risk Factors” beginning on page 10
for a discussion of certain factors that should be considered
by prospective
purchasers of our shares.
These
securities have not been approved or disapproved by the Securities
and Exchange
Commission or any state securities commission, nor has the Securities
and
Exchange Commission or any state securities commission passed upon
the accuracy
or adequacy of this prospectus. Any representation to the contrary
is a criminal
offense.
|
Public
offering Price
|
The
shares will sell at prevailing market prices or privately
negotiated
prices if and when the shares are listed on the Nasdaq
Capital Market or
the Boston Stock Exchange.
|
|
|
|
|
Commission
|
Customary
for the type of transaction involved.
|
|
|
|
|
Proceeds
to Selling Stockholders
|
Market
price, from time to time, a price related to the market
price or
negotiated price, net of customary commission for execution
of the type of
transaction.
|
The
date
of this prospectus is
,
2007.
Below
are
two screen shots of Web Applications developed by Bridgeline Software
Inc., a
developer of Web applications and Web software tools.
Below
is
a screen shot of our netEDITORproTM Content
Management
software tool, which
provides
Content Management capabilities to multiple users of multiple Web
sites, and our
OrgitectureTM
platform,
an integrated suite of on-demand Web-based Web site
development tools.
Alt.
2
PROSPECTUS
SUMMARY
This
summary highlights information contained elsewhere in this prospectus
and does
not contain all of the information you should consider in making
your investment
decision. You should read this summary together with the more
detailed
information, including our financial statements and the related
notes, elsewhere
in this prospectus. You should carefully consider, among other
things, the
matters discussed in “Risk Factors” on page 10. In addition, some of the
statements made in this prospectus discuss future events and
developments,
including our future business strategy and our ability to generate
revenue,
income and cash flow. These forward-looking statements involve
risks and
uncertainties which could cause actual results to differ materially
from those
contemplated in these forward-looking statements. See “Cautionary
Note Regarding Forward-Looking Statements” on page
18.
Unless
the context indicates otherwise, the terms “our,” “we,” “us,” and “Bridgeline”
refer to Bridgeline Software, Inc.
Bridgeline
Software
Bridgeline
Software is a developer of on-demand Web software tools and a developer
of
award-winning Web applications that assist our customers to optimize
business
processes utilizing Web-based technologies. Our solutions can improve
the
effectiveness of our customers by assisting them:
|
·
|
To
increase sales by developing Web applications such as
on-line ordering
systems and proactive integrated marketing tools with
lead generation
capabilities.
|
|
·
|
To
improve customer service and customer loyalty by developing
Web
applications that provide self-service portals that automate
interactions
between the customers and their partners. These types
of portals reduce
their administrative and operational
costs.
|
|
·
|
To
enhance employee communication and training by developing
on-line training
applications allowing our customers to create topic-based
training
programs such as orientation training for new hires and
new policy rollout
training for current employees. These types of on-line training
applications reduce their administrative and operational
costs.
|
Our
proprietary framework enables companies to add functionality on
a per module
basis, providing expandability and scalability. We have
developed an on-demand Web software tools framework that provides
the
following:
|
·
|
Content
Management
|
|
·
|
eCommerce
Management
|
|
·
|
Relationship
Management
|
|
·
|
eMarketing
Management
|
|
·
|
Grants
Management
|
Recent
innovations in information technology have created opportunities
to deliver
software applications directly to users over the Internet in a
subscription-based, on-demand business model. This model is made
possible by the
proliferation of high-speed, broadband Internet connectivity, open
standards for
application integration and advances in network availability and
security. For
the user, on-demand software eliminates the need for expensive
hardware,
software and internal IT support.
Our
on-demand Web management tools are delivered through a “software as a service”
business model, in which we deliver our software over the
Internet while providing maintenance, daily technical operation
and
support.
Alt.
3
In
addition to our on-demand Web management software tools, we develop
award
winning Web applications utilizing our tools for use over the Internet
as well
as for customers’ intranets and extranets. Our in-house team of
Microsoft®-certified
developers specializes in:
-
User experience development
-
Web application development
-
Search engine optimization
A
description of our Web software tools and Web services can be
found beginning on
page 50 of this prospectus.
As
of
December 31, 2006, we have more than 90 active customers of which
we had one
customer generating 21% of revenue and no other customer generating
more than
10%. As of September 30, 2006 our customers included Nomura Securities,
The Bank of New York, Pfizer, Depository Trust & Clearing Corporation and
John Hancock, which each comprised approximately 22%, 7%, 6%, 6%
and 6% of our
revenues, respectively, during the fiscal year ended September
30,
2006.
We
have
received multiple industry awards, including Web Awards from
the Web Marketing
Association; MITX Awards from the Massachusetts Innovation & Technology
Exchange; Axiem Awards; and One Show Interactive Awards. A
description of these awards can be found on page 44
of this prospectus.
Market
Opportunity
We
believe the Web application development market is growing and is
fragmented. We believe there is an opportunity for us to acquire
multiple companies that specialize in Web application development
and are based
in other large North American cities, thereby potentially creating
one of the
largest interactive technology companies in North America. We believe
that
established yet small Web application development companies have
the ability to
market, sell and install Web-based software tools in their local
metropolitan
markets. In addition, we believe that these companies also have a
customer base and a niche presence in the local markets in which
they operate.
We believe that by acquiring certain of these companies and applying
our
business practices and efficiencies, we can dramatically accelerate
our time to
market in areas other than those in which we currently operate.
We
estimate, based on our experience in having made such acquisitions,
that
compounded annual revenue growth rates of at least 20% per year
for each
acquired entity may be possible. We target certain established
Web application
development companies that we believe have:
-
the complementary technical ability to market, sell and deliver Web-based software tools in their particular metropolitan market areas;
-
the desire to improve their profit margins by licensing our web software tools to their customer base;
-
an established base of customers with local market presence that can potentially accelerate our time to market in geographic areas where we do not currently operate;
-
the desire reduce development costs by leveraging our Bangalore, India development center; and
-
the desire to leverage certain centralized cost centers such as finance, human resources, legal, and marketing.
Alt.
4
Acquisitions
Since
our
inception, we have consummated the acquisition of five Web application
development companies:
|
·
|
In
December 2000, we acquired Streamline Communications,
a Boston,
Massachusetts-based company.
|
|
·
|
In
February 2002, we acquired Lead Dog Digital, Inc., a
New York, New
York-based company.
|
|
·
|
In
December 2004, we acquired Interactive Applications Group,
Inc.
(“iapps”®),
a
Washington, D.C.-based company.
|
|
·
|
In
April 2006, we acquired New Tilt, Inc. (“New Tilt”), a Cambridge,
Massachusetts-based company.
|
|
·
|
In
, 2007, we acquired Objectware, Inc. (“Objectware”),
an
Atlanta, Georgia- based
company.
|
Summary
Risk Factors
Our
business is subject to various risks and challenges, including
(without
limitation or any specific order):
|
·
|
our
limited operating history on which to evaluate our
operations;
|
|
·
|
we
have suffered losses since inception which may recur
in the future as we
expand;
|
|
·
|
our
licenses are renewable on a monthly basis and a reduction
in our license
renewal rate could significantly reduce our revenues;
|
|
·
|
our
inability to manage our future growth efficiently or
profitably;
|
|
·
|
our
inability to efficiently integrate Objectware into our
operations;
|
|
·
|
if
our products fail to perform properly due to undetected
errors or similar
problems, our business
|
Alt.
5
|
|
could
suffer, and we could face product liability
exposure;
|
|
·
|
if
the security of our software, in particular the hosted
Internet solutions
products we have developed, is breached, our business
and reputation could
suffer;
|
|
·
|
if
we undertake future business combinations and acquisitions,
they may be
difficult to integrate into our existing operations,
may disrupt our
business, dilute stockholder value or divert management’s
attention;
|
|
·
|
our
external auditors have identified material weaknesses
in our internal
controls;
|
|
·
|
our
dependence on our management team and key personnel and
the loss or
inability to retain these individuals could harm our
business;
and
|
|
·
|
intense
and growing competition, which could result in price
reductions, reduced
operating margins and loss of market
share.
|
For
a
detailed description of these and additional risk factors, please
refer to “Risk
Factors” beginning at page 10.
Corporate
Information
Our
principal executive offices are located at 10 Sixth Road, Woburn,
Massachusetts
01801, and our telephone number is (781) 376-5555. We maintain
offices in New
York, New York, Washington, D.C. and Atlanta, Georgia, as well
as a development
center in Bangalore, India. We maintain a website at www.bridgelinesw.com.
The
information on our website is not part of this prospectus.
THE
OFFERING
|
Common
Stock Presently Outstanding:
|
7,764,742
shares
|
|
|
|
|
Common
Stock Issuable upon Exercise of Selling Stockholder
Warrants:
|
542,000 shares
|
|
|
|
|
Common
Stock to be Outstanding Immediately after Selling
Stockholder
Offering:
|
8,306,742
shares
|
________________
The
number of shares of common stock presently outstanding does not
include:
|
·
|
345,000
shares issuable if the over-allotment option is exercised
in full by the
underwriters of our initial public offering;
|
|
·
|
903,606
shares issuable upon the exercise of outstanding
options at a weighted
average exercise price of $3.04 per share; and
|
|
·
|
728,269
shares issuable upon the exercise of outstanding
warrants.
|
|
|
|
|
|
|
Common
Stock
Offered:
|
All
of the 542,000 shares offered
by this prospectus are being sold by the selling
stockholders who hold or
have the right to acquire shares of common stock
upon exercise of
outstanding warrants.
|
|
|
|
|
|
|
Use
of Proceeds:
|
We
will not receive any proceeds from the resale of
the common stock by the
selling stockholders, but we will receive the proceeds
of their warrant
exercises. The proceeds to the selling stockholders
of their resale of the
common stock will depend on the market price at
the time of
sale.
|
|
|
|
|
|
|
Risk
Factors:
|
You
should consider carefully all of the information
set forth in this
prospectus, and, in particular, the specific factors
set forth under “Risk
Factors” beginning at page 10, before deciding whether or
not to invest in
our shares.
|
|
|
|
|
|
|
Trading
Symbols:
|
Our
common stock is quoted on the Nasdaq Capital Market
and the Boston Stock
Exchange under the symbols “BLSW” and “BLS,”
respectively.
|
_______________________
Alt.
6
“Bridgeline,”
“Bridgeline Software,” “iapps,” “netEDITOR,”
“netEDITOR-pro,” “Orgitecture,” “Projectware” and “Objectware” are our
trademarks and service marks. We have registered the trademarks
“Bridgeline,”
“iapps,” “netEDITOR” and “Projectware” with the United States Patent and
Trademark Office, and have filed applications to register
“netEDITOR-pro,” “Orgitecture” and “Objectware” and claim common law rights
in such marks. This prospectus refers to the trade names, service
marks and
trademarks of other companies. These references are made with
due recognition of
the rights of these companies and without any intent to misappropriate
these
names or marks.
SUMMARY
FINANCIAL DATA
In
accordance with Article 11 of Regulation S-X under the Securities Act
of 1933, as amended, a condensed pro forma balance sheet as of December
31, 2006
and condensed pro forma statements of operations for the three months
ended
December 31, 2006 and the fiscal year ended September 30, 2006 have
been
prepared. For additional information, please refer to the complete
pro forma disclosures beginning on page F-3 of our financial
statements.
The
following tables present our summary statements of operations data
for the three
months ended December 31, 2006 and 2005 and for the years ended September
30, 2006 and 2005, and our summary historical and pro forma balance sheet
data as of December 31, 2006. The summary statements of operations
data for the
years ended September 30, 2006 and 2005 are derived from our audited
financial statements as of and for the years ended September 30, 2006
and 2005, respectively. The summary statements of operations data for the
three months ended December 31, 2006 and 2005 and the selected balance
sheet data as of December 31, 2006 have been derived from our unaudited
financial statements included elsewhere in this prospectus. Our unaudited
financial statements have been prepared on the same basis as the audited
financial statements and notes thereto, which include, in the opinion
of our
management, all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the information for the unaudited
interim
period. Our historical results for prior interim periods are not necessarily
indicative of results to be expected for a full fiscal year or for
any future
period. You should read this data together with our financial statements
and
related notes included elsewhere in this prospectus and the information
under
“Selected Financial Data” and “Management’s Discussion and
Analysis.”
The
following unaudited financial data should be read in conjunction
with the
audited and unaudited historical financial statements of our company,
New Tilt,
Inc. and Objectware, Inc. and the unaudited pro forma combined consolidated
financial information, including the notes thereto, appearing elsewhere
in this
prospectus. The unaudited pro forma condensed combined information
is presented
for illustrative purposes only and is not
Alt.
7
necessarily
indicative of the results of operations or financial position that
would have
occurred if the transactions had been completed at the dates
indicated.
|
|
Unaudited
|
|
|
|||||||||||||
|
|
Three
Months Ended December 31,
|
Year
Ended September 30,
|
||||||||||||||
|
|
2006
|
2005
|
2006
|
2005
|
||||||||||||
|
Historical
Statements of Operations Data:
|
|
|
|
|
||||||||||||
|
Revenue
|
$ |
2,309,000
|
$ |
1,713,000
|
$ |
8,235,000
|
$ |
5,769,000
|
||||||||
|
Cost
of revenue
|
1,141,000
|
867,000
|
3,809,000
|
3,113,000
|
||||||||||||
|
Gross
profit
|
1,168,000
|
846,000
|
4,426,000
|
2,656,000
|
||||||||||||
|
Operating
loss
|
(285,000 | ) | (147,000 | ) | (810,000 | ) | (461,000 | ) | ||||||||
|
Net
loss
|
(630,000 | ) | (174,000 | ) | (1,448,000 | ) | (517,000 | ) | ||||||||
|
Basic
and diluted loss per share
|
$ | (0.15 | ) | $ | (0.04 | ) | $ | (0.36 | ) | $ | (0.14 | ) | ||||
|
Weighted
average shares
|
4,273,833
|
3,903,833
|
4,046,278
|
3,804,527
|
|
|
Three
Months Ended
December
31, 2006
|
Year
Ended
September
30, 2006 (a)
|
||||||
|
Unaudited
Proforma Statements of Operations Data:
|
|
|
||||||
|
Revenue
|
$ |
3,423.000
|
$ |
13,056,000
|
||||
|
Cost
of revenue
|
1,684,000
|
6,653,000
|
||||||
|
Gross
profit
|
1,739,000
|
6,403,000
|
||||||
|
Operating
income (loss)
|
(32,000 | ) |
54,000
|
|||||
|
Net
income (loss)
|
(34,000 | ) |
48,000
|
|||||
|
Earnings
(loss) per share:
|
||||||||
|
Basic
|
$ |
0.00
|
$ |
0.01
|
||||
|
Diluted
|
$ |
0.00
|
$ |
0.01
|
||||
|
Weighted
average shares:
|
||||||||
|
Basic
|
7,764,742
|
8,039,409
|
||||||
|
Diluted
|
7,764,742
|
8,638,387
|
||||||
|
As
of December 31, 2006
|
||||||||
|
Historical
|
Pro
Forma (b)
|
|||||||
|
Balance
Sheet Data:
|
|
|
||||||
|
Working
capital
|
$ | (2,660,000 | ) | $ |
9,646,000
|
|||
|
Total
assets
|
$ |
9,810,000
|
$ |
24,146,000
|
||||
|
Total
liabilities
|
$ |
4,717,000
|
$ |
2,503,000
|
||||
|
Total
shareholders’ equity
|
$ |
5,093,000
|
$ |
21,643,000
|
||||
Non-GAAP
Financial Measures and Reconciliation
We
use
earnings before interest, taxes, depreciation and amortization (“EBITDA”) in
this prospectus as a supplemental measure of our performance that is
not
required by, or presented in accordance with, generally accepted accounting
principles in the United States (“GAAP”). We define EBITDA as net income
before interest, taxes, depreciation and amortization. We present EBITDA
because we consider it an important supplemental
Alt.
8
measure
of our performance by adjusting net income or loss primarily for
the
non-recurring charges included in interest expense that relate to
the
amortization of the fair value of warrants issued pursuant to the
private debt
offering in April 2006, which was fully amortized through interest
expense at
the time of our initial public offering, which charges do not
relate directly to our operating performance. Because the use of
EBITDA
facilitates comparisons of our historical operating performance on
a more
consistent basis, we use this measure for business planning and analysis
purposes, in assessing acquisition opportunities and in determining
how
potential external financing sources are likely to evaluate our business.
In
addition, we believe this measure provides the investor with an accurate
measure
of our ability to meet our future cash flow
requirements.
EBITDA
is not a measurement of our financial performance under GAAP and should
not be
considered as an alternative to net income, operating income or any
other
performance measure derived in accordance with GAAP, as an alternative
to cash
flow from operating activities or as a measure of our liquidity. You
should not
assume that the EBITDA amounts shown in this prospectus are comparable
to
EBITDA
amounts disclosed by other companies. In evaluating EBITDA, you should
be aware
that it excludes expenses that we will incur in the future on a recurring
basis.
EBITDA
has limitations as an analytical tool, and you should not consider
it in
isolation. Some of its limitations are:
|
·
|
it
does not reflect cash expenditures for capital asset
purchases
|
|
·
|
it
does not reflect the non-cash impact of stock compensation
expenses
|
|
·
|
it
does not reflect the cash impact of changes in deferred
revenues
|
|
·
|
it
does not reflect the cash impact of the changes in deferred
assets and
liabilities
|
We
compensate for these limitations by relying primarily on our GAAP results
and
using EBITDA only supplementally. EBITDA is not intended to supersede
or
replace our GAAP results. For more information,
see our consolidated financial statements and the notes to those statements
included elsewhere in this prospectus. The following table reconciles
our net
income to our EBITDA on a historical and pro forma basis as of the
dates
shown:
|
|
Unaudited
|
|
|
|||||||||||||
|
|
Three
Months Ended December 31,
|
Year
Ended September 30,
|
||||||||||||||
|
Other
Financial Data:
|
2006
|
2005
|
2006
|
2005
|
||||||||||||
|
Net loss
|
$ | (630,000 | ) | $ | (174,000 | ) | $ | (1,448,000 | ) | $ | (517,000 | ) | ||||
|
Interest
expense
|
345,000
|
27,000
|
638,000
|
56
,000
|
||||||||||||
|
Depreciation
|
48,000
|
23,000
|
186,000
|
106,000
|
||||||||||||
|
Amortization
of intangibles
|
32,000
|
28,000
|
119,000
|
94
,000
|
||||||||||||
|
EBITDA
|
$ | (205,000 | ) | $ | (96,000 | ) | $ | (505,000 | ) | $ | (261,000 | ) | ||||
|
Other
Unaudited Proforma Financial Data:
|
Three
Months Ended
December
31, 2006 (b)
|
Year
Ended
September
30, 2006 (a)
|
||||||
|
Net
income
|
$ | (34,000 | ) | $ |
48,000
|
|||
|
Income
tax provision
|
16,000
|
57,000
|
||||||
|
Interest
expense
|
5,000
|
17,000
|
||||||
|
Depreciation
|
55,000
|
166,000
|
||||||
|
Amortization
of intangibles
|
33,000
|
212,000
|
||||||
|
EBITDA
|
$ |
75,000
|
$ |
500,000
|
||||
Notes
to Summary Historical and Pro Forma Financial Data
|
(a)
|
On
April 24, 2006 and December 15, 2004 we acquired New Tilt
and iapps®,
respectively. The results of operations of New Tilt and
iapps are
included in our consolidated financial statements from
the dates of the
acquisitions. Subsequent to our initial public offering,
we acquired
Objectware and retired indebtedness. The accompanying summary
financial
data reflect the effect of these transactions as if they
occurred at the
beginning of the most recent fiscal year on October 1,
2005.
|
|
(b)
|
Subsequent
to our initial public offering, we acquired Objectware and
retired indebtedness. The accompanying summary financial
data reflect the
effect of these transactions as if they occurred at the
beginning of the
fiscal year on October 1,
2006.
|
Alt.
9
RISK
FACTORS
You
should carefully consider and evaluate all of the information contained
in this
prospectus, including the following risk factors, before deciding to
invest in
our securities. Any of these risks could materially and adversely affect
our
business, financial condition and results of operations, which in turn
could
adversely affect the price of our common stock.
Risks
Related to our Business
We
have a limited operating history on which to evaluate our operations
and may
again incur losses in the future as we expand.
During
the most recent four years of operations, in 2003, 2004, 2005 and 2006,
we had
revenues of approximately $4.2 million, $4.9 million, $5.8 million
and $8.2
million, respectively, and net losses of $750,000, $178,000, $517,000
and
$1,448,000, respectively. We have a limited operating history on which
to base
an evaluation of our business and prospects. Since 2003, we have funded
operations through operating cash flows, when available, sales of equity
securities, issuances of debt and lines of credit. Any investment in
our company
should be considered a high risk investment because you will be placing
funds at
risk in an unseasoned early stage company with unforeseen costs, expenses,
competition and other problems to which such companies are often subject.
Our
revenues and operating results are difficult to forecast and our projected
growth is dependent, in part, on our ability to complete future acquisitions
of
prospective target companies and the future revenues and operating
results of
such acquired companies. We therefore believe that period-to-period
comparisons
of our operating results thus far should not be relied upon as an indication
of
future performance.
As
we have a limited operating history, we may be unable to accurately
predict our
future operating expenses, which could cause us to experience cash
shortfalls in
future periods.
In order
to substantially grow our business both organically and through additional
acquisitions, we may, from time to time, require additional funding.
There can
be no assurance that we will be able to raise any additionally needed
funds on
acceptable terms or at all. The procurement of any such additional
financing may
result in the dilution of your ownership interest in our
company.
Because
most of our licenses are renewable on a monthly basis, a reduction
in our
license renewal rate could reduce our revenues.
Our
customers have no obligation to renew their monthly 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 revenues to decline which would have
a material
adverse effect on our operations.
Only
a few customers account for a substantial portion of our revenues,
and if we
lose any of these customer accounts, our net sales could substantially
suffer.
We
derive
a significant portion of our revenues from a small number of customers.
For the
fiscal year ended September 30, 2006, approximately 22% of our revenues
were
generated from Nomura Securities, 7% of our revenues were generated
from The Bank of New York, and 6% of our revenues were individually
generated from Pfizer, Depository Trust & Clearing Corporation and John
Hancock. For the three months ended December 31, 2006, Nomura
Securities generated 21% of our revenues. The loss of business from
any of these
customers could substantially reduce our net sales and results of operations
and
could seriously harm our business.
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 be required
to address
potential market opportunities. For example, we will need to expand
the size of
our research and development, sales, corporate finance and operations
staff.
There can be no assurance that our infrastructure will be sufficiently
Alt.
10
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.
Our
recent acquisition of Objectware involves risks, including our inability to
integrate successfully its business and our assumption of
liabilities.
We
may
not be able to integrate successfully Objectware’s business into our existing
business. We cannot assure you that we will be able to market the
services
provided by Objectware with the other services we provide to customers.
Further,
integrating Objectware’s business may involve significant diversion of our
management time and resources and be costly. Our acquisition of Objectware
also
involves the risks that the business acquired may prove to be less
valuable than
we expected and/or that Objectware may have unknown or unexpected
liabilities,
costs and problems. In acquiring Objectware, we relied on limited
representations and warranties of Objectware’s sole stockholder. Although we
have contractual and other legal remedies for losses that we may
incur as a
result of breaches of his agreements, representations and warranties,
we cannot
assure you that our remedies will adequately cover any losses that
we
incur.
If
we undertake additional business combinations and acquisitions, they
may be
difficult to integrate into our existing operations, may disrupt our
business,
dilute stockholder value or divert management’s
attention.
During
the course of our history, we have acquired five businesses, including our
recent acquisition of Objectware. Under this agreement, we intend to
acquire all outstanding capital stock of Objectware. A key element
of our growth
strategy is the pursuit of additional acquisitions in the fragmented
Web
development/services 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. As of the date of this prospectus,
we have no commitments, proposals or arrangements to acquire any
other
business.
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.
Complex
applications software we sell 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:
|
·
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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
Alt.
11
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 revenues. 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
presently we are not 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:
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·
|
be
expensive and time consuming to defend;
|
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·
|
result
in negative publicity;
|
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·
|
force
us to stop licensing our products that incorporate the challenged
intellectual property;
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·
|
require
us to redesign our products;
|
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·
|
divert
management’s attention and our other resources; or
|
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·
|
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
Alt.
12
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.
We
have shifted a significant portion of our software development operations
to
India, which poses significant economic, political and security
risks.
A
significant portion of our software development activities are conducted
by our
Bridgeline Software, Pvt. Ltd. subsidiary in Bangalore, India, in order
to take
advantage of cost efficiencies associated with India’s lower wage scale.
However, we may not continue to achieve the cost savings and other
benefits we
currently receive from these operations and we may not be able to find
sufficient numbers of developers with the necessary skill sets in India
to meet
our needs as we grow. Due to our activities in India, we are exposed
to risks
related to changes in the economic, security and political conditions
of India.
Economic and political instability, military actions and other unforeseen
occurrences in India could impair our ability to continue our software
development in a timely manner, which could put our products at a competitive
disadvantage.
Our
costs will increase significantly as a result of operating as a public
Exchange
Act reporting company, and our management will be required to devote
substantial
time to complying with public company rules and regulations. As a result
of
these costs, our net earnings may be reduced and we may not be able
to devote
sufficient attention to achieving our business
objectives.
Following
our initial public offering, we began to incur significant legal,
financial, accounting and other costs and expenses that we did not
incur as a
private company. In addition, the Sarbanes-Oxley Act of 2002 (SOX)
and rules and
regulations of the Securities and Exchange Commission and various
exchanges,
including the Nasdaq Stock Market, have imposed various requirements
on public
companies, including changes in corporate governance practices and
disclosures.
Our management and other personnel will need to devote a substantial
amount of
time to ensure ongoing compliance with these new
requirements.
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
Alt.
13
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 the management and auditor
reports on
internal controls as part of our annual report for the fiscal year
ending
September 30, 2008, 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.
Our
auditors identified material weaknesses in our internal control over
financial
reporting as of September 30, 2006. Failure to achieve and maintain
effective internal control over financial reporting could result in
our failure
to accurately report our financial results.
In
connection with its audit of our financial statements, our external
auditors,
UHY LLP, advised us that they were concerned that as of and for the
year ended
September 30, 2006, our accounting resources did not include enough
people with
the detailed knowledge, experience and training in the selection and
application
of certain accounting principles generally accepted in the United States
of
America (GAAP) to meet our financial reporting needs. This control
deficiency
contributed to material weaknesses in internal control with respect
to
accounting for revenue recognition, equity and acquisitions. A “material
weakness” is a control deficiency or combination of control deficiencies that
results in more than a remote likelihood that a material misstatement
in the
financial statements or related disclosures will not be prevented or
detected.
In preparation for this offering, we engaged a consultant experienced
in
accounting and financial reporting who assisted us in preparing our
financial
statements. We have begun the process of identifying candidates to
assume newly
created positions in our company, one of which will be at the vice-president
level, with specific responsibilities for external financial reporting,
internal
control, revenue recognition and purchase accounting. We intend to
have these
resources in place sometime during the third quarter of fiscal year
2007. We estimate that the annual cost of the new positions referred
to above will be between $250,000 and $350,000. In addition, we
expect to incur significant additional costs in the future. While we
expect to
complete the process of bringing our internal control documentation
into
compliance with SOX Section 404 as quickly as possible, we cannot at
this time
estimate how long it will take to complete the process or its ultimate
cost. We expect such costs to be
significant.
Risks
Related to Our Industry
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.
Alt.
14
The
market for our products, i.e., Web development services, content
management products, asset management products, e-Training products,
foundations
management products, and Web analytics are competitive and rapidly
changing, and
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 primary public company
competitors
are Website Pros, Filenet, aQuantive, Vignette and WebSideStory.
We also 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.
See
“Business - Competition” on page 59 of this prospectus.
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:
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user
privacy;
|
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·
|
the
pricing and taxation of goods and services offered over the
Internet;
|
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·
|
the
content of Websites;
|
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·
|
copyrights;
|
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·
|
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;
|
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·
|
the
online distribution of specific material or content over
the Internet; or
|
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·
|
the
characteristics and quality of products and services offered
over the
Internet.
|
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
Alt.
15
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.
Risks
Related to this Offering
There
is no prior public market for our common stock and our stock price
could be
volatile and could decline following this offering, resulting in a
substantial
loss in your investment.
Prior
to
this offering, there has not been a public market for our common stock.
An
active trading market for our common stock may never develop or if
it develops
it may not be sustained, which could affect your ability to sell your
shares and
could depress the market price of your shares. In addition, the initial
public
offering price of the shares has been determined through negotiations
between us
and the representatives of the underwriters and may bear no relationship
to the
price at which the shares will trade upon completion of this offering.
The stock
market can be highly volatile. As a result, the market price of our
common stock
can be similarly volatile, and investors in our common stock may experience
a
decrease in the value of their stock, including decreases unrelated
to our
operating performance or prospects. The market price of our common
stock after
the offering will likely vary from the initial offering price and is
likely to
be highly volatile and subject to wide fluctuations in response to
various
factors, many of which are beyond our control. These factors
include:
|
·
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variations
in our operating results;
|
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·
|
changes
in the general economy and in the local economies in which
we
operate;
|
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·
|
the
departure of any of our key executive officers and
directors;
|
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·
|
the
level and quality of securities analysts’ coverage for our common
stock;
|
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·
|
announcements
by us or our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital
commitments;
|
|
·
|
changes
in the federal, state, and local laws and regulations to
which we are
subject; and
|
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·
|
future
sales of our common stock.
|
Shares
of common stock that are issuable pursuant to our stock option plan
and our
outstanding warrants could result in dilution to existing shareholders
and could
cause the market price of our common stock to fall.
We
have
reserved 1,400,000 shares of common stock that are issuable pursuant
to our Amended and Restated Stock Incentive Plan. As of the date
of this
prospectus, we have issued 903,606 options under the plan. In addition,
we have
578,269 shares that are issuable pursuant to our outstanding warrants.
The
existence of these options and warrants may reduce earnings per share
under U.S.
generally accepted accounting principles and, to the extent they
are exercised
and shares of our common stock are issued, dilute percentage ownership
of
existing shareholders, which result in a decline in the market price
of our
common stock.
Future
sale of a significant number of our securities could cause a substantial
decline
in the price of our securities, even if our business is doing
well.
Sales
of
a substantial number of shares of our common stock or the availability
of a
substantial number of such shares for sale could result in a decline
of
prevailing market price of our common stock. In particular, we are registering
the resale of up to 342,000 shares of our common stock that may be acquired
upon
the exercise of certain warrants. These shares may not be sold or otherwise
disposed of during a lock-up period of up to six months from the date
of this
prospectus; thereafter, holders of those shares will be able to sell
them into
the public market without restriction. In addition, we could issue other
series
or classes of preferred stock having rights, preferences and powers senior
to
those of our common stock, including the right to receive dividends and
preferences upon liquidation, dissolution or winding-up in excess of,
or prior
to, the rights of the holders of our common stock. This could reduce
or
eliminate the
Alt.
16
amounts
that would otherwise have been available to pay dividends on the common
stock.
In addition, all of our directors, officers and shareholders have executed
lock-up agreements with the underwriters agreeing not to sell, transfer
or
otherwise dispose of any of their shares for a period of one year from
the date
of this prospectus. The lock-up agreements are subject to customary exceptions
and may be waived by the underwriters. Sales of a substantial number
of these
shares in the public market could depress the market price of our common
stock
and impair our ability to raise capital through the sale of additional
equity
securities.
The
results of our operations could cause our stock price to
decline.
Our
operating results in the future may be affected by a number of factors
and, as a
result, fall below expectations. Any of these events could negatively
affect our
operating results which might cause our stock price to fall:
|
·
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Our
inability to attract new customers at a steady or increasing
rate;
|
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·
|
Our
inability to provide and maintain customer
satisfaction;
|
|
·
|
Price
competition or higher prices in the industry;
|
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·
|
Higher
than expected costs of operating our
business;
|
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·
|
The
amount and timing of operating costs and capital expenditures
relating to
the expansion of our business, operations and infrastructure
are greater
and higher than expected;
|
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·
|
Technical,
legal and regulatory difficulties with respect to our business
occur; and
|
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·
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General
downturn in economic conditions that are specific to our market,
such as a
decline in information technology
spending.
|
We
do not intend to pay dividends, which may limit the return on your
investment.
We
have
never declared or paid cash dividends or distributions to our equity
owners. We
currently intend to retain all available funds and any future earnings
for use
in the operation and expansion of our business and do not anticipate
paying any
cash dividends in the foreseeable future. You should not make this investment
in
our securities if you require dividend income from your investment. The
success
of your investment will likely depend entirely upon any future appreciation
of
the market price of our common stock, which is uncertain and unpredictable.
