UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

 (Mark One)
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended March 31, 2013

OR

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________

Commission File Number 333-139298

Bridgeline Digital, Inc.
(Exact name of registrant as specified in its charter)

 
Delaware
52-2263942
State or other jurisdiction of incorporation or organization
IRS Employer Identification No.
 
80 Blanchard Road
 
Burlington, Massachusetts
01803
(Address of Principal Executive Offices)
(Zip Code)


(781) 376-5555
(Registrant’s telephone number, including area code)
 
(Former name, former address and former fiscal year, if changed since last report)
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  
Yes   x     No    o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)    x  Yes     o  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
  
     
Large accelerated filer   o
Accelerated filer   o
Non-accelerated filer   o
(Do not check if a smaller reporting company)
Smaller reporting company  x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No   x
 

The number of shares of Common Stock par value $0.001 per share, outstanding as of May 10, 2013 was 15,332,968
 
 
1

 
 
Bridgeline Digital, Inc.
 
Quarterly Report on Form 10-Q
 
For the Quarterly Period ended March 31, 2013
 
Index
 
   
Page
 
Part I
Financial Information
   
       
Item 1.
Financial Statements
   
       
 
Condensed Consolidated Balance Sheets (unaudited) as of March 31, 2013 and September 30, 2011
4
 
       
 
Condensed Consolidated Statements of Operations (unaudited) for the three months and six months ended March 31, 2013 and 2012
5
 
       
 
Condensed Consolidated Statements of Comprehensive Income (unaudited) for the three and six months ended March 31, 2013 and 2012
6
 
       
 
Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended March 31, 2013 and 2012
7
 
       
 
Notes to Interim Condensed Consolidated Financial Statements (unaudited)
8
 
       
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
17
 
       
Item 3.
Qualitative and Quantitative Disclosures About Market Risk
30
 
       
Item 4.
Controls and Procedures
30
 
       
Part II
Other Information
   
       
Item 1.
Legal Proceedings
31
 
       
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
31
 
       
Item 6.
Exhibits
32
 
       
Signatures
 
33
 
 
 
2

 

Bridgeline Digital, Inc.
 
Quarterly Report on Form 10-Q
 
For the Quarterly Period ended March 31, 2013
 
 
Statements contained in this Report on Form 10-Q that are not based on historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements may be identified by the use of forward-looking terminology such as “should,” “could,” “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intends,” “continue,” or similar terms or variations of those terms or the negative of those terms.  These statements appear in a number of places in this Form 10-Q and include statements regarding the intent, belief or current expectations of Bridgeline Digital, Inc. Forward-looking statements are merely our current predictions of future events. Investors are cautioned that any such forward-looking statements are inherently uncertain, are not guaranties of future performance and involve risks and uncertainties. Actual results may differ materially from our predictions. Important factors that could cause actual results to differ from our predictions include the impact of the weakness in the U.S. and international economies on our business, our inability to manage our future growth effectively or profitably, fluctuations in our revenue and quarterly results, our license renewal rate, the impact of competition and our ability to maintain margins or market share, the limited market for our common stock, the volatility of the market price of our common stock, the performance of our products, our ability to respond to rapidly evolving technology and customer requirements, our ability to protect our proprietary technology, the security of our software, our dependence on our management team and key personnel, our ability to hire and retain future key personnel, or our ability to maintain an effective system of internal controls.  Although we have sought to identify the most significant risks to our business, we cannot predict whether, or to what extent, any of such risks may be realized, nor is there any assurance that we have identified all possible issues which we might face. We assume no obligation to update our forward-looking statements to reflect new information or developments. We urge readers to review carefully the risk factors described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012 as well as in the other documents that we file with the Securities and Exchange Commission. You can read these documents at www.sec.gov.
 
 
Where we say “we,” “us,” “our,” “Company” or “Bridgeline Digital” we mean Bridgeline Digital, Inc.
 
 
3

 
 
PART I—FINANCIAL INFORMATION
  Item 1.                 Financial Statements.
 
BRIDGELINE DIGITAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 (Dollars in thousands, except share and per share data)
(Unaudited)

   
March 31,
2013
   
September 30,
2012
 
ASSETS
           
             
Current assets:
           
Cash and cash equivalents
  $ 1,799     $ 2,126  
Accounts receivable and unbilled receivables, net
    3,742       3,977  
Prepaid expenses and other current assets
    821       648  
Total current assets
    6,362       6,751  
Equipment and improvements, net
    2,541       2,735  
Intangible assets, net
    1,142       1,527  
Goodwill
    21,880       21,545  
Other assets
    1,742       1,132  
Total assets
  $ 33,667     $ 33,690  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Current liabilities:
               
Accounts payable
  $ 1,159     $ 1,132  
Accrued liabilities
    1,062       1,306  
Accrued earnouts, current
    399       375  
Debt, current
    1,342       1,424  
Capital lease obligations, current
    227       230  
Deferred revenue
    2,996       1,144  
Total current liabilities
    7,185       5,611  
                 
Accrued earnouts, net of current portion
    616       990  
Debt, net of current portion
    2,890       2,988  
Capital lease obligations, net of current portion
    112       127  
Other long term liabilities
    952       1,004  
Total liabilities
  $ 11,755     $ 10,720  
                 
Commitments and contingencies
               
                 
Stockholders’ 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; 15,332,968 and 15,203,538 shares issued and outstanding, respectively
    15       15  
Additional paid-in capital
    41,067       40,847  
Accumulated deficit
    (19,045 )     (17,716 )
Accumulated other comprehensive loss
    (125 )     (176 )
Total stockholders’ equity
    21,912       22,970  
Total liabilities and stockholders’ equity
  $ 33,667     $ 33,690  
 
 
      The accompanying notes are an integral part of these consolidated financial statements.
 
 
4

 
 
BRIDGELINE DIGITAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Dollars in thousands, except share and per share data)
(Unaudited)


   
Three Months Ended
March 31,
   
Six Months Ended
March 31,
 
   
2013
   
2012
   
2013
   
2012
 
Revenue:
                       
Web application development services
  $ 4,489     $ 5,441     $ 9,339     $ 10,749  
Managed service hosting
    491       611       1,047       1,227  
Subscription and perpetual licenses
    1,024       620       1,811       1,213  
Total revenue
    6,004       6,672       12,197       13,189  
Cost of revenue:
                               
Web application development services
    2,494       2,771       5,248       5,626  
Managed service hosting
    76       85       148       191  
Subscription and perpetual licenses
    247       100       415       220  
Total cost of revenue
    2,817       2,956       5,811       6,037  
Gross profit
    3,187       3,716       6,386       7,152  
Operating expenses:
                               
Sales and marketing
    2,164       1,846       3,998       3,561  
General and administrative
    946       1,001       2,300       2,001  
Research and development
    247       480       379       883  
Depreciation and amortization
    390       435       814       850  
Impairment of intangible asset
    -       -       -       281  
Total operating expenses
    3,747       3,762       7,491       7,576  
Loss from operations
    (560 )     (46 )     (1,105 )     (424 )
Interest income (expense), net
    (59 )     (72 )     (135 )     (136 )
Loss before income taxes
    (619 )     (118 )     (1,240 )     (560 )
Provision for income taxes
    68       48       89       69  
Net loss
  $ (687 )   $ (166 )   $ (1,329 )   $ (629 )
                                 
Net loss per share:
                               
Basic and diluted
  $ (0.05 )   $ (0.01 )   $ (0.09 )   $ (0.05 )
Number of weighted average shares:
                               
Basic and diluted
    14,878,361       12,338,156       14,830,488       12,328,899  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
5

 
 
BRIDGELINE DIGITAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 (Dollars in thousands, except share and per share data)
(Unaudited)


   
Three Months Ended
March 31,
   
Six Months Ended
March 31,
 
   
2013
   
2012
   
2013
   
2012
 
Net Loss
  $ (687 )   $ (166 )   $ (1,329 )   $ (629 )
Other comprehensive income (loss):
                               
Net change in foreign currency translation adjustment
    12       (30 )     51       (36 )
Other comprehensive income (loss):
    12       (30 )     51       (36 )
Comprehensive loss
  $ (675 )   $ (196 )   $ (1,278 )   $ (665 )

The accompanying notes are an integral part of these consolidated financial statements.
 
 
6

 

BRIDGELINE DIGITAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Dollars in thousands)
(Unaudited)

   
Six Months Ended
March 31,
 
   
2013
   
2012
 
Cash flows from operating activities:
           
Net loss
  $ (1,329 )   $ (629 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Amortization of intangible assets
    274       386  
Impairment of intangible asset
    -       281  
Depreciation
    540       464  
Other amortization
    79       90  
Stock-based compensation
    279       155  
Contingent earnout liability adjustment
    (312 )     (313 )
Changes in operating assets and liabilities, net of acquisitions:
               
Accounts receivable and unbilled receivables
    199       833  
Prepaid expenses and other assets
    (116 )     (209 )
Accounts payable and accrued liabilities
    (410 )     (745 )
Deferred revenue
    1,828       (134 )
Other liabilities
    (52 )     (139 )
Total adjustments
    2,309       669  
Net cash provided by operating activities
    980       40  
Cash flows from investing activities:
               
Equipment and improvements
    (239 )     (580 )
Acquisitions, net of cash acquired
    -       (33 )
Software development capitalization costs
    (670 )     (14 )
Contingent acquisition payments
    (237 )     (261 )
Net cash used in investing activities
    (1,146 )     (888 )
Cash flows from financing activities:
               
Proceeds from exercise of employee stock options
    67       20  
Proceeds from employee stock purchase plan
    46       -  
Borrowings from bank term loan
    -       -  
Borrowings from bank line of credit
    725       1,875  
Payments on bank term loan
    (183 )     (172 )
Payments on bank line of credit
    (610 )     (1,677 )
Payments on acquired debt
    -       (120 )
Payments on subordinated promissory notes
    (112 )     (83 )
Principal payments on capital leases
    (145 )     (135 )
Net cash used in financing activities
    (212 )     (292 )
Effect of exchange rate changes on cash and cash equivalents
    51       (36 )
Net decrease in cash and cash equivalents
    (327 )     (1,176 )
Cash and cash equivalents at beginning of period
    2,126       2,528  
Cash and cash equivalents at end of period
  $ 1,799     $ 1,352  
Supplemental disclosures of cash flow information:
               
Cash paid for:
               
Interest
  $ 135     $ 130  
Income taxes
  $ 13     $ 34  
Non cash activities:
               
Equipment purchased under capital leases
  $ 123     $ 104  
Equipment and other assets included in accounts payable
  $ -     $ 237  
Accrued contingent consideration (earnouts)
  $ 83     $ 600  
Common stock issued in connection with acquisition
  $ -     $ 150  
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
7

 
 
BRIDGELINE DIGITAL, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
 
1.   Description of Business
 
Overview
 
Bridgeline Digital enables its customers to maximize the performance of their mission critical websites, intranets, and online stores. Bridgeline is the developer of the award-winning iAPPS Web Engagement Management (WEM) product platform and related digital solutions. The iAPPS platform deeply integrates Web Content Management, eCommerce, eMarketing, and web Analytics capabilities within the heart of websites or eCommerce web stores to help marketers deliver online experiences that attract, engage, and convert their customers across all digital channels. Bridgeline’s iAPPS platform combined with its digital services assists customers in maximizing on-line revenue, improving customer service and loyalty, enhancing employee knowledge, and reducing operational costs.

The iAPPS platform is delivered through a cloud-based SaaS (“Software as a Service”) multi-tenant business model, whose flexible architecture provides customers with state of the art deployment providing maintenance, daily technical operation and support; or via a traditional perpetual licensing business model, in which the iAPPS software resides on a dedicated server in either the customer’s facility or Bridgeline’s co-managed hosting facility.

Bridgeline Digital was incorporated under the laws of the State of Delaware on August 28, 2000.

Locations

The Company’s corporate office is located in Burlington, Massachusetts.  The Company maintains regional field offices serving the following geographical locations: Atlanta, GA; Baltimore, MD; Boston, MA; Chicago, IL; Dallas, TX; Denver, CO; New York, NY; Philadelphia, PA; San Diego, CA; and Tampa, FL.  The Company has one wholly-owned subsidiary, Bridgeline Digital Pvt. Ltd. located in Bangalore, India.

2.   Summary of Significant Accounting Policies
 
Basis of Presentation and Principles of Consolidation
 
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated.
 
Unaudited Interim Financial Information

The accompanying interim Condensed Consolidated Balance Sheet as of March 31, 2013, the Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2013 and 2012, respectively, the Condensed and Consolidated Statements of Comrpehensive Income for the three and six months ended March 31, 2013 and 2012, respectively, and the Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2013 and 2012, respectively, are unaudited. The unaudited interim condensed consolidated statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) 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 year ended September 30, 2012. These condensed financial statements include all adjustments, consisting of normal recurring adjustments and accruals, necessary for the fair presentation of the Company’s financial position at March 31, 2013 and its results of operations for the three and six months ended March 31, 2013 and 2012, respectively, and its cash flows for the six months ended March 31, 2013 and 2012, respectively. The results for the three months ended March 31, 2013 are not necessarily indicative of the results to be expected for the year ending September 30, 2013. The accompanying September 30, 2012 Condensed Consolidated Balance Sheet has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by US GAAP for complete financial statements.
 