There is no guarantee that our common stock will appreciate in value
after this
offering or even maintain the price at which you purchased your
shares.
We
have substantial discretion as to how to use the offering proceeds, and
we may
not apply the proceeds in ways that increase the value of your
investment.
While
we
currently intend to use the net proceeds of this offering as set forth
in “Use
of Proceeds” on page 19
of this prospectus, we may choose, in our sole discretion, to use the
net
offering proceeds for different purposes. The effect of the offering
will be to
increase capital resources available to our management, and our management
will
allocate these capital resources as necessary to enhance shareholder
Alt.
17
value.
You will be relying on the judgment of our management with regard to
the use of
the net proceeds of this offering. Our management might not be able
to yield a significant return, if any, on any investment of the net proceeds,
and you will not have the opportunity to influence our decisions on how
to use
the net proceeds.
Provisions
in our charter documents or Delaware law might discourage, delay or prevent
a
change of control of our company, which could negatively affect your
investment.
Our
Amended and Restated Certificate of Incorporation (which will become
effective
shortly before the completion of this offering) and Amended and Restated
By-laws
will contain provisions that could discourage, delay, or prevent a change
of
control of our company or changes in our management that our shareholders
may
deem advantageous. These provisions include:
|
·
|
authorizing
the issuance of preferred stock that can be created and issued
by our
Board of Directors without prior shareholder approval, commonly
referred
to as “blank check” preferred stock, with rights senior to those of our
common stock;
|
|
·
|
limiting
the persons who can call special shareholder
meetings;
|
|
·
|
establishing
advance notice requirements to nominate persons for election
to our Board
of Directors or to propose matters that can be acted on by
shareholders at
shareholder meetings;
|
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·
|
the
lack of cumulative voting in the election of
directors;
|
|
·
|
requiring
an advance notice of any shareholder business before the annual
meeting of
our shareholders;
|
|
·
|
filling
vacancies on our Board of Directors by action of a majority
of the
directors and not by the
shareholders, and
|
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·
|
the
division of our Board of Directors into three classes with
each class of
directors elected for a staggered three year term. In addition,
our
organizational documents will contain a supermajority voting
requirement
for any amendments of the staggered board
provisions.
|
These
and
other provisions in our organizational documents could allow our Board
of
Directors to affect your rights as a shareholder in a number of ways,
including
making it more difficult for shareholders to replace members of our
Board of
Directors. Because our Board of Directors is responsible for appointing
members
of our management team, these provisions could in turn affect any attempt
to
replace the current management team. These provisions could also limit
the price
that investors would be willing to pay in the future for shares of
our common
stock. We are also subject to the provisions of Section 203 of the Delaware
General Corporation Law, which may discourage, delay, or prevent a
change of
control of our company. See “Description of Capital Stock” on page 74 of this
prospectus.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some
of
the information in this prospectus contains forward-looking statements
within
the meaning of the federal securities laws. These statements are only
predictions and you should not place undue reliance on them. Forward-looking
statements typically are identified by use of terms such as “anticipate,”
“believe,” “plan,” “expect,” “future,” “intend,” “may,” “will,” “should,”
“estimate,” “predict,” “potential,” “continue,” and similar words, although some
forward-looking statements are expressed differently. All forward-looking
statements address matters that involve risks and uncertainties. There
are many
important risks, uncertainties and other factors that could cause our actual
results, as well as trends and conditions within the markets we serve,
levels of
activity, performance, achievements and prospects to differ materially
from the
forward-looking statements contained in this prospectus. You should also
carefully consider all forward-looking statements in light of the risks
and
uncertainties set forth under “Risk Factors” and elsewhere in this prospectus.
We undertake no obligation to publicly update or review any forward-looking
statements, whether as a result of new information, future developments
or
otherwise.
In
light
of the significant uncertainties inherent in the forward-looking statements
made
in this prospectus, particularly in view of our early stage of operations,
the
inclusion of this information should not
Alt.
18
be
regarded as a representation by us or any other person that our objectives,
future results, levels of activity, performance or plans will be
achieved.
USE
OF PROCEEDS
We
will
not receive any of the proceeds from the sale of shares of common stock
in this
offering. However, we may receive up to approximately
$ upon exercise of the
outstanding warrants covered by this prospectus (assuming that no warrant
holder
acquires shares by a “cashless”
exercise). We
intend to use any proceeds from the exercise of warrants for working
capital
purposes.
Alt.
19
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Information
Our
common stock began trading on the Nasdaq Capital Market and the Boston
Stock
Exchange under the symbols “BLSW”
and “BLS,”
respectively,
on , 2007. The
following table sets forth the high and low bid quotations for our
common stock
for the periods indicated as quoted on the Nasdaq Capital
Market.
|
Common
Stock
|
||||||||
|
High
|
Low
|
|||||||
|
Quarter
Ended
, 2007
|
$ |
|
$ |
|
||||
On ,
2007, the closing price of our common stock was
$ per
share.
As
of
, 2007, we estimate the approximate number of stockholders of record
of our
common stock to
be
.. This number excludes individual stockholders holding stock under
nominee
security position listings.
Dividend
Policy
We
have
never paid cash dividends or distributions to our equity owners. We do
not
expect to pay cash dividends on our common stock, but, instead, intend
to
utilize available cash to support the development and expansion of our
business.
Any future determination relating to our dividend policy will be made at
the
discretion of our Board of Directors and will depend on a number of factors,
including, but not limited to, future operating results, capital requirements,
financial condition and the terms of any credit facility or other financing
arrangements we may obtain or enter into, future prospects and other factors
our
Board of Directors may deem relevant at the time such payment is considered.
There is no assurance that we will be able or will desire to pay dividends
in
the near future or, if dividends are paid, in what amount.
CAPITALIZATION
The
following table sets forth our capitalization as of December 31, 2006.
You
should read this table in conjunction with “Management’s Discussion and
Analysis” beginning on page 25 and the financial statements and
accompanying notes included elsewhere in this prospectus. Such information
is
set forth on the following basis:
|
·
|
“Actual”
is based on our unaudited financial statements as of December
31,
2006.
|
|
·
|
“Adjustments”
gives the effect of the sale of 3,000,000 shares in our initial
public
offering and the application of the net proceeds from that
offering and is further adjusted for issuances of shares and options
pursuant to the acquisition of
Objectware.
|
|
·
|
“As
Adjusted” gives the net effect of the adjustments to actual for the sale
of 3,000,000 shares in our initial public offering and the
application of
the net proceeds from that offering and the effect for issuances
of shares
and options pursuant to the acquisition of
Objectware.
|
|
|
December
31, 2006
(Dollars
in thousands)
|
|||||||||||
|
|
Actual
|
Adjustments
(a)
|
As
Adjusted
|
|||||||||
|
Long-term
obligations, including current maturities
|
$ |
2,766
|
$ | (2,633 | ) | $ |
133
|
|||||
|
Shareholders’
equity:
|
||||||||||||
|
Common
stock $.001 par value: 20,000,000 shares authorized, 4,273,833 shares
issued and outstanding (actual) and 7,273,833 shares issued and
outstanding (as adjusted)
|
4
|
3
|
7
|
|||||||||
|
Preferred
stock, $.001 par value: 1,000,000 shares authorized, no shares issued
and outstanding
|
—
|
—
|
—
|
|||||||||
|
Additional
paid-in capital
|
9,882
|
16,865
|
26,747
|
|||||||||
|
Accumulated
deficit
|
(4,793 | ) | (318 | )(b) | (5,111 | ) | ||||||
|
Total
equity
|
5,093
|
16,550
|
21,643
|
|||||||||
|
|
||||||||||||
|
Total
capitalization
|
$ |
7,859
|
$ |
13,917
|
$ |
21,776
|
||||||
|
|
||||||||||||
|
(a)
|
Gives
effect to the sale of an aggregate 3,000,000 shares of common
stock in our
initial public offering resulting in net proceeds to us of
$14,181,000 net
of underwriters discount and other expenses of the offering, and
issuance of an additional 490,909 shares of common stock upon
the acquisition of Objectware at a price of $5.50 per share combined
with $174,000 representing conversion of Objectware options
to Bridgeline
options.
|
Alt.
20
|
(b)
|
Includes
expensing the unamortized debt discount of $167,000 and unamortized
financing fees of $151,000.
|
UNAUDITED
CONDENSED PRO FORMA FINANCIAL DATA
In
accordance with Article 11 of Regulation S-X under the Securities Act
of 1933, as amended, a condensed pro forma balance sheet as of December
31, 2006
and condensed pro forma statements of operations for the three months ended
December 31, 2006 and the fiscal year ended September 30, 2006 have been
prepared. For additional information, please refer to the complete Pro
Forma
disclosures beginning on page F-3 of our financial statements. The
summary income statement data for the years ended September 30, 2006 and
September 30, 2005 are derived from our audited financial statements as
of and
for the years ended September 30, 2006 and September 30, 2005. The summary
income statement data for the three months ended December 31, 2006 and
December
31, 2005 and the selected balance sheet data as of December 31, 2006 and
2005
have been derived from our unaudited financial statements included elsewhere
in
this prospectus. Our unaudited financial statements have been prepared
on the
same basis as the audited financial statements and notes thereto, which
include,
in the opinion of our management, all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the information
for
the unaudited interim period. Our historical results for prior interim
periods
are not necessarily indicative of results to be expected for a full fiscal
year
or for any future period. You should read this data together with our financial
statements and related notes included elsewhere in this prospectus and
the
information under “Selected Financial Data” and “Management’s Discussion and
Analysis.” These pro forma financial statements are based upon our
historical financial statements and the historical financial statements
of New
Tilt, Inc. and Objectware, Inc. included elsewhere in this prospectus and
should
be read in conjunction therewith.
The
following unaudited condensed pro forma financial data should be read in
conjunction with the audited and unaudited historical financial statements
of
our company, New Tilt, Inc. and Objectware, Inc. and the unaudited pro
forma
combined consolidated financial information, including the notes thereto,
appearing elsewhere in this prospectus. The unaudited pro forma condensed
combined information is presented for illustrative purposes only and is
not
necessarily indicative of the results of operations or financial position
that
would have occurred if the transactions had been completed at the dates
indicated.
Bridgeline
Software, Inc. Unaudited Condensed Pro Forma Financial
Data
|
|
Unaudited
Three Months Ended December 31,
|
Year
Ended September 30,
|
||||||||||||||||||||||
|
|
|
|
|
|
Unaudited
|
|
||||||||||||||||||
|
|
Historical
|
Pro
Forma
|
Historical
|
Historical
|
Pro
Forma
|
Historical
|
||||||||||||||||||
|
|
2006
|
2006
(b)
|
2005
|
2006
|
2006
(a)
|
2005
|
||||||||||||||||||
|
Income
Statement Data:
|
|
|
|
|
|
|
||||||||||||||||||
|
Revenues
|
$ |
2,309
|
$ |
3,423
|
$ |
1,713
|
$ |
8,235
|
$ |
13,056
|
$ |
5,769
|
||||||||||||
|
Cost
of revenue
|
1,141
|
1,684
|
867
|
3,809
|
6,653
|
3,113
|
||||||||||||||||||
|
Gross
profit
|
1,168
|
1,739
|
846
|
4,426
|
6,403
|
2,656
|
||||||||||||||||||
|
Income
(loss) from operations
|
$ | (285 | ) | $ | (32 | ) | $ | (147 | ) | $ | (810 | ) | $ |
54
|
$ | (461 | ) | |||||||
|
Net
income (loss)
|
$ | (630 | ) | $ | (34 | ) | $ | (174 | ) | $ | (1,448 | ) | $ |
48
|
$ | (517 | ) | |||||||
|
|
||||||||||||||||||||||||
|
Net
income (loss) per share:
|
||||||||||||||||||||||||
|
Basic
|
$ | (0.15 | ) | $ |
0.00
|
$ | (0.04 | ) | $ | (0.36 | ) | $ |
0.01
|
$ | (0.14 | ) | ||||||||
|
Diluted
|
$ | (0.15 | ) | $ |
0.00
|
$ | (0.04 | ) | $ | (0.36 | ) | $ |
0.01
|
$ | (0.14 | ) | ||||||||
Alt.
21
|
|
Unaudited
Three Months Ended December 31,
|
Year
Ended September 30,
|
||||||||||||||||||||||
|
|
|
|
|
|
Unaudited
|
|
||||||||||||||||||
|
|
Historical
|
Pro
Forma
|
Historical
|
Historical
|
Pro
Forma
|
Historical
|
||||||||||||||||||
|
|
2006
|
2006
(b)
|
2005
|
2006
|
2006
(a)
|
2005
|
||||||||||||||||||
|
Number
of weighted average shares:
|
||||||||||||||||||||||||
|
Basic
|
4,273,833
|
7,764,742
|
3,903,833
|
4,046,278
|
8,039,409
|
3,804,527
|
||||||||||||||||||
|
Diluted
|
4,273,833
|
7,764,742
|
3,903,833
|
4,046,278
|
8,638,387
|
3,804,527
|
||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||||||
|
Current
assets
|
$ |
1,971
|
$ |
12,054
|
$ |
1,714
|
$ |
2,073
|
$ |
11,453
|
$ |
935
|
||||||||||||
|
Total
assets
|
$ |
9,810
|
$ |
24,146
|
$ |
7,592
|
$ |
9,824
|
$ |
23,729
|
$ |
6,739
|
||||||||||||
|
|
||||||||||||||||||||||||
|
Current
liabilities
|
$ |
4,631
|
$ |
2,408
|
$ |
2,106
|
$ |
4,093
|
$ |
1,948
|
$ |
1,114
|
||||||||||||
|
Total
liabilities
|
$ |
4,717
|
$ |
2,503
|
$ |
2,172
|
$ |
4,192
|
$ |
2,056
|
$ |
1,147
|
||||||||||||
|
|
||||||||||||||||||||||||
|
Total
shareholders’ equity
|
$ |
5,093
|
$ |
21,643
|
$ |
5,420
|
$ |
5,632
|
$ |
21,673
|
$ |
5,592
|
||||||||||||
|
|
||||||||||||||||||||||||
|
Total
liabilities and shareholders’ equity
|
$ |
9,810
|
$ |
24,146
|
$ |
7,592
|
$ |
9,824
|
$ |
23,729
|
$ |
6,739
|
|
|
Unaudited
Three Months Ended December 31,
|
Year
Ended September 30,
|
||||||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||
|
|
Historical
|
Historical
|
Historical
|
|
Historical
|
|||||||||||||||||||
|
|
2006
|
|
2005
|
2006
|
|
2005
|
||||||||||||||||||
|
Cash
Flow Data:
|
||||||||||||||||||||||||
|
Net
cash (used in) provided by operating activities
|
$ | (320 | ) | $ |
302
|
$ | (733 | ) | $ | (430 | ) | |||||||||||||
|
Acquisitions,
net of cash acquired
|
$ |
—
|
$ |
—
|
$ | (553 | ) | $ | (310 | ) | ||||||||||||||
|
Net
cash used in investing activities
|
$ | (91 | ) | $ | (63 | ) | $ | (842 | ) | $ | (545 | ) | ||||||||||||
|
Proceeds
from issuance of short-term debt
|
$ |
—
|
$ |
323
|
$ |
2,434
|
$ |
—
|
||||||||||||||||
|
Net
increase (decrease) in cash for the period
|
$ | (422 | ) | $ |
518
|
$ |
453
|
$ | (818 | ) |
|
(a)
|
Reflects
the April 24, 2006
acquisition of New Tilt,
the
, 2007 acquisition of Objectware and our initial public
offering.
|
|
(b)
|
Reflects
the probable
acquisition of Objectware and this
offering.
|
Alt.
22
SELECTED
FINANCIAL DATA
In
accordance with Article 11 of Regulation S-X under the Securities Act of
1933,
as amended, a condensed pro forma balance sheet as of December 31, 2006
and
condensed pro forma statements of operations for the three months ended
December 31, 2006 and the fiscal year ended September 30, 2006 have been
prepared. For additional information, please refer to the complete pro
forma
disclosures beginning on Page F-3 of our financial statements.
The
summary below sets forth certain selected historical and pro forma financial
data. The financial data below should be read in conjunction with the historical
financial statements and the notes thereto of our company, New Tilt, Inc.
and
Objectware, Inc. appearing elsewhere in this prospectus. The summary income
statement data for the years ended September 30, 2006 and 2005 are derived
from
our audited financial statements as of and for the years ended September
30,
2006 and 2005, respectively. The summary income statement data for the
three months ended December 31, 2006 and 2005 and the selected balance
sheet data as of December 31, 2006 and 2005 have been derived from our
unaudited
financial statements included elsewhere in this prospectus. Our unaudited
financial statements have been prepared on the same basis as the audited
financial statements and notes thereto, which include, in the opinion of
our
management, all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the information for the unaudited
interim
period. Our historical results for prior interim periods are not necessarily
indicative of results to be expected for a full fiscal year or for any
future
period.
When
you
read the selected financial data below, it is important that you also read
our
audited and unaudited consolidated financial statements and the notes to
those
statements appearing elsewhere in this prospectus, as well as the section
of
this prospectus entitled “Management’s Discussion and Analysis and Results of
Operations” and “Risk Factors.”
Bridgeline
Software, Inc.
Selected
Financial Data
(In
thousands)
|
|
Unaudited
Three Months
Ended
December 31,
|
Year
Ended September 30,
|
||||||||||||||
|
|
(in
thousands)
|
(in
thousands)
|
||||||||||||||
|
|
|
|
|
|
||||||||||||
|
|
2006
(a)
|
2005
|
2006
|
2005
|
||||||||||||
|
Income
Statement Data:
|
|
|
|
|
||||||||||||
|
Revenues
|
$ |
2,309
|
$ |
1,713
|
$ |
8,235
|
$ |
5,769
|
||||||||
|
Cost
of revenue
|
1,141
|
867
|
3,809
|
3,113
|
||||||||||||
|
Gross
profit
|
1,168
|
846
|
4,426
|
2,656
|
||||||||||||
|
Loss
from operations
|
$ | (285 | ) | $ | (147 | ) | $ | (810 | ) | $ | (461 | ) | ||||
|
|
||||||||||||||||
|
Net
loss
|
$ | (630 | ) | $ | (174 | ) | $ | (1,448 | ) | $ | (517 | ) | ||||
|
|
||||||||||||||||
|
Net
loss per share:
|
||||||||||||||||
|
Basic
and diluted
|
$ | (0.15 | ) | $ | (0.04 | ) | $ | (0.36 | ) | $ | (0.14 | ) | ||||
|
|
||||||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||
|
Current
assets
|
$ |
1,971
|
$ |
1,714
|
$ |
2,073
|
$ |
935
|
||||||||
|
Definite-lived
intangible assets, net
|
$ |
271
|
$ |
303
|
$ |
303
|
$ |
331
|
||||||||
|
Goodwill
|
$ |
6,409
|
$ |
5,122
|
$ |
6,346
|
$ |
5,097
|
||||||||
|
Total
assets
|
$ |
9,810
|
$ |
7,592
|
$ |
9,824
|
$ |
6,739
|
||||||||
|
|
||||||||||||||||
|
Senior
notes payable, net of discount
|
$ |
2,633
|
$ |
—
|
$ |
2,497
|
$ |
—
|
||||||||
|
Current
liabilities
|
$ |
4,631
|
$ |
2,106
|
$ |
4,093
|
$ |
1,114
|
||||||||
|
Total
liabilities
|
$ |
4,717
|
$ |
2,172
|
$ |
4,192
|
$ |
1,147
|
||||||||
|
|
||||||||||||||||
|
Total
shareholders’ equity
|
$ |
5,093
|
$ |
5,420
|
$ |
5,632
|
$ |
5,592
|
||||||||
|
|
||||||||||||||||
|
Total
liabilities and shareholders’ equity
|
$ |
9,810
|
$ |
7,592
|
$ |
9,824
|
$ |
6,739
|
Alt.
23
Bridgeline
Software, Inc.
Selected
Proforma Financial Data
(Dollars
in thousands)
|
Actual
|
Proforma
|
|||||||||||
|
|
Unaudited
Three
|
Unaudited
Three
|
Unaudited
|
|||||||||
|
|
Months
Ended
|
Months
Ended
|
Year
Ended
|
|||||||||
|
|
December
31, 2006
|
December
31, 2006 (b)
|
September
30, 2006 (c)
|
|||||||||
|
Income
Statement Data:
|
|
|
||||||||||
|
Revenues
|
$ |
2,309
|
$ |
3,423
|
$ |
13,056
|
||||||
|
Cost
of revenue
|
1,141
|
1,684
|
6,653
|
|||||||||
|
Gross
profit
|
1,168
|
1,739
|
6,403
|
|||||||||
|
Sales
and marketing expense
|
837
|
837
|
3,304
|
|||||||||
|
Technology
development
|
155
|
155
|
176
|
|||||||||
|
General
and administrative expense
|
461
|
779
|
2,869
|
|||||||||
|
Income (loss)
from operations
|
$ | (285 | ) | $ | (32 | ) | $ |
54
|
||||
|
|
||||||||||||
|
Net
income (loss)
|
$ | (630 | ) | $ | (34 | ) | $ |
48
|
||||
|
|
||||||||||||
|
Net
income per share:
|
||||||||||||
|
Basic
|
$ | (0.15 | ) | $ |
0.00
|
$ |
0.01
|
|||||
|
Diluted
|
$ | (0.15 | ) | $ |
0.00
|
$ |
0.01
|
|||||
|
Weighted
Average Shares:
|
||||||||||||
|
Basic
|
4,273,833
|
7,764,742
|
8,039,409
|
|||||||||
|
Diluted
|
4,273,833
|
7,764,742
|
8,638,387
|
|||||||||
|
|
||||||||||||
|
Balance
Sheet Data:
|
||||||||||||
|
Current
assets
|
$ |
1,971
|
$ |
12,054
|
$ |
11,453
|
||||||
|
Definite-lived
intangible assets, net
|
$ |
271
|
$ |
680
|
$ |
712
|
||||||
|
Goodwill
|
$ |
6,409
|
$ |
10,346
|
$ |
10,386
|
||||||
|
Total
assets
|
$ |
9,810
|
$ |
24,146
|
$ |
23,729
|
||||||
|
|
||||||||||||
|
Short-term
debt, net of discount
|
$ |
2,633
|
$ |
—
|
$ |
—
|
||||||
|
Current
liabilities
|
$ |
4,631
|
$ |
2,408
|
$ |
1,948
|
||||||
|
Total
liabilities
|
$ |
4,717
|
$ |
2,503
|
$ |
2,056
|
||||||
|
|
||||||||||||
|
Total
shareholders’ equity
|
$ |
5,093
|
$ |
21,643
|
$ |
21,673
|
||||||
|
|
||||||||||||
|
Total
liabilities and shareholders’ equity
|
$ |
9,810
|
$ |
24,146
|
$ |
23,729
|
||||||
Alt.
24
|
(a)
|
On
April 25, 2006, we acquired New Tilt. The operations of New Tilt
have been
included in our consolidated financial statements from the date
of
acquisition.
|
|
(b)
|
Reflects
the
, 2007 acquisition of Objectware and our initial public
offering.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS
The
following Discussion and Analysis of Financial Condition and Results
of
Operations should be read in conjunction with the historical financial
statements and other financial information appearing elsewhere in this
prospectus, including “Summary Financial Data,” “Capitalization” and “Selected
Financial Data” on pages 7, 20 and 23 of this prospectus,
respectively.
Overview
We
are
developers of on-demand Web software tools and award-winning Web applications.
Our team of Microsoft®-certified
developers specializes in user experience development,
Web application development, and search engine optimization. We have
developed our own on-demand Web software tools that provide Content Management,
Relationship Management, eCommerce management, eMarketing Management and
Grants
Management. By providing award-winning Web applications, we help our customers
to optimize business processes utilizing Web-based technologies.
Although
our revenues have increased substantially on an annual basis since fiscal
2003, we have experienced net losses and negative cash flows from
operations in each fiscal period since inception, and as of December 31,
2006
and September 30, 2006, we had an accumulated deficit of $4,793,000 and
$4,163,000, respectively and a working capital deficit of $2,660,000 and
$2,020,000, respectively. Since inception, we have significantly increased
our
revenues through a combination of factors including (i) obtaining new
customers, (ii) expanding existing customer relationships,
(iii) acquiring complementary businesses, (iv) expanding the features
of our software tools, and (v) offering new and improved products and
services.
Sources
of Revenue
We
generate the majority of our revenue from three different sources: (a)
Web
Services, (b) Managed Services, and (c) Subscriptions. We primarily enter
into Web Services engagements that are typically three to six months in
duration. Our customers pay us fees as products or services are delivered.
Revenues are recognized from our fixed fee engagements in proportion to
the
extent of progress toward completion of the project and on an incurred
basis for
monthly time and materials projects. We believe labor costs are the
most appropriate measure to allocate revenue among reporting periods as
they are
the primary input to the provision of our Web Services. Our fixed fee
engagements are billed monthly or upon the completion of milestones. For
milestone based projects, since milestone pricing is based on hourly costs
and
the duration of such engagements is relatively short, we believe
this approach principally mirrors an output approach under the proportional
performance model for revenue recognition on such fixed priced engagements.
Managed Services revenue is generally recognized monthly or ratably over
the
period in which the services are provided. We also sell software licenses
under
either perpetual or fixed term subscription licenses. Revenue for perpetual
licenses is included in Web Services revenue and is generally recognized
upon
delivery of the software. Such revenues totaled $34,000, $34,000,
$71,000 and $222,000 for the three months ended December 31, 2006 and 2005
and
for the years ended September 30, 2006 and 2005, respectively. Revenue
from
licensed subscription agreements is included in Subscription revenue and
is
generally recognized over the term of the agreements. We offer maintenance
and
post-
Alt.
25
contract
customer support (PCS) to our customers; however the revenues from these
support services are not material to the periods presented. During the
three
months ended December 31, 2006 and 2005 and for the years ended September
30,
2006 and 2005, the composition of our revenue was as follows:
|
|
|
Three
Months Ended
December 31,
|
|
Years
Ended September
30,
|
||||
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Web
Services
|
|
81.5%
|
|
77.8%
|
|
79.2%
|
|
72.5%
|
|
Managed
Services
|
|
13.3
|
|
15.6
|
|
15.1
|
|
21.6
|
|
Subscription
|
|
5.2
|
|
6.6
|
|
5.7
|
|
5.9
|
|
|
|
100.0%
|
|
100.0%
|
|
100.0%
|
|
100.0%
|
The
demand for our
services has been affected in the past, and may continue to be affected
in the
future, by various factors, including, but not limited to, the
following:
|
·
|
economic
conditions affecting the budget priorities of our
customers;
|
|
·
|
the
acquisition or cancellation of significant
clients;
|
|
·
|
worldwide
acts of terrorism effecting U.S. markets; and
|
|
·
|
seasonality.
|
For
these
and other reasons, our revenue and results of operations in quarter ended
December 31, 2006 and any prior periods may not necessarily be indicative
of
future revenues and results of operations.
We
define
our significant customers as those that generate in excess of ten percent
of
total revenues. These significant customers in aggregate generated 21%,
21%, 22%
and 31% of our revenues in the three months ended December 31, 2006 and
2005 and
the years ended September 30, 2006 and 2005, respectively. One customer
generated greater than 10% of total revenue in the three months ended December
31, 2006 and 2005 and the fiscal year ended September 30, 2006 and two
customers
generated greater than 10% of total revenue in the year ended September
30,
2005.
Cost
of Revenue and Operating Expenses
Cost
of Revenue. Cost of revenue includes salaries, benefits and related
expenses of operations and database support, implementation and support
services
and the amortization of intangible assets resulting from prior acquisitions.
Gross profit represents revenue less the costs of revenue for personnel
directly
involved in Web development and services activities, including stock-based
compensation allocable to such personnel. Gross profit percentage is highly
dependent on individually negotiated contracts and overhead allocations.
We do
not believe that historical gross profit margins are a reliable indicator
of
future gross profit margins. As our Subscription revenue increases, we
expect
our gross margins to also increase.
Sales
and Marketing Expenses. Sales and marketing expenses consist primarily of
salaries, commissions, benefits and related expenses of personnel engaged
in
selling, marketing and customer service functions, as well as public relations,
advertising and promotional costs, and overhead costs of our various locations.
Sales and marketing expenses include stock-based compensation allocable
to
certain personnel performing sales and marketing activities.
General
and Administrative Expenses. General and administrative expenses consist
primarily of personnel-related expenses, depreciation, legal and other
professional fees, facilities and communication expenses and expenses to
maintain our information technology infrastructure. General and administrative
expenses include stock-based compensation allocable to certain personnel
performing general and administrative activities.
Alt.
26
Technology
Development. Research and development expenditures for technology
development are charged to operations as incurred. Technology development
expenses include stock-based compensation allocable to certain personnel
performing such research and development activities. Software development
costs
subsequent to the establishment of technological feasibility are capitalized
and
amortized to cost of software and included in cost of sales. Based on our
product development process, technological feasibility is established upon
completion of a working model. Costs incurred between completion of a working
model and the point at which the product is ready for general release are
capitalized if significant. No software development costs have been capitalized
to date as a result of our development process.
During
our fiscal year 2005, we established a research and development center
in
Bangalore, India in conjunction with our new On-demand Software Development
initiative described in the Business section of this prospectus. In
addition, on an on-going basis since our inception, we have derived technology
benefits from engagements with our customers; however we do not track or
quantify such costs separately for any periods.
Acquisitions
Acquisitions
have been an important part of our growth and expansion to date. Our
acquisitions have enabled us to increase our product and service offerings
and
expand into other geographies. We may continue to acquire companies that
provide
us with proprietary technology, access to key accounts, or personnel
with
significant experience in the Web development industry. During fiscal
2005, we
completed the acquisition of Interactive Applications Group, Inc. (“iapps”®)
giving us further
exposure and access into the foundation and non-profit industry. During
fiscal
2006, we completed the acquisition of New Tilt, Inc., (“New Tilt”) expanding our
exposure and access into the life sciences segment of our industry. In
fiscal
2007, we completed the acquisition of Objectware, Inc.
(“Objectware”).
We
believe these acquisitions
contribute to our business strategy by providing us with new geographical
distribution opportunities, an expanded customer base, an expanded sales
force
and an expanded developer force. In addition, integrating the acquired
businesses into our existing operations allows us to consolidate the finance,
human resources, legal and marketing and other expenses of the acquired
businesses with our own, reducing the aggregate of these expenses for the
combined businesses, and resulting in improved over-all operating
results.
From
time
to time, in connection with business acquisitions, we agree to make additional
future payments to sellers contingent upon achievement of specific
performance-based milestones by the acquired entities. Pursuant to the
provisions of SFAS No. 141, Business Combinations, and related
interpretations, such amounts are accrued and recorded by us as liabilities
when
the contingency is probable and estimatable and, hence, the additional
consideration becomes payable.
Business
Enterprise Segments
We
are
structured and operate internally as one reportable operating segment as
defined
in SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information (“SFAS 131”). SFAS 131 establishes standards for the
way public business enterprises report information about operating segments
in
annual consolidated financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas and major customers. Although we
had
three U.S. operating locations and an Indian subsidiary at September 30,
2006 and 2005, under the aggregation criteria set forth in SFAS 131, we
operate
in only one reportable operating segment since each location has similar
economic characteristics.
Critical
Accounting Policies and Estimates
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires us to make
estimates
and assumptions that affect the reported
Alt.
27
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 include our valuation of accounts
receivable and long-term assets, including intangibles and deferred tax
assets,
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:
|
·
|
Allowance
for doubtful accounts;
|
|
·
|
Revenue
recognition;
|
|
·
|
Accounting
for goodwill and other intangible assets; and
|
|
·
|
Accounting
for stock-based compensation.
|
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.
Revenue
Recognition. Substantially all of our revenue is generated from three
activities: Web Services, Managed Services and Software Licenses and
Subscriptions. We enter into arrangements to sell services, software licenses
or
combinations thereof. We recognize revenue in accordance with Securities
and
Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104,
Revenue Recognition in Financial Statements, Emerging Issues Task Force
(“EITF”) Issue No. 00-21, Accounting For Revenue Arrangements with Multiple
Deliverables (“EITF 00-21”), and American Institute of Certified Public
Accountants Statement of Position No. 97-2, Software Revenue Recognition
(“SOP 97-2”) and related interpretations. 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
Services
Web
Services include professional services primarily related to the our Web
development solutions that address specific customer needs such as information
architecture and usability engineering, interface configuration, Web application
development, rich media, e-Commerce, e-Learning and e-Training, search
engine
optimization, and content management. Web Services are sold either on a
stand
alone basis or, as described below, in multiple element arrangements with
Managed Services and/or our licensed software products.
Revenue
from stand-alone Web Services is recognized when the services are performed
using the proportional performance model using a method based on cost incurred
in relation to total estimated cost at completion. Labor costs are the
most
appropriate measure to allocate revenue among reporting
Alt.
28
periods,
as they are the primary input to the provision of our Web
Services. Fixed fee engagements are billed monthly or
upon the completion of milestones. For milestone based projects,
since milestone pricing is based on hourly costs and the duration of such
engagements is relatively short, this approach principally mirrors an output
approach under the proportional performance model for revenue recognition
on
such fixed priced engagements.
Web
Services also include revenue from our perpetual software licenses described
below under Software Licenses and Subscriptions. Perpetual licenses
are only sold in connection with Web Services engagements; therefore,
we believe it is appropriate to include revenue from perpetual licenses
with revenue from Web Services. Revenues derived from such perpetual software
license sales have been insignificant in all periods presented (representing
less than 3% of Web Services revenues) to warrant separate classification
in the
statement of operations, and is not anticipated to increase significantly
in
future periods.
Managed
Services
Managed
services primarily include on-going retained professional services and
may also
include monthly hosting fees for the use of hardware and infrastructure,
generally at our network operating center. Managed Services are sold on
a
stand-alone basis or, as described below, in multiple element arrangements
with
Web Services (including training and implementation services) and our licensed
software products. Stand-alone on-going retained professional services
are
either 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. These arrangements do not require formal customer acceptance and
do not
grant any future right to labor hours contracted for but not used.
Revenue
from Hosting services is incidental to our Web Services activities and
for all
periods presented, the only customers under contractual hosting arrangements
have been previous Web Services customers. Hosting revenue has
historically been insignificant to both our business strategy and to our
total
revenues..
Software
Licenses and Subscriptions
As
described further below under Multiple Element Arrangements, our
licensed software products are generally sold with Web Services and Managed
Services.
We
recognize revenue from perpetual software licenses upon delivery of the
software
provided as the related Web Services are not essential to the functionality
of
the software. The related post-contract customer support revenue is also
recognized upon delivery of the software since PCS does not contain rights
to
unspecified upgrades, is included in the price of the multiple element
arrangement, and extends only for a period of one year or less and the
cost of
providing the PCS is deemed to be insignificant. Perpetual software
license revenue and related PCS represented approximately $34,000 and $34,000
of
revenue for the three months ended December 31, 2006 and 2005 and $71,000
and
$222,000 of revenue for the years ended September 30, 2006 and 2005,
respectively. Subsequent renewals of PCS have been insignificant.
Subscriptions
include fixed term software and a related hosting arrangement (“Licensed
Subscription Agreements”). Licensed Subscription Agreements are accounted
for as separate units of accounting based on their respective value to
the
customer on a stand-alone basis and are separately priced based either
on vendor
specific objective evidence (“VSOE”)
of fair value or
on third party evidence of fair value when VSOE of fair value is not available.
The Licensed Subscription Agreements and related hosting services are included
in Subscription revenue and recognized ratably over the term of their month
to
month subscription agreements. We have concluded that, consistent with
EITF
00-3, Application of AICPA SOP 97-2, “Software Revenue Recognition”, to
Arrangements That Include the Right to Use Software Stored on Another Entity’s
Hardware, that our Licensed Subscription Agreements are outside the scope
of SOP 97-2 since the software is only accessible through a hosting arrangement
with us and the customer cannot take possession
Alt.
29
of
the
software. As such, the Licensed Subscription Agreements are considered
a single
unit of accounting for purposes of recognizing revenue in the multiple
element
arrangements described below.
Multiple
Element Arrangements
Web
Services and Managed Services are also provided as part of multiple element
arrangements that include licensed software, post contract customer support
(“PCS”), managed services and/or a hosting arrangement. We account for these
multiple elements separately pursuant to EITF 00-21.
In
determining whether the Web Services element in a multiple element arrangement
can be accounted for separately from other elements, we consider the
availability of Web Services from other vendors and whether objective and
reliable evidence of fair value exists for the undelivered elements. Web
Services do not involve significant production, modification, or customization
of our licensed software products. The Web Services are regularly sold
on a
stand-alone basis pursuant to a price list and are not discounted. We have
also
concluded that the software element in these multiple element arrangements
is
incidental to the Web Services and is not essential to the functionality
of the
Web Services. Except when provided as a part of our Licensed Subscription
Agreements described above, hosting services, if any, are accounted for
separately as Managed Services, as those services have value to the customer on
a stand-alone basis and are separately priced based on vendor specific
objective
evidence (“VSOE”) of fair value or based on third party evidence of fair value
if VSOE of fair value is not available.
In
determining whether the Managed Services element of a multiple element
arrangement can be accounted for separately, we consider that Managed Services
have value to its customers on a stand-alone basis since those services
are
regularly sold separately pursuant to standard price lists which are not
discounted. The hosting services are considered to have stand-alone value
to the
customer and are separately priced based on third party evidence of fair
value.
In
accordance with EITF 00-21, we recognize revenue pursuant to multiple element
arrangements using the residual method whereby the value ascribed to the
delivered element (generally the Web Services) is equal to the total
consideration less the VSOE of fair value or third party evidence of fair
value
of the undelivered elements.
Customer
Payment Terms
Our
payment terms with customers typically are “due upon receipt” or “net 30 days
from invoice”. Payments terms may vary by customer but in all
instances do not exceed 45 days from invoice date. For Web Services,
we typically invoice project deposits of between 20% and 33% of the total
contract value which we record as deferred revenue until such time the
related
services are completed. Subsequent invoicing for Web Services is
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
due
upon invoice receipt. 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 generally between 30 to 90 days
from the
completion of work. In hosting arrangements, we may 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.
Alt.
30
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.
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 amounts 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) any future declines in our operating results,
(ii) a decline in the value of technology company stocks, including the
value of our common stock, (iii) 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
SFAS
No. 142, Goodwill and Other Intangible Assets (“SFAS 142”),
management has determined that there was 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.
The
results of the assessments performed to date was that the fair value of
the
reporting unit exceeded its carrying amount; therefore, no impairment charges
to
the carrying value of goodwill have been recorded since inception.
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 would be 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.
Alt.
31
Stock-Based
Compensation
At
December 31, 2006, we maintained two stock-based compensation plans which
are
more fully described in Note 9. Through September 30, 2006, we accounted
for
stock compensation awards under the provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation (“SFAS 123”), as amended by
SFAS No. 148, Accounting for Stock-Based
Compensation—Transition and Disclosure (“SFAS 148”). As permitted by
SFAS 123, for all periods before September 30, 2006, we measure
compensation cost in accordance with Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (“APB 25”) and
related interpretations using the intrinsic value method and follow the
disclosure-only provisions of SFAS 123.
Under
the
intrinsic value method, compensation expense is determined at the measurement
date, generally the date of grant, as the excess, if any, of the estimated
fair
value of our common stock (the “Stock Price”) and the exercise price, multiplied
by the number of options granted. Generally, we grant stock options with
exercise prices equal to the Stock Price; however, to the extent that the
Stock
Price exceeds the exercise price of stock options on the date of grant,
we
record stock-based compensation expense using the graded vested attribution
method over the vesting schedule of the options, which is generally three
years.
Since
inception, there has been no public market for our common stock to observe
its
Stock Price on award grant dates. Therefore, for purposes of applying the
intrinsic value method, management estimated the stock price based on the
American Institute of Certified Public Accountants Practice Alert No. 00-1,
Accounting for Certain Equity Transactions. The estimated fair value of
the common stock on the date of grant was based on weighing a variety of
different quantitative and qualitative factors including, but not limited
to,
our financial position, an evaluation of our competition, the economic
climate
in the marketplace, the illiquid nature of the common stock, contemporaneous
and
anticipated private sales of the common stock, and an internal analysis
of the
trading prices of a peer group of comparable public companies. For periods
prior
to August 1, 2005, we estimated the fair value of common stock based on
contemporaneous transactions included in private placement sales of common
stock
for cash that were executed at or near the grant dates. Since August 1,
2005, we
have estimated the fair value of common stock based on
valuation analyses performed for applicable periods which consider several
factors including discounted cash flows, the average trading multiples
of
comparable peer group public companies and the multiples derived from recent
purchase and sales transactions of comparable companies in the industry.
We
believe this approach results in a reasonable application of valuation
methodology for all periods.
Effective
October 1, 2006, we adopted SFAS No. 123R, Share-Based
Payments (“SFAS 123R”). Because we used the fair-value-based method
for disclosure under SFAS 123, we adopted SFAS 123R using the modified
prospective application. Under the modified prospective method,
compensation expense that we recognize beginning on that date will include:
(a) compensation expense for all share-based payments granted prior to, but
not yet vested as of October 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of SFAS 123, and
(b) compensation expense for all share-based payments granted on or after
October 1, 2006, based on the grant date fair value estimated in accordance
with the provisions of SFAS 123R. We have disclosed the pro forma effect
of
stock-based compensation expenses pursuant to SFAS 123R in the financial
statements and under the modified prospective transition method, the results
for
prior periods will not be restated.
We
estimate the fair value of options granted using the Black-Scholes-Merton
option
valuation model (the “Model”) and the assumptions shown in Note 1 to our
financial statements. We estimate the expected term of options granted
based on
the history of grants and exercises in our option database. We estimate
the
volatility of our common stock at the date of grant based on the historical
volatility of comparable public companies consistent with SFAS 123R and
Securities and Exchange Commission Staff Accounting Bulletin No. 107,
Share Based Payment. We base the risk-free interest rate that we use in
the Model on the implied yield in effect at the time of option grant on
U.S.
Treasury zero-coupon issues with equivalent remaining terms. For purposes
of
calculating the pro forma compensation we have used our actual forfeiture
rates of between 11% and 13% for all awards which we believe is a reasonable
approximation of
Alt.
32
expected
future forfeitures. We have never paid any cash dividends on our common
stock
and we do not anticipate paying any cash dividends in the foreseeable future.
Consequently, we use an expected dividend yield of zero in the Model. We
amortize the fair value ratably over the vesting period of the awards,
which is
typically three years. We may elect to use different assumptions under
the Model
in the future or select a different option valuation model altogether,
which
could materially affect our net income or loss and net income or loss per
share
in the future. At September 30, 2006, based on the Model, there was
approximately $363,000 of total unrecognized compensation cost related
to
non-vested share-based compensation arrangements granted under all equity
compensation plans. The intrinsic value of all outstanding vested and
unvested options based on the estimated initial public offering price of
$5.50
was $1,372,000 and $917,000, respectively as of December 31, 2006.
For
periods beginning in August 2005 and thereafter, we estimated the fair
value of
the stock price on the date of grant for purposes of applying the intrinsic
value method after weighing a variety of different quantitative and qualitative
factors including, but not limited to, the status of business development,
our
financial position, the composition and ability of our engineering, operations
and management team, the economic climate in the marketplace, the illiquid
nature of our common stock, contemporaneous and anticipated private sales
of our
common stock, the probability of a liquidation event such as an initial
public
offering or the sale of Bridgeline, and our analysis of a peer group of
comparable public company trading prices. Since August 2005, we have estimated
the value of common stock using this combination of valuation methodologies,
including income, market and transaction approaches. We believe that its
valuation of the stock price on the date of grant represents fair value
and that
the practices and approach employed by us are consistent with the practices
recommended by the American Institute of Certified Public Accountants Audit
and
Accounting Practice Aid Series: Valuation of Privately-Held-Company Equity
Securities Issued as Compensation, issued in 2004.
As
of
December 31, 2006, we had 903,606 options outstanding ranging in option
prices
between $0.003 and $3.75, of which 477,341 were
exercisable.
Results
of Operations
Comparison
of Three Fiscal Months Ended December 30, 2006 and
2005
The
following table sets forth certain
Consolidated Statements of Operations data expressed as a percentage of
revenue
for the periods indicated:
|
Three
Fiscal Months Ended
December
31,
|
||||||||
|
|
2006
|
2005
|
||||||
|
Revenue
|
100 | % | 100 | % | ||||
|
Cost
of revenue
|
49
|
51
|
||||||
|
Gross
profit
|
51
|
49
|
||||||
|
Operating
expenses:
|
||||||||
|
Sales
and marketing
|
36
|
40
|
||||||
|
General
and administrative
|
20
|
17
|
||||||
|
Technology
development
|
7
|
1
|
||||||
|
Loss
from operations
|
(12 | ) | (9 | ) | ||||
|
Interest
income (expense), net
|
(15 | ) | (1 | ) | ||||
|
Net
loss
|
(27 | %) | (10 | %) | ||||
Alt.
33
Revenue,
Cost of Revenue and Gross Profit
The
following table presents revenue, cost of revenue and gross profit for
the
fiscal three months ended December 31, 2006 and 2005:
|
|
|
|
Net
change 2006 vs. 2005
|
|||||||||||||
|
Fiscal
Three Months Ended December 31,
|
2006
|
2005
|
$
|
%
|
||||||||||||
|
Total
revenue
|
$ |
2,309,000
|
$ |
1,713,000
|
$ |
596,000
|
35 | % | ||||||||
|
Cost
of revenue
|
1,141,000
|
867,000
|
274,000
|
32
|
||||||||||||
|
Gross
profit
|
$ |
1,168,000
|
$ |
846,000
|
$ |
322,000
|
38 | % | ||||||||
Revenue.
Our revenue is generated principally by fees paid for Web Services,
Managed
Services and Subscription revenue. The following table presents revenue
from
each of our revenue streams and their respective contribution to the increase
in
revenue in the three months ended December 31, 2006 and 2005:
|
|
|
|
Net
change 2006 vs. 2005
|
|||||||||||||
|
Fiscal
Three Months Ended December 31,
|
2006
|
2005
|
$
|
%
|
||||||||||||
|
Web
Services
|
$ |
1,882,000
|
$ |
1,332,000
|
$ |
550,000
|
41 | % | ||||||||
|
Managed
Services
|
308,000
|
267,000
|
41,000
|
15
|
||||||||||||
|
Subscription
|
119,000
|
114,000
|
5,000
|
4
|
||||||||||||
|
|
$ |
2,309,000
|
$ |
1,713,000
|
$ |
596,000
|
35 | % | ||||||||
Revenue
from Web Services increased 41% to $1,882,000 in 2006 from $1,332,000 in
2005.
This growth was primarily due to engagements with new customers ($556,000)
combined with increased revenue resulting from the acquisition of New Tilt
($480,000) in April 2006, partially offset by projects completed for our
customers for which we now host their websites ($351,000). The
increase in Web Services was mainly due to our increased sales increased
sales
resulting from additional sales personnel attributable to the Net Tilt
acquisition, and a rapidly expanding Web Services market.
Managed
Services revenue consists primarily of retained maintenance services agreements
(83%) and Web hosting arrangements (17%). Revenue from managed services
increased $41,000 or 15% as compared to total revenue increase of 35% mainly
due
to increased services to our existing customers.
Subscription
revenue consists primarily of continuous access to the on-demand features
of our
Orgitecture platform in the foundation and non-profit sector of our
business. Subscription revenue remained relatively flat, increasing only
$5,000 or 4%, but decreased as a percentage of total sales from 7% of revenue
in
the three months ended December 31, 2005 to 5% of revenue in the three
months
ended December 31, 2006.
Alt.
34
Cost
of Revenue. Our cost of revenue is generated principally by
costs associated with our various revenue categories: Web Services, Managed
Services and Subscription revenue. The following table presents cost of
revenue
from each of our revenue streams in the three months ended December 31,
2006 and
2005:
|
|
|
|
Net
change 2006 vs. 2005
|
|||||||||||||
|
Fiscal
Three Months Ended December 31,
|
2006
|
2005
|
$
|
%
|
||||||||||||
|
Web
Services
|
$ |
1,052,000
|
$ |
780,000
|
$ |
272,000
|
35 | % | ||||||||
|
Managed
Services
|
82,000
|
72,000
|
10,000
|
14
|
||||||||||||
|
Subscription
|
7,000
|
15,000
|
(8,000 | ) | (53 | ) | ||||||||||
|
|
$ |
1,141,000
|
$ |
867,000
|
$ |
274,000
|
32 | % | ||||||||
Total
cost of revenue increased 32% as compared to a total 35% increase in
revenue. Cost of revenue in Managed Services increased 14% which is
proportional to the revenue increase in Managed Services of 15%. Cost
of Subscription decreased 53% as compared to an increase in subscription
revenue
of 4% equating to the fact that the costs of subscription revenue is minimal
compared to the amount of revenue generated. The cost of maintenance
of our customers’ web hosting sites decreased due to the streamlining of these
costs and the centralization of the associated computer
resources. Web Services cost of revenue increased 35% while the
revenue from Web Services increased 41% which resulted from better utilization
of our Web resources personnel due to the increased absorption of available
capacity.
Gross
Profit. The following table presents gross profit from
each of our revenue streams in the three months ended December 31, 2006
and
2005:
|
|
|
|
Net
change 2006 vs. 2005
|
|||||||||||||
|
Fiscal
Three Months Ended December 31,
|
2006
|
2005
|
$
|
%
|
||||||||||||
|
Web
Services
|
$ |
830,000
|
$ |
552,000
|
$ |
278,000
|
50 | % | ||||||||
|
Managed
Services
|
226,000
|
195,000
|
31,000
|
16
|
||||||||||||
|
Subscription
|
112,000
|
99,000
|
13,000
|
13
|
||||||||||||
|
|
$ |
1,168,000
|
$ |
846,000
|
$ |
322,000
|
38 | % | ||||||||
Gross
profit increased 38% mainly due to the 35% increase in revenue combined
with the
increased efficiencies of better utilization in Web Services and minimal
decrease in cost of revenue for Subscription combined with a 15% increase
in
Subscription revenue.
Sales
and Marketing Expenses. Sales and marketing expenses increased $152,000
from $685,000 in 2005 to $837,000 in 2006, but as a percent of revenue
decreased
from 40% in 2005 to 36% in 2006. The increase in selling and marketing
expenses
was primarily due to the costs associated with the three additional personnel
acquired in the New Tilt acquisition.
General
and Administrative Expenses. General and administrative expenses increased
to $461,000, or 20% of revenue, in 2006 compared to $293,000, or 17% of
revenue
in 2005. The total increase resulted primarily from an increase in
professional services including accounting and legal services due to
preparation for becoming a public company of $36,000 and the adoption of
SFAS
123R of $41,000.
Technology
Development Expenses. Technology development expenses increased to
$155,000, or 7% of revenues, in 2006 compared to $15,000, or 1% of revenues,
in
2005. The increase resulted primarily from product enhancement activities
for
the netEDITOR content management product.
Alt.
35
Interest
Expense. Interest expense
increased $318,000
from $27,000 in 2005 to $345,000 in 2006 and as a percentage of sales increased
from 2% to 15%, mainly due to the contractual interest on our Senior Notes
Payable issued in April 2006 of $81,000 and the amortization of debt discount
and deferred financing fees recorded in connection therewith of $249,000
partially offset by the decrease in interest pertaining to the line of
credit
that was fully repaid in June 2006.
Comparison
of Fiscal Years Ended September 30, 2006 and 2005
The
following table sets forth certain Consolidated Statements of Operations
data
expressed as a percentage of revenue for the periods indicated:
|
Fiscal
Years Ended
September
30,
|
||||||||
|
|
2006
|
2005
|
||||||
|
Revenue
|
100 | % | 100 | % | ||||
|
Cost
of revenue
|
46
|
54
|
||||||
|
Gross
profit
|
54
|
46
|
||||||
|
Operating
expenses:
|
||||||||
|
Sales
and marketing
|
39
|
36
|
||||||
|
General
and administrative
|
23
|
17
|
||||||
|
Technology
development
|
2
|
1
|
||||||
|
Loss
from operations
|
(10 | ) | (8 | ) | ||||
|
Interest
income (expense), net
|
(8 | ) | (1 | ) | ||||
|
Net
loss
|
(18 | %) | (9 | %) | ||||
Revenue,
Cost of Revenue and Gross Profit
The
following table presents revenue, cost of revenue and gross profit for
the
fiscal years ended September 30, 2006 and 2005:
|
|
|
|
Net
change 2006 vs. 2005
|
|||||||||||||
|
Fiscal
Years Ended September 30,
|
2006
|
2005
|
$
|
%
|
||||||||||||
|
Total
revenue
|
$ |
8,235,000
|
$ |
5,769,000
|
$ |
2,466,000
|
43 | % | ||||||||
|
Cost
of revenue
|
3,809,000
|
3,113,000
|
696,000
|
22
|
||||||||||||
|
Gross
profit
|
$ |
4,426,000
|
$ |
2,656,000
|
$ |
1,770,000
|
67 | % | ||||||||
Alt.
36
Revenue.
Our revenue is generated principally by fees paid for Web Services,
Managed
Services and Subscription revenue. The following table presents revenue
from
each of our revenue streams and their respective contribution to the increase
in
revenue in the fiscal years ended September 30, 2006 and 2005:
|
|
|
|
Net
change 2006 vs. 2005
|
|||||||||||||
|
Fiscal
Years Ended September 30,
|
2006
|
2005
|
$
|
%
|
||||||||||||
|
Web
Services
|
$ |
6,525,000
|
$ |
4,182,000
|
$ |
2,343,000
|
56 | % | ||||||||
|
Managed
Services
|
1,243,000
|
1,244,000
|
(1,000 | ) |
—
|
|||||||||||
|
Subscription
|
467,000
|
343,000
|
124,000
|
36
|
||||||||||||
|
|
$ |
8,235,000
|
$ |
5,769,000
|
$ |
2,466,000
|
43 | % | ||||||||
Revenue
from Web services increased 56% to $6,525,000 in 2006 from $4,182,000 in
2005.
This growth was primarily due to engagements with new customers ($895,000)
and
new work with existing customers ($849,000), combined with increased revenues
resulting from the acquisitions of iapps ($437,000) and New Tilt ($596,000)
in
December 2004 and April 2006, respectively offset by the loss of certain
customers ($457,000). The increase in Web Services was mainly due to
our increased sales penetration with one customer, increased sales resulting
from additional sales personnel attributable to the Net Tilt acquisition,
and a
the rapidly expanding Web Services market.
Managed
Services revenue consists primarily of retained maintenance services agreements
(83%) and Web hosting (17%) arrangements. Revenues from managed services
remained relatively consistent but decreased as a percent of sales from
22% in
2005 to 15% in 2006 due to lower revenues on retainer services with one
financial services customer.
Subscription
revenue consists primarily of continuous access to the on-demand features
of our
Orgitecture platform in the foundation and non-profit sector of our
business. Subscription revenue increased 36% to $467,000 in 2006 from
$343,000 in 2005, reflecting the additional 2.5 months of revenue from
iapps in
2006 as compared to 2005.
Cost
of Revenue. Our cost of revenue is classified similar to our revenue
classifications: Web Services, Managed Services and Subscription revenue.
The
following table presents cost of revenue from each of our revenue streams
and
their respective contribution to the increase in cost of revenue in the
fiscal
years ended September 30, 2006 and 2005:
|
|
|
|
Net
change 2006 vs. 2005
|
|||||||||||||
|
Fiscal
Years Ended September 30,
|
2006
|
2005
|
$
|
%
|
||||||||||||
|
Web
Services
|
$ |
3,389,000
|
$ |
2,629,000
|
$ |
760,000
|
29 | % | ||||||||
|
Managed
Services
|
363,000
|
457,000
|
(94,000 | ) | (21 | ) | ||||||||||
|
Subscription
|
57,000
|
27,000
|
30,000
|
111
|
||||||||||||
|
|
$ |
3,809,000
|
$ |
3,113,000
|
$ |
696,000
|
22 | % | ||||||||
Cost
of
revenue in Managed Services decreased 21% while Managed services revenue
remained relatively flat.. This was due to the fact that we utilized
more internal resources instead of outsourcing the labor. Cost of
Subscription increased 111% as compared to an increase in subscription
revenue
of 36% resulting from more help desk support as iapps’ operations are merged
into Bridgeline’s as well as an extra 2.5 months of iapps’ subscription revenue
as iapps was acquired in December 2004. Web Services cost of revenue
increased 29% while the revenue from Web Services increased 56% which resulted
from better utilization of internal billable labor resulting from the increased
volume.
Alt.
37
Gross
Profit. Our gross profit is generated principally from our
revenue less cost of revenue associated with our various revenue categories:
Web
Services, Managed Services and Subscription revenue. The following table
presents gross profit from each of our revenue streams in the fiscal years
ended
September 30, 2006 and 2005:
|
|
|
|
Net
change 2006 vs. 2005
|
|||||||||||||
|
Fiscal
Years Ended September 30,
|
2006
|
2005
|
$
|
%
|
||||||||||||
|
Web
Services
|
$ |
3,136,000
|
$ |
1,553,000
|
$ |
1,583,000
|
102 | % | ||||||||
|
Managed
Services
|
880,000
|
787,000
|
93,000
|
12
|
% | |||||||||||
|
Subscription
|
410,000
|
316,000
|
94,000
|
30
|
% | |||||||||||
|
|
$ |
4,426,000
|
$ |
2,656,000
|
$ |
1,770,000
|
67 | % | ||||||||
Gross
profit increased 67% mainly due to the 30% increase in revenue combined
with the
increased efficiencies of better utilization in Web services and minimal
decrease in cost of revenue for Subscription combined with a 36% increase
in
Subscription revenue to $467,000 in 2006 from $343,000 in 2005 reflecting
the
extra 2.5 months of iapps revenue as iapps was acquired in December
2004.
Sales
and Marketing Expenses. Sales and marketing expenses increased $1,167,000
from $2,060,000 in 2005 to $3,227,000 in 2006 and as a percent of revenue
increased to 39% in 2006 from 36% in 2005. The increase in selling and
marketing
expenses was primarily due to the costs associated with additional personnel
hired and the four and three additional personnel acquired in the iapps
and New
Tilt acquisitions, respectively, which occurred in December 2004 and April
2006,
respectively.
General
and Administrative Expenses. General and administrative expenses increased
to $1,833,000, or 23% of revenue, in 2006 compared to $1,014,000, or 17%
of
revenue in 2005. The total increase resulted primarily from an increase
of
$650,000 in consulting and accounting services related to preparation for
becoming a public company, $98,000 attributed to an increase in headcount
resulting from an additional hire and $57,000 related to bonuses granted
to
employees.
Technology
Development Expenses. Technology development expenses increased to
$176,000, or 2% of revenues, in 2006 compared to $43,000, or 1% of revenues,
in
2005. The increase resulted primarily from product enhancement activities
for
the netEDITOR content management product.
Interest
Expense. Interest expense increased $582,000 from $56,000 in 2005 to
$638,000 in 2006 and as a percentage of sales increased from 1% to 8% mainly
due
to the contractual interest of $123,000 on our senior notes payable issued
in
April 2006 and the amortization of debt discount and deferred financing
fees
recorded in connection therewith of $610,000 partially offset by the interest
paid on the line of credit which was fully repaid in June 2006.
Liquidity
and Capital Resources
We
have
historically funded our operations principally through issuances of short-term
debt and private equity. In April 2006, we completed a private placement
financing in the amount of $2,800,000 and received net proceeds of $2,434,000
after financing fees. In connection with this debt, we issued 280,000
warrants
exercisable at $0.001 (the “Debt Warrants”) and 112,000 warrants
exercisable
at $ ,
the initial public offering price of our shares in our initial public
offering.
These warrants have been valued at $646,000 and are recorded as a debt
discount
and deferred financing fees, respectively. This debt was retired upon
the completion of our initial public offering.
Alt.
38
In
November 2006, the terms of the Debt Warrants were amended to eliminate a
certain provision, included in the Debt Warrants in error during the drafting
of
the Debt Warrant documents, which provision resulted in a contingent obligation
to redeem the Debt Warrants in the event that an initial public offering
of our
common stock did not occur prior to the April 2011 expiration date of the
Debt
Warrants. As a result of the amendment correcting this error, we have accounted
for the Debt Warrants in shareholder’s equity as additional paid in capital
since the date of issuance. Had this amendment not been executed, the
value of the Debt Warrants would have been recorded as a liability and
such
value would have been subject to future adjustment based on changes in
the value
of our common stock.
We
have
incurred annual losses since commencement of operations in 2000 and have
used a
significant amount of cash to fund our operations over the last several
years.
As a result, we have a working capital deficit of $2,660,000 and an accumulated
deficit of $4,793,000 at December 31, 2006. Our revenues have not
grown sufficiently to satisfy our increases in debt service,
principally relating to the $2,800,000 senior notes payable described
in Note 7
to the financial statements, capital expenditures and operating
activities and to generate sufficient cash flows to maintain
operations. Prior to our initial public offering
in
, 2007, we issued various equity and debt securities to satisfy our
capital requirements and had taken significant steps to streamline our
operations over the last several years. We will continue to do so as
circumstances warrant. Having completed our initial public offering,
we believe
that we have sufficient working capital to fund current operations and
to fund
the long term cash requirements described above.
In
connection with our acquisition of Objectware, we may be required to
pay
contingent consideration in the form of additional purchase price of
up to
$1,800,000, of which up to $1,000,000 will be payable in cash and $800,000
will
be payable in common stock. The contingent consideration, if earned,
will be payable quarterly over the three years subsequent to the closing
of this
acquisition. The shares of common stock issued pursuant to contingent
consideration will be valued at the closing price of our common stock
on the
final business day of each quarter to which such payment
applies. These payments are contingent upon Objectware generating
positive earnings before interest, taxes and depreciation and amortization
(“Post-Merger EBITDA”) as defined in the acquisition agreement, of at least
$225,000 per calendar quarter during the 12 consecutive calendar quarters
following the acquisition. For example, if the Post-Merger EBITDA in
any quarter
is at least equal to $250,000, our cash payment to Objectware’s former
shareholder with respect to that quarter will be $83,333 and we will
be required
to issue a number of shares of our common stock equal to $66,667, priced
as
described above. Furthermore, if the Post-Merger EBITDA in any quarter
is less
than $250,000 but at least equal to $225,000, our cash payment with respect
to
that quarter will be reduced to $41,667 and we will be required to issue
a
number of shares of our common stock equal to $33,333.
Alt.
39
As
of
December 31, 2006, as part of both the iapps and New Tilt acquisitions,
we have
remaining contingent acquisition obligations to both of these prior entities’
shareholders which are to be paid in cash up to a maximum of $262,500 $325,000
and $240,000 for the fiscal years ending September 30, 2007, 2008, and
2009,
respectively provided that the contingent results are
achieved. The contingent acquisition obligations of iapps and
New Tilt are based on the achievement of positive EBITDA, as defined in
the
acquisition agreements.
Cash
Flows
Operating
Activities
Our
net
cash provided by (used in) operating activities was ($320,000), $302,000,
($733,000) and ($430,000) for the three months ended
December 31, 2006 and 2005 and the fiscal years ended September 30, 2006
and
2005, respectively. The increase in cash used in operating activities
corresponds to the increase in net loss during the periods as well as the
increased working capital needs due to the increased volume of sales and
the
costs associated with becoming a public company.
At
December 31, 2006, we had a working capital deficit of $2,660,000 compared
to a working capital deficit of $392,000, $2,020,000 and $179,000 at December
31, 2005 and September 30, 2006 and 2005, respectively. The increase as of
December 31, 2006 and September 30, 2006 was primarily a result of the
$2,800,000 private placement completed in April 2006, offset by cash used
in the
acquisition of New Tilt, expenses of our initial public offering and net
operating losses.
At
December 31, 2006, we had receivables of $1,759,000. This
compares to $1,045,000, $1,443,000 and $772,000 in receivables at
December 31, 2005 and September 30, 2006 and 2005, respectively. The level
of trade receivables at December 31, 2006 and 2005 and September 30, 2006
and 2005 represented approximately 54, 42, 36 and 38 days of revenues,
respectively. We typically require 30-day terms from our customers. Our
receivables can vary dramatically due to overall sales volumes, the timing
of
implementation of services, receipts from large customers, and other contract
payments. Unbilled receivables at December 31, 2006 increased $124,000 from
December 31, 2005 principally due to the timing of billing in accordance
with
stated contract terms. The decrease of $245,000 from September 30, 2006
resulted from billing in arrears on services completed at month
end.