Subsequent Events

On May 3, 2013 the Company amended its charter to increase the number of authorized common shares from 20 million to 30 million.
 
 
8

 

BRIDGELINE DIGITAL, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
 
Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-05 (“ASU 2011-05”), Presentation of Comprehensive Income , which amends ASC Topic 220, Comprehensive Income . ASU 2011-05 eliminates the option to present the components of other comprehensive income as a part of the statement of stockholders’ equity and requires other comprehensive income to be presented as part of a single continuous statement of comprehensive income or in a statement of other comprehensive income immediately following the statement of operations. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income. ASU 2011-05 is effective for fiscal years beginning after December 15, 2011 and must be retrospectively applied to all reporting periods presented. The Company adopted ASU 2011-05 on October 1, 2012. The adoption of ASU 2011-05 did not have an impact on the Company’s financial condition, results of operations or cash flows.

3. Accounts Receivable and Unbilled Receivables

Accounts receivable and unbilled receivables consists of the following:
 
   
As of
March 31, 2013
   
As of
September 30, 2012
 
Accounts receivable
  $ 3,451     $ 3,794  
Unbilled receivables
    384       381  
Subtotal
    3,835       4,175  
Allowance for doubtful accounts
    (93 )     (198 )
Accounts receivable and unbilled receivables, net
  $ 3,742     $ 3,977  


4.   Acquisitions

MarketNet, Inc.

On May 31, 2012, the Company completed the acquisition of MarketNet, Inc. (“MarketNet”), an interactive technology company that provides web application development based in Dallas, Texas. The Company acquired all of the outstanding capital stock of MarketNet for consideration consisting of (i) $20 thousand in cash, (ii) assumption of debt of $244 thousand and (ii) contingent consideration of up to $650 thousand in cash and 204,331 shares of Bridgeline Digital common stock, valued at $250 thousand ($1.22 per share). The cash consideration was reduced by $58 thousand due to the Seller’s inability to meet an agreed upon target for working capital at the time of acquisition and was applied against Marketnet’s earnout payment for the three months ended December 31, 2012. The contingent consideration is payable quarterly over the 12 consecutive calendar quarters following the acquisition, contingent upon the acquired business achieving certain quarterly revenue and quarterly operating income targets during the period. To the extent that either the quarterly revenue target or the quarterly operating income target is not met in a particular quarter, the earn-out period will be extended for up to four additional quarters. MarketNet is also eligible to earn additional bonus equity consideration of 200,000 shares, if annual net revenues of the acquired business exceed a certain threshold in any fiscal year through September 30, 2015. The Company is required to assess the probability of the acquired business achieving the contingent cash and stock payments which requires management to make estimates and judgments based on forecasts of future performance. As a result, the Company reduced the initial estimate of $607 thousand for the contingent cash consideration to be achieved and $262 thousand for the contingent stock consideration to be achieved by $8 thousand and $30 thousand, respectively. The contingent common stock has been issued and is being held in escrow pending satisfaction of the applicable targets. MarketNet achieved its quarterly revenue and operating income targets for the first two quarterly periods after the acquisition date but not for the three months ended March 31, 2013.   MarketNet’s operating results are reflected in the Company’s condensed consolidated financial statements as of the acquisition date.

Magnetic Corporation

On October 3, 2011, the Company completed the acquisition of Magnetic Corporation (“Magnetic”), a web technology company based in Tampa, Florida. Bridgeline acquired all of the outstanding capital stock of Magnetic for consideration consisting of (i) $150 thousand in cash and (ii) contingent consideration of up to $600 thousand in cash and 166,666 shares of Bridgeline Digital common stock, valued at $150 thousand ($0.90 per share). The cash consideration was reduced by $100 thousand due to the Seller’s inability to meet an agreed upon target for working capital at the time of acquisition. The contingent consideration is payable quarterly over the 12 consecutive calendar quarters following the acquisition, contingent upon the acquired business achieving certain quarterly revenue and quarterly operating income targets during the period. The contingent common stock has been issued and is being held in escrow pending satisfaction of the applicable targets.  To the extent that either the quarterly revenue target or the quarterly operating income target is not met in a particular quarter, the earn-out period will be extended for up to four additional quarters. The Company is required to assess the probability of the acquired business achieving the contingent cash and stock payments which requires management to make estimates and judgments based on forecasts of future performance. As a result, the Company estimated and accrued $600 thousand of the contingent cash consideration to be achieved and $150 thousand of the contingent stock consideration to be achieved. Magnetic achieved its quarterly revenue and operating income targets for all periods since the acquisition date. Magnetic’s operating results are reflected in the Company’s condensed consolidated financial statements as of the acquisition date, which corresponds to the Company’s commencement of fiscal 2012.
 
 
9

 
 
BRIDGELINE DIGITAL, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)

The estimated fair value of net assets acquired from the MarketNet and Magnetic acquisitions are summarized as follows:

Net assets acquired:
 
Amount
 
Cash
  $ 35  
Accounts Receivable, net
    327  
Other Assets
    181  
Fixed Assets
    91  
Intangible Assets
    910  
Goodwill
    1,426  
Total Assets
    2,970  
Current Liabilities
    1,210  
Liabilities, net of current
    73  
Total liabilities assumed
    1,283  
Net assets acquired:
  $ 1,687  
         
Purchase Price:
       
Cash Paid
  $ 70  
Contingent earnouts - payable in cash
    1,206  
Contingent earnouts - payable in common stock
    411  
    $ 1,687  
   
As part of the Magnetic acquisition, of the $430 thousand allocated to intangible assets, $350 thousand is allocated to customer relationships and $80 thousand is allocated to non-compete agreements, with an average useful life of five years.

The Company completed its formal valuation of intangibles acquired in the MarketNet transaction during the three months ended March 31, 2013. As a result, the Company’s initial estimate of $600 thousand allocated to intangible assets was reduced to $480 thousand. $370 thousand was allocated to customer relationships with and estimated useful life of 5 years and $110 thousand allocated to non-compete agreements with an estimated useful life of 7 years.

The goodwill recorded as a result of the Magnetic and MarketNet acquisitions is nondeductible for tax purposes.

The following unaudited pro forma financial information reflects the combined results of operations for Bridgeline for the three and six months ended March 31, 2012, including certain adjustments, as if the acquisition of MarketNet had occurred on October 1, 2011.  This information does not necessarily reflect the results of operations that would have occurred had the acquisitions taken place at the beginning of the period, and is not necessarily indicative of the results which may be obtained in the future (in thousands, except per share data):
 
 
10

 

BRIDGELINE DIGITAL, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
 
   
Three Months
Ended
March 31, 2013
   
Six Months
Ended
March 31, 2013
 
             
Total revenue
  $ 7,285     $ 14,455  
Net loss
  $ (149 )   $ (681 )
Net loss per share:
               
Basic and diluted
  $ (0.01 )   $ (0.06 )
Number of weighted average shares:
               
Basic and diluted
    12,355,184       12,345,928  

Contingent earnout liabilities for acquisitions completed after September 30, 2009 were recorded at fair value based on valuation models that utilize relevant factors such as estimated probabilities of the acquisitions achieving the performance targets throughout the earnout period. During the three months ended March 31, 2013, total estimated contingent earnout liabilities, cash and stock, were reduced by $312 thousand which comprised $141 thousand of contingent cash earnouts and $171 thousand of contingent stock earnouts. The following table summarizes the changes in accrued earnout liabilities for the six months ended March 31, 2013:


Balance at September 30, 2012
  $ 1,365  
Contingent earnout liability accruals
    83  
Contingent earnout liability payments
    (237 )
Contingent earnout reduced by working capital adjustment
    (55 )
Contingent earnout liability estimate adjustment
    (141 )
Balance at March 31, 2013
  $ 1,015  
 
 
5.   Intangible Assets


Changes in the carrying amount of intangible assets are as follows:

   
As of March 31, 2013
 
   
Gross
Amount
   
Accumulated
Amortization
   
Impairment
   
Net
Amount
 
Intangible assets:
                       
Domain and trade names
  $ 26     $ (26 )   $ -     $ -  
Customer related
    4,126       (2,876 )     (281 )     969  
Non-compete agreements
    827       (654 )     -       173  
Acquired software
    362       (362 )     -       -  
Total intangible assets
  $ 5,341     $ (3,918 )   $ (281 )   $ 1,142  
 
 
11

 
 
BRIDGELINE DIGITAL, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)

 
   
As of September 30, 2012
 
   
Gross
Amount
   
Accumulated
Amortization
   
Impairment
   
Net
Amount
 
Intangible assets:
                       
Domain and trade names
  $ 26     $ (26 )   $ -     $ -  
Customer related
    4,187       (2,654 )     (281 )     1,252  
Non-compete agreements
    877       (602 )     -       275  
Acquired software
    362       (362 )     -       -  
Total intangible assets
  $ 5,452     $ (3,644 )   $ (281 )   $ 1,527  

Total amortization expense related to intangible assets for the three months ended March 31, 2013 and 2012 was $118 thousand and $191 thousand, respectively, and amortization expense related to intangible assets for the six months ended March 31, 2013 and 2012 was $274 thousand and $386 thousand, respectively. They are reflected in operating expenses on the Condensed Consolidated Statements of Operations.


6 .   Goodwill

Changes in the carrying amount of goodwill follows:

   
As of
March 31, 2013
   
As of
September 30, 2012
 
Balance at beginning of period
  $ 21,545     $ 20,122  
Acquisitions
    -       1,175  
Contingent acquisition payments
    83       248  
Purchase price allocation adjustments
    252       -  
Balance at end of period
  $ 21,880     $ 21,545  

 
7.   Debt

Bank Term Loan

In March 2010, the Company entered into an Amended and Restated Loan and Security Agreement SVB (the “Loan Agreement”) with Silicon Valley Bank (“SVB”). The Loan Agreement has a two year term which expired on March 31, 2012. In May 2011, the Company amended its loan arrangement (the “Amendment”) with SVB, extending the maturity date of the line of credit for one year to March 31, 2013. The Amendment also revised certain financial covenants and amended the out of formula borrowings to be structured as a $2 million term loan and interest on the term loan will be at SVB’s prime rate plus 1.75%.  In May 2012, the Company amended its loan agreement (the “2012 Amendment”) with SVB, extending the maturity date of the line of credit for one year to March 31, 2014. The 2012 Amendment also revised certain financial covenants. In February 2013, the Company amended its loan agreement (the “2013 Amendment”) with SVB, extending the maturity date of the line of credit for one year to March 31, 2015. The 2013 Amendment also revised certain financial covenants. The Company would not have been in compliance with one of its covenants for the three months ended December 31, 2012 if the amendment was not completed. The Company was compliant with its financial covenants as of March 31, 2013.

Promissory Notes

In May 2012, the Company assumed two Promissory Notes in connection with the acquisition of MarketNet, Inc. The first Promissory Note in the amount of $63 thousand is payable in eight equal installments of $8 thousand, including interest accrued at 5%, and matures in May 2014. The first installment was due in July 2012. The second Promissory Note in the amount of $80 thousand is payable in twelve equal installments of $7 thousand, including interest accrued at 5%, and matures in May 2015. The first installment was due in July 2012.
 
 
12

 
 
BRIDGELINE DIGITAL, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)

Debt consists of the following:

   
As of
March 31, 2013
   
As of
September 30, 2012
 
Line of credit borrowings
  $ 2,496     $ 2,382  
Bank term loan
    1,510       1,692  
Subordinated promissory notes
    226       338  
Total debt
  $ 4,232     $ 4,412  
Less current portion
  $ 1,342     $ 1,424  
Long term debt, net of current portion
  $ 2,890     $ 2,988  

 
  8.   Other Long Term Liabilities

Deferred Rent

In connection with new leases for the Company’s headquarters in Burlington, Massachusetts and a new location in New York, the Company made investments in leasehold improvements at these locations of approximately $1.4 million, of which the respective landlords funded approximately $857 thousand.  The capitalized leasehold improvements are being amortized over the initial lives of each lease. The improvements funded by the landlords are treated as lease incentives.  Accordingly, the funding received from the landlords was recorded as fixed asset additions and a deferred rent liability on the Condensed Consolidated Balance Sheet. As of March 31, 2013, $121 thousand was reflected in Accrued Liabilities and $580 thousand is reflected in Other Long Term Liabilities. The deferred rent liability is being amortized as a reduction of rent expense over the lives of the leases.


9.   Shareholder’s Equity

Common Stock

On May 31, 2012, the Company sold 2,173,913 shares of common stock at $1.15 per share for gross proceeds of $2.5 million in a private placement. Net proceeds to the Company after offering expenses were approximately $2.3 million. In addition, the Company issued the placement agent and its affiliates five year warrants to purchase an aggregate of 217,913 shares of Bridgeline’s common stock at a price equal to $1.40 per share. The Company agreed to provide piggyback registration rights with respect to the shares of common stock sold in the offering and underlying the warrants.