Investing
Activities
Net
cash
used in investing activities was $91,000, $63,000, $842,000 and $545,000
for the
three fiscal months ended December 31, 2006 and 2005 and for the fiscal
years
ended September 30, 2006 and 2005. The major expenditures in the fiscal
year periods were for cash payments for our acquisitions of iapps ($310,000)
in
December 2004 and New Tilt ($553,000) in April 2006. In addition to our
cash
payments for our acquisitions, we also incurred $63,000, $25,000, $126,000
and
$113,000 in contingent consideration for these acquisitions for the three
months
ended December 31, 2006 and 2005 and for the years ended September 30,
2006 and
2005. We expect to incur more costs for future acquisitions and
capital expenditures as well as contingent earn-out related to our prior
acquisitions payments in the aggregate amount of $828,000 to be paid $262,000,
$335,000, and $231,000 in our fiscal years ending September 30, 2007, 2008
and
2009, respectively. We expect to fund the investing activities described
above,
as well as future acquisitions from the proceeds of the offering. If the
offering is not completed, we expect to fund these activities through a
combination of private equity financings and through private and commercial
debt.
Financing
Activities
During
the three fiscal months ended December 31, 2005 and the fiscal year ended
September 30, 2005, we financed our working capital requirements primarily
through short-term debt. In March 2005, we entered into a short term credit
facility with a private commercial lender whereby we pledged certain receivables
and received an 80% advance against these receivables with the additional
20%
being received
Alt.
40
upon
collection of the receivable. This credit facility carried 1.7% interest
per
month and certain fees and was terminated subsequent to the successful
completion of the April 2006 private placement financing, proceeds of which
were
used to finance our working capital requirements for the fiscal three months
ended December 31, 2006 and the fiscal year ended September 30, 2006 as
well as
finance our costs of becoming a public company.
Net
cash
provided by (used in) financing activities was ($11,000), $279,000, $2,028,000
and $157,000 for the three months ended December 31, 2006 and 2005 and the
years ended September 30, 2006 and 2005. The cash provided by
financing activities in the year ended September 30, 2006 was primarily
provided
by the private placement of short-term debt of $2,800,000 described above,
offset by $366,000 in associated fees. The net cash provided by financing
activities for the three months ended December 31, 2005 and the fiscal
year
ended September 30, 2005 of $279,000 and $157,000, respectively, was primarily
provided by the private commercial lending facility described
above.
The
short-term notes have a one-year term, the maturity which has been extended
to
July 20, 2007. If we are unsuccessful in completing this offering and we
are
unable to further extend the maturity of these obligations, we may be forced
to
raise additional funds to pay them through the issuance of additional debt
or
equity securities. Particularly in light of our limited operating history
and
losses incurred, there can be no assurance that we will be able to obtain
the
necessary additional capital on a timely basis, on acceptable terms or
at all.
In any of such events, our business prospects, financial condition and
results
of operations would be materially and adversely affected. As a result of
any
such financing, the holders of our common stock may experience substantial
dilution.
If
we are
unable to increase our revenues and decrease our expenses, we will need
to raise
additional funds to finance our future capital needs. We may need additional
financing earlier than we anticipate.
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. We
are,
therefore, not materially exposed to any financing, liquidity, market or
credit
risk that could arise if we had engaged in such relationships.
Capital
Resources and Liquidity Outlook
We
have
been dependent upon raising private capital for short and long-term cash
needs.
In March 2005, we obtained a $500,000 credit line under which we could
borrow up
to 80% of our eligible outstanding accounts receivable. In connection with
this
credit line, the lender obtained a first priority security interest in
all of
our assets. This line of credit was increased to $750,000 on September
12, 2005
and was terminated on June 30, 2006 with the proceeds of the April 2006
private
placement financing described above.
Material
Weakness
In
connection with the audit of our financial statements, our external auditors
advised us that they were concerned that as of and for the years ended
September
30, 2006 and 2005, our accounting resources did not include enough people
with
the detailed knowledge, experience and training in the selection and application
of certain accounting principles generally accepted in the United States
of
America (GAAP) to meet our financial reporting needs. This control deficiency
contributed to material weaknesses in internal control with respect to
accounting for revenue recognition, equity and acquisitions. A “material
weakness” is a control deficiency or combination of control deficiencies that
results in more than a remote likelihood that a material misstatement in
the
financial statements or related disclosures will not be prevented or
detected.
Alt.
41
In
preparation for our initial public offering, we engaged a consultant
experienced
in accounting and financial reporting who assisted us in preparing our
financial
statements. We have initiated the process of identifying candidates to
assume
newly created positions in our company, one of which will be at the
vice-president level, with specific responsibilities for external financial
reporting, internal control, revenue recognition and purchase accounting.
Prior
to preparing for that offering, our infrastructure was not conducive
to external
reporting in either the necessary systems or personnel. We intend to
have these
resources in place sometime during the third quarter of fiscal year
2007. The annual cost of these new positions and systems improvements
is estimated to be between $250,000 and $350,000. In addition, the costs
to
bring our internal control documentation into compliance with SOX Section
404
are expected to be significant. During the process of implementing
new systems, procedures and hiring personnel, we intend to mitigate the
potential adverse affects of this material weakness by engaging with
financial
consultants and temporary staff to supplement our internal personnel
requirements.
Inflation
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.
Contractual
Obligations
We
lease our corporate headquarters in Woburn, Massachusetts. We
also lease facilities in New York, New York; Washington, D.C.; Atlanta,
Georgia;
and Bangalore, India.
Our
other
contractual obligations include certain equipment acquired under capitalized
lease agreements that begin to expire in fiscal year 2009. We have no
contractual obligations extending beyond five years.
The
following summarizes our long-term contractual obligations as of
December 31, 2006:
(in
thousands)
|
Payment
Obligations by Year
|
FY
07
|
FY
08
|
FY
09
|
FY
10
|
FY
11
|
Totals
|
||||||||||||||||||
|
Operating
leases
|
$ |
365
|
$ |
309
|
$ |
239
|
$ |
230
|
$ |
—
|
$ |
1,143
|
||||||||||||
|
Capital
lease obligations
|
50
|
65
|
40
|
13
|
1
|
169
|
||||||||||||||||||
|
Contingent
acquisition payments (A)
|
263
|
325
|
240
|
—
|
828
|
|||||||||||||||||||
|
Short-term
debt (including interest)
|
2,912
|
—
|
—
|
—
|
—
|
2,912
|
||||||||||||||||||
|
Total
|
$ |
3,590
|
$ |
699
|
$ |
519
|
$ |
243
|
$ |
1
|
$ |
5,052
|
||||||||||||
|
(A)
|
The
contingent acquisition payments are maximum potential earn-out
consideration payable to the former owners of iapps and New
Tilt. Amounts actually paid may be
less.
|
Alt.
42
Recent
Accounting Requirements
In
September 2006, the SEC staff issued Staff Accounting
Bulletin No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements (“SAB 108”). SAB 108 was issued in order to eliminate the
diversity of practice surrounding how public companies quantify financial
statement misstatements. Traditionally, there have been two widely-recognized
methods for quantifying the effects of financial statement misstatements:
the
“roll-over” method and the “iron curtain” method. The roll-over method focuses
primarily on the impact of a misstatement on the income statement -
including the reversing effect of prior year misstatements - but its use
can lead to the accumulation of misstatements in the balance sheet. The
iron-curtain method, on the other hand, focuses primarily on the effect
of
correcting the period-end balance sheet with less emphasis on the reversing
effects of prior year errors on the income statement. In SAB 108, the SEC
staff established an approach that requires quantification of financial
statement misstatements based on the effects of the misstatements on each
of a
company’s financial statements and the related financial statement disclosures.
This model is commonly referred to as a “dual approach” because it requires
quantification of errors under both the iron curtain and the roll-over
methods.
We have evaluated SFAS 108 and believe its adoption will not materially
impact
our consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”), which defines fair value, establishes a framework for measuring
fair value in accounting principles generally accepted in the United State
of
America, and expands disclosures about fair value measurements. SFAS 157
prioritizes the inputs to valuation techniques used to measure fair value
into a
hierarchy containing three broad levels. The fair value hierarchy gives
the
highest priority to quoted prices (unadjusted) in active markets for identical
assets and liabilities (Level 1) and the lowest priority to unobservable
inputs
(Level 3). In some cases, the inputs used to measure fair value might fall
in
different levels of the fair value hierarchy. The level in the fair value
hierarchy within which the fair value measurement in its entirety falls
shall be
determined on the lowest level input that is significant to the fair value
measurement in its entirety. Assessing the significance of a particular
input to
the fair value measurement in its entirety requires judgment, considering
factors specific to the asset or liability. SFAS No. 157 is effective for
interim and annual financial statements for fiscal years beginning after
November 15, 2007. Upon initial adoption of SFAS 157, differences between
the
carrying value and the fair value of those instruments shall be recognized
as a
cumulative-effect adjustment to the opening balance of retained earnings
for
that fiscal year, and the effect of subsequent adjustments resulting from
recurring fair value measurements shall be recognized in earnings for the
period. We are currently evaluating the impact of SFAS 157 on the
consolidated financial statements.
In
June
2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes — an Interpretation of FASB Statement
No. 109 (“FIN 48”), which clarifies the accounting for
uncertainty in tax positions. FIN No. 48 requires that we recognize
the impact of a tax position in the financial statements, if that position
is
more likely than not to be sustained on audit, based on the technical merits
of
the position. The provisions of FIN 48 are effective for fiscal years
beginning after December 15, 2006, with the cumulative effect, if any,
of the
change in accounting principle recorded as an adjustment to opening retained
earnings. We have evaluated FIN 48 and believes its adoption will not materially
impact the consolidated financial statements.
In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS 159”). SFAS 159 provides companies
with an option to report selected financial assets and liabilities at
fair value
and establishes presentation and disclosure requirements designed to
facilitate
comparisons between companies that choose different measurement attributes
for
similar types of assets and liabilities. SFAS 159 is effective for fiscal
years
beginning after November 15, 2007. We are in the process of evaluating
the
impact of the adoption of this statement on our results of operations
and
financial condition.
Quantitative
and Qualitative Disclosure about Market Risk
We
do not
use derivative financial instruments. We place our cash and cash equivalents
in
institutions that meet high credit quality standards. Our cash and cash
equivalents are not subject to significant interest risks due to the short-term
maturities of these instruments. As of December 31, 2006 and 2005 and September
30, 2006 and 2005, the carrying value of our cash and cash equivalents
approximated fair value and we have concluded that there is no material
market
risk exposure. Therefore, no quantitative tabular disclosures are
required.
Alt.
43
BUSINESS
Overview
Bridgeline
Software is a developer of on-demand Web software tools and a developer
of
award-winning Web applications that assist our customers to optimize
business
processes utilizing Web-based technologies. As a result, our solutions
can
improve the effectiveness of our customers by assisting them to increase
sales,
enhance compliance requirements, reduce administrative and operational
expenses,
improve customer loyalty, and enhance internal employee
communication.
Our
proprietary framework enables companies to add functionality on a per
module
bases, providing expandability and scalability. We have
developed on-demand Web software tools framework that provides the
following:
|
·
|
Content
Management
|
|
·
|
eCommerce
Management
|
|
·
|
Relationship
Management
|
|
·
|
eMarketing
Management
|
|
·
|
Grants
Management
|
Recent
innovations in information technology have created opportunities to deliver
software applications directly to users over the Internet in a
subscription-based, on-demand business model. This model is made possible
by the
proliferation of high-speed, broadband Internet connectivity, open standards
for
application integration and advances in network availability and security.
For
the user, on-demand software eliminates the need for expensive hardware,
software and internal IT support.
Our
on-demand Web management tools are delivered through a “software as a
service” business model in which we deliver our software over the Internet while
providing maintenance, daily technical operation and support.
In
addition to our on-demand Web management software tools and we develop
award
winning Web applications utilizing our tools for use over the Internet
as well
as for customers’ intranets and extranets. Our in-house team of
Microsoft®-certified
developers specializes in:
|
·
|
User
experience development
|
|
·
|
Web
application development
|
|
·
|
Search
engine optimization
|
As
of
December 31, 2006, we have more than 90 active customers of which we
had one
customer generating 21% of revenue and no other customer generating more
than
10%. As of September 30, 2006 our customers included Nomura Securities,
The Bank of New York, Pfizer, Depository Trust & Clearing Corporation and
John Hancock, which each comprised approximately 22%, 7%, 6%, 6% and
6% of our
revenues, respectively, during the fiscal year ended September 30,
2006.
We
have
received multiple industry related awards. Awards and similar
recognition we have achieved since 2002 include:
|
·
|
a
Standard of Excellence Award and Outstanding Website Awards
in the Web
Marking Association’s WebAward Competition, an annual competition that
names the best Web applications in 96
industries;
|
|
·
|
being
selected as a finalist for numerous MITX Awards from the Massachusetts
Innovation & Technology Exchange, which acknowledge the best creative
and technological accomplishments in interactive technology
emerging from
New England;
|
Alt.
44
|
·
|
being
among the winners of several Axiem Awards, an international
award program
created to honor those who produce the best in all forms of
interactive
technology; and
|
|
·
|
winning
Bronze and Merit Awards at the One Show Interactive Awards
from The One
Club for Art and Copy, Inc., which honor creativity and effectiveness
in
global communications in the area of interactive
technology.
|
Market
Opportunity
Based
on
industry data provided by Harte-Hanks (a data intelligence firm), we
believe
that the professional Web development market is fragmented. Consequently,
we
believe there is an opportunity for us to acquire many such companies,
grow the
acquired businesses under the Bridgeline Software name and thereby potentially
create one of the largest interactive technology companies in North America.
We
believe that established yet small Web application development companies
have
the ability to market, sell and install Web-based software tools in their
local
metropolitan markets. In addition, we believe that these companies also
have
customer bases and a niche presence in the local markets in which they
operate. We believe that by acquiring certain of these companies and
applying our business practices and efficiencies, we can dramatically
accelerate
our time to market in areas other than those in which we now
operate.
We
estimate, based on our experience in having made such acquisitions, that
compounded annual revenue growth rates of at least 20% per year for each
acquired entity may be possible. We target certain established Web application
development companies that we believe have:
-
the complementary technical ability to market, sell and deliver Web-based software tools in their particular metropolitan market areas;
-
the desire to improve their profit margins by licensing our web software tools to their customer base;
-
an established base of customers with local market presence that can potentially accelerate our time to market in geographic areas where we do not currently operate;
-
the desire reduce development costs by leveraging our Bangalore, India development center; and
-
the desire to leverage certain centralized cost centers such as finance, human resources, legal, and marketing.
|
Acquisitions
|
Since
our
inception, we have consummated the acquisitions of five Web application
development companies:
|
·
|
In
December 2000, we acquired Streamline Communications, a
Boston,
Massachusetts-based company.
|
|
·
|
In
February 2002, we acquired Lead Dog Digital, Inc., a New
York, New
York-based company.
|
|
·
|
In
December 2004, we acquired Interactive Applications, Inc.,
a Washington,
D.C.-based company.
|
|
·
|
In
April 2006, we acquired New Tilt, Inc., a Cambridge, Massachusetts-based
company.
|
|
·
|
In
, 2007, we acquired Objectware, Inc., an Atlanta, Georgia-based
company.
|
We
believe these acquisitions contribute to our business strategy by providing
us
with new geographical distribution opportunities, an expanded customer
base, an
expanded sales force and an expanded developer force. In addition, integrating
the acquired businesses into our existing operations allowed us to consolidate
the finance, human resources, legal and marketing and other expenses
of the
acquired businesses with our own, reducing the aggregate of these expenses
for
the combined businesses, and resulting in improved over-all operating
results.
Alt.
45
The
Web Services and Web Tools Marketplace
Web
Services Market
The
word
“Web” is shorthand for the TCP/IP (or Transmission Control Protocol / Internet
Protocol) standard that carries Internet traffic around the world and
also the
networking standard for the integration of the corporate enterprise,
from the
manufacturing floor and sales office to the boardroom and across the
global span
of the enterprise’s manufacturing, sales, and service locations. Web design and
development is no longer just about creating attractive and functional
Web
sites; it has evolved to bear a very practical, commercial importance
to many
companies.
We
believe that several ongoing developments have contributed to the complexity
of
the Web. Existing client-server applications with connections to resources
-
mainframes, minicomputers, and legacy data sources - have been redesigned
using
Web technology. ERP (enterprise resource planning), CRM (customer relationship
management), SCM (supply chain management) and other enterprise-scale
applications have been reconfigured as enterprise wide application services
(Web
services) with custom portals for each of the various corporate
departments.
We
believe that Web properties and Web applications will continue to increase
in
number and complexity. In order to differentiate themselves from competitors,
we
expect many companies to increase the use of sophisticated technologies
in their
Web sites in order to provide users with an enhanced experience, either
with
content that is graphically enhanced with motion video or with user interfaces
that provide the look and feel of a desktop application without constant
interaction with servers. We believe the trend toward increases in the
use of
sophisticated technology could accelerate if companies have access to
tools that
make the development of such client user interfaces easier and make Web
site
development an integral part of the broader information technology (“IT”)
development life cycle.
International
Data Corporation (“IDC”)
estimates that
the number of Internet users continues to grow substantially, especially
in
emerging economies. According to IDC estimates, in the next four years,
400
million new users will come online and commerce will double. By the end
of 2006,
IDC estimates that 50% of Internet households will be broadband and less
than 5%
of total commerce will be conducted online.
IDC
estimates spending on Web services software was $2.33 billion in 2004,
more than
doubling from the prior year. With application developers continuing
to enable
and introduce more native Web service solutions, and a market for hosted
services unfolding, IDC believes that applications will continue to represent
a
significant growth area for years to come.
Annual
investments in Web services-based technologies are increasing. IDC’s Web
Services Total Opportunity Model estimates that worldwide companies spent
approximately $4.11 billion on Web services software in 2005, nearly
double the
amount spent in the prior year. Because Web services still represent
an emerging
market, growth rates appear high, but this volume represented only 2%
of the
total worldwide software market in 2005. The model further forecasts
that
worldwide spending will reach close to $15 billion by 2009. The chart
below
represents IDC’s 2004 to 2009 projections for Web services revenue in North
America; IDC estimates that the North American market share consistently
remains
greater than 54% of the world wide spending.
Alt.
46
IDC
identifies the following trends influencing the level of spending for
Web
services technology:
|
·
|
Many
of the existing Web applications were developed from 1999 to
2003,
utilizing older Web development technologies such as HTML.
The Web
applications developed were limited and did not provide significant
operational efficiencies. Since 1999, there have been technological
advancements in dynamic Web logic, open source standards, and
broadband
technologies. We believe these technological advancements combined
with a
resurgence in information technology spending will fuel strong
investments
towards redeveloping legacy Web
applications.
|
|
·
|
Many
organizations will likely continue to experiment and expand
their use of
Web services by utilizing their existing base of technologies
until volume
and levels of complexity force review and investment, in particular
for
service-oriented management
solutions.
|
|
·
|
A
heavy influence on the timing and amounts of when organizations
may
determine to invest relates to the waves of major versions
released by key
vendors. For example, organizations may determine to wait until
Microsoft
meets market commitments on its Longhorn releases, and SAP
customers may
be interested in investing as prior versions of software are
retired from
support.
|
|
·
|
The
conversion of software pricing models from traditional license
models to
more subscription-oriented methods will influence the rate of growth and
overall size of the market, especially in the context of hosted
applications and service, creating a normalizing
effect.
|
According
to IDC, one of the larger trends in the North American Web services market
is
the resurrection of the application service provider (“ASP”) model, empowered
and enhanced via Web services standards and technologies. Our subscription-based
OrgitectureTM
Web platform provides customers with an integrated suite of on-demand
Web-based
tools designed to maximize organizational effectiveness, streamline Web
site
management and reduce operating costs. See “Products and Services -
OrgitectureTM -
Modular
On-Demand Web Tools,” below.
According
to IDC, the Web services applications marketplace is expected to show
the most
significant growth during the next three years, originating from the
least of
the three primary software markets, to reach $5.13 billion by 2009. In
2005,
this specialized marketplace represented less than 1% of the worldwide
applications software market. Yet by 2009, it is expected to increase
to more
than 5% of the worldwide applications software market. The
Alt.
47
chart
below represents IDC’s 2004 to 2009 projections for total Web services
worldwide primary category. IDC estimates that the North American
market share will consistently remain greater than 54% of the worldwide
spending.
The
Content Management Market
An
organization’s Web properties (Internet, intranet, and extranets) can be among
its most valuable assets. To maintain the value of these assets, the
content
within the sites must be current, accurate and dynamic. Product features,
prices, investor information, press releases, customer communications,
employee
communications, and other content need frequent updating. These ongoing
editing
requirements can be time-consuming and costly. As a result, many organizations
fall behind on content updates, greatly reducing the effectiveness of
their Web
properties. We believe that the combination of these critical communications
requirements with heightened compliance requirements will result in a
high
demand for powerful, easy-to-use Web content management systems that
have
integrated work flow controls.
During
the economic downturn in 2000, many companies de-emphasized Web content
management for their Web properties, and, instead, focused their attention
on
cost containment and internal efficiency. We believe, however, that companies
are again turning to Web content management to support their growth strategies,
such as selling products via the Web and creating or supporting new products
and
services through the delivery of content.
During
the downturn, we believe many chief information officers interested in
Web
content management decided their custom-built Web sites were sufficient
to meet
their business objectives and postponed replacing them with Web content
management systems. Based on information provided in a report released
by
Forrester Research in February 2006, we believe many chief information
officers
and architecture groups are revisiting their past enterprise content
management
strategies and are planning to replace their custom Web sites with Web
content
management systems during the next 18 months.
We
believe many of the new systems being planned will be second-generation
Web
sites, i.e., they will support and synchronize complex Web environments
consisting of multiple Web sites housed in difference physical locations.
The
newer systems will be required to manage changes to code and to distribute
content and code from multiple Web content management vendors within
a network
of Web sites.
The
chart
below projects the North American revenues derived from licensed Web
content
management systems. The projections exclude other service revenue that
can also
be derived from training, consulting, and system integration.
Alt.
48
N.
American Content Management Software Forecast
Source:
IDC, May 2006
We
believe that a new class of applications is now expanding that combines
data and
content in support of business processes or new content-related products,
and,
accordingly, a growing number of companies have now prototyped or piloted
these
applications and are looking to expand them. Examples of content-related
applications include a restaurant that plans to use digital content instead
of
traditional photographs to show food items, a hotel that uses its Web
site as an
extension of its concierge service, or an automotive manufacturer that
uses its
Web site for customers to buy, service, maintain, and track payments
for their
vehicles.
IDC
reports that a growing number of companies are turning their attention
to
digital assets such as digital photographs, graphics, and logos. In certain
cases, organizations need a specialized digital asset management product
to
support high volumes of digital assets, searching for assets based on
the
content itself - in addition to metadata, displaying thumbnails, and
managing
video and audio. IDC states that a number of companies are using their
Web
content management systems to manage digital assets rather than buying
a
specialized digital asset management product and expects this trend to
increase in 2006 and beyond.
The
Web Analytics Tool Market
Web
analytics, the measurement of the behavior of visitors to a website,
generally
focus on a single Web site or an individual visiting a single Web site
rather
than the surfing habits of individuals as they move from site to
site.
Site-independent
analytics can be used to build a file of total surfing behavior for panels
of
known or anonymous individuals for marketing personalization. Web analytics
provide real-time, actionable reporting that measures the effectiveness
of Web
sites and on-line marketing initiatives. Web analytics tools identify
and track
the factors that uniquely affect a Web sites success, providing insight
needed
to optimize marketing efforts and drive company online business
success.
We
believe that over the past five years Web sites have evolved from being
brochure-ware type Web sites to highly functional Web applications.
Increasingly, organizations are demanding statistical data from their
Web
applications fueling a growing Web analytics market.
According
to IDC, on-demand Web analytics constitute an increasing proportion of
new
business among the larger vendors. We believe that this growth constitutes
penetration into previously installation-only verticals, such as
Alt.
49
financial
institutions. In addition, we believe that the on-demand implementation
short
circuits much of the negotiation process that marketers would otherwise
have to
conduct with their IT departments. An interesting side effect of the
on-demand
business model is the ability to glean information on actual adoption
and
feature usage far beyond the limits of focus groups, labs, and survey
questionnaires.
According
to IDC, the Web analytics market is a growing market expected to reach
more than
$600 million by the end of 2010. (See chart below.)
Worldwide
Web Analytics Software Applications Forecast
Source:
IDC, June
2006
We
are
currently developing an on-demand Web analytics software tool. We currently
expect to launch and introduce this native .NET on-Demand Web analytics
product
to our customer base in early calendar 2007.
Products
and Services
Web
Development Services
We
provide an explanation of each term below. By providing scalable Web
software
tools with award-winning Web application development capabilities, we
provide
our customers with complete solutions that optimize business processes
through
Web-based technologies.
We
believe this strategy results in a stronger relationship with our customer
base,
creating and maintaining a repeatable business model.
Web
Application Development
Our
in-house team of Microsoft®-certified
developers develops award-winning custom Web applications. These Web
applications include business-to-business Web properties such as broker-dealer
extranets, employee intranets, case management systems, eRecruiting
applications, on-line performance evaluation systems, and dynamic eCommerce
sites. Our development teams utilize programming tools such as ASP,
.NET, HTML, XML, Cold Fusion, Java Script, CGI/Perl, and Flash. Our
Web development expertise includes:
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·
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Internet
sites
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Intranet
sites
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Extranet
sites
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·
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eCommerce
|
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|
Database
development
|
Our
developers are proficient in C, C++, J2EE and Microsoft .NET development
frameworks for back-end integration. We use these and other tools to
integrate
with back-end databases (SQL, Oracle, DB/2, mySQL), application servers
(IIS/MTS, Oracle, WebSphere, Apache/Tomcat, J2EE servers, Sun), Web services
and
legacy systems. While our front-end design teams provide the appropriate
look
and feel for the display of the data, it is the job of the back-end teams
to
ensure that the data is available to the front-end systems. Depending
on
business requirements and goals for the Web application, our technical
design
teams employ data caching, parallelism, threading and other techniques
to ensure
that the data is made available to the front-end in the most efficient
and
reliable manner.
We
develop Web applications utilizing our own Web software tools such as
netEDITOR® or
OrgitectureTM,
providing a complete end to end Web-based solution.
Information
Architecture
Information
architecture is a design methodology focused on structuring information
to
ensure that users can find the appropriate data and complete their desired
transactions within a Web site or a Web application. Understanding
users and the context in which they will be using a Web application is
core to
Information Architecture. Information architects try to put
themselves in the position of a typical application’s user 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 more educated 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.
We
provide information architecture for most of the Web applications we
develop.
Usability
Engineering
The
Web
was originally conceived as a “hypertextual” information space, in which users
could store data through computer programs that allow other users to
create and
link fields of information at will and to retrieve the data nonsequentially.
The
development of increasingly sophisticated user interfaces and applications,
however, has fostered the Web’s use as a remote software interface. This dual
nature has led to much confusion, as user experience has been mixed.
Today,
usability engineering is a critical component towards developing any
successful
Web-based application.
We
believe that a majority of Internet users leave a Web site after viewing
the
first page. A Web property (Internet Web site, intranet site, or extranet
site)
has one chance to make a first impression on a potential user. 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:
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Usability
audits
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·
|
Information
architecture
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Process
analysis and optimization
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Interface
design
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User
testing
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Our
systematic and user-centered approach to Web development focuses on developing
Web properties 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.
Rich
Media Development
Rich
media is a combination of interactive digital media such as video, audio,
and
animation that often includes user interaction. Rich media with its
movement, sound and emotive quality provides designers with a tool set
more
powerful than text and graphics alone. Its dynamic movement and sound
is compelling and engaging to users. The more emotive a message, the
more
appropriate rich media is for communicating it.
Rich
media impact on the Web is much wider than online advertising. E-learning
applications often use animations to convey processes more effectively
than text
and diagrams. Rich media content and rich media interactions are becoming
more
common in Web applications user interfaces and when used appropriately
provide a
richer user experience.
We
develop custom rich media applications such as sales training, product
launches,
and enhanced corporate communication via the web.
e-Training
Applications
We
believe e-Training is both a valuable tool for employee development and
to
enhance and extend relationships with customers. We believe effective
e-Training
solutions must go beyond formatting existing content to fit on a computer
screen. Our experience in developing e-Training applications helps to
improve
user comprehension and retention.
Our
e-Training applications combine video, audio, animation, and interactive
quiz
elements, all supported by a strong technical back-end, allowing customers
to
enjoy benefits such as:
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·
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Flexibility:
accessibility via Internet, intranet, or
extranets
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·
|
Savings:
reduced training costs and related
expenses
|
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·
|
Convenience:
24/7 availability at the user’s
discretion
|
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·
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Longevity:
post-learning usage of updatable
resources
|
On-Demand
Web Tools - OrgitectureTM
Our
OrgitectureTM
platform provides customers with an integrated suite of on-demand Web-based
tools designed to maximize organizational effectiveness, streamline Web
site
management and reduce operating costs. Orgitecture offers the stability,
reliability and economies of scale of a subscription-based service, along
with
the flexibility of a fully customized enterprise solution.
Developed
on open source standards, Orgitecture facilitates the development and
deployment
of complex Web properties. Web solutions developed on Orgitecture are
modular by
design, so customers can add functionality as their needs evolve. Every
Orgitecture Web site is customized by our developers to meet the unique
needs of
its end users. Software modules include: Web content
management, logic-based survey tools, discussion boards,
resource libraries, calendaring, email newsletters, user management,
and online
registration.
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52
Relationship
Management Module: We believe that the more a customer
knows about the history of its relationships with those involved in its
business
operations, the more effective its communications will be. Orgitecture’s
relationship management module enables organizations to capture, track,
manage
and analyze key constituent information, including contact and demographic
data,
billing records, professional interests, event attendance, and other
relevant
data. The relationship management module can also be integrated with
Orgitecture’s content management module to drive the delivery of personalized
content.
Web
Content Management Module: A Web site can be among an
organization’s most valuable assets. In order to properly maintain the value of
that asset, the content within the site must be current and
accurate. Program updates, policy alerts, press releases, member
communications, donor communication and other content require frequent
updating.
Orgitecture is a browser-based content management module that gives a
customer
control over its site without requiring coding or technical expertise.
A
customer needs only a standard Web browser to change site content quickly,
eliminating reliance on a dedicated technical webmaster. With built-in
support
for workflow processes, image management, document management and group
security, Orgitecture’s Content Management Module allows the responsibility for
site management to be distributed as needed to a customer’s program,
communications and to administrative or executive staff.
eSurvey
Module: We believe the Internet is the
single most effective way to capture information and metrics regarding
key
constituents. With Orgitecture’s highly configurable eSurvey module, customers
can capture, measure and analyze time-sensitive information gleaned from
their
target audiences. Online surveys can be created, modified and
deployed within minutes – all using a simple Web interface.
eNewsletter
Module: We believe that effective email outreach and eNewsletters
can significantly increase the traffic to a customer’s Web site. Our eNewsletter
module allows for the dissemination of information from customer Web
sites. The
module can be seamlessly integrated with Orgitecture’s content and relationship
management modules, so that customers can send targeted newsletters to
key
constituents – by region, interest area, membership status and other criteria.
eNewsletter templates are aligned with the look and feel of a customer’s Web
site and linked directly to its content to ensure a consistent user
experience.
eCommerce
Module: We believe that the amount spent
purchasing products on-line or making on-line donations has more than
doubled
over the past few years. We believe organizations that have well executed
online
initiatives can encourage their customers or contributors to purchase
products
online or make online donations. Orgitecture’s eCommerce module
contains sophisticated shopping cart tools and provides customers with
secure
transaction capabilities, reliable order processing and fulfillment,
receipt
generation and inventory control.
Event
Registration Module: We believe that face-to-face
events deliver the greatest return on investment in marketing, while
strengthening customer and vendor relationships. The cost of managing
and
organizing events can be significantly reduced through effective online
event
management tools. Customers have the ability to streamline administrative
processes with Orgitecture’s Event Registration Management module. Customers set
up either free or paid events using a secure portal that integrates with
a
customer’s Internet merchant account. Through this module,
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53
customers
can track registrations, request RSVPs, send reminders and manage attendance.
This module can also be seamlessly integrated with Orgitecture’s Relationship
Management system to pre-populate registrants’ data and track
attendance.
Integrated
Grants Management Module: Using the Web for
grants management can significantly reduce workload, minimize redundancy
and
streamline key business processes. For grantmaking foundations, the Orgitecture
platform supports integrated grants management – from eligibility screening and
online application processing to grantee reporting. We can help
organizations and foundations capture data on the Web and integrate it
with
their existing grants management systems. Similarly, we can integrate
a
customer’s internal systems with its Web site to ensure that relevant and timely
grants data is easily accessible and searchable online.
Web
Content Management Software-
netEDITOR®
Most
companies outsource Web development, while content such as text, graphics,
and
rich media is generally developed in-house. However, our experience suggests
that most organizations are not adept at Web content publishing and Web
content
managing. Content management and content publishing can be very complex
and
costly when there is a large volume of content produced by multiple contributors
throughout an organization. We believe that for many companies,
developing internal support for Web content publishing is challenging
and
without proper management and centralization of Web production, these
companies
may encounter production delays and increased costs.
Furthermore,
the volume of content changes on a Web site can be variable, causing
unpredictable variances in the workload for Web resources, often resulting
in
serious bottlenecks in content publishing. We believe that regardless
of whether
the content is managed internally or outsourced, the total cost of ownership
for
Web applications will continue to increase.
We
have developed a software solution to the content management challenge.
Our
proprietary content management software solutions, netEDITOR® and
netEDITOR-proTM,
provide
non-technical users the ability to create, edit, and publish content
via an easy
to use, browser-based interface at a lower cost than most commercial
solutions. These products are suitable for both simple and complex
content management requirements.
The
image
below is a sample screen shot of the netEDITOR-pro’s easy to use
interface.
Workflow
is an important feature of netEDITOR®.
Multiple levels of
approval ensure that content is always reviewed and approved before it
gets
published. Customers can easily build either serial or parallel custom
workflow
processes within the system for individuals or groups in order to meet
specific
organizational needs. E-mail helps facilitate this process by
notifying participants of any pending action that is required.
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54
Anyone
with basic computer knowledge should easily be able to configure the
workflow
within netEDITOR for a complex, larger organization that has strict regulatory
policies or a simple, single person environment.
The
following workflow and user/group rights can be implemented out of the
box using
netEDITOR®
:
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·
|
Editors:
Have rights to contribute content in identified areas of the
site.
|
|
·
|
Approvers:
Responsible for reviewing and either approving or rejecting
content for
particular areas of the site.
|
|
·
|
Publishers:
Ultimately responsible for final review and publishing of
content. These users can post content to the live
site.
|
|
·
|
Administrators:
Responsible for administration of the system. Administrators
have the
ability to add/modify/delete users, groups, permissions, content
sections,
site structure, and content
workflow.
|
The
chart
below shows an example of author, approver and publisher roles as the
building
blocks of any workflow:
Our
netEDITOR product offers core functionality that we believe many companies
need in a content management system that is easy to implement and
maintain. We believe we have eliminated the complexity of web content
management. We offer netEDITOR to mid-market and larger
companies.
Research
and
Development
During
our fiscal year 2005, we established a research and development center
in
Bangalore, India in conjunction with our new On-demand Software Development
initiative described below. For the periods ending September 30, 2006
and 2005 expenses related to technology development activities were $176,000
and
$43,000, respectively. In addition, on an on-going basis since our
inception, we have derived technology benefits from engagements with
our
customers; however it is not possible to track and quantify such costs
separately for any periods.
New
On-demand Software Development Initiative
Our
current on-demand software platform, OrgitectureTM has
been developed
in Cold Fusion and has limited scalability. We have begun to develop
a new on-demand software product platform in ASP.NET 2.0 that we believe
will
provide significant enhancements and scalability.
Business
processes, regardless of industry or vertical market, fall into common
categories. For example, all companies must deal with issues surrounding
security, workflow, version control and user management. While the
processes of individual entities may vary they can generally be classified
in
their simplest form as mentioned above. We are creating an ASP.NET
2.0-based application development framework based on these common
classifications.
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55
This
development framework will include software components to support security,
workflow, version control and user management, and will empower companies
or
developers to create Internet-based applications with advanced business
logic,
state-of-the-art graphical user interfaces and improved quality all in
a shorter
timeframe with less coding that was is now typically required.
The
development framework will allow us to build custom Web applications
based on
analyzing and optimizing our customer’s business processes and then map the
results to a common software component solution. While we believe
that is a very powerful concept by itself, the real synergies come together
when
we launch our product suite built on this framework. To support our
customer base’s Web related initiatives, the product suites in development will
include:
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Content
management
|
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·
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Web
analytics
|
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·
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Online
marketing
|
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·
|
Digital
asset management
|
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·
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E-Commerce
|
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·
|
Grants
management
|
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·
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E-Training
|
While
each product suite will be used as a stand-alone solution, each product
will
utilize our common underlying framework. This means once a customer has
a
product suite installed (which requires that the entire framework be
installed
as well), any of the other product suites could be integrated quickly,
efficiently, and cost effectively.
Recent
innovations in information technology have created opportunities to deliver
software applications directly to users over the Internet in a
subscription-based, on-demand business model. This model is made possible
by the
proliferation of high-speed, broadband Internet connectivity, open standards
for
application integration and advances in network availability and security.
For
the user, on-demand software eliminates the need for expensive hardware,
software and internal IT support.
The
newly
developed on-demand Web software tools will be delivered through a
software as a
service business model, in which we deliver our software
over the Internet while providing maintenance, daily technical operation
and
support. In addition if larger customers desire, we plan to provide
the framework and product suites as a stand-alone system (i.e.,
installed at a client site).
We
expect
to release the new platform and our on-demand Web product suites in mid
2007.
Development
Center in Bangalore, India
In
2003,
we formed a wholly owned subsidiary, Bridgeline Software, Pvt. Ltd.,
as our
software development center located in Bangalore, India. Bangalore, India
is an
emerging global center for software development activities and IT services.
This
technologically rich region allows us to hire talented Web application
developers and software engineers at comparatively lower compensation
rates.
This offshore development center reduces our Web application development
cost,
improves development productivity, increases profit margins and our overall
competitiveness in the area of Web services. By working with our own
employees
in India rather than outsourcing the software development work, we have
greater
control over the quality of work and are able to set the priorities of
the
group.
In
addition to assembling a quality Web Services programming team, our India
operation has a dedicated research and development team of engineers
that
focuses exclusively on the continued development of the netEDITOR®,
OrgitectureTM,
and future native
.Net Web software tools.
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Customers
We
primarily serve five vertical markets that we believe have a history
of
investing in IT enhancements and initiatives. These vertical markets
are:
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Financial
services
|
|
·
|
Life
sciences
|
|
·
|
High
technology
|
|
·
|
Foundations
and non profit organizations
|
|
·
|
Federal
and state government agencies
|
Our
business development teams and marketing resources focus our efforts
on middle
market and large organizations (i.e., $100 million and higher in annual
revenues, or organizations that have over 500 full-time employees).
We
have
more than 90 active customers including companies such as Nomura Securities,
The
Bank of New York, Pfizer, Depository Trust & Clearing Corporation and John
Hancock, comprising approximately 22%, 7%, 6%, 6% and 6% of our revenues,
respectively, for the fiscal year ended September 30, 2006.
The
loss
of business from any of these customers, and in particular Nomura Securities,
could substantially reduce our net sales and results of operations and
could
seriously harm our business. See “Risk Factors – Only a few customers account
for a substantial portion of our revenues, and the loss of any of these
customers could substantially reduce our net sales.” Nomura Securities has been
a customer since 2002. Our relationship with Nomura Securities is non-exclusive
and may be terminated by either party with 30 days written notice. Our
Bridgeline Software Pvt. Ltd. subsidiary has an independent relationship
with
Nomura Securities under which it provides Nomura Securities with software
development services on a non-exclusive basis. That relationship may
also be
terminated by either party with 30 days written notice.
Growth
and Expansion Strategy
We
believe that the Web services/Web tools industry is a rapidly growing
fragmented
marketplace that presents significant consolidation opportunities. According
to
Harte-Hanks (a data intelligence firm), there are over 2,000 Web development
companies in North America. Many of these entities are profitable, with
annual
revenues between $1 million and $5 million.
As
we
develop additional Web-based scalable product solutions, we believe
our North
America geographical expansion will allow us to leverage our products,
rapidly
increase our customer base, and enhance our market position. We currently
have
sales and implementation teams in Boston, Massachusetts, New York,
New
York, Washington, D.C., and Atlanta, Georgia. We believe each major
metropolitan market selected is poised to grow. We plan to implement
two
expansion initiatives over the next several years:
Organic
Growth - Over the last three years, our current locations have
experienced 26% organic growth on average each year. Based on this experience,
we project our organic revenue growth on average will be at least 20%
per year
in our geographical regions once we are established in each such geographical
region. No assurance can be given, however, that we will be able to
maintain this level of, or any, organic growth. Many of the risks identified
elsewhere in this prospectus could materially and adversely affect our
ability
to grow organically as well as our business, financial condition and
results of
operations as a whole. See “Risk Factors.”
We
have
defined sales and marketing activities to help enhance organic growth
opportunities. Some of these activities are:
Four
phase selling system: We use an accountable, strategic engagement process
developed specifically for target companies that require a mature professional
approach. We believe it is critical to qualify each opportunity and to
assure
our skill set and tools match up well with the customer’s needs. An essential
part of every engagement, we believe our Four Phase Engagement
Process:
Alt.
57
|
·
|
streamlines
our customer qualification process
|
|
·
|
strengthens
our relationship with our customer
|
|
·
|
ensures
our skill set and tools match the customer’s needs
|
|
·
|
results
in the submission of accurate
proposals
|
Organic
growth from existing customer base: We have specific programs that
consistently market Bridgeline Software’s brand, services, and web software
tools. Our business development professionals seek ongoing business
opportunities within our customer base and within other operating divisions
or
subsidiaries of our existing customer base each month.
New
customer acquisition: In the geographies we operate, we identify target
customers within our vertical expertise (financial services, life sciences,
high
technology, foundations, and government). Our business development professionals
develop an annual territory plan identifying various strategies to engage
our
target customers.
Customer
retention programs: We use our own email marketing capabilities when
marketing to our customer base. We email eNewsletters, internally generated
whitepapers, and company announcements to our customers, in addition
we host
educational on-line seminars on a regular basis.
New
lead generation programs: We generate targeted leads and new business
opportunities by leveraging a combination of on-line marketing and third
party
telemarketing services. We receive leads by maximizing our search engine
optimization of our web site. Through our web site, we provide various
educational white papers and promote upcoming on-line seminars. We also
pay for
banner advertisements on various independent newsletters, linked to our
web
site. We also participate and exhibit at targeted events to generate
new
leads.
Acquisitions
- We plan to continue to acquire small, established Web development
companies in various geographical locations in North America. We expect
that
each of the acquired companies will have the same core development expertise
as
we do, will have a complementary customer base to market our Web software
tools,
and will be a profitably run business. We anticipate that this strategy
will
enhance our time to market and our customer base, and will reduce local
market
entry risk.
We
target
profitable Web development companies with annual revenues of at least
$2.5
million. We believe that by merging with us, these companies could benefit
from:
|
·
|
Differentiation
by marketing our content management software, netEDITOR®
|
|
·
|
Differentiation
by marketing our on-demand Web tools from the OrgitectureTM
platform
|
|
·
|
Improved
margins by selling and licensing our Web software tools mentioned
above
|
|
·
|
Improved
margins by utilizing our development center in Bangalore,
India
|
|
·
|
Improved
sales by being a part of a larger company
|
|
·
|
Improved
sales by adopting our 4-phase sales
methodology
|
|
·
|
Improved
internal reporting and communications
|
|
·
|
Reduced
expense (centralized G&A, R&D, HR, legal, and
marketing)
|
|
·
|
Liquidity
for their shareholders
|
Our
proposed strategy is to acquire an entity at a discount to public company
trading multiples at a purchase price consisting of cash at closing,
contingent
earn-out payments payable upon the attainment of post-closing performance
milestones, and our common stock.
Historical
Acquisitions
Streamline
Communications, Inc. - A Boston, Massachusetts-based Web application
development company, acquired in December 2000.
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58
Lead
Dog Digital, Inc. - A New York, New York-based Web application
development company, acquired in February 2002.
Interactive
Applications Group, Inc. (“iapps”®)
-
A Washington, D.C.-based Web application development company, acquired
in
December 2004.
New
Tilt, Inc. - A Cambridge, Massachusetts-based Web application
development company, acquired in April 2006.
Objectware,
Inc. - An Atlanta, Georgia-based Web application development company,
acquired
in
, 2007.
Competition
The
market for our products and services, including Web application development
services and web software tools is highly competitive 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. Our competition includes in-house
web
application development efforts by our customers and potential customers,
as
well as other independent web application development companies. In
addition our competition includes other software developers that directly
address web software tools such as content management systems, ecommerce
systems, web analytics systems, and on-line marketing systems.
We
believe there are multiple areas in which we compete with various competitors
in
our industry, including product/service range, pricing, ease of implementation,
expandability, customization flexibility, and reliability. Most
existing developers of Web software tools offer their software tools
without
directly providing Web application development services and conversely
existing
Web applications developers do not provide internally develop Web software
tools. To distinguish ourselves from the competition, we offer both
Web application development services and related web software tools to
enhance
the likelihood of the customer receiving a functional, scalable, expandable,
and
integrated web application from one source. We believe that the
foregoing combination brings enhanced value to our customers and provides
us
with a competitive advantage in this highly competitive industry.
Many
of
our competitors have longer operating histories and significantly greater
financial, technical, marketing and other resources than we do and thus
may be
able to respond more quickly to new or changing opportunities, technologies
and
customer requirements. Also, many current and potential competitors
have wider name recognition and more extensive customer bases that could
be
leveraged, thereby gaining market share to our detriment. Such
competitors may be able to undertake more extensive promotional activities,
adopt more aggressive pricing policies, and offer more attractive terms
to
purchasers than we can.
We
compete with a diverse group of companies in our industry. The
companies listed below are a representative sample of the competitive
landscape
we are facing.
|
·
|
Website
Pros, Inc. - Provides web development to medium-sized
enterprises. Website Pros on-demand platform directly competes
to our on-demand platform Orgitecture.
|
|
·
|
FileNet
Corp. - Develops content management systems that directly
compete
with our content management
systems.
|
|
·
|
aQuantive,
Inc. – A large division of aQuantive named RazorFish provides
web
application development services directly competing with our
web
application development services.
|
|
·
|
Vignette
Corp. - Develops content management systems
that
directly compete with our content management systems, and they
provide web
application development services that directly compete with
our web
application development services.
|
|
·
|
WebSideStory,
Inc. – Develops web analytic software tools that directly
compete
with our planed web analytic tool and they developed a web
content
management system that directly competes with our content management
systems.
|
|
·
|
Agency.com
Ltd. - Provides web application development services
directly
competing to our Web application development
services.
|
Intellectual
Property
We
have
no issued patents and have not applied for patent protection in any
jurisdictions. We rely upon copyrights, trademarks, trade secrets,
confidentiality agreements, proprietary know-how and continuing technological
innovation to remain competitive. We require all employees and consultants
to
execute a non-disclosure, non-compete and technology transfer agreement
upon
hire. We continue to seek ways to protect our proprietary technology
and trade
secrets.
We
have
registered the trademarks “Bridgeline,” “iapps”, “netEDITOR” and “Projectware”
with the United
States Patent and Trademark Office. We claim common law rights in the
trademark
“Orgitecture”, “netEDITOR-pro” and “Objectware.”
Alt.
59
Properties
Our
headquarters are located twelve miles north of Boston, Massachusetts
at 10 Sixth
Road, Woburn, Massachusetts 01801. This office also serves as our New
England
business unit. The following table lists our offices, all of which are
leased:
|
Location
|
|
Address
|
|
Size
|
|
Woburn,
Massachusetts
|
|
10
Sixth Road
Woburn,
Massachusetts 01801
|
|
9,335
square feet,
professional
office space
|
|
New
York, New York
|
|
104
West 40th
Street
New
York, New York 10018
|
|
4,400
square feet,
professional
office space
|
|
Washington,
D.C.
|
|
2639
Connecticut Ave., NW
Washington,
D.C. 20008
|
|
9,383
square feet,
professional
office space
|
|
Bangalore,
India
|
|
71
Sona Towers, West Wing
Millers
Rd., Bangalore 560 052
|
|
7,800
square feet,
professional
office space
|
|
Norcross,
Georgia
|
|
5555
Triangle Parkway
Norcross,
Georgia 30092
|
|
7,068
square feet,
professional
office space
|
|
Reston,
Virginia
|
|
11440
Commerce Park Drive,
Suite
502, Reston, VA 20191
|
|
1,413
square feet,
professional
office space
|
We
also
assumed a lease in conjunction with the acquisition of New Tilt in April
2006 in
Cambridge, Massachusetts but operations were consolidated with our Woburn,
Massachusetts facility and we are subleasing this facility effective
January 15,
2007.
Employees
We
have
111 full-time employees, of whom 39 are employed by Bridgeline Software
Pvt.
Ltd., our software development center in India. We have no unionized
employees. The full-time employees include 84 that are in Web
application/product development, 10 in sales and marketing, and 17 in
general and administrative departments. We consider our relations with
our
employees, independent contractors and vendors to be good.
Legal
Proceedings
In
the
normal course of business, we are subject to ordinary routine litigation
and
claims incidental to our business. We monitor and assess the merits and
risks of
pending legal proceedings. While the results of litigation and claims
cannot be
predicted with certainty, based upon our current assessment, we believe
that the
final outcome of any existing legal proceeding will not have a materially
adverse effect, individually or in the aggregate, on our consolidated
results of
operations or financial condition.
Alt.
60
MANAGEMENT
The following table sets forth information regarding our directors and
executive
officers:
|
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
|
|
Thomas
Massie
|
|
45
|
|
Chairman,
Chief Executive Officer and President
|
|
|
|
|
|
|
|
William
Coldrick
|
|
65
|
|
Director
(1)(2)(3)(4)
|
|
|
|
|
|
|
|
Kenneth
Galaznik
|
|
55
|
|
Director
(1)(3)(4)
|
|
|
|
|
|
|
|
Robert
Hegarty
|
|
44
|
|
Director(1)(2)(3)(4)
|
|
|
|
|
|
|
|
Gary
Cebula
|
|
48
|
|
Executive
Vice President, Treasurer, Corporate Secretary and Chief
Financial
Officer
|
|
|
|
|
|
|
|
Brett
Zucker
|
|
35
|
|
Executive
Vice President and Chief Technical
Officer
|
|
(1)
|
Member
of the Audit Committee.
|
|
(2)
|
Member
of the Compensation Committee.
|
|
(3)
|
Member
of the Nominating and Governance Committee.
|
|
(4)
|
Independent
director.
|
The
following table sets forth information regarding certain of our key
employees:
|
Michael
Matteo
|
|
42
|
|
Executive
Vice President & General Manager, New York
|
|
|
|
|
|
|
|
Michelle
Chambers
|
|
49
|
|
Executive
Vice President and General Manager, New England
|
|
Erez
Katz
|
—
|
Executive
Vice President and General Manager, Atlanta
|
||
|
|
|
|
|
|
|
Babu
Subramanian
|
|
50
|
|
Executive
Vice President and General Manager, Bridgeline India
|
|
|
|
|
|
|
|
Miles
Fawcett
|
|
37
|
|
President
of iapps®
|
|
|
|
|
|
|
|
Peter
“Pip” Winslow
|
|
47
|
|
Executive
Vice President of Human Resources
|
|
|
|
|
|
|
|
Donna
Tramontozzi
|
|
53
|
|
Executive
Vice President of Business Strategy
|
|
|
|
|
|
|
|
Robert
Seeger
|
|
33
|
|
Senior
Vice President of Business Development, New York
|
|
|
|
|
|
|
|
David
Goldsmith
|
|
45
|
|
Vice
President of Business Development,
iapps
|
Alt.
61
|
|
|
|
|
|
|
Jenny
Quinn
|
|
43
|
|
Senior
Vice President of Business Development, New England
|
|
|
|
|
|
|
|
William
Matteson
|
|
61
|
|
Vice
President of Merger
Integration
|
Board
of Directors
Our
Board
of Directors oversees our business affairs and monitors the performance
of our
management. Our Board of Directors currently consists of four members
who are
divided into three classes. Each year shareholders elect the members
of one of
the three classes to three year staggered terms. The terms of our Class I
Director (Mr. Hegarty), Class II Director (Mr. Galaznik) and
Class III Directors (Messrs. Massie and Coldrick) expire in 2007, 2008 and
2009, respectively. Each director and executive officer will hold office
until
his successor is duly elected and qualified, until his resignation or
until he
shall be removed in the manner provided by our Amended and Restated By-laws.
All
officers serve at the discretion of the Board and are elected annually
at the
annual meeting of our Board held after each annual meeting of shareholders.
Our
Board of directors has determined that all directors (other than Mr.
Massie) are
independent as defined under the rules of the Nasdaq Stock
Market.
Below
are
descriptions of the backgrounds of our executive officers and directors
and
their principal occupation for at least the last five years:
Thomas
Massie Mr. Massie has served as our Chairman, President and Chief
Executive Officer since our inception in late 2000. Prior
to founding Bridgeline, Mr. Massie founded and took public two technology
companies. From 1991 to 2000, Mr. Massie was the founder, Chairman of
the Board
and Chief Executive Officer of Focus Enhancements, a publicly held developer
of
proprietary video conversion ASIC chip technology that had global distribution
and technology alliances with companies such as Intel, Microsoft, Apple
Computer, Thompson, Philips, SONY, Nokia, and Zenith. Mr. Massie led
Focus
Enhancements from concept to a public market capitalization of $230 million.
From 1986 to 1991, Mr. Massie was the founder and Chairman of the Board
of Mass
Microsystems, a publicly held developer of proprietary multimedia products.
Mr.
Massie led Mass Microsystems from inception to a public market capitalization
in
excess of $75 million. Since 2002, Mr. Massie has been a member of the
Board of
Directors of MapInfo Corporation, a publicly held global company that
develops
location intelligence software solutions, for which he is the Chairman
of its
Corporate Governance Committee and a member of its Audit and Compensation
Committees. From 1997 to 2005, Mr. Massie was a co-owner and a member
of the
Board of Directors of The Hockey Academy, a private hockey-program management
company. Mr. Massie was a decorated non-commissioned officer in the U.S.
Army,
101st Airborne Division.
William
Coldrick Mr. Coldrick has served as a Director since our inception.
He
is also a principal of Enterprise Development Partners, a consulting
firm he
founded in 1998 that serves emerging growth companies. Since 1993, Mr.
Coldrick
has served as Vice Chairman of the Board of Focus Enhancements. Since
1996 he
has been a director of Advanced Electronics Support Products. From 1996
to 1998,
he was Vice President and General Manager of Worldwide Channel Operations
for
the Computer Systems Division of Unisys Corp. From 1982 to 1991, Mr.
Coldrick
held several senior management positions at Apple Computer. In his last
position
at Apple as Senior Vice President of U.S. Sales, he was responsible for
managing
all sales, support, service, distribution and channel activities for
the United
States. Before joining Apple, Mr. Coldrick spent fourteen years with
Honeywell
Information Systems, where he held several positions, including regional
marketing director. He holds a B.A. degree in marketing from Iona College
in New
Rochelle, New York.
Kenneth
Galaznik Mr. Galaznik began serving as a Director in August 2006. Since
February 2005, Mr. Galaznik has been the Senior Vice President, Chief
Financial
Officer and Treasurer of American Science and Engineering, Inc., a publicly
held
supplier of X-ray inspection and screening systems. From November 2001
until
August 2002, he was self-employed as a consultant. From August 2002 until
February 2005, Mr. Galaznik was Vice President of Finance of American
Science
and Engineering, Inc. Prior to joining that company, from March 1999
to
September 2001, he served as Vice President of Finance at Spectro Analytical
Instruments, Inc. and has more than 25 years of experience in accounting
and
finance positions in
Alt.
62
manufacturing
and real estate development entities. Mr. Galaznik holds a B.B.A. degree
in
accounting from The University of Houston.
Robert
Hegarty Mr.
Hegarty began serving as a Director in September 2006. Since 1999, Mr.
Hegarty
has been Managing Director of TowerGroup Securities & Investments Group, a
capital markets and investment and wealth management firm owned by MasterCard
International. Before joining TowerGroup in 1999, Mr. Hegarty was vice
president
of trading systems at Putnam Investments in Boston, Massachusetts and
was
employed by Fidelity Investments in
Boston for eight years,
during which he served as vice president of technology of the institutional
broker-dealer arm of Fidelity Investments and Fidelity Capital Markets.
Mr.
Hegarty holds an M.B.A. degree in finance and marketing from Babson College
and
a B.S. degree in computer science from North Adams State
College.
Gary
Cebula Mr. Cebula has served as our Executive Vice President, Chief
Financial Officer, Treasurer, and Corporate
Secretary since our inception. From 1998 to 2000, Mr.
Cebula was Vice President of Finance, Administration and Treasurer of
Focus
Enhancements, a publicly held developer of proprietary video conversion
ASIC
chip technology that had global distribution and technology alliances
with
companies such as Intel, Microsoft, Apple Computer, Thompson, Philips,
SONY,
Nokia, and Zenith. Mr. Cebula was a key contributor to Focus’ strategic
initiatives, spurring a market capitalization growth from $45 million
to $230
million during his tenure. Focus merged with Silicon Valley-based Videonics
in
2000. From 1996 to 1998, Mr. Cebula was Chief Financial Officer of Hanold
Holding Corporation, a manufacturer and distributor of educational products
and
services. From 1986 to 1996 he was Corporate Controller of Continental
Resources, then a $125 million value-added reseller of computer peripherals
and
system integration services. A graduate of General Electric’s Financial
Management Program, Mr. Cebula earned a B.S. degree in accounting and
an M.S.
degree in taxation from Bentley College.
Brett
Zucker Mr. Zucker was the Director of Development and Delivery for
Lead
Dog Digital, Inc., a custom Web development company we acquired in February
2002, and has served as our Executive Vice President and General Manager,
New
York, and since January 1, 2006, as our Chief Technical Officer. Prior
to
joining Lead Dog Digital in September 2000, Mr. Zucker served as Senior
Producer
at AppNet, where he was responsible for managing a team of project managers
working on a wide range of custom development projects. Mr. Zucker holds
a B.S.
degree in Electrical Engineering from Cornell University and an M.B.A.
degree
from Harvard Business School.
Below
are
descriptions of the backgrounds of certain of our key employees:
Michael
Matteo Mr. Matteo has served as our Executive Vice President and
General Manager for our New York region since September 2006. From our
February
2002 acquisition of Lead Dog Digital to April 2005, Mr. Matteo served
as our
Senior Vice President, operating out of our New York City office. In
addition,
Mr. Matteo was a member of our Board of Directors from February 2002
until
December 2006. From May 2005 until October 2006, Mr. Matteo was the Chief
Operating Officer of Telecom Infrastructure Corp., a privately held firm
headquartered in New York City. Prior to our February 2002 acquisition,
Mr.
Matteo served as Lead Dog Digital’s Chief Executive Officer. Prior to joining
Lead Dog Digital, most of Mr. Matteo’s career was spent working for AT&T in
strategy, development, deployment and maintenance of complex information
systems. Mr. Matteo earned an M.B.A. degree from the Wharton Business
School and
a B.A. degree in both Computer Science and Management Science from the
State
University of New York.
Michelle
Chambers Ms. Chambers has served as our Executive Vice President and
General Manager for the New England region since April 2006. Prior to
joining
our company, Ms. Chambers was President and co-founder of New Tilt, a
Web
application development and Internet strategy company, where she was
responsible
for sales and marketing as well as the strategic direction of the company.
We
acquired New Tilt in April 2006. Ms. Chambers earned a B.A. degree in
Journalism
and English from Michigan State University.
Babu
Subramanian Mr. Subramanian has served as our Executive Vice President
and General Manager of our Bridgeline Software, Pvt. Ltd. subsidiary
in
Bangalore, India since 2006. Prior to joining Bridgeline, Mr. Subramanian
was
the co-founder and Managing Director of Merindus, the Indian arm of Indus
Consultancy Services, NJ from 2002 until 2006. Prior to joining Merindus,
from
2000 until 2002 Mr. Subramanian was Director-
Alt.
63
Projects
in Lisle Technology Partners, Bangalore, India, where he was responsible
for
building technology for companies in the United States and India. Prior
to
joining Lisle, from 1998 until 2000 Mr. Subramanian was Group Head in
Sonata
Software Limited, Bangalore, where he was responsible for delivery of
projects
in Groupware, Mobile computing and eBusiness. Prior to Sonata, Mr. Subramanian
was Center Head of the India center of the Netherlands-based Wisdom Information
Consultants, which specialized in Internet and intranet applications.
Mr.
Subramanian holds a Master of Technology degree with specialization in
Computer
Science from Indian Institute of Science in Bangalore, India and a Bachelor
of
Engineering degree in Electronics and Communication from Regional Engineering
College, now known as National Institute of Technology, in Tiruchirappalli,
India.
Miles
Fawcett Miles Fawcett founded Interactive Applications Group, Inc.
(iapps®)
in
1994, a company which develops and offers nonprofit organizations a new
generation of communication tools, and which we acquired in 2004. As
President
of our iapps division, Mr. Fawcett oversees its direction, including
strategic
planning, and operational management. In addition Mr. Fawcett is a member
of our
Executive Committee and Product Development Committee. Mr. Fawcett serves
on the
board of Men Can Stop Rape and is a judge in the Nonprofit and Government
category for the Computerworld Smithsonian Awards. Mr. Fawcett graduated
from
the Park School of Communications at Ithaca College, and served two years
on the
faculty of American University Graduate School of Communications.
Peter
Winslow Mr. Winslow is our Executive Vice President of Human Resources.
From 2003 to July 2006, Mr. Winslow was our Vice President of Marketing.
From
2001 to 2003 Mr. Winslow was a principal of Top Gun Arena Management,
Inc., a
sports facility development and management company. From 1990 to 2001
Mr.
Winslow was the New England Regional Business Manager for The Orvis Company,
Inc. Mr. Winslow graduated from the School for the Museum of Fine Arts
and holds
a B.A. degree from Tufts University.
Donna
Tramontozzi Ms. Tramontozzi is our Executive Vice President of Business
Strategy. Prior to joining our company, Ms. Tramontozzi was co-founder
and Chief
Strategy Officer of New Tilt, where she was responsible for providing
vision and
thought leadership to the planning, design and delivery teams. We acquired
New
Tilt April 2006. Ms. Tramontozzi received a B.A. degree in English and
Secondary
Education from Boston College.
Robert
Seeger Mr. Seeger is Senior Vice President of Business Development
for
our New York region. Mr. Seeger was the Vice President of Business Development
for Lead Dog Digital, a custom Web development company that we acquired
in
February 2002. Prior to joining Lead Dog Digital, Mr. Seeger worked for
Western
Industries, Inc. where he was commissioned with opening their New York
Office.
Mr. Seeger is a graduate of Rutgers University where he majored in Business
and
was captain of The Rutgers University football team.
David
Goldsmith As Vice President of Business Development for our iapps
division, Mr. Goldsmith oversees iapps’ business strategy, including business
development and strategic partnerships. Mr. Goldsmith also consults with
iapps
customers on knowledge management, community building and online communications
strategies. Mr. Goldsmith joined iapps in April 1997 after seven years
with
HandsNet, the first online network in the United States designed exclusively
for
nonprofit organizations working on issues of social and economic justice.
Mr.
Goldsmith holds a B.A. degree in Political Ecology from Huxley College
of
Environmental Studies at Western Washington University.
Jenny
Quinn Ms. Quinn is Senior Vice President of Business Development,
for
our New England region. Ms. Quinn has over 20 years experience as an
account
manager or sales executive for technology solutions and services firms.
Prior to
joining our company, Ms. Quinn was responsible for New Tilt’s business
development. We acquired New Tilt in April 2006. Ms. Quinn holds a B.A.
degree
from Dartmouth College.
William
Matteson Mr. Matteson is our Vice President of Merger Integration, and
is responsible for the integration of new companies that we acquire.
Prior to
his current position, he was our Vice President of Business Development
for New
England, having joined our company at its inception. From 1995 to 2000,
Mr.
Matteson was President, chief executive officer and co-founder of Streamline
Communications, a Boston-based Web development company that we acquired
in 2000.
Mr. Matteson received a B.A. degree in English from Brown
University.
Alt.
64
All
of
our executive officers and key employees devote their full-time attention
to our
business. No director or executive officer is related to any other of
our
directors or executive officers, and there are no arrangements or understandings
between a director and any other person that such person will be elected
as a
director. There are no material proceedings to which any director, director
nominee, executive officer or affiliate of our company, any owner of
record or
beneficially of more than five percent of any class of voting securities
of our
subsidiaries or our company, or any associate of any such director, officer,
affiliate or security holder is a party adverse to us.
Directors’
and Officers’ Insurance
Though
we
do not maintain directors’ and officers’ liability insurance as of the date of
this prospectus, we expect to obtain such a policy, with limits of
$3 million, shortly after the completion of this offering.
Board
Committees
Our
Board
has designated three standing committees: the Audit Committee, the Compensation
Committee and the Nominating and Governance Committee.