In connection with the acquisition of MarketNet on May 31, 2012, contingent consideration of 204,331 shares of Bridgeline Digital common stock is contingently issuable to the sole stockholder of MarketNet. The contingent consideration is payable quarterly over the 12 consecutive calendar quarters following the acquisition, contingent upon the acquired business achieving certain operating and revenue targets. The common stock has been issued and is being held in escrow pending satisfaction of the applicable earnout targets.  In addition, MarketNet is also eligible to earn additional bonus equity consideration of 200,000 shares of Bridgeline Digital common stock if a certain annual revenue threshold is met in any fiscal year during the next three years. As of March 31, 2013, the sole stockholder of MarketNet had earned 34,056 shares of common stock.

In connection with the acquisition of Magnetic Corporation on October 3, 2011, contingent consideration of 166,666 shares of Bridgeline Digital common stock is contingently issuable to the sole stockholder of Magnetic. The contingent consideration is payable quarterly over the 12 consecutive calendar quarters following the acquisition, contingent upon the acquired business achieving certain operating and revenue targets. The common stock has been issued and is being held in escrow pending satisfaction of the applicable earnout targets.  As of March 31, 2013, the sole stockholder of Magnetic had earned 83,334 shares of common stock.
 
 
13

 
 
BRIDGELINE DIGITAL, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
 
Employee Stock Purchase Plan

On April 12, 2012, the Company’s stockholders approved and adopted the Bridgeline Digital, Inc. 2012 Employee Stock Purchase Plan (the “ESPP”).  Under the terms of the ESPP, the Company will grant eligible employees the right to purchase shares of Bridgeline common stock through payroll deductions at a price equal to 85% of the fair market value of Bridgeline common stock on the purchase termination date of defined offering or purchase periods. Each offering period is six months in duration. The ESPP permits the Company to offer up to 300,000 shares of common stock. The maximum number of shares of common stock that may be purchased by all participants in any purchase period may not exceed 150,000 shares.   During the six months ended March 31, 2013, 24,964 shares were purchased by employees.

Common Stock Warrants

On October 21, 2010, the Company issued 50,000 common stock warrants to purchase shares of the Company’s common stock to a non-employee consultant as compensation for services rendered. The warrants vested over a one year period and expire on October 15, 2015.  Of the warrants issued, 25,000 are exercisable at an exercise price of $1.00 per share and 25,000 are exercisable at an exercise price of $2.00 per share.  

On October 29, 2010, the Company issued four year warrants to the placement agent in the Company’s private placement.  The warrants are exercisable to purchase 64,000 shares of the Company’s common stock at a price equal to $1.45 per share.   In return for such warrants, the placement agent agreed to cancel 71,231 warrants issued to the placement agent in April 2006 and 57,000 IPO Warrants.  In December 2012 all 64,000 warrants were exercised using a cashless feature where the holders forfeited 41,401 shares in lieu of paying the exercise price.

On May 31, 2012, the Company issued five year warrants to the placement agent in the Company’s private placement.  The warrants are exercisable to purchase 217,931 shares of the Company’s common stock at a price equal to $1.40 per share.  
 
Summary of Option and Warrant Activity and Outstanding Shares


   
Stock Options
   
Stock Warrants
 
   
Options
   
Weighted
Average
Exercise
Price
   
Warrants
   
Weighted
Average
Exercise
Price
 
                         
Outstanding, September 30, 2012
    2,989,620     $ 0.86       331,931     $ 1.42  
Granted
    391,500     $ 1.70       -       -  
Exercised
    (75,367 )   $ 0.90       (22,599 )   $ 1.45  
Forfeited or expired
    (88,002 )   $ 1.23       (41,401 )   $ 1.45  
Outstanding, March 31, 2013
    3,217,751     $ 0.95       267,931     $ 1.42  
 
 
14

 
 
BRIDGELINE DIGITAL, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
 
10.  Accumulated Other Comprehensive Loss

The following table presents changes in accumulated other comprehensive loss for six months ended March 31, 2013 (in thousands):

   
Cumulative
Foreign Currency
Translation
Adjustment
 
       
Balance at September 30, 2012
  $ (176 )
Current period other comprehensive income
    51  
Balance at March 31, 2013
  $ (125 )

11.   Net Loss Per Share


Basic and diluted net loss per share is computed as follows:

(in thousands, except per share data)
 
Three Months Ended
March 31,
   
Six Months Ended
March 31,
 
   
2013
   
2012
   
2013
   
2012
 
Net loss
  $ (687 )   $ (166 )   $ (1,329 )   $ (629 )
Weighted average common shares outstanding - basic
    14,878       12,338       14,830       12,329  
Effect of dilutive securities (primarily stock options)
    -       -       -       -  
Weighted average common shares outstanding - diluted
    14,878       12,338       14,830       12,329  
                                 
Net loss per share - basic and diluted
  $ (0.05 )   $ (0.01 )   $ (0.09 )   $ (0.05 )

Basic net income per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding. Diluted net income per share is computed by using the weighted average number of common shares outstanding during the period plus the dilutive effect of outstanding stock options and warrants using the “ treasury stock” method.

For the three months ended March 31, 2013, options and warrants to purchase shares of the Company’s common stock of 1,278,242 were excluded from the computation of diluted net loss per share as the effect was anti-dilutive to the Company’s net loss.  Also excluded for the three months ended March 31, 2013 were 1,042,607 contingent shares to be issued in connection with prior acquisitions.

For the six months ended March 31, 2013, options and warrants to purchase shares of the Company’s common stock of 1,399,282 were excluded from the computation of diluted net loss per share as the effect was anti-dilutive to the Company’s net loss.  Also excluded for the three months ended March 31, 2013 were 1,042,607 contingent shares to be issued in connection with prior acquisitions.

For the three months ended March 31, 2012, options and warrants to purchase shares of the Company’s common stock of 248,238 were excluded from the computation of diluted net loss per share as the effect was anti-dilutive to the Company’s net loss.  Also, excluded were 727,888 contingent shares to be issued in connection with the prior acquisitions. 

For the six months ended March 31, 2012, options and warrants to purchase shares of the Company’s common stock of 222,766 were excluded from the computation of diluted net loss per share as the effect was anti-dilutive to the Company’s net loss.  Also, excluded were 727,888 contingent shares to be issued in connection with the prior acquisitions. 

12.  Income Taxes

Income tax expense was $68 thousand and $48 thousand for the three months ended March 31, 2013 and 2012, respectively. Income tax expense consists of the estimated liability for federal, state and foreign income taxes owed by the Company, including the alternative minimum tax and deferred tax liabilities related to indefinite-lived, tax deductible goodwill acquired in previous acquisitions.  Net operating loss carry forwards are estimated to be sufficient to offset additional taxable income for all periods presented.
 
 
15

 
 
BRIDGELINE DIGITAL, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
 
The Company does not provide for U.S. income taxes on the undistributed earnings of its Indian subsidiary, which the Company considers to be a permanent investment.

13.  Related Party Transactions
 
As part of the Magnetic acquisition, the Company entered into an operating lease for the Bridgeline Tampa location with the previous owner of Magnetic who now serves as the Regional Senior Vice President and General Manager of Bridgeline Tampa. The lease term is three years and rent is $85 thousand per year.
 
14.  Legal Proceedings

Bridgeline Digital, Inc. vs. e.Magination network, LLC and its principal owner, Daniel Roche.

In August 2010, Bridgeline initiated a lawsuit against e.Magination network, LLC and its principal owner, Daniel Roche, in the Federal District Court of Massachusetts.  Bridgeline seeks damages for accounts receivable allegedly collected by Mr. Roche and e.Magination and used to pay obligations of e.Magination and Mr. Roche (accounts receivable contractually belonging to Bridgeline).  e.Magination and Mr. Roche have asserted counterclaims against Bridgeline and Thomas Massie alleging that Bridgeline has breached Mr. Roche’s employment agreement by improperly terminating Mr. Roche for cause and also alleging breach of the Asset Purchase Agreement by Bridgeline. This lawsuit remains unresolved as of March 31, 2013 and is currently expected to go to trial in June 2013.
 
 
16

 
 
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This section contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of a variety of factors and risks including risks described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012 as well as in the other documents that we file with the Securities and Exchange Commission. You can read these documents at www.sec.gov.

This section should be read in combination with the accompanying unaudited consolidated financial statements and related notes prepared in accordance with United States generally accepted accounting principles.

Overview

Bridgeline Digital enables its customers to maximize the performance of their mission critical websites, intranets, and online stores. Bridgeline is the developer of the award-winning iAPPS® Web Engagement Management (WEM) product platform and related digital solutions. The iAPPS platform deeply integrates Web Content Management, eCommerce, eMarketing, and web Analytics capabilities within the heart of websites or eCommerce web stores to help marketers deliver online experiences that attract, engage, and convert their customers across all digital channels. Bridgeline’s iAPPS platform combined with its digital services assists customers in maximizing on-line revenue, improving customer service and loyalty, enhancing employee knowledge, and reducing operational costs.

In fiscal 2012 Bridgeline Digital announced the release of a new product, iAPPS ds (“distributed subscription”), a platform that empowers franchise and large dealer networks with state-of-the-art web engagement management while providing superior oversight of corporate branding. iAPPS ds deeply integrates content management, eCommerce, eMarketing and web analytics and is a self-service web platform that is offered to each authorized franchise or dealer for a monthly subscription fee.
 
The iAPPS platform is delivered through a cloud-based SaaS (“Software as a Service”) multi-tenant business model, whose flexible architecture provides customers with state of the art deployment providing maintenance, daily technical operation and support; or via a traditional perpetual licensing business model, in which the iAPPS software resides on a dedicated server in either the customer’s facility or Bridgeline’s co-managed hosting facility.
 
In 2012, KMWorld Magazine Editors selected Bridgeline Digital as one of the 100 Companies That Matter in Knowledge Management and also selected iAPPS as a Trend Setting Product in 2012. iAPPS Content Manager and iAPPS Commerce were selected as finalists for the 2012 and 2013 CODiE Awards for Best Content Management Solution and Best Electronic Commerce Solution, globally. In 2013 the Web Marketing Association sponsored Internet Advertising Competition honored Bridgeline Digital with three awards for iAPPS customer websites.  In addition, in 2013 Bridgeline Digital won fifteen Horizon Interactive Awards for outstanding development of web applications and websites and B2B Magazine has selected Bridgeline Digital as one of the Top Interactive Technology companies in the United States.
 
Bridgeline Digital was incorporated under the laws of the State of Delaware on August 28, 2000.

Customer Information

We currently have over 2,500 customers. For the three and six months ended March 31, 2013 and 2012 no customer represented 10% or more of total revenue.
 
 
17

 
 
Acquisitions

MarketNet, Inc.

On May 31, 2012, we completed the acquisition of MarketNet, Inc. (“MarketNet”), an interactive technology company that provides web application development based in Dallas, Texas. We acquired all of the outstanding capital stock of MarketNet for consideration consisting of (i) $20 thousand in cash, (ii) assumption of debt of $244 thousand and (ii) contingent consideration of up to $650 thousand in cash and 204,331 shares of Bridgeline Digital common stock, valued at $250 thousand ($1.22 per share). The cash consideration was reduced by $58 thousand due to the Seller’s inability to meet an agreed upon target for working capital at the time of acquisition and was applied against MarketNet’s earnout payment for the three months ended December 31, 2012. The contingent consideration is payable quarterly over the 12 consecutive calendar quarters following the acquisition, contingent upon the acquired business achieving certain quarterly revenue and quarterly operating income targets during the period. To the extent that either the quarterly revenue target or the quarterly operating income target is not met in a particular quarter, the earn-out period will be extended for up to four additional quarters. MarketNet is also eligible to earn additional bonus equity consideration of 200,000 shares, if annual net revenues of the acquired business exceed a certain threshold in any fiscal year through September 30, 2015. We are required to assess the probability of the acquired business achieving the contingent cash and stock payments which requires management to make estimates and judgments based on forecasts of future performance. As a result, we reduced the initial estimate of $607 thousand for the contingent cash consideration to be achieved and $262 thousand for the contingent stock consideration to be achieved by $8 thousand and $30 thousand, respectively. The contingent common stock has been issued and is being held in escrow pending satisfaction of the applicable targets. MarketNet achieved its quarterly revenue and operating income targets for the first two quarterly periods after the acquisition date but not for the three months ended March 31, 2013.   MarketNet’s operating results are reflected in our condensed consolidated financial statements as of the acquisition date.

Magnetic Corporation

On October 3, 2011, we completed the acquisition of Magnetic Corporation (“Magnetic”), a web technology company based in Tampa, Florida. Bridgeline acquired all of the outstanding capital stock of Magnetic for consideration consisting of (i) $150 thousand in cash and (ii) contingent consideration of up to $600 thousand in cash and 166,666 shares of Bridgeline Digital common stock, valued at $150 thousand ($0.90 per share). The cash consideration was reduced by $100 thousand due to the Seller’s inability to meet an agreed upon target for working capital at the time of acquisition. The contingent consideration is payable quarterly over the 12 consecutive calendar quarters following the acquisition, contingent upon the acquired business achieving certain quarterly revenue and quarterly operating income targets during the period. The contingent common stock has been issued and is being held in escrow pending satisfaction of the applicable targets.  To the extent that either the quarterly revenue target or the quarterly operating income target is not met in a particular quarter, the earn-out period will be extended for up to four additional quarters. We are required to assess the probability of the acquired business achieving the contingent cash and stock payments which requires management to make estimates and judgments based on forecasts of future performance. As a result, we estimated and accrued $600 thousand of the contingent cash consideration to be achieved and $150 thousand of the contingent stock consideration to be achieved. Magnetic achieved its quarterly revenue and operating income targets for all periods since the acquisition date. Magnetic’s operating results are reflected in the Company’s condensed consolidated financial statements as of the acquisition date, which corresponds to the Company’s commencement of fiscal 2012.