Audit
Committee. The Audit Committee assists the Board in the oversight of the
audit of our consolidated financial statements and the quality and integrity
of
its accounting, auditing and financial reporting processes. The Audit
Committee
is responsible for making recommendations to the Board concerning the
selection
and engagement of independent registered public accountants and for reviewing
the scope of the annual audit, audit fees, results of the audit and auditor
independence. The Audit Committee also reviews and discusses with management
and
the Board such matters as accounting policies, internal accounting controls
and
procedures for preparation of financial statements. Our Audit Committee
is
comprised of Messrs. Galaznik (Chair), Coldrick and Hegarty. Our Board
has
determined that each of the members of the Audit Committee meets the
criteria
for independence under the standards provided by the Nasdaq Stock Market.
A copy
of the Audit Committee Charter is filed as an exhibit to the registration
statement of which this prospectus is a part.
Audit
Committee Financial Expert. Our Board has also determined that
Mr. Galaznik qualifies as an “audit committee financial expert” as defined
under Item 407(d)(5) of Regulation S-B. Mr. Galaznik is
“independent” under Rule 10A-3 under the Securities Act. A copy of the
Audit Committee Charter is filed as an exhibit to the registration statement
of
which this prospectus is a part.
Compensation
Committee. The Compensation Committee evaluates the performance of our
senior executives, considers the design and competitiveness of our compensation
plans, reviews and approves senior executive compensation and administers
our
equity compensation plans. In addition, the Committee also conducts reviews
of
executive compensation to ensure compliance with Section 162(m) of the
Internal Revenue Code of 1986, as amended. Our Compensation Committee
is
comprised of Messrs. Hegarty (Chair) and Coldrick, both of whom are independent
directors. A copy of the Compensation Committee Charter is filed as an
exhibit
to the registration statement of which this prospectus is a part.
Nominating
and Governance Committee. The Nominating and Governance Committee
identifies candidates for future Board membership and proposes criteria
for
Board candidates and candidates to fill Board vacancies, as well as a
slate of
directors for election by the shareholders at each annual meeting. The
Nominating and Governance Committee also annually assesses and reports
to the
Board on Board and Board Committee performance and effectiveness and
reviews and
makes recommendations to the Board concerning the composition, size and
structure of the Board and its committees. Messrs. Coldrick (Chair),
Galaznik
and Hegarty, all of whom are independent directors, are the members of the
Nominating and Governance Committee. A copy of
the Nominating and Governance Committee Charter is filed as an exhibit to
the registration statement of which this prospectus is a part.
Code
of Ethics
Our
Board
has adopted a Code of Ethics within the meaning of Item 406(b) of
Regulation S-B of the Securities Act that applies to all of our officers
and employees, including our principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing
similar functions. Our Code of Ethics
Alt.
65
codifies
the business and ethical principles that govern our business. A copy
of the Code
of Ethics is filed as an exhibit to the registration statement of which
this
prospectus is a part.
The
Code
of Ethics is designed to deter wrongdoing and to promote:
|
·
|
Honest
and ethical conduct, including the ethical handling of actual
or apparent
conflicts of interest between personal and professional
relationships;
|
|
·
|
Full,
fair, accurate, timely, and understandable disclosure in reports
and
documents that we file with, or submit to, the SEC and in other
public
communications made by us;
|
|
·
|
Compliance
with applicable governmental laws, rules and
regulations;
|
|
·
|
The
prompt internal reporting of violations of the ethics code
to an
appropriate person or persons identified in the
code; and
|
|
·
|
Accountability
for adherence to the Code of
Ethics.
|
Compensation
Committee Interlocks and Insider
Participation
None
of
our executive officers served:
|
·
|
as
a member of the compensation committee of another entity which
has had an
executive officer who has served on our compensation
committee;
|
|
·
|
as
a director of another entity which has had an executive officer
who has
served on our compensation
committee; or
|
|
·
|
as
a member of the compensation committee of another entity which
has had an
executive officer who has served as one of our
directors.
|
Underwriters’
Board Rights
Pursuant
to the underwriting agreement relating to our initial public offering,
we agreed, for a period of no less than two years, to engage a
designee of the representative of the underwriters, mutually agreed
upon by us
and the underwriters, as an advisor to the Board. This advisor may
attend Board
meetings, receive all notices and other correspondence and communications
sent
by us to members of our Board and receive compensation equal to the
highest
compensation of our non-employee directors, excluding the chairs of
our standing
committees. In addition, the advisor is entitled to receive reimbursement
for
all costs incurred in attending Board or committee meetings including
food,
lodging and transportation. The advisor will have none of the duties,
rights or
powers of a director. Stephan Stein, Chief Operating Officer of Joseph
Gunnar
& Co., LLC, has been appointed as the designee.
Director
Compensation
In
the
last fiscal year, none of our existing directors were compensated for
their
Board service.
Our
Board
recently adopted the following compensation policy for our non-management
directors:
Stock
Grants. Outside directors will each receive annual grants of options to
purchase 10,000 shares of our common stock at an exercise price equal
to the
fair market value of the shares on the date of grant. The options will
be
granted in each year on the date of the annual meeting of stockholders.
The
options shall vest over three years in equal installments on the anniversary
of
grant. Each of the two new directors received options to purchase 25,000
shares
of our common stock at $3.75 per share upon election to the Board.
Cash
Compensation. Each outside directors will be compensated $1,500 for
each meeting such director attends, whether in person or by telephone
conference
call.
Committee
Chair Bonus. The Chair of our Audit Committee will receive an additional
annual fee of $5,000. The Chairs of our Compensation Committee and Nominating
and Corporate Governance Committee will each receive an
Alt.
66
additional
annual fee of $2,500. These fees will be payable in lump sums in advance.
Other
directors who serve on our standing committees will not receive additional
compensation for their committee services.
Travel
Expenses. All directors will be reimbursed for their reasonable out of
pocket expenses associated with attending meetings. For domestic travel,
only
coach airfare will be reimbursed; for international travel we will reimburse
for
business class.
Indemnification
and Limitation of Director and Officer Liability
Our
organizational documents contain provisions indemnifying our directors
and
officers to the fullest extent permitted by law.
In
addition, as permitted by Delaware law, our Amended and Restated Certificate
of
Incorporation provides that no director will be liable to us or our
shareholders for monetary damages for breach of certain fiduciary duties
as a
director. The effect of this provision will be to restrict our rights
and the
rights of our shareholders in derivative suits to recover monetary
damages
against a director for breach of certain fiduciary duties as a director,
except
that a director will be personally liable for:
|
·
|
any
breach of the director’s duty of loyalty to us or our
shareholders;
|
|
·
|
acts
or omissions not in good faith or which involve intentional misconduct
or
a knowing violation of law;
|
|
·
|
the
payment of dividends or the redemption or purchase of stock in
violation
of Delaware law; or
|
|
·
|
any
transaction from which the director derived an improper personal
benefit.
|
At
present, there is no pending litigation or proceeding involving any of
our
directors, officers, employees or agents where indemnification will be
required
under Delaware law. We are not aware of any threatened litigation or proceeding
that might result in a claim for such indemnification.
Commission
Position on Indemnification for Securities Act Liabilities
Insofar
as indemnification for liabilities arising under the Securities Act may
be
permitted to our directors, officers and controlling persons pursuant to
the
foregoing provisions, or otherwise, we have been advised that in the opinion
of
the Securities and Exchange Commission such indemnification is against
public
policy as expressed in the Securities Act and is, therefore,
unenforceable.
Alt.
67
EXECUTIVE
COMPENSATION
The
following table and discussions summarize all plan and non-plan compensation
earned by or paid to our Chief Executive Officer and our three other most
highly
compensated executive officers for our last three completed fiscal years
(the
“named executive officers”).
SUMMARY
COMPENSATION TABLE
|
Long
Term Compensation
|
|||||||||||||||||||||
|
Annual
Compensation
|
Awards
|
||||||||||||||||||||
|
Restricted
|
Securities | ||||||||||||||||||||
|
Other
Annual
|
Stock
|
Underlying | |||||||||||||||||||
|
Salary
|
Bonus
|
Compensation
|
Award(s)
|
Options/SARs | |||||||||||||||||
|
Name
and Principal Position
|
Year
|
($)
|
($)
|
($)
|
($)
|
($)
|
|||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
|
Thomas
Massie
|
2006
|
150,000
|
50,000
|
20,272
|
(1) |
|
|||||||||||||||
|
|
2005
|
150,000
|
76,333
|
24,242
|
(1) |
|
|||||||||||||||
|
|
2004
|
123,167
|
15,000
|
12,121
|
(1) |
|
|||||||||||||||
|
Gary
Cebula
|
2006
|
122,083
|
45,000
|
|
|||||||||||||||||
|
|
2005
|
120,000
|
10,000
|
100,000
|
|||||||||||||||||
|
|
2004
|
123,167
|
20,000
|
||||||||||||||||||
|
Brett
Zucker
|
2006
|
144,000
|
52,000
|
||||||||||||||||||
|
|
2005
|
133,358
|
21,366
|
100,000
|
|||||||||||||||||
|
|
2004
|
125,716
|
69,419
|
||||||||||||||||||
|
Robert
Seeger
|
2006
|
119,375
|
254,085
|
||||||||||||||||||
|
|
2005
|
123,333
|
157,748
|
50,000
|
|||||||||||||||||
|
|
2004
|
101,375
|
212,290
|
||||||||||||||||||
|
(1)
Represents life insurance premiums.
|
No
executive officer received perquisites or other personal benefits which,
in the
aggregate, exceeded the lesser of either $50,000 or 10% of the total of
annual
salary and bonus paid during the fiscal year.
The
following table summarizes information related to grants of stock options
(whether or not in tandem with Stock Appreciation Rights (“SARs”)) and
freestanding SARs made during the fiscal year ended September 30, 2006
to each
of the named executive officers specified below:
OPTIONS/
SAR GRANTS IN THE LAST FISCAL YEAR
(INDIVIDUAL
GRANTS)
|
Name
|
Number
of
Securities
Underlying
Options/SARs
Granted
|
%
of Total
Options/SARs
Granted
to
Employees
in
Fiscal
Year
|
Exercise
or
Base
Price
($/Share)
|
Expiration
Date
|
||||||||||||
|
Thomas
Massie
|
—
|
—
|
—
|
—
|
||||||||||||
|
Gary
Cebula
|
100,000
|
24.4
|
$ |
3.75
|
06/01/15
|
|||||||||||
|
Brett
Zucker
|
100,000
|
24.4
|
$ |
3.75
|
06/01/15
|
|||||||||||
|
Robert
Seeger
|
50,000
|
12.2
|
$ |
3.75
|
06/01/15
|
|||||||||||
Alt.
68
The
following table sets forth certain information concerning the number and
value
of unexercised options held by each of the named executive officers at
September
30, 2006.
AGGREGATED
OPTION EXERCISES IN LAST FISCAL YEAR AND OPTION VALUES
|
|
|
Value
of Unexercised
|
||||||||||||||
|
|
Number
of Securities Underlying
|
“in
the Money”
|
||||||||||||||
|
|
Unexercised
Options at
|
Options
at
|
||||||||||||||
|
|
September
30, 2006
|
September
30, 2006 (1)
|
||||||||||||||
|
|
Exercisable
|
Unexercisable
|
Exercisable
|
Unexercisable
|
||||||||||||
|
Thomas
Massie
|
40,000
|
—
|
$ |
119,981
|
$ |
-
0
-
|
||||||||||
|
Gary
Cebula
|
65,000
|
66,667
|
$ |
157,481
|
$ |
116,667
|
||||||||||
|
Brett
Zucker
|
82,283
|
66,667
|
$ |
225,410
|
$ |
116,667
|
||||||||||
|
Robert
Seeger
|
68,164
|
33,333
|
$ |
197,390
|
$ |
58,333
|
||||||||||
|
(1)
|
Options
are “in the money” if the market value of the shares covered thereby is
greater than the option exercise price. There was no public trading
market
for our common stock as of September 30, 2006. The value of unexercised
“in the money” options at September 30, 2006 are determined by multiplying
the number of shares underlying the options by the difference
between the
initial public offering price of $5.50 per share and the per
share option
exercise price.
|
Employment
Agreements, Termination of Employment and Change-In-Control
Arrangements
Thomas
Massie
We
have
entered into an employment agreement with Thomas Massie, our Chief Executive
Officer, to provide executive management services. The agreement had an
initial
term of three years commencing on October 1, 2001 and was renewed in 2004
for
another three-year term. The term of the agreement is automatically extended
so
that it always has an effective period of three years. For all services
rendered
to us, Mr. Massie is compensated in the form of initial base salary in
the
amount of $150,000 and an annual contingent bonus of at least $50,000,
payable
based upon goals mutually agreed upon by Mr. Massie and our Board of Directors.
Both the annual salary and bonus are subject to periodic review and adjustment
by our Board.
This
agreement may be terminated by (i) us, in the event of Mr. Massie’s death,
resignation, retirement or disability, or for or without cause, or (ii)
Mr.
Massie for good reason. In the event that Mr. Massie is terminated by us
without
cause or Mr. Massie resigns for good reason, he is entitled to receive
severance
payments equal to the greater of: (a) three years’ total compensation, including
bonus amounts, or (b) $1 million.
Named
Executive Officers and Key Employees
We
have
entered into an employment agreement with each of our named executive officers
and certain of our key employees, each for an initial term of one year.
The term
of each agreement automatically renews for successive periods of one year
each
unless terminated under the agreement. Each agreement sets forth the officer’s
or employee’s initial base salary and annual contingent bonus.
Each
agreement may be terminated by (i) us, in the event of the officer’s or
employee’s death, resignation, retirement, or disability, or for or without
cause, or (ii) by the officer officer’s or employee for good reason. Except
in the case of Erez Katz, the former owner of Objectware, in the event that
the officer or employee is terminated by us without cause or if the officer
or
employee terminates his employment for good reason, he is entitled to
receive
severance payments equal to six months’ salary plus the quarterly bonus paid to
him for the two quarters immediately prior to the termination. In the
event that
Mr. Katz’ employment is terminated by us without cause or if Mr. Katz terminates
his employment for good reason, (i) prior to the completion of three
years from
the initial date of the employment agreement, he is entitled to a severance
payment of $750,000, or (ii) after the completion of three years from
the
initial date of the employment agreement, he is entitled to receive severance
payments equal to twelve months’ salary plus the quarterly bonus paid to him for
the four quarters immediately prior to the termination.
Alt.
69
Each
of
these employment agreements also contains non-competition, confidentiality,
indemnification and other terms and provisions customary for agreements
of this
nature. The foregoing is a summary of the material terms and provisions
of the
employment agreements with our named executive officers and key employee’s.
Copies of the agreements with our named executive officers are filed as
exhibits
to the registration statement of which this prospectus is a part.
Amended
and Restated Stock Incentive Plan
Our
Amended and Restated Stock Incentive Plan, originally adopted in 2000 and
amended and restated in August 2006, allows us to grant options and other
forms
of stock-based compensation to our officers, directors, employees and outside
consultants and advisors. We have developed this Plan to align the interests
of
(i) employees, (ii) non-employee Board members, and
(iii) consultants and key advisors with the interests of our shareholders
and to provide incentives for these persons to exert maximum efforts for
our
success and to encourage them to contribute materially to our
growth.
The
Plan
is not subject to the provisions of the Employment Retirement Income Security
Act, as amended (“ERISA”), and is not a “qualified plan” within the meaning of
Section 401 of the Internal Revenue Code, as amended (the “Code”). The Plan
is administered by our Compensation Committee which has exclusive discretion
to
select the participants who will receive awards under the Plan and to determine
the type, size and terms of each award.
Shares
Subject to the Plan. We may issue up to 1,400,000 shares under the
Plan, subject to adjustment to prevent dilution from stock dividends, stock
splits, recapitalization or similar transactions.
Administration
of the Plan. The Plan is administered by the Compensation Committee. Except
for certain non-discretionary option grants to certain of our directors
described below, the Compensation Committee selects the individuals to
whom
options and awards are granted and determines the option exercise price
and
other terms of each award, subject to the provisions of the Plan.
Awards
under the Plan. Under the Plan, the Compensation Committee may grant awards
in the form of incentive stock options, as defined in Section 422 of the
Code, options which do not so qualify, stock awards, performance share
awards
and stock appreciation rights.
Alt.
70
Options.
The duration of any option shall be within the sole discretion of the
Compensation Committee; provided, however, that any incentive stock option
granted to a 10% or less stockholder or any nonqualified stock option shall,
by
its terms, be exercised within 10 years after the date the option is
granted and any incentive stock option granted to a greater than 10% stockholder
shall, by its terms, be exercised within five years after the date the
option is
granted. The exercise price of all options will be determined by the
Compensation Committee; provided, however, that the exercise price of an
option
(including incentive stock options or nonqualified stock options) will
be equal
to, or greater than, the fair market value of a share of our stock on the
date
the option is granted and further provided that incentive stock options
may not
be granted to an employee who, at the time of grant, owns stock possessing
more
than 10% of the total combined voting power of all classes of our stock
or any
parent or subsidiary, as defined in section 424 of the Code, unless the
price per share is not less than 110% of the fair market value of our stock
on
the date of grant.
The
Plan
provides that each director who is not an employee of Bridgeline, on the
date of
each annual meeting or special meeting in lieu thereof, shall automatically
receive a grant of a non-statutory option for the purchase of 10,000 shares
of
Common Stock. Such option shall vest over three years on the anniversary
of the
date of grant at a rate of 33.33% per year until fully vested.
Termination
of Employment. Unless the Compensation
Committee provides otherwise in the terms of an option agreement, if the
employment or service of a participant is terminated, options granted to
such
participant prior to August 18, 2006 will immediately cease to be exercisable
and any options granted after that date will cease to be exercisable (i)
immediately if the participant’s employment or service is terminated for cause
or (ii) up to three (3) months after the participant’s employment or service is
terminated without cause.
Termination
or Amendment of the Plan. Our Board of Directors may at any time terminate
the Plan or make such amendments thereto as it deems advisable, without
action
on the part of our shareholders unless their approval is required under
the law.
However, no termination or amendment will, without the consent of the individual
to whom any option has been granted, affect or impair the rights of such
individual. Under Section 422(b)(2) of the Code, no incentive stock option
may be granted under the Plan more than ten years from the date the Plan
was
amended and restated or the date such amendment and restatement was approved
by
our shareholders, whichever is earlier.
Lead
Dog Digital, Inc. 2001 Stock Option Plan
As
part
of our acquisition of Lead Dog Digital, Inc. in February 2002, we assumed
the
Lead Dog Digital, Inc. 2001 Stock Option Plan. There are currently options
to
purchase a total of 98,731 shares of our common stock outstanding under
this
plan. We are not granting new options under this plan.
The
Lead
Dog Digital plan is not subject to the provisions of ERISA and is not a
“qualified plan” within the meaning of Section 401 of the Code. The plan is
administered by our Compensation Committee which has exclusive discretion
to
select the participants who will receive awards under the plan and to determine
the type, size and terms of each award.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Loan
Agreements
All
future affiliated transactions and loans entered into will be on terms
that are
no less favorable to us than were obtained from unaffiliated third parties.
In
addition, a majority of all disinterested and independent directors will
approve
future affiliated transactions and loans, and any forgiveness of such
loans.
In
September 2002, we issued two convertible term notes to Thomas Massie,
our
President and Chief Executive Officer, in the aggregate principal amount
of
$312,000, pursuant to which we borrowed money from Mr. Massie from time
to time.
Our obligations under these notes were terminated as of September 7, 2006,
and
we have no
Alt.
71
further
obligations to Mr. Massie under these notes. A security agreement pursuant
to which we granted Mr. Massie a security interest in certain assets to
secure
repayment of these notes has also been terminated.
Participation
in Private Placement
Mr.
Massie and Mr. Coldrick each purchased one unit in our April 2006 private
placement for $100,000. Mr. Seeger purchased one-half of one unit in our
April
2006 private placement for $50,000. The terms of these transactions were
identical to the terms on which all other investors participated.
Based
on
its services as placement agent for our April 2006 private placement, Joseph
Gunnar & Co., LLC (“Gunnar”) received the cash and equity compensation
described below:
|
Private
Placement
|
Cash
Fee
|
Number
of
Warrants
|
Exercise
Price
|
|||||||||
|
April
2006 Private Placement
|
$ | 280,000 | (1) |
112,000
|
$ |
(2)
|
||||||
|
(1)
|
Does
not include amounts paid by us to Gunnar as reimbursement for
out-of-pocket expenses in connection with the 2006 private placement
or
for fees of Gunnar’s counsel.
|
|
(2)
|
Exercise
price is equal to the offering price of our common stock in this
offering.
|
We
have
entered into a Business Combination Services Agreement effective October
1, 2005
with Gunnar, pursuant to which Gunnar provides us with certain advisory
services
concerning potential acquisitions and transactions. The term of the agreement
is
for one year with automatic one-year renewals until either party elects
not to
renew and provides 90 days’ written notice prior to the commencement of the next
renewal period or after the consummation of two business combinations during
any
term. During the term and any renewal periods, we are required to pay cash
advances against success fees in the initial amount of $7,500 per month,
which
amount increased to $10,000 per month in May 2006, and will increase to
$15,000
per month upon the completion of this offering. As compensation for its
services, we are obligated to pay Gunnar, at the closing of a business
combination (i.e., a merger, acquisition, sale or joint venture), a
success fee equal to six percent of the total value of all cash, securities
or
other property paid in connection with the transaction. The success fee
for each
business combination consummated during the initial term or a renewal period
is
a minimum of $125,000 and a maximum of $375,000, net of the cash advances
paid
to Gunnar during the applicable period. We are also obligated to reimburse
Gunnar for reasonable expenses incurred in connection with providing the
advisory services. This agreement also contains exclusivity, indemnification
and
other terms and provisions customary for agreements of this nature. The
foregoing is a summary of the material terms and provisions of this agreement,
a
copy of which is filed as an exhibit to the registration statement of which
this
prospectus is a part.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The
following table sets forth as of February 1, 2007, the beneficial ownership
of
our common stock, as adjusted for this offering, by (i) each person or
group of persons known to us to beneficially own more than 5% of the outstanding
shares of our common stock, (ii) each of our directors and named executive
officers and (iii) all of our executive officers and directors as a
group.
Except
as
indicated in the footnotes to the table below, each shareholder named in
the
table has sole voting and investment power with respect to the shares shown
as
beneficially owned by such shareholder.
Beneficial
ownership is determined in accordance with Rule 13d-3 under the Securities
Exchange Act of 1934, as amended. In computing the number of shares beneficially
owned by a person or a group and the percentage ownership of that person
or
group, shares of our common stock subject to options or warrants currently
exercisable or exercisable within 60 days after February 1, 2007 are deemed
outstanding, but are not deemed outstanding for the purpose of computing
the
percentage ownership of any other person. The following table assumes (i)
7,273,833 shares of common stock are outstanding after closing of this
offering
based on shares of our common stock
Alt.
72
outstanding
as of the date of this prospectus as calculated above, and (ii) no exercise
of the over-allotment option. Unless otherwise indicated, the address of
each
individual named below is our address, 10 Sixth Road, Woburn, Massachusetts
01801.
|
|
Number
of
Shares
|
Percentage
of
Outstanding
Shares Owned
|
|||||||||||
|
|
of
Common
Stock
|
|
|
||||||||||
|
Name
and Address of
Beneficial
Owner
|
Beneficially
Owned
|
Before
Offering
|
After
Offering
(1)
|
||||||||||
|
Thomas
Massie
|
916,667 | (2) | 21.2% | 12.2% | |||||||||
|
William
Coldrick
|
57,223 | (3) | 1.3% | 0.8% | |||||||||
|
Kenneth
Galaznik
|
0
|
—
|
—
|
||||||||||
|
Robert
Hegarty
|
0
|
—
|
—
|
||||||||||
|
Gary
Cebula
|
164,999 | (4) | 3.8% | 2.2% | |||||||||
|
Brett
Zucker
|
164,786 | (5) | 3.8% | 2.2% | |||||||||
|
Robert
Seeger
|
220,188 | (6) | 5.1% | 2.9% | |||||||||
|
Miles
Fawcett
|
489,445 | (7) | 11.4% | 6.5% | |||||||||
|
Peter
L. Winslow
|
472,297 | (8) | 10.8% | 6.3% | |||||||||
|
Fin
Net, LLC
|
367,398 | (9) | 8.6% | 4.8% | |||||||||
|
All
executive officers and directors as a group
(7 persons)
|
1,523,863 | (10) | 33.4% | 19.6% | |||||||||
|
(1)
|
The
percentages assume the issuance of 150,000 shares of common stock
upon the
exercise of the Underwriters’ Warrants which would be issued upon the sale
of the shares in this offering.
|
|
(2)
|
Includes
options to purchase 6,667 shares of common stock at an exercise
price of
$0.003 per share and 33,333 shares of common stock at an exercise
price of
$3.00 per share. Includes a warrant to purchase 10,000 shares
of common
stock at an exercise price of $.001 per
share.
|
|
(3)
|
Includes
an option to purchase 5,556 shares of common stock at an exercise
price of
$3.75 per share.
|
|
(4)
|
Includes
options to purchase 6,667 shares of common stock at an exercise
price of
$0.003 per share, 25,000 shares of common stock at an exercise
price of
$3.00 per share and 33,333 shares of common stock at an exercise
price of
$3.75 per share.
|
|
(5)
|
Includes
options to purchase 1,820 shares of common stock at an exercise
price of
$0.3573 per share, 16,797 shares of common stock at an exercise
price of
$1.0797 per share, 33,333 shares of common stock at an exercise
price of
$3.00 per share, and 33,333 shares of common stock at an exercise
price of
$3.75 per share.
|
|
(6)
|
Includes
options to purchase 4,167 shares of common stock at an exercise
price of
$0.003 per share, 13,997 shares of common stock at an exercise
price of
$1.0716 per share, 33,333 shares of common stock at an exercise
price of
$3.00 per share and 16,667 shares of common stock at an exercise
price of
$3.75 per share. Includes a warrant to purchase 5,000 shares
of common
stock at an exercise price of $.001 per
share.
|
|
(7)
|
Includes
options to purchase 12,778 shares of common stock at an exercise
price of
$3.75 per share.
|
|
(8)
|
Includes
warrants to purchase 104,899 shares of common stock at an exercise
price
of $3.75 per share (the vested portion of one warrant grant to
purchase
31,667 shares) and $4.68 per share (the vested portion of two
warrant
grants to purchase 73,232 shares). Includes 367,398 shares held by
Fin Net, LLC, as to which Mr. Winslow disclaims beneficial
ownership. Mr. Winslow is Chairman and Managing Director of Fin
Net, LLC.
|
|
(9)
|
Fin
Net, LLC’s address is 33 Broad Street, Boston, MA
02114.
|
|
(10)
|
Includes
options to purchase 276,781 shares of common
stock.
|
Alt.
73
DESCRIPTION
OF CAPITAL STOCK
The
following is a description of our capital stock as set forth in our Amended
and Restated Certificate of Incorporation and Amended and Restated By-laws,
which have been filed with the SEC as exhibits to the registration statement
of
which this prospectus is a part.
General
Our
authorized capital stock consists of 20,000,000 shares of common stock, par
value $.001 per share, and 1,000,000 shares of preferred stock, par
value $.001 per share. As
of ,
2007, there were 7,273,833 shares of common stock held by
approximately shareholders
of record. There are no shares of preferred stock
outstanding.
Common
Stock
Voting
Rights. The holders of common stock are entitled to one vote per share on
all matters. The common stock does not have cumulative voting rights, which
means that holders of the shares of common stock with a majority of the
votes to
be cast for the election of directors can elect all directors then being
elected.
Dividends.
Each share of common stock has an equal and ratable right to receive
dividends
to be paid from our assets legally available therefore when, as and if
declared
by our Board of Directors. We do not anticipate paying cash dividends
on the
common stock in the foreseeable future. See “Market for Common Equity and
Related Stockholder Matters - Dividend Policy” on page 20 of this
prospectus.
Liquidation.
In the event we dissolve, liquidate or wind up, the holders of common stock
are
entitled to share equally and ratably in the assets available for distribution
after payments are made to our creditors and to the holders
of any outstanding preferred stock we may designate and issue in the future
with
liquidation preferences greater than those of the common stock.
Other.
The holders of shares of our common stock have no preemptive, subscription
or
redemption rights and are not liable for further call or assessment. All
of the
outstanding shares of common stock are, and the shares of common stock
offered
hereby will be, fully paid and nonassessable. Prior to the date of this
prospectus, there has been no established public trading market for the
common
stock.
Preferred
Stock
Our
Board
of Directors is authorized, without further shareholder action, to divide
any or
all shares of our authorized preferred stock into series and to fix and
determine the designations, preferences and relative participating, optional
or
other dividend rights, liquidation preferences, redemption rights and conversion
or exchange privileges. Our Board of Directors has no plans, agreements
or
understandings for the issuance of any shares of preferred stock.
Preferred stock could be issued with rights and preferences that would
adversely
affect the holders of common stock. Preferred stock could be used as an
anti-takeover device.
Common
Stock Warrants
We
currently have outstanding warrants to purchase an aggregate of 578,269
shares
of our common stock at a weighted average exercise price of $2.65 per
share.
Alt.
74
In
connection with our private placement of promissory notes in April 2006,
we
issued to the purchasers of those notes warrants to purchase an aggregate
of
280,000 shares of our common stock at an exercise price of $.001 per share,
of
which 230,000 are outstanding at September 30, 2006. We have authorized
and
reserved for issuance the shares of common stock issuable upon exercise
of the
warrants.
In connection
with that private placement in April 2006, we issued to Joseph Gunnar
& Co.,
LLC, our placement agent, warrants to purchase an aggregate of 112,000
shares of
our common stock at an exercise price equal to
$
, the offering price of our common stock in our initial public offering.
The
warrants have a five-year term. We have authorized and reserved for issuance
the
shares of common stock issuable upon exercise of the
warrants.
In
addition, in connection with our initial public offering, pursuant
to a warrant
agreement between the warrant agent, Joseph Gunnar & Co., and us, we issued
the underwriters of our offering warrants to purchase an aggregate
of 150,000
shares of our common stock at an exercise price of
$ , which is 125% of the
offering price of our common stock in the initial public offering.
These
warrants are exercisable beginning
on , 2007, which is six months
after the completion of our initial public
offering, and may be exercised for up to five years after the
completion
of our initial public offering. The exercise price and the number of
shares of
common stock purchased upon exercise of the warrants are subject to
adjustment
in the event of, among other events, a stock dividend on, or a subdivision,
recapitalization or reorganization of, the common stock, or the merger
or
consolidation of us with or into another corporation or business
entity.
In
connection with the acquisition of iapps in December 2004 we issued warrants
to
purchase 72,527 shares of our common stock to Fin Net, LLC as compensation
for
investment banking services in connection with the acquisition of iapps.
The
warrants have an exercise price of $4.68 per share and a five-year
term.
In
connection with securing a commercial financing facility, we issued
warrants to purchase 3,200 shares of our common stock to a private commercial
lender pursuant to a financing agreement dated March 29, 2005. The warrants
have an exercise price of $4.68 per share and a five-year
term.
During
2001 through 2004, we issued to certain investment advisors warrants to
purchase
160,542 shares of common stock for services rendered in connection with
private
placement sales of common stock with aggregate proceeds of approximately
$4,700. The warrants are exercisable at $3.75 and $4.68 per share at any
time within five years from the grant date.
The
warrant exercise price and the number of shares of common stock purchased
upon
exercise of the warrants are subject to adjustment in the event of, among
other
events, a stock dividend on, or a subdivision, recapitalization or
reorganization of, the common stock, or the merger or consolidation of
us with
or into another corporation or business entity.
We
are
not required to issue any fractional shares of common stock upon the exercise
of
the warrants or upon the occurrence of adjustments pursuant to anti-dilution
provisions. We will pay to holders of fractional shares an amount equal
to the
cash value of such fractional shares based upon the then-current market
price of
a share of common stock.
Alt.
75
Registration
Rights
The
holders of 796,667 shares of our common stock are entitled to certain
piggyback
registration rights with respect to the registration of the securities
being
offered under the Securities Act. If we register any securities for public
sale
for the benefit of any member of our management team or any stockholder
who
acquired the shares in connection with the sale of their business to
us, other
than for this offering or pursuant to a registration statement on Form
S-4 or
S-8 relating to our securities issued in connection with any business
combination involving our company or shares issuable in connection with
any
stock option or employee benefit plan, the holders of these shares will
have the
right to include their shares in the registration statement.
Lock-up Restrictions
All
of
our shareholders and our directors and officers who own any of our securities,
including warrants and options, have agreed in writing not to sell, transfer
or
otherwise dispose of our common stock or any securities exercisable for
or
convertible into our common stock owned by them prior
to
, 2007 without prior written consent or waiver from the
underwriters.
Anti-Takeover
Provisions
Provisions
of Delaware law and our Amended and Restated Certificate of Incorporation
and Amended and Restated By-laws could make our acquisition by means
of a tender
offer, a proxy contest or otherwise, and the removal of incumbent officers
and
directors, more difficult. These provisions are expected to discourage
types of
coercive takeover practices and takeover bids and to encourage persons
seeking
to acquire control to first negotiate with us. We believe that the benefits
of
increased protection of our potential ability to negotiate with the proponent
of
an unfriendly or unsolicited proposal to acquire or restructure us outweighs
the
disadvantages of discouraging proposals, including proposals that are
priced
above the then current market value of our common stock, because, among
other
things, negotiation of these proposals could result in an improvement
of their
terms.
Delaware
Law
We
are
subject to Section 203 of the Delaware General Corporation Law. Under this
provision, we may not engage in any business combination with any interested
shareholder for a period of three years following the date the shareholder
became an interested shareholder, unless:
|
·
|
prior
to that date our Board of Directors approved either the business
combination or the transaction that resulted in the shareholder
becoming
an interested shareholder;
|
|
·
|
upon
completion of the transaction that resulted in the shareholder
becoming an
interested shareholder, the interested shareholder owned at least
85% of
the voting stock outstanding at the time the transaction
began; or
|
|
·
|
on
or following that date the business combination is approved by
our Board
of Directors and authorized at an annual or special meeting of
shareholders, by the affirmative vote of at least two-thirds
of the
outstanding voting stock that is not owned by the interested
shareholder.
|
Section 203
defines “business combination” to include:
|
·
|
any
merger or consolidation involving the corporation and the interested
shareholder;
|
Alt.
76
|
·
|
any
sale, lease, exchange, mortgage, transfer, pledge, or other disposition
of
10% or more of the assets of the corporation involving the interested
shareholder;
|
|
·
|
subject
to some exceptions, any transaction that results in the issuance
or
transfer by the corporation or any of its direct or indirect
subsidiaries
of any stock of the corporation or of any such subsidiary to
the
interested shareholder;
|
|
·
|
any
transaction involving the corporation or any of its direct or
indirect
subsidiaries that has the effect of increasing the proportionate
share of
the stock of any class or series of the corporation or of any
such
subsidiary beneficially owned by the interested shareholder;
or
|
|
·
|
the
receipt by the interested shareholder of the benefit of any loans,
advances, guarantees, pledges, or other financial benefits provided
by or
through the corporation or any direct or indirect majority-owned
subsidiary.
|
In
general, Section 203 defines an “interested shareholder” as any entity or
person who beneficially owns, or an affiliate or associate of the corporation
that at any time within three years prior to the date of determination
of
interested shareholder status did beneficially own, 15% or more of the
outstanding voting stock of the corporation, and affiliates and associates
of
such person.
Certificate
of Incorporation and By-laws
Our
Amended and Restated Certificate of Incorporation and Amended and Restated
By-laws contain provisions that could have the effect of discouraging
potential acquisition proposals or tender offers or delaying or preventing
a
change of control of our company. In particular, our Amended and Restated
Certificate of Incorporation and Amended and Restated By-laws, as applicable,
will, among other things:
|
·
|
provide
that special meetings of the shareholders may be called only
by our
Chairman of the Board, our President or our Board of
Directors;
|
|
·
|
establish
procedures with respect to shareholder proposals and shareholder
nominations, including requiring that advance written notice
of proposals
and nominations generally must be received at our principal executive
offices not less than 90 days nor more than 120 days prior to
the
anniversary of the preceding annual meeting of
shareholders;
|
|
·
|
provide
that shareholders may not take actions by written consent in
lieu of an
annual or special meeting of shareholders;
|
|
·
|
do
not include a provision for cumulative voting in the election
of
directors. Under cumulative voting, a minority shareholder holding
a
sufficient number of shares may be able to ensure the election
of one or
more directors. The absence of cumulative voting may have the
effect of
limiting the ability of minority shareholders to effect changes
in the
Board of Directors and, as a result, may have the effect of deterring
a
hostile takeover or delaying or preventing changes in control
or
management of our company;
|
|
·
|
provide
that vacancies on our Board of Directors may be filled by a majority
of
directors in office, although less than a quorum, and not by
the
shareholders;
|
|
·
|
provide
for staggered terms for the members of our Board of Directors.
The Board
of Directors is divided into three staggered classes, and each
director
serves a term of three years. At each annual shareholders’ meeting only
those directors comprising one of the three classes will have
completed
their term and stand for re-election or replacement. In addition,
our
Amended and Restated Certificate of Incorporation contains a
supermajority
voting requirement for any amendments of the staggered Board
provisions;
|
|
·
|
require
an advance notice of any shareholder business before the annual
meeting of
our shareholders; and
|
|
·
|
allow
us to issue without shareholder approval up to 1,000,000 shares of
preferred stock that could adversely affect the rights and powers,
including voting rights, of the holders of common stock. In some
circumstances, this issuance could have the effect of decreasing
the
market price of the common stock as well as having the anti-takeover
effect discussed above.
|
These
provisions are intended to enhance the likelihood of continuity and stability
in
the composition of our Board and in the policies formulated by them and
to
discourage certain types of transactions that may involve an actual or
threatened change of control of our company. These provisions are designed
to
reduce our vulnerability to an unsolicited acquisition proposal and to
discourage certain tactics that may be used in proxy fights. However, these
provisions could have the effect of discouraging others from making tender
offers for our shares that could
Alt.
77
result
from actual or rumored takeover attempts. These provisions also may have
the
effect of preventing changes in our management.
Transfer
Agent
American
Stock Transfer is the transfer agent for our common stock.
SHARES
ELIGIBLE FOR FUTURE SALE
As
of the
date of this prospectus, we have outstanding 7,764,772 shares of common
stock without taking into account any options or warrants that may be
granted or exercised. We have options outstanding to purchase 903,606
shares of common stock and warrants outstanding to purchase 728,269 shares
of
common stock.
All
of
our shareholders and our directors and officers who own any of our securities,
including warrants and options, agreed in writing not to sell, transfer
or
otherwise dispose of our common stock or any securities exercisable for
or
convertible into our common stock owned by them prior
to
, 2007 without prior written consent or waiver from the underwriters
of our
initial public offering. As a result of these contractual restrictions,
notwithstanding possible earlier eligibility for sale under the provisions
of
Rules 144, 144(k) and 701, shares subject to lock-up agreements may not be
sold until such agreements expire or are waived by the
underwriters.
Rule 144
In
general, Rule 144 allows a shareholder (or shareholders whose shares are
aggregated) who has beneficially owned our shares of common stock for at
least
one year and who files a Form 144 with the SEC to sell within any
three-month period commencing 90 days after the date of this prospectus a
number of shares of our common stock that does not exceed the greater of:
(i) 1% of the number of shares of our common stock then outstanding or
(ii) the average weekly trading volume of the shares of our common stock
during the four calendar weeks preceding the filing of the Form 144 with
respect to such sale.
Sales
under Rule 144, however, are subject to specific manner of sale provisions,
notice requirements, and the availability of current public information
about
our company. We cannot estimate the number of shares our
existing shareholders will sell under Rule 144, as this will depend on
the market price for our shares, the personal circumstances of the shareholders,
and other factors.
Rule 144(k)
Under
Rule 144(k), in general, a shareholder who has beneficially owned shares of
our common stock for at least two years and who is not deemed to have been
an
affiliate of ours at any time during the immediately preceding 90 days may
sell such shares without complying with the manner of sale provisions,
notice
requirements, public information requirements, or volume limitations of
Rule 144. Affiliates of our company, however, must always sell pursuant to
Rule 144, even after the otherwise applicable Rule 144(k) holding
periods have been satisfied.
Rule 701
Rule 701
generally allows a shareholder who purchased our securities pursuant to
a
written compensatory plan or contract and who is not deemed to have been
an
affiliate of our company during the immediately preceding 90 days to sell
securities in reliance upon Rule 144, but without being required to comply
with the public information, holding period, volume limitation, or notice
provisions of Rule 144. Rule 701 also permits our affiliates
to
sell
their Rule 701 securities under Rule 144 without complying with the
holding period requirements of Rule 144.
We
intend
to file a registration statement on Form S-8 under the Securities Act to
register shares of common stock reserved for issuance under our Amended
and
Restated Stock Incentive Plan. Persons who are not affiliates, and who
receive
shares that are registered under the Form S-8 registration statement, will
be able to resell those shares in the public market without restriction
under
the Securities Act. Such registration statement will become effective
immediately upon filing.
There
can
be no assurance that an active trading market will develop or continue
after the
completion of this offering or that the market price of our common stock
will
not decline below the initial public offering price. No prediction can
be made
as to the effect, if any, that future sales of shares of common stock,
or the
availability of shares for future sale, will have on the market price
prevailing
from time to time. Sales of substantial amounts of common stock in the
public
market, or the perception that such sales could occur, could adversely
affect
the prevailing market price of the common stock or our ability to raise
capital
through a public offering of our equity securities.
Alt.
78
SELLING
STOCKHOLDERS
The
following table sets forth as of March 15, 2007, a list of the selling
stockholders who own or who have the right to acquire the 542,000 shares
of
common stock covered by this prospectus. As set forth below, some of
these
selling stockholders hold, or within the past three years have held,
a position,
office or other material relationship with us.
The
following table sets forth information concerning the selling stockholders,
including:
|
·
|
the
number of shares currently held;
|
|
·
|
the
number of shares issuable upon exercise of warrants;
and
|
|
·
|
the
number of shares offered by each selling
shareholder.
|
The
shares being offered by the selling shareholders as listed below were
obtained
by the selling shareholders, other than Joseph Gunnar & Co., LLC and its
affiliates, in connection with our private placement of promissory
notes in
April 2006. As part of this private placement we issued to the
purchasers of the notes warrants to purchase an aggregate of 280,000
shares of
our common stock at an exercise price of $.001 per share. The
warrants have a term of five years. The shares underlying the
warrants may not be sold or otherwise disposed of for a period of six
months
from the date of our initital public offering.
In
connection with the April 2006 private placement, we issued to Joseph
Gunnar
& Co., LLC, our placement agent, and its affiliates warrants to purchase
an
aggregate of 112,000 shares of our common stock at an exercise price
equal to
the offering price of our common stock in this offering. The warrants
have a
term of five-years. The shares underlying the warrants may not be sold
or
otherwise disposed of for a period of six months from the date of our
initital public offering.
In
addition, 150,000 of the shares being offered by Joseph Gunnar & Co., LLC
may be obtained upon the exercise of the underwriters’ warrants. One
underwriters’ warrant will entitle the holder to purchase one share of common
stock at an exercise price equal to 125% of the offering price of our
common
stock in our initital public offering beginning on the date which is
six months
after the date of ourinitital public offering and ending on the date
which is
five years after the date of our initital public offering. The warrants
will be
issued pursuant to the terms of a warrant agreement between the warrant
agent,
Joseph Gunnar & Co., LLC and us. The warrants are exercisable to
purchase a total of 150,000 shares of our common stock.
Pursuant
to the terms of all the warrants described above, the warrant exercise
price and
the number of shares of common stock purchased upon exercise of the
warrants are
subject to adjustment in the event of, among other events, a stock
dividend on,
or a subdivision, recapitalization or reorganization of, the common
stock, or
the merger or consolidation of us with or into another corporation
or business
entity.
We
have
no knowledge of the intentions of any selling shareholder to actually
sell any
of the securities listed under the columns “Shares Being
Offered.”
|
|
|
Shares
Owned at
Closing
of
Initial Public
Offering
(1)
|
|
Shares
Being
Offered
|
|
Shares
Owned after
Resale
of Warrant
Shares
(2)
|
|
|||||||||
|
Name
|
|
Number
|
|
Percentage
|
|
Number
|
|
Number
|
|
Percentage
|
|
|||||
|
Neil
T. Anderson
|
|
|
30,000
|
|
|
*
|
|
|
30,000
|
|
|
0
|
|
|
*
|
|
|
Paul
Auersperg
|
|
|
5,000
|
|
|
*
|
|
|
5,000
|
|
|
0
|
|
|
*
|
|
|
Christopher
P. Baker
|
|
|
36,667
|
|
|
*
|
|
|
10,000
|
|
|
26,667
|
|
|
*
|
|
|
Balfour
Associates, L.P. (3)
|
|
|
20,000
|
|
|
*
|
|
|
20,000
|
|
|
0
|
|
|
*
|
|
Alt.
79
|
Burg
Family Trust (4)
|
|
|
5,000
|
|
|
*
|
|
|
5,000
|
|
|
0
|
|
|
*
|
|
|
Brian
Callahan
|
|
|
10,000
|
|
|
*
|
|
|
10,000
|
|
|
0
|
|
|
*
|
|
|
William
B. Coldrick (5)
|
|
|
57,223
|
|
|
0.8%
|
|
|
10,000
|
|
|
47,223
|
|
|
0.6%
|
|
|
Edward
C. Davenport
|
|
|
5,000
|
|
|
*
|
|
|
5,000
|
|
|
0
|
|
|
*
|
|
|
James
R. Davis
|
|
|
25,000
|
|
|
*
|
|
|
25,000
|
|
|
0
|
|
|
*
|
|
|
Thomas
B. Dupree, Jr.
|
|
|
10,000
|
|
|
*
|
|
|
10,000
|
|
|
0
|
|
|
*
|
|
|
Fortune
Footwear, Inc. (6)
|
|
|
5,000
|
|
|
*
|
|
|
5,000
|
|
|
0
|
|
|
*
|
|
|
Albert
Freed
|
|
|
5,000
|
|
|
*
|
|
|
5,000
|
|
|
0
|
|
|
*
|
|
|
Ronald
Heffernan
|
|
|
65,231
|
|
|
*
|
|
|
10,000
|
|
|
55,231
|
|
|
*
|
|
|
Herbert
Wrabel Living Trust (7)
|
|
|
5,000
|
|
|
*
|
|
|
5,000
|
|
|
0
|
|
|
*
|
|
|
High
Capital Funding, LLC (8)
|
|
|
10,000
|
|
|
*
|
|
|
10,000
|
|
|
0
|
|
|
*
|
|
|
Charles
Jia
|
|
|
5,000
|
|
|
*
|
|
|
5,000
|
|
|
0
|
|
|
*
|
|
|
Mitchell
and Allison Kersch
|
|
|
5,000
|
|
|
*
|
|
|
5,000
|
|
|
0
|
|
|
*
|
|
|
Elia
Kotler
|
|
|
5,000
|
|
|
*
|
|
|
5,000
|
|
|
0
|
|
|
*
|
|
|
John
Landy
|
|
|
30,000
|
|
|
*
|
|
|
30,000
|
|
|
0
|
|
|
*
|
|
|
Scott
J. and Suzanne Lefebvre
|
|
|
5,000
|
|
|
*
|
|
|
5,000
|
|
|
0
|
|
|
*
|
|
|
Larry
Lowrance
|
|
|
10,000
|
|
|
*
|
|
|
10,000
|
|
|
0
|
|
|
*
|
|
|
Thomas
L. and Theresa M. Massie (9)
|
|
|
916,667
|
|
|
12.5%
|
|
|
10,000
|
|
|
906,667
|
|
|
11.3%
|
|
|
Robert
S. McCoy
|
|
|
5,000
|
|
|
*
|
|
|
5,000
|
|
|
0
|
|
|
*
|
|
|
Robert
McLemore
|
|
|
41,667
|
|
|
*
|
|
|
5,000
|
|
|
36,667
|
|
|
*
|
|
|
Ian
D. Mead
|
|
|
10,000
|
|
|
*
|
|
|
10,000
|
|
|
0
|
|
|
*
|
|
|
John
and Betty Panagolpolous
|
|
|
10,000
|
|
|
*
|
|
|
10,000
|
|
|
0
|
|
|
*
|
|
|
George
Rizos
|
|
|
5,000
|
|
|
*
|
|
|
5,000
|
|
|
0
|
|
|
*
|
|
|
Robert
and Kara Seeger (10)
|
|
|
220,188
|
|
|
3.0%
|
|
|
5,000
|
|
|
215,188
|
|
|
2.7%
|
|
|
John
L. Troutman
|
|
|
5,000
|
|
|
*
|
|
|
5,000
|
|
|
0
|
|
|
*
|
|
|
Joseph
A. Alagna (11)
|
|
|
37,216
|
|
|
*
|
|
|
37,216
|
|
|
0
|
|
|
*
|
|
|
Joseph
Duarte (11)
|
|
|
16,363
|
|
|
*
|
|
|
16,363
|
|
|
0
|
|
|
*
|
|
|
Michael
Mondiello (11)
|
|
|
1,300
|
|
|
*
|
|
|
1,300
|
|
|
0
|
|
|
*
|
|
|
Bradford
Pine (11)
|
|
|
1,750
|
|
|
*
|
|
|
1,750
|
|
|
0
|
|
|
*
|
|
|
Anthony
Sica (11)
|
|
|
4,406
|
|
|
*
|
|
|
4,406
|
|
|
0
|
|
|
*
|
|
|
Stephan
A. Stein (11)
|
|
|
34,015
|
|
|
*
|
|
|
34,015
|
|
|
0
|
|
|
*
|
|
|
Abner
Zalaznick (11)
|
|
|
2,000
|
|
|
*
|
|
|
2,000
|
|
|
0
|
|
|
*
|
|
|
Nicholas
Lobasso (11)
|
|
|
3,000
|
|
|
*
|
|
|
3,000
|
|
|
0
|
|
|
*
|
|
|
Gary
Saccaro (11)
|
|
|
3,000
|
|
|
*
|
|
|
3,000
|
|
|
0
|
|
|
*
|
|
|
Joseph
Gunnar & Co., LLC (12)
|
|
|
158,950
|
|
|
2.0%
|
|
|
158,950
|
|
|
0
|
|
|
*
|
|
*
Less
than 1%.
|
(1)
|
Based
on 7,273,833 shares outstanding immediately following the
initial public
offering, plus, for each person, such number of shares of
common stock
that the selling stockholder has the right to acquire beneficial
ownership
of within 60 days after February 1, 2007.
|
|
(2)
|
This
table assumes that each selling stockholder will sell all
shares offered
for sale by it under this registration statement. Stockholders
are not
required to sell their shares.
|
|
(3)
|
James
Mintzer holds investment and voting control for Balfour
Associates
|
|
(4)
|
Harold
Burg holds investment and voting control for Burg Family
Trust.
|
|
(5)
|
Mr.
Coldrick is a Director of the company. Includes 5,556 shares
subject to
options that are exercisable within 60 days of February 1,
2007.
|
|
(6)
|
Paul
Ausperg holds investment and voting control for Fortune
Footwear.
|
|
(7)
|
Herbert
Wrabel holds investment and voting control for Herbert Wrabel
Living
Trust.
|
|
(8)
|
Frank
Hart holds investment and voting control for High Capital
Funding
LLC.
|
Alt.
80
|
(9)
|
Mr.
Massie is President, Chief Executive Officer and a Director
of the
company. Includes 40,000 shares subject to options that are
exercisable
within 60 days of February 1, 2007.
|
|
(10)
|
Mr.
Seeger is Senior Vice President of Business Development of
the company.
Includes 68,164 shares subject to options that are exercisable
within 60
days of February 1, 2007.
|
|
(11)
|
This
selling shareholder is an affiliate of Joseph Gunnar &
Co
|
|
(12)
|
Joseph
Alagna holds investment and voting control for Joseph Gunnar
&
Co.
|
PLAN
OF DISTRIBUTION
We
are
registering the shares of common stock on behalf of the selling
stockholders. As
used in this prospectus, “selling stockholders” includes the pledges, donees,
transferees or others who may later hold the selling stockholders’ interests. We
have agreed to pay the costs and fees of registering the shares,
but the selling
stockholders will pay any brokerage commissions, discounts or other
expenses
relating to the sale of the shares, including attorneys’
fees.
The
stockholders and any of their pledgees, assignees and successors-in-interest
may, from time to time, sell any or all of their shares of common
stock on any
stock exchange, market or trading facility on which the shares
are traded or in
private transactions. These sales may be at fixed or negotiated
prices. The
stockholders may use any one or more of the following methods when
selling
shares:
|
·
|
ordinary
brokerage transactions and transactions in which the
broker dealer
solicits purchasers;
|
|
·
|
block
trades in which the broker-dealer will attempt to sell
the shares as agent
but may position and resell a portion of the block as
principal to
facilitate the transaction;
|
|
·
|
purchases
by a broker-dealer as principal and resale by the broker
dealer for its
account;
|
|
·
|
an
exchange distribution in accordance with the rules of
the applicable
exchange;
|
|
·
|
privately
negotiated transactions;
|
|
·
|
settlement
of short sales;
|
|
·
|
broker-dealers
may agree with the stockholders to sell a specified number
of such shares
at a stipulated price per share;
|
|
·
|
a
combination of any such methods of sale; and
|
|
·
|
any
other method permitted pursuant to applicable
law.
|
The
stockholders may also sell shares under Rule 144 under the Securities
Act, if
available, rather than under this prospectus.
Broker-dealers
engaged by the stockholders may arrange for other brokers dealers
to participate
in sales. Broker-dealers may receive commissions or discounts from
the
stockholders (or, if any broker-dealer acts as agent for the purchaser
of
shares, from the
purchaser) in amounts to be negotiated. The stockholders do not
expect these
commissions and discounts to exceed what is customary in the types
of
transactions involved.
The
stockholders may from time to time pledge or grant a security interest
in some
or all of the shares of common stock owned by them and, if they
default in the
performance of their secured obligations, the pledgees or secured
parties may
offer and sell the shares of common stock from time to time under
this
prospectus, or under an amendment to this prospectus under Rule
424(b)(3) or
other applicable provision of the Securities Act of 1933, as amended,
amending
the list of stockholders to include the pledgee, transferee or
other successors
in interest as stockholders under this prospectus.
The
stockholders and any broker-dealers or agents that are involved
in selling the
shares may be deemed to be “underwriters” within the meaning of the Securities
Act in connection with such sales. In such event, any commissions
received by
such broker-dealers or agents and any profit on the resale of the
shares
purchased by them may be deemed to be underwriting commissions
or discounts
under the Securities Act.
The
selling stockholders have advised us that they have not entered
into any
agreements, understandings or arrangements with any underwriters
or
broker-dealers regarding the sale of their securities. Under the
rules and
regulations of the NASD, any such broker-dealer may not receive
discounts,
concessions or commissions in excess of 8% in connection with the
sale of any
securities being registered hereunder.
Alt.
81
We
are
required to pay all fees and expenses incident to the registration
of the
shares. We have agreed to indemnify the stockholders against certain
losses,
claims, damages and liabilities, including liabilities under the
Securities Act.
The selling stockholders will be subject to the prospectus delivery
requirements
of the Securities Act. We have informed the selling stockholders
that the
anti-manipulative provisions of Regulation M promulgated under
the Securities
Exchange Act of 1934 may apply to their sales in the
market.
LEGAL
MATTERS
Morse,
Barnes-Brown & Pendleton, P.C., Waltham, Massachusetts, has acted as our
counsel in connection with this offering, including with respect to the
validity
of the issuance of the common stock offered in this prospectus.
EXPERTS
The
consolidated financial statements of Bridgeline Software, Inc. at September
30,
2006 and 2005 and for the years then ended, the financial statements of
Objectware, Inc. at September 30, 2006 and 2005 and for the years then
ended,
and the financial statements of New Tilt, Inc. at April 24, 2006 and
December 31, 2005 and for the period January 1, 2006 to April 24, 2006
and for
the year ended December 31, 2005, included in this prospectus have been
audited
by UHY, LLP, independent registered public accounting firm, as set forth
in its
reports thereon (which report for Bridgeline Software, Inc. includes an
explanatory paragraph regarding substantial doubt about Bridgeline Software,
Inc.’s ability to continue as a going concern) appearing elsewhere herein, and
are included in reliance upon such reports given on the authority of said
firm
as experts in accounting and auditing.
ADDITIONAL
INFORMATION
We
have
filed with the Securities and Exchange Commission a registration statement
on
Form SB-2 under the Securities Act for the shares offered hereby. This
prospectus, which constitutes a part of the registration statement, does
not
contain all of the information set forth in the registration statement
or the
exhibits and schedules which are part of the registration statement. For
additional information about us and our securities, we refer you to the
registration statement and the accompanying exhibits and schedules. Statements
contained in this prospectus regarding the contents of any contract or
any other
documents to which we refer are not necessarily complete. In each instance,
reference is made to the copy of the contract or document filed as an exhibit
to
the registration statement, and each statement is qualified in all respects
by
that reference. Copies of the registration statement and the accompanying
exhibits and schedules may be inspected without charge (and copies may
be
obtained at prescribed rates) at the public reference facility of the SEC
at
Room 1024, 100 F Street, NE, Washington, D.C. 20549.
You
can
request copies of these documents upon payment of a duplicating fee by
writing
to the Securities and Exchange Commission. You may call the Securities
and
Exchange Commission at 1-800-SEC-0330 for further information on the operation
of its public reference rooms. Our filings, including the registration
statement, will also be available to you on the Internet Web site maintained
by
the Securities and Exchange Commission at http://www.sec.gov. We intend
to
furnish our shareholders with annual reports containing financial statements
audited by our independent auditors, and make available to our shareholders
quarterly reports for the first three quarters of each year containing
unaudited
interim financial statements.
We
are
subject to the information and reporting requirements of the Exchange Act.
As a
result, we file periodic reports, proxy statements and other information
with the Securities and Exchange Commission. The periodic reports, proxy
statements and other information we file are available for inspection and
copying at the Securities and Exchange Commission’s public reference facilities
and the Web site of the Commission referenced to above.
Alt.
82
OrgitectureTM
is our
on-demand Web-based platform which provides expandable on-demand
modules such as
Relationship Management, eSurvey, eNewsletter, Content Management,
eCommerce,
Event Registration and Integrated Grants Management.
The
graphic below displays the on-demand web modules available in
Orgitecture:
Below
are
screen shots of Orgitecture’s eCommerce module:
Below
are
screen shots of other Orgitecture related modules:
|
|
||
|
eSurvey
|
eNewsletter
|
Relationship
Manager
|
Alt.
83
|
Until
,
2007 (25 days after the date of this prospectus), all dealers
effecting transactions in the shares offered by this
prospectus whether or
not participating in the offering may be required to
deliver a copy of
this prospectus. Dealers may also be required to deliver
a copy of this
prospectus when acting as underwriters and for their
unsold allotments or
subscriptions.
|
TABLE
OF CONTENTS
|
Prospectus
Summary
|
|
|
|
The
Offering
|
|
|
|
Summary
Financial Data
|
|
|
|
Risk
Factors
|
|
|
|
Cautionary
Note Regarding Forward Looking Statements
|
|
|
|
Use
of Proceeds
|
|
|
|
Market
for Common Equity and Related Stockholder Matters
|
|
|
|
Capitalization
|
|
|
|
Unaudited
Condensed Pro Forma Financial Data
|
|
|
|
Selected
Financial Data
|
|
|
|
Management’s
Discussion and Analysis Business
|
|
|
|
Business
|
|
|
|
Management
|
|
|
|
Executive
Compensation
|
|
|
|
Certain
Relationships and Related Transactions
|
|
|
|
Security
Ownership of Certain Beneficial Owners and Management
|
|
|
|
Description
of Capital Stock
|
|
|
|
Shares
Eligible for Future Sale
|
|
|
|
Selling
Stockholders
|
|
|
|
Plan
of Distribution
|
|
|
|
Legal
Matters
|
|
|
|
Experts
|
|
|
|
Index
to Financial Statements
|
|
|
You
should rely only on the information contained in this prospectus.
We have not
authorized anyone to provide you with different information.
If anyone provides
you with different information, you should not rely on it. We
are not making an
offer to sell these shares in any jurisdiction where the offer
or sale is not
permitted. You should assume that the information contained in
this prospectus
is accurate only as of the date on the front cover of the prospectus.
Our
business, financial condition, results of operations and prospects
may have
changes since that date.
602,000
Shares
Bridgeline
Software, Inc.
Alt.
84
PART II
Information
Not Required In Prospectus
Item
24. Indemnification of Directors and
Officers
Section 102
of the General Corporation Law of the State of Delaware permits a corporation
to
eliminate the personal liability of directors of a corporation to the
corporation or its shareholders for monetary damages for a breach of fiduciary
duty as a director, except for breaches of the director’s duty of loyalty to the
corporation or its shareholders, acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of a law, authorizations
of the payments of a dividend or approval of a stock repurchase or redemption
in
violation of Delaware corporate law or for any transactions from which the
director derived an improper personal benefit. Our Amended and Restated
Certificate of Incorporation provides that no director will be liable to
us or
our shareholders for monetary damages for breach of fiduciary duties as a
director, subject to the same exceptions as described above.
Section 145
of the General Corporation Law of the State of Delaware provides that a
corporation has the power to indemnify a director, officer, employee, or
agent
of the corporation and certain other persons serving at the request of the
corporation in related capacities against expenses (including attorneys’ fees),
judgments, fines, and amounts paid in settlements actually and reasonably
incurred by the person in connection with a threatened, pending, or completed
action, suit or proceeding to which he or she is or is threatened to be made
a
party by reason of such position, if such person acted in good faith and
in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the corporation, and, in any criminal action or proceeding,
had no
reasonable cause to believe his or her conduct was unlawful, except that,
in the
case of actions brought by or in the right of the corporation, indemnification
is limited to expenses (including attorneys’ fees) actually and reasonably
incurred by the person in connection with defense or settlement of such action
or suit and no indemnification shall be made with respect to any claim, issue,
or matter as to which such person shall have been adjudged to be liable to
the
corporation unless and only to the extent that the Court of Chancery or other
adjudicating court determines that, despite the adjudication of liability
but in
view of all of the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of Chancery
or such other court shall deem proper. In addition, to the extent that a
present
or former director or officer of a corporation has been successful on the
merits
or otherwise in defense of any action, suit, or proceeding described above
(or
claim, issue, or matter therein), such person shall be indemnified against
expenses (including attorneys’ fees) actually and reasonably incurred by such
person in connection therewith. Expenses (including attorneys’ fees) incurred by
an officer or director in defending any civil, criminal, administrative,
or
investigative action, suit, or proceeding may be advanced by the corporation
upon receipt of an undertaking by such person to repay such amount if it
is
ultimately determined that such indemnification is not required under
Section 145 of the General Corporation Law of the State of
Delaware.
Our
Amended and Restated Certificate of Incorporation and Amended and Restated
By-laws provide that each person who was or is made a party or is threatened
to
be made a party to or is otherwise involved in any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or
investigative, by reason of the fact that he or she is or was our director
or
officer or is or was serving at our request as a director, officer, employee
or
agent of another corporation or of a partnership, joint venture, trust or
other
enterprise, will be indemnified and held harmless by us to the fullest extent
required under Delaware law, against all expense, liability and loss (including
attorneys’ fees) judgments, fines and amounts paid in settlement) reasonably
incurred by such indemnities. We are also required to indemnify and advance
costs or to agree to indemnify and advance costs to any person that is or
was
our officer, director, agent or employee, will be indemnified and held harmless
by us to the fullest extent permitted under Delaware law against all expense,
liability and loss (including attorneys’ fees) judgments, fines and amounts paid
in settlement reasonably incurred by the indemnities. We also agree to pay
the expenses (including attorneys’ fees) incurred in defending
any such proceeding in advance of its final disposition to the extent required
under Delaware law.
The
preceding discussion gives effect our Amended and Restated Certificate of
Incorporation, which will become effective shortly before the completion
of this
offering.
II-1
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
and
is, therefore, unenforceable.
Item
25. Other Expenses of Issuance and Distribution
The
following table sets forth estimates expected to be incurred in connection
with
the issuance and distribution of the securities being registered. We will
pay
all fees, disbursements and expenses in connection with the proposed
offering.
|
|
|
|
||
|
SEC
Registration Fee
|
|
$
|
2,660
|
|
|
NASD
Filing Fee
|
|
|
2,985
|
|
|
Nasdaq
Capital Market Listing Fee
|
|
|
35,000
|
|
|
Boston
Stock Exchange Listing Fee
|
|
|
10,000
|
|
|
Accounting
Fees and Expenses
|
|
|
575,000
|
|
|
Legal
Fees and Expenses
|
|
|
200,000
|
|
|
Blue
Sky Fees and Expenses
|
|
|
20,000
|
|
|
Printing
and Engraving Expenses
|
|
|
50,000
|
|
|
Miscellaneous
|
|
|
100,000
|
|
|
Total
|
|
$
|
995,645
|
|
Item
26. Recent Sales of Unregistered Securities
The
following summarizes all sales of our unregistered securities within the
past
three years. The securities in each one of the below-referenced transactions
were (i) made 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. Unless stated otherwise, 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.