Results of Operations for the Three and Six Months Ended March 31, 2013 compared to the Three and Six Months Ended March 31, 2012

Total revenue for the three months ended March 31, 2013 was $6.0 million compared with $6.7 million for the prior period.  We had a net loss of ($687) thousand for the three months ended March 31, 2013 compared with net loss of ($166) thousand for the prior period.  Net loss per share was ($0.05) for the three months ended March 31, 2013 compared to ($0.01) for the prior period.

Total revenue for the six months ended March 31, 2013 was $12.2 million compared with $13.2 million for the prior period.  We had a net loss of ($1.3) million for the three months ended March 31, 2013 compared with net loss of ($0.6) million for the prior period.  Net loss per share was ($0.09) for the three months ended March 31, 2013 compared to ($0.05) for the prior period.

The following table sets forth the percentages of revenue for items included in our unaudited condensed consolidated statement of operations presented in our Quarterly Reports on Form 10-Q for the periods presented.
 
 
18

 
 
Revenue:
 
Three Months
Ended
March 31,
2013
   
Three Months
Ended
March 31,
2012
   
 
 
$
Change
   
%
Change
 
Six Months
Ended
March 31,
2013
   
Six Months
Ended
March 31,
2012
   
$
Change
   
%
Change
Web application development services
                                               
iAPPS application development services
  $ 3,562     $ 3,524       38       1 %   $ 6,975     $ 6,539       436       7 %
% of total revenue
    59 %     53 %                     57 %     50 %                
Other application development services
    927       1,917       (990 )     (52 %)     2,364       4,210       (1,846 )     (44 %)
% of total revenue
    15 %     29 %                     19 %     32 %                
Subtotal web application development services
    4,489       5,441       (952 )     (18 %)     9,339       10,749       (1,410 )     (13 %)
% of total revenue
    75 %     82 %                     77 %     81 %                
Managed service hosting
    491       611       (120 )     (20 %)     1,047       1,227       (180 )     (15 %)
% of total revenue
    8 %     9 %                     9 %     9 %                
Subscription and perpetual licenses
    1,024       620       404       65 %     1,811       1,213       598       49 %
% of total revenue
    17 %     9 %                     15 %     9 %                
Total revenue
    6,004       6,672       (668 )     (10 %)     12,197       13,189       (992 )     (8 %)
Cost of revenue:
                                                               
Web application development services
                                                               
iAPPS application development costs
    1,911       1,692       219       13 %     3,690       3,139       551       18 %
% of iAPPS application development revenue
    54 %     48 %                     53 %     48 %                
Other application development costs
    583       1,079       (496 )     (46 %)     1,558       2,487       (929 )     (37 %)
% of other application development revenue
    63 %     56 %                     66 %     59 %                
Subtotal web application development costs
    2,494       2,771       (277 )     (10 %)     5,248       5,626       (378 )     (7 %)
% of web application development services revenue
  56 %     51 %                     56 %     52 %                
Managed service hosting
    76       85       (9 )     (11 %)     148       191       (43 )     (23 %)
% of managed service hosting revenue
    15 %     14 %                     14 %     16 %                
Subscription and perpetual licenses
    247       100       147       147 %     415       220       195       89 %
% of subscription and perpetual revenue
    24 %     16 %                     23 %     18 %                
Total cost of revenue
    2,817       2,956       (139 )     (5 %)     5,811       6,037       (226 )     (4 %)
Gross profit
    3,187       3,716       (529 )     (14 %)     6,386       7,152       (766 )     (11 %)
Gross profit margin
    53 %     56 %                     52 %     54 %                
Operating expenses:
                                                               
Sales and marketing
    2,164       1,846       318       17 %     3,998       3,561       437       12 %
% of total revenue
    36 %     28 %                     33 %     27 %                
General and administrative
    946       1,001       (55 )     (5 %)     2,300       2,001       299       15 %
% of total revenue
    16 %     15 %                     19 %     15 %                
Research and development
    247       480       (233 )     (49 %)     379       883       (504 )     (57 %)
% of total revenue
    4 %     7 %                     3 %     7 %                
Depreciation and amortization
    390       435       (45 )     (10 %)     814       850       (36 )     (4 %)
% of total revenue
    6 %     7 %                     7 %     6 %                
Impairment of intangible asset
    -       -       -       0 %     -       281       (281 )     (100 %)
% of total revenue
    0 %     0 %                     0 %     2 %                
Total operating expenses
    3,747       3,762       (15 )     0 %     7,491       7,576       (85 )     (1 %)
                                                                 
Loss from operations
    (560 )     (46 )     (514 )     1,117 %     (1,105 )     (424 )     (681 )     161 %
Interest income (expense) net
    (59 )     (72 )     13       (18 %)     (135 )     (136 )     1       (1 %)
Loss before income taxes
    (619 )     (118 )     (501 )     425 %     (1,240 )     (560 )     (680 )     121 %
Provision for income taxes
    68       48       20       42 %     89       69       20       29 %
Net loss
  $ (687 )   $ (166 )   $ (521 )     314 %   $ (1,329 )   $ (629 )   $ (700 )     111 %
Adjusted EBITDA
  $ 17     $ 524     $ (507 )     (97 %)   $ 67     $ 952     $ (885 )     (93 %)

Revenue

Our revenue is derived from three sources: (i) web application development services (ii) managed service hosting and (iii) subscription and perpetual licenses.  

Web Application Development Services

Web application development services revenue is comprised of iAPPS development related services and other web development related services generated from non iAPPS related engagements.
 
 
19

 
 
Revenue from iAPPS application development services in the three months ended March 31, 2013 increased $38 thousand, or 1%, to $3.6 million compared to the prior period. Revenue from non-iAPPS application development services decreased $990 thousand, or 52%, compared to the prior period. The decrease in non-iAPPS application development services is due to our continued concentration on selling higher-margin iAPPS related engagements to both new and existing customers. As a result, total revenue from web application development services for the three months ended March 31, 2013, decreased $952 thousand, or 18%, to $4.5 million compared to the prior period.  

Web application development services revenue as a percentage of total revenue for the three months ended March 31, 2013 decreased to 75% from 82% compared to the prior period.  The decrease is attributable to the decrease in web application development services revenue discussed above and an increase in iAPPS license related revenue.

Revenue from iAPPS application development services in the six months ended March 31, 2013 increased $436 thousand, or 7%, to $7.0 million compared to the prior period.  The increase in iAPPS related revenue is due to the expansion of our iAPPS customer base by selling more iAPPS licenses, which was offset by longer than expected implementation times than expected as the size and scope of iAPPS related projects has increased. Revenue from non-iAPPS application development services decreased $1.8 million, or 44%, compared to the prior period. The decrease in non-iAPPS application development services is due to our continued concentration on selling higher-margin iAPPS engagements to both new and existing customers. As a result, total revenue from web application development services for six months ended March 31, 2013, decreased $1.4 million, or 13%, to $9.3 million compared to the prior period.  

Web application development services revenue as a percentage of total revenue for the six months ended March 31, 2013 decreased to 77% from 81% compared to the prior period.  The decrease is attributable to the decrease in web application development services revenue discussed above and an increase in iAPPS license related revenue.

Managed Service Hosting

Revenue from managed service hosting for the three months ended March 31, 2013 decreased $120 thousand, or 20%, to $491thousand compared to the prior period.   The decrease is due to our efforts to engage with customers that are aligned with our core competencies and proactively end engagements with a number of smaller hosting customers obtained through previous acquisitions.

Managed services revenue as a percentage of total revenue for the three months ended March 31, 2013 decreased to 8% from 9% compared to the prior period due to the decrease in managed services revenue discussed above.

Revenue from managed service hosting for the six months ended March 31, 2013 decreased $180 thousand, or 15%, to $1.0 million compared to the prior period.   The decrease is due to our efforts to engage with customers that are aligned with our core competencies and proactively end our engagements with a number of smaller hosting customers obtained through previous acquisitions. This decrease was partially offset by incremental hosting revenues from our MarketNet acquisition in 2012.

Managed services revenue as a percentage of total revenue for the six months ended March 31, 2013 and 2012 was 9%.

Subscription and Perpetual Licenses

Revenue from subscription and perpetual licenses for the three months ended March 31, 2013 increased $0.4 million, or 65%, to $1.0 million compared to the prior period.  The increase is due to license revenues from our new product, iAPPS ds, increases in iAPPS SaaS licenses sold, incremental non-iAPPS SaaS licenses from our acquisition of MarketNet and incremental annual maintenance revenue.

Subscription and perpetual license revenue as a percentage of total revenue for the three months ended March 31, 2013 increased to 17% from 9% compared to the prior period and a result of the increased license sales and revenues discussed above.

Revenue from subscription and perpetual licenses for the six months ended March 31, 2013 increased $0.6 million, or 49%, to $1.8 million compared to the prior period.  The increase is due to license revenues from our new product, iAPPS ds, increases in iAPPS SaaS licenses sold, incremental non-iAPPS SaaS licenses from our acquisition of MarketNet and incremental annual maintenance revenue.

Subscription and perpetual license revenue as a percentage of total revenue for the six months ended March 31, 2013 increased to 15% from 9% compared to the prior period and a result of the increased license sales and revenues discussed above.
 
 
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Costs of Revenue

Total cost of revenue for the three months ended March 31, 2013 decreased $139 thousand, or 5%, to $2.8 million compared to the prior period. Total cost of revenue for the six months ended March 31, 2013 decreased $226 thousand, or 4%, to $5.8 million compared to the prior period. These decreases are primarily due to a reduction of labor costs and, to a lesser extent, efficiencies in costs for managed service hosting as we continue to make investments in our co-managed network operation center to support our core iAPPS customer base. These reductions in cost were offset by an increase in costs of subscription and perpetual licenses.

Cost of Web Application Development Services

Cost of web application development for the three months ended March 31, 2013 decreased $277 thousand, or 10%, to $2.5 million compared to the prior period. Cost of web application development for the six months ended March 31, 2013 decreased $378 thousand, or 7%, to $5.2 million compared to the prior period. The decreases in both periods are due to reduced labor costs.

The cost of web application development services as a percentage web application development services revenue increased for both the three and six months ended March 31, 2013 when compared to prior periods due to the decreases in non-iAPPS web application development revenue in both periods.

Cost of Managed Service Hosting

Cost of managed service hosting for the three months ended March 31, 2013 decreased $9 thousand, or 11%, to $76 thousand compared to the prior period. Cost of managed service hosting for the six months ended March 31, 2013 decreased $43 thousand, or 23%, to $148 thousand compared to the prior period. The decreases in managed service hosting costs for both periods are due to cost efficiencies as we continue to consolidate hosting engagements on to our co-managed network operations center, reducing third party hosting costs.

The cost of managed service hosting as a percentage of managed service hosting revenue increased in the three months ended March 31, 2013 compared to the prior period due to an increase in the aforementioned ending of engagements with a number of smaller hosting customers obtained through previous acquisitions.

The cost of managed service hosting as a percentage of managed service hosting revenue decreased in the six months ended March 31, 2013 compared to the prior period due to cost savings from consolidating hosting arrangements on to our co-managed network operations center.

Cost of Subscription and Perpetual License

Cost of subscription and perpetual licenses for the three months ended March 31, 2013 increased $147 thousand, or 147%, compared to the prior period. This is primarily due to the 65% increase in subscription and perpetual license revenue as more of the direct costs associated with our co-managed network operations center are being used to support subscription license revenue, investments made in our co-managed network operations center during the period and, to a lesser extent, incremental costs on lower margin, non-iAPPS SaaS licenses from the MarketNet acquisition.

The cost of subscription and perpetual licenses as a percentage of subscription and perpetual license revenue for the three months ended March 31, 2013 increased to 24% from 16% compared to the prior period.  This is primarily due to a decrease in perpetual license sales when compared to the prior period as perpetual licenses sales can fluctuate from quarter to quarter and have a significantly lower direct cost than subscription licenses.

Cost of subscription and perpetual licenses for the six months ended March 31, 2013 increased $195 thousand, or 89%, compared to the prior period. This is primarily due to the 49% increase in subscription and perpetual license revenue as more of the direct costs associated with our co-managed network operations center are being used to support subscription license revenue, investments made in our co-managed network operations center during the period and, to a lesser extent, incremental costs on lower margin, non-iAPPS SaaS licenses from the MarketNet acquisition.