Acquisitions
Objectware
- The acquisition of Objectware, Inc. will close in escrow shortly before
the
completion of this offering. At that time, we will issue 490,909 shares of
our
common stock to the escrow agent as partial consideration in our acquisition.
Once this offering is completed, the consideration for the acquisition then
held
in escrow will be released to a single individual. We will pay Joseph Gunnar
& Co., LLC cash compensation of approximately $375,000 for services related
to this acquisition.
New
Tilt, Inc. - On April 24, 2006, we issued 320,000 shares of our common
stock to two individuals as partial consideration in our acquisition of New
Tilt, Inc. We paid Joseph Gunnar & Co., LLC cash compensation of $150,000
for services related to this acquisition.
Interactive
Applications Group, Inc. - On December 15, 2004, we issued 476,667 shares
of our common stock to one individual as partial consideration in our
acquisition of Interactive Applications Group, Inc. We issued Fin Net, LLC
warrants to purchase 72,527 shares of common stock at an exercise price of
$4.68
per share.
II-2
April
2006 Private Placement
On
April 21, 2006, we issued a total of 22.5 units, each unit consisting of
a
secured note in the principal amount of $100,000 and a five year warrant
to
purchase 10,000 shares of our common stock at an exercise price of
$.001.
On
April 27, 2006, we issued a total of 5.5 units, each unit consisting of a
secured note in the principal amount of $100,000 and a five year warrant
to
purchase 10,000 shares of our common stock at an exercise price of
$.001.
The
units
were offered on our behalf by Joseph Gunnar & Co., LLC (the “Placement
Agent”). The total offering price was $2,800,000 and sales commissions paid to
our Placement Agent were $280,000. We issued our Placement Agent a five year
warrant to purchase 112,000 shares of our common stock at an exercise price
equal to the offering price in the initial public offering of our common
stock.
2004
Private Placement
Between
July 2004 and September 2004, we issued a total of 416,065 shares of common
stock at a purchase price of $3.75 per share for a total offering price of
$1,560,244.
2003
Private Placement
Between
July and September 2003, we issued a total of 194,334 shares of common stock
at
a purchase price of $3.00 per share for a total offering price of
$583,002.
Winslow,
Evans & Crocker, Inc. (“WEC”) served as our placement agent in connection
with our 2004 and 2003 private placements. We paid WEC a total of $214,324
in
sales commissions and issued WEC, and affiliates of WEC and issued warrants
to
purchase an aggregate of 160,542 of our common stock at exercise prices of
between $3,75 and $4.68.
In
return
for investment banking advisory services, in January 2004 we issued Fin Net,
LLC
warrants to purchase 31,667 shares of our common stock at an exercise price
of
$3.75.
Financing
Arrangements
In
March
2005, we issue a warrant to purchase 3,200 shares of our common stock at
an
exercise price of $4.68 to a private commercial lender, as part of a
short-term accounts receivable financing arrangement. Indebtedness was
retired upon the completion of the April 2006 private placement
financing.
Exercise
of Options
In
fiscal
year 2004 we issued 22,000 shares of our common stock pursuant to the exercise
of vested stock options. We did not issue any shares of common stock pursuant
to
the exercise of vested stock options in either fiscal year 2005 or fiscal
year
2006. Since the end of fiscal year 2006, we have not issued any shares of
common stock pursuant to such exercises of stock options.
Within
the past three years, we have granted options to purchase equity shares on
the
following dates and amounts:
|
Date
|
Number
|
Exercise
Price
|
||||||
|
October
21, 2003
|
11,667
|
$ |
3.00
|
|||||
|
November
17, 2003
|
16,666
|
$ |
3.00
|
|||||
|
January
15, 2004
|
11,000
|
$ |
3.00
|
|||||
|
February
9, 2004
|
8,333
|
$ |
3.00
|
|||||
|
March
22, 2004
|
1,000
|
$ |
3.00
|
|||||
II-3
|
April
1, 2004
|
3,333
|
$ |
3.00
|
|||||
|
April
9, 2004
|
6,667
|
$ |
3.00
|
|||||
|
May
4, 2004
|
18,066
|
$ |
3.00
|
|||||
|
June
14, 2004
|
3,333
|
$ |
3.00
|
|||||
|
June
21, 2004
|
667
|
$ |
3.00
|
|||||
|
July
1, 2004
|
2,667
|
$ |
3.00
|
|||||
|
July
1, 2004
|
667
|
$ |
3.00
|
|||||
|
July
16, 2004
|
16,667
|
$ |
3.75
|
|||||
|
October
14, 2004
|
1,667
|
$ |
3.75
|
|||||
|
October
20, 2004
|
3,333
|
$ |
3.75
|
|||||
|
December
15, 2004
|
50,949
|
$ |
1.20
|
|||||
|
December
15, 2004
|
36,167
|
$ |
3.75
|
|||||
|
March
1, 2005
|
1,000
|
$ |
3.75
|
|||||
|
March
1, 2005
|
5,000
|
$ |
3.00
|
|||||
|
April
1, 2005
|
4,833
|
$ |
3.75
|
|||||
|
May
1, 2005
|
3,333
|
$ |
3.75
|
|||||
|
June
1, 2005
|
316,667
|
$ |
3.75
|
|||||
|
July
1, 2005
|
6,666
|
$ |
3.75
|
|||||
|
December
31, 2005
|
16,667
|
$ |
3.75
|
|||||
|
January
21, 2006
|
16,667
|
$ |
3.75
|
|||||
|
February
1, 2006
|
8,333
|
$ |
3.75
|
|||||
|
March
1, 2006
|
2,500
|
$ |
3.75
|
|||||
|
March
15, 2006
|
8,333
|
$ |
3.75
|
|||||
|
April
24, 2006
|
102,420
|
$ |
3.75
|
|||||
|
September
20, 2006
|
50,000
|
$ |
3.75
|
|||||
|
October
20, 2006
|
31,880
|
$ |
3.75
|
The
securities were issued exclusively to our directors, executive officers,
employees and consultants. The issuance of options and the shares of common
stock issuable upon the exercise of such options as described above were
issued
pursuant to written compensatory plans or arrangements with our employees,
directors and consultants, in reliance on the exemption provided by
Rule 701 promulgated under the Securities Act.
The
securities issued as consideration in our acquisitions were issued to U.S.
investors in reliance upon exemptions from the registration provisions of
the
Securities Act set forth in Section 4(2) thereof relative to sales by an
issuer
not involving any public offering, to the extent an exemption from such
registration was required.
The
securities issued in the April 2006, the 2004 and the 2003 private placements
were issued in accordance with, and in reliance upon exemptions from the
registration provisions of the Securities Act set forth in Rule 506 of the
Securities Act and were issued to accredited investors and who were acquiring
the shares for investment and not distribution, and who represented that
they
could bear the risks of the investment and could hold the securities for
an
indefinite period of time. Such purchasers received written disclosures that
the
securities had not been registered under the Securities Act and that any
resale
must be made pursuant to a registration or an available exemption from such
registration.
All
of the foregoing securities are deemed restricted securities for purposes
of the
Securities Act. All certificates representing the issued shares of common
stock
described in this Item 15 included appropriate legends setting forth that
the
securities had not been registered and the applicable restrictions on
transfer.
II-4
Item
27. Exhibits
The
following Exhibits are filed as part of this Registration Statement pursuant
to
Item 601 of Regulation S-B:
|
|
Item
|
|
|
Title
|
|
|
1.1†††
|
|
|
Underwriting
Agreement
|
|
|
2.1†
|
|
|
New
Tilt, Inc. Acquisition Agreement**
|
|
|
2.2†
|
|
|
Interactive
Applications, Inc. Acquisition Agreement**
|
|
|
2.3††
|
|
|
Objectware,
Inc. Acquisition Agreement**
|
|
|
2.4†
|
|
|
Lead
Dog Digital, Inc. Acquisition Agreement**
|
|
|
2.5†
|
|
|
Streamline
Communications, Inc. Acquisition Agreement**
|
|
2.6
|
First Amendment to Agreement and Plan of Merger filed as Exhibit 2.3, dated as of March 29, 2007 | |||
|
|
3.1(i)†
|
|
|
Certificate
of Incorporation, as amended to date
|
|
|
3.1(ii)†
|
|
|
Form
of Amended and Restated Certificate of Incorporation
(to become effective
shortly before the completion of the offering contemplated
by this
registration statement)
|
|
|
3.1(iii)†
|
|
|
Amended
and Restated By-laws
|
|
|
4.1†††
|
|
|
Specimen
Common Stock Certificate
|
|
|
5.1†††
|
|
|
Opinion
of Morse, Barnes-Brown & Pendleton, P.C. regarding the legality of the
shares offered hereby
|
|
|
10.1†
|
|
|
Office
Building Lease between Sixth Road Woburn, LLC and Bridgeline
Software,
Inc., dated May 5, 2005
|
|
|
10.2†
|
|
|
Office
Building Lease between 104 West 40th
Street
Partners LLC and Bridgeline Software, Inc., dated November
26,
2003
|
|
|
10.3†
|
|
|
Office
Building Lease between Starwood Urban Retail I, LLC
and Interactive
Applications Group, Inc., dated August 20, 1999
|
|
|
10.4†
|
|
|
First
Amendment to Office Building Lease between Starwood
Urban Retail I, LLC
and Interactive Applications Group, Inc., dated January
16,
2001
|
|
|
10.5††
|
|
|
Office
Building Lease between Valliappa Software Technological
Park Pvt. Ltd. and
Bridgeline Software Enterprises Pvt. Ltd. dated December
5,
2005
|
|
|
10.6†
|
|
|
Lease
between Cameron-Elmwood Realty, LLC and New Tilt, Inc.
dated December 6,
2004
|
|
|
10.7†
|
|
|
Employment
Agreement with Thomas Massie, dated October 1, 2001*
|
|
|
10.8†
|
|
|
Employment
Agreement with Gary Cebula, dated January 1, 2006*
|
|
|
10.9†
|
|
|
Employment
Agreement with Brett Zucker, dated January 1, 2006*
|
|
|
10.10†
|
|
|
Employment
Agreement with Robert Seeger, dated January 1, 2006*
|
|
|
10.11†††
|
|
|
Form
of Employment Agreement with Erez M. Katz
|
|
|
10.12†
|
|
|
Business
Combination Services Agreement dated as of October
1, 2005 between
Bridgeline Software, Inc. and Joseph Gunnar & Co.,
LLC
|
|
|
10.13†
|
|
|
Memorandum
of Understanding between Fin Net, LLC and Bridgeline
Software, Inc. dated
January 5, 2004
|
|
|
10.14†
|
|
|
Financing
Agreement between Sand Hill Finance, LLC and Bridgeline
Software, Inc.
dated March 29, 2005
|
|
|
10.15†
|
|
|
First
Amendment to Financing Agreement between Sand Hill
Finance, LLC and
Bridgeline Software, Inc. dated September 12, 2005
|
|
|
10.16†
|
|
|
Convertible
Term Note issued by Bridgeline Software, Inc. to Thomas
Massie for the
principal sum of $200,000, dated September 3, 2002
|
|
|
10.17†
|
|
|
Convertible
Term Note issued by Bridgeline Software, Inc. to Thomas
Massie for the
principal sum of $112,000, dated September 3, 2002
|
|
|
10.18†
|
|
|
Security
Agreement between Bridgeline Software, Inc. and Thomas
Massie dated as of
September 3, 2002
|
|
|
10.19†
|
|
|
Placement
Agent Agreement by and between Bridgeline Software,
Inc. and Joseph Gunnar
& Co., LLC, dated as of April 10,
2006
|
II-5
|
|
10.20†
|
|
|
General
Security Agreement by and between Bridgeline Software,
Inc. and the
investors named therein, dated as of April 21, 2006
|
|
|
10.21†
|
|
|
Form
of Subscription Agreement by and between Bridgeline
Software, Inc. and the
investors listed on Schedule A attached thereto
|
|
|
10.22†
|
|
|
Form
of Secured Promissory Note issued to the investors
listed on Schedule A
attached thereto
|
|
|
10.23†
|
|
|
Form
of Warrant to Purchase Common Stock of Bridgeline Software,
Inc. issued to
the investors listed on Schedule A attached thereto,
as
amended
|
|
|
10.24†
|
|
|
Form
of Warrant to Purchase Common Stock of Bridgeline Software,
Inc. issued to
Placement Agent in April 2006 offering, as amended
|
|
|
10.25†
|
|
|
Form
of Warrant to Purchase Common Stock of Bridgeline Software,
Inc. issued to
Winslow, Evans & Crocker, Inc., and associates of Winslow, Evans &
Crocker, Inc., as compensation for services as placement
gent in 2003 and
2004 equity offerings
|
|
|
10.26†
|
|
|
Form
of Warrant to Purchase Common Stock of Bridgeline Software,
Inc. issued to
Fin Net, LLC as compensation for investment banking
services
|
|
|
10.27†
|
|
|
Common
Stock Purchase Warrant of Bridgeline Software issued
to Sand Hill Finance,
LLC
|
|
|
10.28†
|
|
|
Data
Processing and Technical Services Agreement between
The Bank of New York
and Bridgeline Software, Inc. dated as of October 25,
2002
|
|
|
10.29†
|
|
|
Professional
Services Agreement between The Depository Trust & Clearing Corporation
and Bridgeline Software, Inc. dated as of January 2,
2006
|
|
|
10.30†
|
|
|
Statement
of Work for Web Maintenance Services between Nomura
Securities, Inc. and
Bridgeline Software, Inc. dated as of June 12, 2002
|
|
|
10.31†
|
|
|
Agreement
between Pfizer, Inc. and Bridgeline Software, Inc.
dated as of December
16, 2005
|
|
|
10.32†
|
|
|
Master
Services Agreement between John Hancock Life Insurance
Co. and Bridgeline
Software, Inc. dated as of July 1, 2004
|
|
|
10.33†
|
|
|
Amended
and Restated Stock Incentive Plan*
|
|
|
10.34†
|
|
|
Lead
Dog Digital, Inc. 2001 Stock Option Plan*
|
|
|
10.35†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Brett
Zucker, dated February
27, 2002*
|
|
|
10.36†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Brett
Zucker, dated February
27, 2002*
|
|
|
10.37†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Brett
Zucker, dated February
27, 2002*
|
|
|
10.38†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Brett
Zucker, dated June 1,
2003*
|
|
|
10.39†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Brett
Zucker, dated June 1,
2005*
|
|
|
10.40†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Robert
Seeger, dated February
27, 2002*
|
|
|
10.41†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Robert
Seeger, dated February
27, 2002*
|
|
|
10.42†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Robert
Seeger, dated
September 30, 2002*
|
|
|
10.43†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Robert
Seeger, dated June 1,
2003*
|
|
|
10.44†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Robert
Seeger, dated June 1,
2005*
|
|
|
10.45†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Gary Cebula,
dated August 31,
2000*
|
|
|
10.46†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Gary Cebula,
dated September
30, 2002*
|
|
|
10.47†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Gary Cebula,
dated June 1,
2003*
|
|
|
10.48†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Gary Cebula,
dated June 1,
2005*
|
|
|
10.49†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to William
Coldrick, dated June
1, 2005*
|
|
|
10.50†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Thomas
Massie, dated
September 3, 2002*
|
|
|
10.51†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Thomas
Massie, dated
September 30, 2002*
|
|
|
10.52†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Robert
Hegarty, dated
September 20, 2006*
|
|
|
10.53†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Kenneth
Galaznik, dated
September 20, 2006*
|
|
10.54
|
Amendment No. 1 to Secured Promissory Note filed as Exhibit 10.22, dated as of March 29, 2007 | |||
|
|
14.1†
|
|
|
Code
of Ethics
|
|
|
21.1†
|
|
|
Subsidiaries
of the Registrant
|
|
|
23.1†††
|
|
|
Consent
of Morse, Barnes-Brown & Pendleton, P.C. (incorporated into
exhibit 5.1)
|
II-6
|
|
23.2
|
|
|
Consent
of UHY LLP
|
|
|
24.1†
|
|
|
Power
of Attorney
|
|
|
99.1†
|
|
|
Audit
Committee Charter
|
|
|
99.2†
|
|
|
Compensation
Committee Charter
|
|
|
99.3†
|
|
|
Nominating
and Governance
Charter
|
________________________
|
†
|
Filed
as an exhibit to the Registrant’s Registration Statement on Form SB-2 No.
333-139298 and incorporated herein by
reference.
|
|
††
|
Filed
as an exhibit to Amendment No. 1 to the Registrant’s Registration
Statement on Form SB-2, No. 333-139298, and incorporated by
reference
|
|
†††
|
To
be filed by amendment.
|
|
*
|
Management
contract or compensatory plan
|
|
**
|
Schedules
and attachments to this exhibit have been omitted in reliance on
Item
601(b)(2) of Regulation S-B. Such schedules and attachments are listed
in
the index to the exhibit and will be provided to the Commission upon
request.
|
Item
28. Undertakings
The
undersigned registrant hereby undertakes to:
|
(1)
|
File,
during any period in which offers or sales are being made, a
post-effective amendment to this registration statement
to:
|
|
(i)
|
Include
any prospectus required by Section 10(a)(3) of the Securities Act of
1933, as amended (the “Securities
Act”);
|
|
(ii)
|
Reflect
in the prospectus any facts or events which, individually or together,
represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease
in
volume of securities offered (if the total dollar value of the
securities
offered would not exceed that which was registered) and any deviation
from
the low or high end of the estimated maximum offering range may
be
reflected in the form of a prospectus filed with the Commission
pursuant
to Rule 424(b) under the Securities Act if, in the aggregate, the
changes in volume and price represent no more than a 20% change
in the
maximum aggregate offering price set forth in the “Calculation of
Registration Fee” table in the effective registration
statement, and
|
|
(iii)
|
Include
any additional or changed material information on the plan of
distribution.
|
|
(2)
|
For
determining liability under the Securities Act, treat each post-effective
amendment as a new registration statement of the securities offered,
and
the offering of the securities at that time to be the initial bona
fide
offering.
|
|
(3)
|
File
a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the
offering.
|
|
(4)
|
For
determining liability of the undersigned small business issuer
under the
Securities Act to any purchaser in the initial distribution of
the
securities, the undersigned undertakes that in a primary offering
of
securities of the undersigned small business issuer pursuant to
this
registration statement, regardless of the underwriting method used
to sell
the securities to the purchaser, if the securities are offered
or sold to
such purchaser by means of any of the following communications,
the
undersigned small business issuer will be a seller to the purchaser
and
will be considered to offer or sell such securities to such
purchaser:
|
II-7
|
(i)
|
Any
preliminary prospectus or prospectus of the undersigned small
business
issuer relating to the offering required to be filed pursuant
to
Rule 424;
|
|
(ii)
|
Any
free writing prospectus relating to the offering prepared by
or on behalf
of the undersigned small business issuer or used or referred
to by the
undersigned small business issuer;
|
|
(iii)
|
The
portion of any other free writing prospectus relating to
the offering
containing material information about the undersigned small
business
issuer or its securities provided by or on behalf of the
undersigned small
business issuer; and
|
|
(iv)
|
Any
other communication that is an offer in the offering made
by the
undersigned small business issuer to the
purchaser.
|
|
(5)
|
The
small business issuer hereby undertakes to provide to the underwriters,
at
the closing specified in the underwriting agreement, certificates
in such
denominations and registered in such names as required by the underwriters
to permit prompt delivery to each
purchaser.
|
|
(6)
|
Insofar
as indemnification for liabilities arising under the Securities
Act may be
permitted to directors, officers and controlling persons of the
registrant
pursuant to the foregoing provisions, or otherwise, the registrant
has
been advised that in the opinion of the Securities and Exchange
Commission
such indemnification is against public policy as expressed in the
Securities Act and is, therefore,
unenforceable.
|
|
(7)
|
In
the event that a claim for indemnification against such liabilities
(other
than the payment by the registrant of expenses incurred or paid
by a
director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted
by such
director, officer or controlling person in connection with the
securities
being registered, the registrant will, unless in the opinion of
its
counsel the matter has been settled by controlling precedent, submit
to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the
Securities Act and will be governed by the final adjudication of
such
issue.
|
|
(8)
|
The
undersigned registrant hereby undertakes
that:
|
|
(i)
|
For
purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of
this
registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4), or 497(h) under the Securities Act shall be deemed to be
part of
this registration statement as of the time it was declared
effective
|
|
(ii)
|
For
the purpose of determining any liability under the Securities Act,
each
post-effective amendment that contains a form of prospectus shall
be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be
deemed to be the initial bona fide offering
thereof.
|
|
(9)
|
For
the purpose of determining liability under the Securities Act
to any
purchaser:
|
Each
prospectus filed pursuant to Rule 424(b) under the Securities Act as part
of a registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in
reliance on Rule 430A (§ 230.430A of this chapter), shall be deemed to
be part of and included in the registration statement as of the date it is
first
used after effectiveness. Provided however, that no statement made in a
registration statement or prospectus that is part of the registration statement
or made in a document incorporated or deemed incorporated by reference into
the
registration statement or prospectus that is part of the registration statement
will, as to a purchaser with a time of contract of sale prior to such first
use,
supersede or modify any statement that was made in the registration statement
or
prospectus that was part of the registration statement or made in any such
document immediately prior to such date of first use.
II-8
Signatures
In
accordance with the requirements of the Securities Act of 1933, as amended,
the
registrant certifies that it has reasonable grounds to believe that it
meets all
of the requirements for filing on Form SB-2 and authorized this Amendment
No. 2 to Registration Statement to be signed on its behalf by the undersigned,
in the City of Woburn, Commonwealth of Massachusetts, on April
2,
2007.
|
|
|
|
|
|
BRIDGELINE
SOFTWARE,
INC.
|
|
|
|
a
Delaware corporation
|
|
|
|
|
|
|
|
By:
|
/s/ Thomas
Massie
Name:
Thomas Massie
|
|
|
Title:
Chief Executive Officer and
Director
|
|
In
accordance with the requirements of the Securities Act of 1933, as amended,
this
Amendment No. 2 to registration statement has been signed by the following
persons in the capacities with Bridgeline Software, Inc., and on the dates
indicated.
|
Signature
|
|
Position
|
|
Date
|
|
|
|
|
|
|
|
/s/
Thomas Massie
Thomas
Massie
|
|
Chief
Executive Officer and Director
(Principal
Executive Officer)
|
|
April
2, 2007
|
|
|
|
|
|
|
|
/s/
Gary Cebula
Gary
Cebula
|
|
Chief
Financial Officer (Principal
Financial
Officer and Principal Accounting
Officer)
|
|
April
2, 2007
|
|
|
|
|
|
|
|
/s/
William Coldrick*
William
Coldrick
|
|
Director
|
|
April
2, 2007
|
|
|
|
|
|
|
|
/s/
Kenneth Galaznik*
Kenneth
Galaznik
|
|
Director
|
|
April
2, 2007
|
|
|
|
|
|
|
|
/s/
Robert Hegarty*
Robert
Hegarty
|
|
Director
|
|
April
2, 2007
|
|
|
|
|
|
|
|
*
|
The
undersigned, by signing his name hereto, does hereby sign this
Amendment
No. 2 to Registration Statement on behalf of the above-indicated
officer or director of the Registrant pursuant to the Power
of Attorney
signed by such officer or
director.
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/
Thomas Massie
|
|
|
|
|
|
Name:
|
|
Thomas
Massie
|
|
|
|
|
|
Title:
|
|
President
|
|
|
II-9
Exhibit
Index
|
|
Item
|
|
|
Title
|
|
|
1.1†††
|
|
|
Underwriting
Agreement
|
|
|
2.1†
|
|
|
New
Tilt, Inc. Acquisition Agreement**
|
|
|
2.2†
|
|
|
Interactive
Applications, Inc. Acquisition Agreement**
|
|
|
2.3††
|
|
|
Objectware,
Inc. Acquisition Agreement**
|
|
|
2.4†
|
|
|
Lead
Dog Digital, Inc. Acquisition Agreement**
|
|
|
2.5†
|
|
|
Streamline
Communications, Inc. Acquisition Agreement**
|
|
2.6
|
First Amendment to Agreement and Plan of Merger filed as Exhibit 2.3, dated as of March 29, 2007 | |||
|
|
3.1(i)†
|
|
|
Certificate
of Incorporation, as amended to date
|
|
|
3.1(ii)†
|
|
|
Form
of Amended and Restated Certificate of Incorporation
(to become effective
shortly before the completion of the offering contemplated
by this
registration statement)
|
|
|
3.1(iii)†
|
|
|
Amended
and Restated By-laws
|
|
|
4.1†††
|
|
|
Specimen
Common Stock Certificate
|
|
|
5.1†††
|
|
|
Opinion
of Morse, Barnes-Brown & Pendleton, P.C. regarding the legality of the
shares offered hereby
|
|
|
10.1†
|
|
|
Office
Building Lease between Sixth Road Woburn, LLC and Bridgeline
Software,
Inc., dated May 5, 2005
|
|
|
10.2†
|
|
|
Office
Building Lease between 104 West 40th
Street
Partners LLC and Bridgeline Software, Inc., dated November
26,
2003
|
|
|
10.3†
|
|
|
Office
Building Lease between Starwood Urban Retail I, LLC
and Interactive
Applications Group, Inc., dated August 20, 1999
|
|
|
10.4†
|
|
|
First
Amendment to Office Building Lease between Starwood
Urban Retail I, LLC
and Interactive Applications Group, Inc., dated January
16,
2001
|
|
|
10.5††
|
|
|
Office
Building Lease between Valliappa Software Technological
Park Pvt. Ltd. and
Bridgeline Software Enterprises Pvt. Ltd. dated December
5,
2005
|
|
|
10.6†
|
|
|
Lease
between Cameron-Elmwood Realty, LLC and New Tilt, Inc.
dated December 6,
2004
|
|
|
10.7†
|
|
|
Employment
Agreement with Thomas Massie, dated October 1, 2001*
|
|
|
10.8†
|
|
|
Employment
Agreement with Gary Cebula, dated January 1, 2006*
|
|
|
10.9†
|
|
|
Employment
Agreement with Brett Zucker, dated January 1, 2006*
|
|
|
10.10†
|
|
|
Employment
Agreement with Robert Seeger, dated January 1, 2006*
|
|
|
10.11†††
|
|
|
Form
of Employment Agreement with Erez M. Katz
|
|
|
10.12†
|
|
|
Business
Combination Services Agreement dated as of October
1, 2005 between
Bridgeline Software, Inc. and Joseph Gunnar & Co.,
LLC
|
|
|
10.13†
|
|
|
Memorandum
of Understanding between Fin Net, LLC and Bridgeline
Software, Inc. dated
January 5, 2004
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|
10.14†
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|
Financing
Agreement between Sand Hill Finance, LLC and Bridgeline
Software, Inc.
dated March 29, 2005
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|
10.15†
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|
First
Amendment to Financing Agreement between Sand Hill
Finance, LLC and
Bridgeline Software, Inc. dated September 12, 2005
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|
10.16†
|
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|
Convertible
Term Note issued by Bridgeline Software, Inc. to Thomas
Massie for the
principal sum of $200,000, dated September 3, 2002
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|
10.17†
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|
Convertible
Term Note issued by Bridgeline Software, Inc. to Thomas
Massie for the
principal sum of $112,000, dated September 3, 2002
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|
10.18†
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|
Security
Agreement between Bridgeline Software, Inc. and Thomas
Massie dated as of
September 3, 2002
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|
10.19†
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|
Placement
Agent Agreement by and between Bridgeline Software,
Inc. and Joseph Gunnar
& Co., LLC, dated as of April 10, 2006
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10.20†
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|
General
Security Agreement by and between Bridgeline Software,
Inc. and the
investors named therein, dated as of April 21, 2006
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10.21†
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|
Form
of Subscription Agreement by and between Bridgeline
Software, Inc. and the
investors listed on Schedule A attached
thereto
|
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|
10.22†
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|
Form
of Secured Promissory Note issued to the investors
listed on Schedule A
attached thereto
|
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|
10.23†
|
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|
Form
of Warrant to Purchase Common Stock of Bridgeline Software,
Inc. issued to
the investors listed on Schedule A attached thereto,
as
amended
|
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|
10.24†
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|
Form
of Warrant to Purchase Common Stock of Bridgeline Software,
Inc. issued to
Placement Agent in April 2006 offering, as amended
|
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|
10.25†
|
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|
Form
of Warrant to Purchase Common Stock of Bridgeline Software,
Inc. issued to
Winslow, Evans & Crocker, Inc., and associates of Winslow, Evans &
Crocker, Inc., as compensation for services as placement
gent in 2003 and
2004 equity offerings
|
|
|
10.26†
|
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|
Form
of Warrant to Purchase Common Stock of Bridgeline Software,
Inc. issued to
Fin Net, LLC as compensation for investment banking
services
|
|
|
10.27†
|
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|
Common
Stock Purchase Warrant of Bridgeline Software issued
to Sand Hill Finance,
LLC
|
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|
10.28†
|
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|
Data
Processing and Technical Services Agreement between
The Bank of New York
and Bridgeline Software, Inc. dated as of October 25,
2002
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|
10.29†
|
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|
Professional
Services Agreement between The Depository Trust & Clearing Corporation
and Bridgeline Software, Inc. dated as of January 2,
2006
|
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|
10.30†
|
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|
Statement
of Work for Web Maintenance Services between Nomura
Securities, Inc. and
Bridgeline Software, Inc. dated as of June 12, 2002
|
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|
10.31†
|
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|
Agreement
between Pfizer, Inc. and Bridgeline Software, Inc.
dated as of December
16, 2005
|
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|
10.32†
|
|
|
Master
Services Agreement between John Hancock Life Insurance
Co. and Bridgeline
Software, Inc. dated as of July 1, 2004
|
|
|
10.33†
|
|
|
Amended
and Restated Stock Incentive Plan*
|
|
|
10.34†
|
|
|
Lead
Dog Digital, Inc. 2001 Stock Option Plan*
|
|
|
10.35†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Brett
Zucker, dated February
27, 2002*
|
|
|
10.36†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Brett
Zucker, dated February
27, 2002*
|
|
|
10.37†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Brett
Zucker, dated February
27, 2002*
|
|
|
10.38†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Brett
Zucker, dated June 1,
2003*
|
|
|
10.39†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Brett
Zucker, dated June 1,
2005*
|
|
|
10.40†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Robert
Seeger, dated February
27, 2002*
|
|
|
10.41†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Robert
Seeger, dated February
27, 2002*
|
|
|
10.42†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Robert
Seeger, dated
September 30, 2002*
|
|
|
10.43†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Robert
Seeger, dated June 1,
2003*
|
|
|
10.44†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Robert
Seeger, dated June 1,
2005*
|
|
|
10.45†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Gary Cebula,
dated August 31,
2000*
|
|
|
10.46†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Gary Cebula,
dated September
30, 2002*
|
|
|
10.47†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Gary Cebula,
dated June 1,
2003*
|
|
|
10.48†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Gary Cebula,
dated June 1,
2005*
|
|
|
10.49†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to William
Coldrick, dated June
1, 2005*
|
|
|
10.50†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Thomas
Massie, dated
September 3, 2002*
|
|
|
10.51†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Thomas
Massie, dated
September 30, 2002*
|
|
|
10.52†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Robert
Hegarty, dated
September 20, 2006*
|
|
|
10.53†
|
|
|
Stock
Option Grant by Bridgeline Software, Inc. to Kenneth
Galaznik, dated
September 20, 2006*
|
|
10.54
|
Amendment No. 1 to Secured Promissory Note filed as Exhibit 10.22, dated as of March 29, 2007 | |||
|
|
14.1†
|
|
|
Code
of Ethics
|
|
|
21.1†
|
|
|
Subsidiaries
of the Registrant
|
|
|
23.1†††
|
|
|
Consent
of Morse, Barnes-Brown & Pendleton, P.C. (incorporated into
exhibit 5.1)
|
|
|
23.2
|
|
|
Consent
of UHY LLP
|
|
|
24.1†
|
|
|
Power
of Attorney
|
|
|
99.1†
|
|
|
Audit
Committee Charter
|
|
|
99.2†
|
|
|
Compensation
Committee Charter
|
|
|
99.3†
|
|
|
Nominating
and Governance
Charter
|
________________________
|
†
|
Filed
as an exhibit to the Registrant’s Registration Statement on Form SB-2 No.
333-139298 and incorporated herein by
reference.
|
|
††
|
Filed
as an exhibit to Amendment No. 1 to the Registrant’s Registration
Statement on Form SB-2, No. 333-139298, and incorporated by
reference
|
|
†††
|
To
be filed by amendment.
|
|
*
|
Management
contract or compensatory plan
|
|
**
|
Schedules
and attachments to this exhibit have been omitted in reliance
on Item
601(b)(2) of Regulation S-B. Such schedules and attachments are
listed in
the index to the exhibit and will be provided to the Commission
upon
request.
|