The cost of subscription and perpetual licenses as a percentage of subscription and perpetual license revenue for the six months ended March 31, 2013 increased to 23% from 18% compared to the prior period.  This is primarily due to a decrease in perpetual license sales when compared to the prior period as perpetual licenses sales can be lumpy and have a significantly lower direct cost than subscription licenses.
 
 
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We expect amortization of software costs to increase by $90 thousand per quarter in the third quarter of fiscal 2013 due to costs capitalized in the six months ended March 31, 2013 and the fourth quarter of fiscal 2012.  These costs are related to significant enhancements to our iAPPS platform that will be released in the third fiscal quarter of 2013 and, to a lesser extent, costs associated with the development of iAPPS ds. We also expect costs of subscription and perpetual licenses as a percentage of license revenue to increase from the current level as a result of such enhancements to our iAPPS platform, but expect this increase to be temporary and should begin to decrease as we continue to expand our iAPPS customer base by selling more iAPPS licenses, including iAPPS ds.

Operating Expenses

Sales and Marketing Expenses

Sales and marketing expenses for the three months ended March 31, 2013 increased $318 thousand, or 17%, to $2.2 million compared to the prior period.  The increase is due to incremental sales and marketing expenses from the acquisition of MarketNet and an increase in sales and marketing investments as we continue to focus on marketing our iAPPS web engagement products.

Sales and marketing expenses as a percentage of total revenue for the three months ended March 31, 2013 increased to 36% from 28% compared to the prior period. This is due to the decrease in revenues for the same period and the increase in expenses described above.

Sales and marketing expenses for the six months ended March 31, 2013 increased $437 thousand, or 12%, to $4.0 million compared to the prior period.  The increase is due to incremental sales and marketing expenses from the acquisition of MarketNet and an increase in marketing related expenses as we continue to focus on marketing our iAPPS products.

Sales and marketing expenses as a percentage of total revenue for the six months ended March 31, 2013 increased to 33% from 27% compared to the prior period. This is due to the decrease in revenues for the same period and the increase in expenses described above.

General and Administrative Expenses

General and administrative expenses for the three months ended March 31, 2013 decreased $55 thousand, or 5%, to $946 thousand compared to the prior period.    The decrease was due to reductions in various general and administrative expenses compared to the prior period.

General and administrative expenses as a percentage of total revenue for the three months ended March 31, 2013 increased to 16% from 15% compared to the prior period. This is due to the decrease in revenues for the same period and the increase in expenses described above.

General and administrative expenses for the six months ended March 31, 2013 increased $299 thousand, or 15%, to $2.3 million compared to the prior period.    This was due to increases in various general and administrative expenses; the most significant being personnel costs, increases in staffing and an increase in legal expenses, offset by the reduction of $312 thousand recorded for a change in estimate of settlement of contingent earnout payments from prior acquisitions that will not be achieved.

General and administrative expenses as a percentage of total revenue for the six months ended March 31, 2013 increased to 19% from 15% compared to the prior period. This was due to the increase in expense discussed above and the decrease in revenue compared to the prior period.

Research and Development

Research and development expense for the three months ended March 31, 2013 decreased by $233 thousand, or 49%, to $247 thousand compared to the prior period.  The decrease in research and development expense is due to the capitalization of $398 thousand of software development costs related to enhancements to our iAPPS product platform in the three months ended March 31, 2013. Software development costs capitalized in the prior period were immaterial. We expect research and development expense will increase to between $400 -$425 thousand per quarter beginning in the third quarter of fiscal 2013 as the significant enhancements to our iAPPS product platform were complete as of March 31, 2013.

Research and development expense as a percentage of total revenue for the three months ended March 31, 2013 decreased to 4% from 8% compared to the prior period. This was due the capitalization of costs discussed above.

Research and development expense for the six months ended March 31, 2013 decreased by $504 thousand, or 57%, to $379 thousand compared to the prior period.  The decrease in research and development expense is due to the capitalization of $670 thousand of software development costs related to enhancements to our iAPPS product platform in the six months ended March 31, 2013. Software development costs capitalized in the prior period were immaterial.
 
 
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Research and development expense as a percentage of total revenue for the three months ended March 31, 2013 decreased to 3% from 7% compared to the prior period. This was due the capitalization of costs discussed above.
Depreciation and Amortization

Depreciation and amortization expense for the three months ended March 31, 2013 decreased by $45 thousand, or 10%, compared to the prior period.  This decrease was due to several intangibles from previous acquisitions reaching the end of their useful life since March 31, 2012, offset by incremental expense from the MarketNet acquisition.

Depreciation and amortization represented 6% and 7% of revenue for the three months ended March 31, 2013 and 2012, respectively.   

Depreciation and amortization expense for the six months ended March 31, 2013 decreased by $36 thousand, or 4%, compared to the prior period.  This decrease was due to several intangibles from previous acquisitions reaching the end of their useful life since March 31, 2012, offset by incremental expense from the MarketNet acquisition.

Depreciation and amortization represented 7% and 6% of revenue for the six months ended March 31, 2013 and 2012, respectively.   

Impairment of Intangible Assets

In the first quarter of fiscal 2012, the Company stopped servicing low margin non-iAPPS opportunities acquired from e.Magination IG, LLC. It was therefore determined that a portion of the customer list was impaired. 

Income Taxes

The provision for income tax expense was $68 thousand for the three months ended March 31, 2013 compared to $48 thousand for the prior period.  The provision for income tax expense was $89 thousand for the six months ended March 31, 2013 compared to $69 thousand for the prior period. These increases are due to deferred tax liabilities related to indefinite lived, tax deductible assets from previous acquisitions.

Income tax expense represents the estimated liability for federal, state and foreign income taxes owed by the Company, including the alternative minimum tax and deferred tax liabilities related to indefinite lived, tax deductible assets from previous acquisitions.  The Company has net operating loss carryforwards and other deferred tax benefits that are available to offset future taxable income.

Loss from Operations

The loss from operations was ($560) thousand for three months ended March 31, 2013, compared to a loss of ($46) thousand in the prior period. The loss from operations was ($1.1) million for six months ended March 31, 2013, compared to a loss of ($424) thousand in the prior period. These increases were primarily attributable to the decreases in web application development services revenue.

Adjusted EBITDA

We also measure our performance based on a non-GAAP (“Generally Accepted Accounting Principles”) measurement of earnings before interest, taxes, depreciation, and amortization and before stock-based compensation expense and impairment of goodwill and intangible assets (“Adjusted EBITDA”).

We believe this non-GAAP financial measure of Adjusted EBITDA is useful to management and investors in evaluating our operating performance for the periods presented and provide a tool for evaluating our ongoing operations.

Adjusted EBITDA, however, is not a measure of operating performance under GAAP and should not be considered as an alternative or substitute for GAAP profitability measures such as (i) income from operations and net income, or (ii) cash flows from operating, investing and financing activities, both as determined in accordance with GAAP. Adjusted EBITDA as an operating performance measure has material limitations since it excludes the financial statement impact of income taxes, net interest expense, amortization of intangibles, depreciation, other amortization and stock-based compensation, and therefore does not represent an accurate measure of profitability.  As a result, Adjusted EBITDA should be evaluated in conjunction with net income for a complete analysis of our profitability, as net income includes the financial statement impact of these items and is the most directly comparable GAAP operating performance measure to Adjusted EBITDA. Our definition of Adjusted EBITDA may also differ from and therefore may not be comparable with similarly titled measures used by other companies, thereby limiting its usefulness as a comparative measure. Because of the limitations that Adjusted EBITDA has as an analytical tool, investors should not consider it in isolation, or as a substitute for analysis of our operating results as reported under GAAP.
 
 
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The following table reconciles net (loss) income (which is the most directly comparable GAAP operating performance measure) to EBITDA, and EBITDA to Adjusted EBITDA (in thousands):
 
   
Three Months Ended
   
Six Months Ended
 
   
March 31,
   
March 31,
 
   
2013
   
2012
   
2013
   
2012
 
Net loss
  $ (687 )   $ (166 )   $ (1,329 )   $ (629 )
Provision for income tax
    68       48       89       69  
Interest expense (income), net
    59       72       135       136  
Amortization of intangible assets
    118       191       274       386  
Impairment of intangible asset
    -       -       -       281  
Depreciation
    272       244       540       464  
     EBITDA
    (170 )     389       (291 )     707  
Other amortization
    35       40       79       90  
Stock based compensation
    152       95       279       155  
     Adjusted EBITDA
  $ 17     $ 524     $ 67     $ 952  

 
The decreases in Adjusted EBITDA are primarily due to the decrease in non-iAPPS related web application development services.


Liquidity and Capital Resources

Cash Flows

Operating Activities

Cash provided by operating activities was $1.0 million for the six months ended March 31, 2013 compared to cash provided by operating activities of $40 thousand for the prior period.  The increase in cash provided by operating activities is due to an increase in deferred revenue as the majority of our iAPPS ds customers elect annual subscriptions. This increase was offset by lower net income, adjusted for non-cash items such as amortization and depreciation, for the period and an increase in accounts receivable for the three months ending March 31, 2013 as compared to the prior period.
  
Investing Activities
 
Cash used in investing activities was $1.1 million for the six months ended March 31, 2013 compared to $888 thousand for the prior period.   The increase is due to $670 thousand in software development expenditures related to significant enhancements of our iAPPS platform, offset by a $0.4 million decrease in spending on equipment and improvements for the six months ended March 31, 2013 as we had two office relocations in the three months ended December 31, 2011.
 
Financing Activities

Cash used in financing activities was $212 thousand for the six months ended March 31, 2013 compared to $292 thousand for the prior period.  The decrease in cash used by financing activities is primarily due to the payment of $120 thousand in acquired debt in the Magnetic acquisition during the prior period and the increase in proceeds from options and the employee stock purchase program in the current period, offset by an increase in subordinated promissory note payments.

Capital Resources and Liquidity Outlook
 
We believe that cash generated from operations and our bank line of credit will be sufficient to fund the company’s working capital and capital expenditure needs in the foreseeable future. We may choose to explore additional financing sources if needed to support our merger and acquisition strategy.
 
 
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In February 2013, the Company amended its loan arrangement (the “2013 Amendment”) with Silicon Valley Bank extending the maturity date of the line of credit for one year to March 31, 2015. The 2013 Amendment also revised certain financial covenants, including the covenants for the three months ending March 31, 2013.  We would not have complied with one of our financial covenants as of December 31, 2012 had the amendment not been completed. We were in compliance with our financial covenents as of March 31, 2013.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, financings or other relationships with unconsolidated entities or other persons, other than our operating leases and contingent acquisition payments.
  
We currently do not have any variable interest entities. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Therefore, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Commitments and Contingencies

New contractual obligations as of March 31, 2013 that include equipment acquired under capitalized lease agreements were valued at $123 thousand with payments extending through April 2015.

As of March 31, 2013, we had an accrued contingent earnout liability of $1.0 million from acquisitions completed in prior fiscal years, which are scheduled to be paid out through fiscal 2015.  Contingent earnout payments related to acquisitions are paid when and if certain revenue and earnings targets are achieved.

Critical Accounting Policies

These critical accounting policies and estimates by our management should be read in conjunction with Note 2 Summary of Significant Accounting Policies to the Consolidated Financial Statements that were prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) that are included in our Annual Report on Form 10-K and filed with the Securities and Exchange Commission on December 5, 2012.

The preparation of financial statements in accordance US GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period. We regularly make estimates and assumptions that affect the reported amounts of assets and liabilities. The most significant estimates included in our financial statements are the valuation of accounts receivable and long-term assets, including intangibles, goodwill and deferred tax assets, stock-based compensation, amounts of revenue to be recognized on service contracts in progress, unbilled receivables, and deferred revenue. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected.

We consider the following accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment:

 
·
Revenue recognition;

 
·
Allowance for doubtful accounts;

 
·
Accounting for cost of computer software to be sold, leased or otherwise marketed;

 
·
Accounting for goodwill and other intangible assets; and

 
·
Accounting for stock-based compensation.
 
 
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Revenue Recognition

Overview

We enter into arrangements to sell web application development services (professional services), software licenses or combinations thereof.  Revenue is categorized into (i) Web Application Development Services (ii) Managed Service Hosting, and (iii) Subscriptions and Perpetual Licenses.

We recognize revenue as required by the Revenue Recognition Topic of the Codification.  Revenue is generally 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.

During fiscal 2010, we began to develop a reseller channel to supplement our direct sales force for our iAPPS Product Suite. We continued to develop this reseller channel in fiscal 2013.  Resellers are generally located in territories where we do not have a direct sales force.  Customers generally sign a license agreement directly with us. Revenue from perpetual licenses sold through resellers is recognized upon delivery to the end user as long as evidence of an arrangement exists, collectability is probable, and the fee is fixed and determinable. Revenue for subscription licenses is recognized monthly as the services are delivered.

Web Application Development Services

Web application development services include professional services primarily related to the Company’s web development solutions that address specific customer needs such as information architecture and usability engineering, interface configuration, application development, rich media development, back end integration, search engine optimization, and project management.

Web application development services are contracted for on either a fixed price or time and materials basis.  For its fixed price engagements, after assigning the relative selling price to the elements of the arrangement, the Company applies the proportional performance model (if not subject to contract accounting) to recognize revenue based on cost incurred in relation to total estimated cost at completion. The Company has determined that labor costs are the most appropriate measure to allocate revenue among reporting periods, as they are the primary input when providing application development services. Customers are invoiced monthly or upon the completion of milestones. For milestone based projects, since milestone pricing is based on expected hourly costs and the duration of such engagements is relatively short, this input approach principally mirrors an output approach under the proportional performance model for revenue recognition on such fixed priced engagements.  For time and materials contracts, revenues are recognized as the services are provided.
  
Web application development services also include retained professional services contracted for on an “on call” basis or for a certain amount of hours each month. Such arrangements generally provide for a guaranteed availability of a number of professional services hours each month on a “use it or lose it” basis.   For retained professional services sold on a stand-alone basis we recognize revenue as the services are delivered or over the term of the contractual retainer period. These arrangements do not require formal customer acceptance and do not grant any future right to labor hours contracted for but not used.

Managed Service Hosting

Managed service hosting includes hosting arrangements that provide for the use of certain hardware and infrastructure for those customers who do not wish to host our applications independently.  Hosting agreements are either annual or month-to-month arrangements that provide for termination for convenience by either party generally upon 30-days notice.  Revenue is recognized monthly as the hosting services are delivered.   Set up fees paid by customers in connection with managed hosting services are deferred and recognized ratably over the longer of the life of the hosting period or the expected lives of customer relationships.  We continue to evaluate the length of the amortization period of the set up fees as we gain more experience with customer contract renewals.

Subscriptions and Perpetual Licenses

The Company licenses its software on either a perpetual or subscription basis. Customers who license the software on a perpetual basis receive rights to use the software for an indefinite time period and an option to purchase post-customer support (“PCS”).  For arrangements that consist of a perpetual license and PCS, as long as Vendor Specific Objective Evidence (“VSOE”) exists for the PCS, then PCS revenue is recognized ratably on a straight-line basis over the period of performance and the perpetual license is recognized on a residual basis.  Under the residual method, the fair value of the undelivered elements are deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and recognized as revenue, assuming all other revenue recognition criteria have been met.  
 
 
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Customers may also license the software on a subscription basis, which can be described as “Software as a Service” or “SaaS”.  SaaS is a model of software deployment where an application is hosted as a service provided to customers across the Internet.  Subscription agreements include access to the Company’s software application via an internet connection, the related hosting of the application, and PCS.  Customers receive automatic updates and upgrades, and new releases of the products as soon as they become available. Customers cannot take possession of the software.  Subscription agreements are either annual or month-to-month arrangements that provide for termination for convenience by either party upon 90 days notice.  Revenue is recognized monthly as the services are delivered.  Set up fees paid by customers in connection with subscription services are deferred and recognized ratably over the longer of the life of subscription period or the expected lives of customer relationships.  We continue to evaluate the length of the amortization period of the set up fees as we gain more experience with customer contract renewals.  

Multiple Element Arrangements
 
 In accounting for multiple element arrangements, we follow either ASC Topic 605-985 Revenue Recognition Software or ASC Topic 605-25 Revenue Recognition Multiple Element Arrangements , as applicable.

In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Revenue Recognition: Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”). ASU 2009-13 provides amendments to certain paragraphs of previously issued ASC Subtopic 605-25 – Revenue Recognition: Multiple-Deliverable Revenue Arrangements .  In accordance with ASU 2009-13, each deliverable within a multiple-deliverable revenue arrangement is accounted for as a separate unit of accounting if both of the following criteria are met (1) the delivered item has value to the customer on a standalone basis and (2) for an arrangement that includes a right of return relative to the delivered item, delivery or performance of the delivered item is considered probable and within our control. If the deliverables do not meet the criteria for being a separate unit of accounting then they are combined with a deliverable that does meet that criterion.  The accounting guidance also requires that arrangement consideration be allocated at the inception of an arrangement to all deliverables using the relative selling price method. The accounting guidance also establishes a selling price hierarchy for determining the selling price of a deliverable.  We determine selling price using VSOE, if it exists; otherwise, we use Third-party Evidence (“TPE”).  If neither VSOE nor TPE of selling price exists for a unit of accounting, we use Estimated Selling Price (“ESP”).

VSOE is generally limited to the price at which we sell the element in a separate stand-alone transaction. TPE is determined based on the prices charged by our competitors for a similar deliverable when sold separately. It is difficult for us to obtain sufficient information on competitor pricing, so we may not be able to substantiate TPE. If we cannot establish selling price based on VSOE or TPE then we will use ESP.  ESP is derived by considering the selling price for similar services and our ongoing pricing strategies. The selling prices used in our allocations of arrangement consideration are analyzed at minimum on an annual basis and more frequently if our business necessitates a more timely review. We have determined that we have VSOE on our SaaS offerings, certain application development services, managed hosting services, and PCS because we have evidence of these elements sold on a stand-alone basis.

When the Company licenses its software on a perpetual basis in a multiple element arrangement that arrangement typically includes PCS and application development services, we follow the guidance of ASC Topic 605-985.  In assessing the hierarchy of relative selling price for PCS, we have determined that VSOE is established for PCS.  VSOE for PCS is based on the price of PCS when sold separately, which has been established via annual renewal rates. Similarly, when the Company licenses its software on a perpetual basis in a multiple element arrangement that also includes managed service hosting (“hosting”), we have determined that VSOE is established for hosting based on the price of the hosting when sold separately, which has been established based on renewal rates of the hosting contract.   Revenue recognition for perpetual licenses sold with application development services are considered on a case by case basis.   The Company has not established VSOE for perpetual licenses or fixed price development services and therefore in accordance with ASC Topic 605-985, when perpetual licenses are sold in multiple element arrangements including application development services where VSOE for the services has not been established, the license revenue is deferred and recognized using contract accounting. The Company has determined that services are not essential to the functionality of the software and it has the ability to make estimates necessary to apply percentage-of-completion accounting. In those cases where perpetual licenses are sold in a multiple element arrangement that includes application development services where VSOE for the services has been established, the license revenue is recognized under the residual method and the application services are recognized upon delivery.  

In determining VSOE for the application development services element, the separability of the application development services from the software license and the value of the services when sold on a standalone basis are considered.  The Company also considers the categorization of the services, the timing of when the services contract was signed in relation to the signing of the perpetual license contract and delivery of the software, and whether the services can be performed by others.  The Company has concluded that its application development services are not required for the customer to use the product but, rather enhance the benefits that the software can bring to the customer.  In addition, the services provided do not result in significant customization or modification of the software and are not essential to its functionality, and can also be performed by the customer or a third party.  If an application development services arrangement does qualify for separate accounting, the Company recognizes the perpetual license on a residual basis.  If an application development services arrangement does not qualify for separate accounting, the Company recognizes the perpetual license under the proportional performance model as described above.
 
 
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When subscription arrangements are sold with application development services, the Company uses its judgment as to whether the application development services qualify as a separate unit of accounting. When subscription service arrangements involve multiple elements that qualify as separate units of accounting, the Company allocates arrangement consideration in multiple-deliverable arrangements at the inception of an arrangement to all deliverables based on the relative selling price model in accordance with the selling price hierarchy, which includes: (i) VSOE when available; (ii) TPE if VSOE is not available; and (iii) ESP if neither VSOE or TPE is available. For those subscription arrangements sold with multiple elements whereby the application development services do not qualify as a separate unit of accounting, the application services revenue is recognized ratably over the subscription period.  Subscriptions also include a PCS component, and the Company has determined that the two elements cannot be separated and must be recognized as one unit over the applicable service period.  Set up fees paid by customers in connection with subscription arrangements are deferred and recognized ratably over the longer of the life of the hosting period or the expected lives of customer relationships, which generally range from two to three years.  We continue to evaluate the length of the amortization period of the set up fees as we gain more experience with customer contract renewals and our newer product offerings.

Customer Payment Terms
 
Payment terms with customers typically require payment 30 days from invoice date. Payment terms may vary by customer but generally do not exceed 45 days from invoice date.  Invoicing for web application development services are either monthly or upon achievement of milestones and payment terms for such billings are within the standard terms described above. Invoicing for subscriptions and hosting are typically issued monthly and are generally due in the month of service.

Our agreements with customers do not provide for any refunds for services or products and therefore no specific reserve for such is maintained. In the infrequent instances where customers raise concerns over delivered products or services, we have endeavored to remedy the concern and all costs related to such matters have been insignificant in all periods presented.
 
Warranty
 
Certain arrangements include a warranty period which is generally 30 days from the completion of work. In hosting arrangements, we provide warranties of up-time reliability. We continue to monitor the conditions that are subject to the warranties to identify if a warranty claim may arise. If we determine that a warranty claim is probable, then any related cost to satisfy the warranty obligation is estimated and accrued. Warranty claims to date have been immaterial.

Reimbursable Expenses
 
In connection with certain arrangements, reimbursable expenses are incurred and billed to customers and such amounts are recognized as both revenue and cost of revenue.
 
Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts which represents estimated losses resulting from the inability, failure or refusal of our clients to make required payments.

We analyze historical percentages of uncollectible accounts and changes in payment history when evaluating the adequacy of the allowance for doubtful accounts. We use an internal collection effort, which may include our sales and services groups as we deem appropriate. Although we believe that our allowances are adequate, if the financial condition of our clients deteriorates, resulting in an impairment of their ability to make payments, or if we underestimate the allowances required, additional allowances may be necessary, resulting in increased expense in the period in which such determination is made.

Accounting for Cost of Computer Software to be Sold, Leased or Otherwise Marketed   

We charge research and development expenditures for technology development to operations as incurred.  However, in accordance with Codification 985-20 Costs of Software to be Sold Leased or Otherwise Marketed , we capitalize certain software development costs subsequent to the establishment of technological feasibility.  Based on our product development process, technological feasibility is established upon completion of a working model. Certain costs incurred between completion of a working model and the point at which the product is ready for general release is capitalized if significant. Once the product is available for general release, the capitalized costs are amortized in cost of sales. 
 
 
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Accounting for Goodwill and Intangible Assets

Goodwill is tested for impairment annually during the fourth quarter of every year and more frequently if events and circumstances indicate that the asset might be impaired.  In assessing goodwill for impairment, an entity has the option to assess qualitative factors to determine whether events or circumstances indicate that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount. We assess goodwill at the consolidated level as one reporting unit. If this is the case, then performing the quantitative two-step goodwill impairment test is unnecessary. An entity can choose not to perform a qualitative assessment for any or all of its reporting units, and proceed directly to the use of the two-step impairment test. In assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we assess relevant events and circumstances that may impact the fair value and the carrying amount of a reporting unit. The identification of relevant events and circumstances and how these may impact a reporting unit’s fair value or carrying amount involve significant judgments by management. These judgments include the consideration of macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, events which are specific to Bridgeline, and trends in the market price of our common stock. Each factor is assessed to determine whether it impacts the impairment test positively or negatively, and the magnitude of any such impact.

For fiscal 2012 we performed the annual assessment of our goodwill during the fourth quarter of fiscal 2012, using the qualitative approach described above. Based on our qualitative assessment, we concluded that it was not more likely than not that the fair values of any of our reporting units were less than their carrying amounts, and therefore it was not necessary to perform the quantitative two-step impairment test. The key qualitative factors that led to our conclusion included the following: (i) our stock price more than doubled to $1.20 as of September 30, 2012. (ii) our strategic alliance with UPS Logistics and the successful launch of iAPPS ds with our first iAPPS ds customer, a franchisor with over 4,000 locations, has improved the predictability of our forecasts and (iii) inputs from recent transactions within the technology sector, such a revenue multiples used to value transactions, have either remained steady or improved since the fiscal 2011 assessment. We did not have an impairment of goodwill in fiscal 2012 or 2011.
 
The factors the Company considers important that could indicate impairment include its stock price, 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. To the extent there are unfavorable changes in assumptions used to determine the Company’s fair value there can be no assurance that the Company will not have an impairment charge in the future.

 During the three months ended March 31, 2013 the carrying value of goodwill increased as a result of a final contingent acquisition payment related to an acquisition completed prior to September 30, 2009, which was recorded as an increase to goodwill in the period it was earned, and the acquisition of MarketNet.

Accounting for Stock-Based Compensation
 
At March 31, 2013, we maintained one stock-based compensation plan and one employee stock purchase plan which are more fully described in Note 11 to the Consolidated Financial Statements of our Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 5, 2012.

The Company accounts for stock compensation awards in accordance with the Compensation-Stock Compensation Topic of the Codification.  Share-based payments (to the extent they are compensatory) are recognized in our consolidated statements of operations based on their fair values.
 
We recognize stock-based compensation expense for share-based payments issued or assumed after October 1, 2006 that are expected to vest on a graded, accelerated basis over the service period of the award, which is generally three years.  We recognize the fair value of the unvested portion of share-based payments granted prior to October 1, 2006 over the remaining service period, net of estimated forfeitures.  In determining whether an award is expected to vest, we use an estimated, forward-looking forfeiture rate based upon our historical forfeiture rate and reduce the expense over the recognition period. Estimated forfeiture rates are updated for actual forfeitures quarterly.  We also consider, each quarter, whether there have been any significant changes in facts and circumstances that would affect our forfeiture rate.  Although we estimate forfeitures based on historical experience, actual forfeitures in the future may differ.  In addition, to the extent our actual forfeitures are different than our estimates, we record a true-up for the difference in the period that the awards vest, and such true-ups could materially affect our operating results.

We estimate the fair value of employee stock options using the Black-Scholes-Merton option valuation model.  The fair value of an award is affected by our stock price on the date of grant as well as other assumptions including the estimated volatility of our stock price over the term of the awards and the estimated period of time that we expect employees to hold their stock options.  The risk-free interest rate assumption we use is based upon United States treasury interest rates appropriate for the expected life of the awards.  We use the historical volatility of our publicly traded options in order to estimate future stock price trends.  In order to determine the estimated period of time that we expect employees to hold their stock options, we use historical trends of employee turnovers.  Our expected dividend rate is zero since we do not currently pay cash dividends on our common stock and do not anticipate doing so in the foreseeable future. The aforementioned inputs entered into the option valuation model we use to fair value our stock awards are subjective estimates and changes to these estimates will cause the fair value of our stock awards and related stock-based compensation expense we record to vary.
 
 
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We record deferred tax assets for stock-based awards that result in deductions on our income tax returns, based on the amount of stock-based compensation recognized and the statutory tax rate in the jurisdiction in which we will receive a tax deduction.  
 
Item 3.                      Qualitative and Quantitative Disclosures About Market Risk.

Not required.

 
Item 4.       Controls and Procedures.

Evaluation of Disclosure Controls and Procedures
 
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 , as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our President and Chief Executive Officer (Principal Executive Officer) and our Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer), as appropriate, to allow timely decisions regarding required disclosure.  In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
 
As of March 31, 2013 we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in enabling us to record, process, summarize and report information required to be included in our periodic filings with the Securities and Exchange Commission within the required time period.
 
Changes in Internal Control over Financial Reporting
 
There have been no changes in our internal controls over financial reporting that occurred during the quarter ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
30

 
 
PART II – OTHER INFORMATION
 
Item 1.                                   Legal Proceedings.
 
From time to time we are subject to ordinary routine litigation and claims incidental to our business. We are not currently involved in any legal proceedings, except as described below, that we believe are material beyond those previously disclosed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 5, 2012.

Bridgeline Digital, Inc. vs. e.Magination network, LLC and its principal owner, Daniel Roche.

In August 2010, Bridgeline initiated a lawsuit against e.Magination network, LLC and its principal owner, Daniel Roche, in the Federal District Court of Massachusetts.  Bridgeline seeks damages for accounts receivable allegedly collected by Mr. Roche and e.Magination and used to pay obligations of e.Magination and Mr. Roche (accounts receivable contractually belonging to Bridgeline).  e.Magination and Mr. Roche have asserted counterclaims against Bridgeline and Thomas Massie alleging that Bridgeline has breached Mr. Roche’s employment agreement by improperly terminating Mr. Roche for cause and also alleging breach of the Asset Purchase Agreement by Bridgeline. This lawsuit remains unresolved as of March 31, 2013 and is currently expected to go to trial in June 2013.

 
Item 2.                                 Unregistered Sales of Equity Securities and Use of Proceeds.
 
 
The following summarizes all sales of our unregistered securities during the quarter ended March 31, 2013. The securities in the below-referenced transactions were (i) issued without registration and (ii) were subject to restrictions under the Securities Act and the securities laws of certain states, in reliance on the private offering exemptions contained in Sections 4(2), 4(6) and/or 3(b) of the Securities Act and on Regulation D promulgated there under, and in reliance on similar exemptions under applicable state laws as transactions not involving a public offering. Unless stated otherwise, no placement or underwriting fees were paid in connection with these transactions.

During the fiscal quarter ended March 31, 2013, the Company granted 126,500 stock options under its Amended and Restated Stock Incentive Plan at a weighted average exercise price of $1.55 per share.

The securities were issued exclusively to our directors, executive officers and employees. 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 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. 
 
Item 5.           Other Information.

On May 14, 2013, the Company amended and restated the employment agreement in place with each of Brett Zucker, the Company’s Executive Vice President and Chief Technology Officer, and Michael Prinn, the Company’s Executive Vice President and Chief Financial Officer.  The amendment to the employment agreement with each executive officer provides each executive with a severance benefit equal to three times the executive’s annual salary in the event the executive’s employment is terminated by the Company without cause or by the executive for good reason within twelve months after a change in control of the Company.  The amendment also revised the definition of what constitutes a termination by the executive for good reason to include termination of employment due to the relocation of the executive’s principal place of employment by more than 30 miles.

The above summary of the amendment to the employment agreements does not purport to be complete and is qualified in its entirety by reference to the full employment agreements, copies of which are filed as exhibits to this Quarterly Report on Form 10-Q.
 
 
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Item 6.             Exhibits.
 
Exhibit No.
 
Description of Document
     
3.1
 
Amended and Restated Certificate of Incorporation, as amended.
     
10.1
  Employment Agreement with Brett Zucker, dated May 14, 2013
     
10.2
  Employment Agreement with Michael Prinn, dated May 14, 2013
     
31.1
 
Certification required by Rule 13a-14(a) or Rule 15d-14(a).
     
31.2
 
Certification required by Rule 13a-14(a) or Rule 15d-14(a).
     
32.1
 
Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).
     
32.2
 
Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).
     
101.INS*   XBRL Instance
     
101.SCH*   XBRL Taxonomy Extension Schema
     
101.CAL*   XBRL Taxonomy Extension Calculation
     
101.DEF*  
XBRL Taxonomy Extension Definition
     
101.LAB*
  XBRL Taxonomy Extension Labels
     
101.PRE*
  XBRL Taxonomy Extension Presentation
 
*XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 and 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
 
 
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SIGNATURES
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
   
Bridgeline Digital, Inc.
   
(Registrant)
     
May 15, 2013
 
/s/    Thomas L. Massie
Date
 
Thomas L. Massie
President and Chief Executive Officer
(Principal Executive Officer)
 
     
May 15, 2013
 
/s/    Michael D. Prinn
Date
 
Michael D. Prinn
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
 

 
 
33

 
 
INDEX OF EXHIBITS

 
Exhibit No.
 
Description of Document
     
3.1
 
Amended and Restated Certificate of Incorporation, as amended.
     
10.1
  Employment Agreement with Brett Zucker, dated May 14, 2013
     
10.2
  Employment Agreement with Michael Prinn, dated May 14, 2013
     
31.1
 
Certification required by Rule 13a-14(a) or Rule 15d-14(a).
     
31.2
 
Certification required by Rule 13a-14(a) or Rule 15d-14(a).
     
32.1
 
Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).
     
32.2
 
Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).
     
101.INS*   XBRL Instance
     
101.SCH*   XBRL Taxonomy Extension Schema
     
101.CAL*   XBRL Taxonomy Extension Calculation
     
101.DEF*  
XBRL Taxonomy Extension Definition
     
101.LAB*
  XBRL Taxonomy Extension Labels
     
101.PRE*
  XBRL Taxonomy Extension Presentation
 
*XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 and 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
 

34
Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
BRIDGELINE SOFTWARE, INC.
 
Pursuant to Sections 241 and 245 of the
General Corporation Law
of the State of Delaware


          Bridgeline Software, Inc., a corporation organized and existing under the laws of the State of Delaware (the “ Corporation ”), hereby certifies as follows:

          1. The name of the Corporation is “Bridgeline Software, Inc.”

           2. The original Certificate of Incorporation of the Corporation (the “ Certificate ”) was filed in the office of the Secretary of State of the State of Delaware on August 28, 2000.  An amendment to the Certificate was filed in the office of the Secretary of State of the State of Delaware on April 7, 2006

          3. In the manner prescribed by Sections 242 and 245 of the General Corporation Law of the State of Delaware (the “ DGCL ”), this Amended and Restated Certificate of Incorporation was duly adopted at a meeting of the Board of Directors of the Corporation held on August 18, 2006, and by written consent of the stockholder of the Corporation on September 29, 2006 pursuant to Section 228 of the DGCL.

          4. The Certificate is hereby amended and restated in its entirety and the text of the Amended and Restated Certificate of Incorporation (the “ Amended and Restated Certificate ”) is to read as follows:

Article 1. NAME

          The name of this corporation is Bridgeline Software, Inc. (the “Corporation”).

Article 2. REGISTERED OFFICE AND AGENT

          The address of the registered office of the Corporation in the State of Delaware is 1209 Orange Street, in the city of Wilmington, in the county of New Castle. The registered agent of the Corporation at such address is The Corporation Trust Company.

Article 3. PURPOSE

          The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the DGCL.
 
 
 

 

Article 4. CAPITAL STOCK

      4.1. Authorized Shares

          The Corporation is authorized to issue two classes of stock to be designated, respectively, “ Common Stock ” and “ Preferred Stock .” The total number of shares of all classes of stock that the Corporation shall have the authority to issue is Twenty-One Million (21,000,000), of which Twenty Million (20,000,000) shares shall be Common Stock, having a par value of $.001 per share, and of which One Million (1,000,000) shares shall be Preferred Stock, having a par value of $.001 per share.

      4.2. Common Stock
 
            4.2.1. Relative Rights

          The Common Stock shall be subject to all of the rights, privileges, preferences and priorities of the Preferred Stock as set forth in one or more the certificates of designations, preferences and relative rights filed with the State of Delaware to establish the respective series of Preferred Stock. Each share of Common Stock shall have the same relative rights as, and be identical in all respects to, all the other shares of Common Stock.

            4.2.2. Dividends

          Whenever there shall have been paid, or declared and set aside for payment, to the holders of shares of any class of stock having preference over the Common Stock as to the payment of dividends, the full amount of dividends and of sinking fund or retirement payments, if any, to which such holders are respectively entitled in preference to the Common Stock, then dividends may be paid on the Common Stock and on any class or series of stock entitled to participate therewith as to dividends, out of any assets legally available for the payment of dividends thereon, but only when and as declared by the Board of Directors of the Corporation.

           4.2.3. Dissolution, Liquidation, Winding Up

          In the event of any dissolution, liquidation, or winding up of the Corporation, whether voluntary or involuntary, the holders of the Common Stock, and holders of any class or series of stock entitled to participate therewith, in whole or in part, as to the distribution of assets in such event, shall become entitled to participate in the distribution of any assets of the Corporation remaining after the Corporation shall have paid, or provided for payment of, all debts and liabilities of the Corporation and after the Corporation shall have paid, or set aside for payment, to the holders of any class of stock having preference over the Common Stock in the event of dissolution, liquidation or winding up the full preferential amounts (if any) to which they are entitled.
 
 
 

 
 
  4.2.4. Voting Rights

          Each holder of shares of Common Stock shall be entitled to attend all special and annual meetings of the stockholders of the Corporation and, share for share and without regard to class, together with the holders of all other classes of stock entitled to attend such meetings and to vote (except any class or series of stock having special voting rights), to cast one vote for each outstanding share of Common Stock so held upon any matter or thing (including, without limitation, the election of one or more directors) properly considered and acted upon by the stockholders.

      4.3. Preferred Stock

          The Board of Directors of the Corporation is authorized, subject to limitations prescribed by the DGCL and the provisions of this Amended and Restated Certificate, to provide, by resolution or resolutions from time to time and by filing a certificate or certificates of designations pursuant to the DGCL, for the issuance of the shares of Preferred Stock in series, to establish from time to time the number of shares to be included in each such series, the voting powers (if any) of the shares to be included in each such series, to fix the powers, designations, preferences and relative, participating, optional or other special rights of the shares of each such series and to fix the qualifications, limitations or restrictions thereof, including without limitation thereof, dividend rights, special voting rights, conversion rights, redemption privileges and liquidation preferences, as shall be stated and expressed in such resolutions, all to the full extent now or hereafter permitted by the DGCL.  Without limiting the generality of the foregoing, the resolutions providing for issuance of any series of Preferred Stock may provide that such series shall be superior or rank equally or be junior to the Preferred Stock of any other series to the extent permitted by law.  Except as otherwise specifically provided in this Amended and Restated Certificate, no vote of the holders of the Preferred Stock or Common Stock shall be a prerequisite to the issuance of any shares of any series of the Preferred Stock authorized by and complying with the conditions of this Amended and Restated Certificate, the right to have such vote being expressly waived by all present and future holders of the capital stock of the Corporation..

Article 5. BOARD OF DIRECTORS

      5.1. Number; Term; Election

          The number of directors of the Corporation shall be such number as from time to time shall be fixed by, or in the manner provided in, the bylaws of the Corporation. Unless and except to the extent that the bylaws of the Corporation shall otherwise require, the election of directors of the Corporation need not be by written ballot. Except as otherwise provided in this Amended and Restated Certificate, each director of the Corporation shall be entitled to one vote per director on all matters voted or acted upon by the Board of Directors.

Subject to the rights of holders of any series of Preferred Stock to elect additional directors under specified circumstances, the directors shall be divided into three classes, designated as Class I, Class II and Class III, respectively, as nearly equal in number as possible. The number of directors in each class shall be determined in the manner provided in the bylaws of the Corporation. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors.
 
 
 

 
          
The term of office of the first class (Class I) shall expire at the first annual meeting of stockholders or any special meeting in lieu thereof following the closing of the initial public offering of the Corporation’s securities pursuant to an effective registration statement filed with the U.S. Securities and Exchange Commission under the Securities Act of 1933, as amended (the “ Initial Public Offering ”); the term of office of the second class (Class II) shall expire at the second annual meeting of stockholders or any special meeting in lieu thereof following the Initial Public Offering; and the term of office of the third class (Class III) shall expire at the third annual meeting of stockholders or any special meeting in lieu thereof following the Initial Public Offering. At each annual meeting of stockholders or special meeting in lieu thereof, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of the stockholders or special meeting in lieu thereof after their election and until their successors are duly elected and qualified. Directors need not be residents of the state of incorporation or stockholders of the Corporation.

Notwithstanding the foregoing provisions of this Article 5 , each director shall serve until his or her successor is duly elected and qualified or until his or her death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the terms of any incumbent director.

With respect to newly created directorships resulting from an increase in the number of directors, the Board of Directors shall determine and designate to which class of directorships each director belongs.
     
5.2 Management of Business and Affairs of the Corporation.

          The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors.

         5.3 Indemnification.      

To the fullest extent permitted by the DGCL as it presently exists or may hereafter be amended, the Corporation shall indemnify any person (and such person’s heirs, executors or administrators) who was or is made or is threatened to be made a party to or is otherwise involved in any threatened, pending or completed action, suit or proceeding (brought in the right of the Corporation or otherwise), whether civil, criminal, administrative or investigative, and whether formal or informal, including appeals, by reason of the fact that such person, or a person for whom such person was the legal representative, is or was a director or officer of the Corporation or, while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, limited liability company, nonprofit entity or other enterprise, for and against all loss and liability suffered and expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement reasonably incurred by such person or such heirs, executors or administrators in connection with such action, suit or proceeding, including appeals, if (i) such person acted in good faith and in a manner such person reasonably believed to be in, or not opposed to, the best interests of the Corporation and (ii) with respect to any criminal action or proceeding, such person had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that such person did not act in good faith, did not act in a manner that he or she reasonably believed to be in, or not opposed to, the best interests of the Corporation or, with respect to any criminal action or proceeding, did not have reasonable cause to believe that such person's conduct was unlawful. The foregoing right of indemnification shall in no way be exclusive of any other rights of indemnification to which any such person may be entitled, under any by-law, agreement, vote of directors or stockholders or otherwise. No amendment to or repeal of the provisions of this paragraph shall deprive a person of the benefit of this paragraph with respect to any act or failure to act of such person occurring prior to such amendment or repeal.
 
 
 

 

      5.4 Limitation of Liability

          No director of the Corporation shall be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that this provision shall not eliminate or limit the liability of a director (a) for any breach of the director’s duty of loyalty to the Corporation or its stockholders; (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (c) under Section 174 of the DGCL; or (d) for any transaction from which the director derived an improper personal benefit. Any repeal or modification of this Section 5.4 shall be prospective only and shall not adversely affect any right or protection of, or any limitation of the liability of, a director of the Corporation existing at, or arising out of facts or incidents occurring prior to, the effective date of such repeal or modification.

Article 6. AMENDMENT OF CERTIFICATE

          The Corporation reserves the right to amend, alter or repeal any provision contained in this Amended and Restated Certificate in the manner prescribed by the laws of the State of Delaware and all rights conferred upon stockholders are granted subject to this reservation; provided, however, that, notwithstanding any other provision of this Amended and Restated Certificate or any provision of law that might otherwise permit a lesser vote or no vote, but in addition to any vote of the holders of any class or series of the stock of this Corporation required by law or by this Amended and Restated Certificate, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting power of all of the then-outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to amend or repeal this Article 6 or Article 5 of this Amended and Restated Certificate.

Article 7. ADOPTION AND AMENDMENT OF BYLAWS .

          The Board of Directors of the Corporation shall adopt, and may amend and restate from time to time, the by-laws of the Corporation. Any amendment of the by-laws shall require the affirmative vote of at least sixty-six and two-thirds percent (66 2/3%) of the directors comprising the Board of Directors, at a meeting called for the purpose of amending and/or restating the Bylaws. Absent affirmative vote of at least sixty-six and two-thirds percent (66 2/3%) of the directors comprising the Board of Directors, at a meeting called for the purpose of amending and/or restating the Bylaws, the stockholders of the Company may amend the by-laws by an affirmative vote of sixty-six and two-thirds percent (66 2/3%) of each class of issued and outstanding shares of voting securities of the Corporation.
 
 
 

 

Article 8. NO STOCKHOLDER ACTION BY WRITTEN CONSENT

After the Initial Public Offering,   the stockholders of the Corporation may not take action by written consent without a meeting and must take any actions at a duly called annual or special meeting. Meetings of stockholders may be called in the manner and by the persons specified in the Corporation’s by-laws.

Article  9. SURVIVAL

          If any Article of this Amended and Restated Certificate or any portion thereof is found to be void or unenforceable by a court of competent jurisdiction, the remaining Articles or portions of said Article, as the case may be, shall nevertheless remain in full force and effect as though the unenforceable part had been severed and deleted.
 
 
 

 

           IN WITNESS WHEREOF , the undersigned hereby certifies that the facts hereinabove stated are truly set forth, and accordingly executes this Amended and Restated Certificate of Incorporation this 27th day of June, 2007.
 
 
 
Bridgeline Software, Inc.
 
       
 
By:
/s/Thomas Massie  
   
Thomas Massie
 
   
President
 
       

 
 
 
 

 

 
CERTIFICATE OF AMENDMENT

TO THE

AMENDED AND RESTATED

CERTIFICATE OF INCORPORATION

OF

BRIDGELINE SOFTWARE, INC.

Pursuant to Section 242
of the General Corporation Law of
                 the State of Delaware                 

Bridgeline Software, Inc. (hereinafter called the “ Corporation ”), organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify:
At a meeting held on February 12, 2010, resolutions were duly adopted by the Board of Directors, pursuant to Sections 141 and 242 of the General Corporation Law of the State of Delaware, setting forth a proposed amendment to the Certificate of Incorporation of the Corporation and declaring said amendment to be advisable.  The Stockholders of the Corporation duly approved said proposed amendment at the 2010 Annual Meeting of Stockholders, held on March 19, 2010, in accordance with Sections 211 and 242 of the General Corporation Law of the State of Delaware.  The resolution setting forth the amendment is as follows:

RESOLVED :     That Article FIRST of the Certificate of Incorporation of the Corporation be and hereby is amended to read in its entirety as follows:

FIRST:               The name of the Corporation is Bridgeline Digital, Inc.


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IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be signed by its President and Chief Executive Officer this 19th day of March, 2010.

 
BRIDGELINE SOFTWARE, INC.
 
     
       
 
By:
/s/Thomas L. Massie   
   
Name: Thomas L. Massie
 
    Title:   President and Chief Executive Officer  
 

 
 

 

CERTIFICATE OF AMENDMENT
 
TO THE
 
AMENDED AND RESTATED
 
CERTIFICATE OF INCORPORATION
 
OF
 
BRIDGELINE DIGITAL, INC.
 
Pursuant to Section 242
 
of the General Corporation Law of
 
              the State of Delaware               
 
Bridgeline Digital, Inc. (hereinafter called the “ Corporation ”), organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify:
 
At a meeting held on January 18, 2013, resolutions were duly adopted by the Board of Directors, pursuant to Sections 141 and 242 of the General Corporation Law of the State of Delaware, setting forth a proposed amendment to the Certificate of Incorporation of the Corporation and declaring said amendment to be advisable.  The Stockholders of the Corporation duly approved said proposed amendment at the 2013 Annual Meeting of Stockholders, held on April 26, 2013, in accordance with Sections 211 and 242 of the General Corporation Law of the State of Delaware.  The resolution setting forth the amendment is as follows:
 
RESOLVED:
That Article FOURTH, Section 4.1 of the Amended and Restated Certificate of Incorporation of Bridgeline Digital, Inc., as amended to date, be and hereby is further amended by deleting the first paragraph thereof and inserting in its place the following:
 
 
“The Corporation is authorized to issue two classes of stock to be designated, respectively, “Common Stock” and “Preferred Stock.” The total number of shares of all classes of stock that the Corporation shall have the authority to issue is Thirty-One Million (31,000,000), of which Thirty Million (30,000,000) shares shall be Common Stock, having a par value of $.001 per share, and of which One Million (1,000,000) shares shall be Preferred Stock, having a par value of $.001 per share.”
 

 
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IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be signed by its President and Chief Executive Officer this 29 th day of April, 2013.
 

 

 
BRIDGELINE DIGITAL, INC.
 
     
     
       
 
By:
/s/Thomas L. Massie   
   
Name: Thomas L. Massie
 
    Title:   President and Chief Executive Officer  
 
 
 
 

 

 

Exhibit 10.1
 
 
   
interactive technology solutions
 
 
AMENDED AND RESTATED EMPLOYMENT AGREEMENT

WHEREAS, Bridgeline Digital, Inc., a Delaware Corporation (the “ Employer ” or the “ Company ”) and Brett Zucker (the “ Employee ”), previously entered into an Employment Agreement (the “ Original Agreement ”), dated as of October 1, 2012;

WHEREAS, pursuant to Section 7.5, the Original Agreement may be amended with the written consent of the Employee and the Chief Executive Officer of Employer and the proper authorization by Employer’s Board of Directors;

WHEREAS, the Employer and Employee desire to amend and restate the Original Agreement in the manner set forth herein and the Employer’s Board of Directors has approved such amendment and restatement; and

WHEREAS, in order to induce Employee to enter into this Agreement, the Employer and the Employee agree to the terms set forth below.

NOW THEREFORE, in consideration of the mutual promises made herein, Employer and Employee agree that effective May 14, 2013, the Original Agreement be amended and restated as follows:

ARTICLE 1
TERM OF EMPLOYMENT

Section 1.1              Specified Period .   Employer hereby employs Employee, and Employee hereby accepts employment with Employer for the term of one (1) year, with the period beginning on October 1, 2012 (the “ Commencement Date ”), and terminating on September 30, 2013 (“ Initial Term ”).

Section 1.2              Succeeding Term .  At the end of the Initial Term, or any succeeding one year term, this Employment Agreement shall renew for successive periods of one (1) year each (a “ Succeeding Term ”) only if the Employer gives written notice of renewal to Employee not less than sixty (60) days prior to the end of the Initial Term.  If such notice of renewal is not provided to the Employee by the Employer this Employment Agreement will terminate, except the  provisions of Sections 2.3, 2.4, 2.5 and 2.6 shall continue in force so long as the Employee remains employed by the Employer or any Affiliate of the Employer, whether under this Agreement or not, and whether as a consultant or not, and shall survive any termination of employment under this Agreement for the periods specified therein, all as is more specifically provided in Section 7.10. Once this Employment Agreement terminates then the Employee shall become an employee at will at the end of the Initial Term or Succeeding Term.

Section 1.3              Employment Term Defined .   As used herein, the phrase “employment term” refers to the entire period of employment of Employee by Employer hereunder, whether such employment is during the Initial Term, Succeeding Term or, following the end of the Succeeding Term, as an employee at will.

ARTICLE 2
DUTIES AND OBLIGATIONS OF EMPLOYEE

Section 2.1              General Duties .  Employee shall serve as Executive Vice President and Chief Technology Officer for the Employer.  In such capacity, Employee shall do and perform all services, acts or things consistent within the scope of his employment and with the Employee’s skill and expertise in accordance with the instructions of and policies set by Employer’s Chief Executive Officer, or his designee.  Employee shall perform such services at 80 Blanchard Road, Burlington, Massachusetts or at such other location as may be designated by Employer.  The Employee shall be available to make business trips within the United States for the purpose of meeting with and consulting with other members of the Employer’s management, as well as with present and proposed customers and parties with whom the Employer does business, all on reasonable terms, bearing in mind the position of the Employee.
 
         
  Employee   Bridgeline  
 
 

 

Section 2.2              Devotion to Employer’s Business .

(a)           Employee shall devote his best efforts and entire productive time, ability and attention to diligently promote and improve the business of Employer during the Term.

(b)           Employee shall not engage in any other business duties or pursuits whatsoever, or directly or indirectly render any services of a business, commercial or professional nature to any other person or organization, whether for compensation or otherwise, without the prior written consent of the Employer’s Chief Executive Officer .  This Agreement shall not be interpreted to prohibit Employee from making passive personal investments or conducting private business affairs if those private business affairs do not materially interfere with the services required under this Agreement.

Section 2.3              Confidential Information; Tangible Property; Competitive Activities .

(a)           Employee shall hold in confidence and not use or disclose to any person or entity without the express written authorization of Employer, either during the term of employment or any time thereafter, secret or confidential information of Employer, as well as secret or confidential information and materials received in confidence from third parties by Employee or Employer.  If any confidential information described below is sought by legal process, Employee will promptly notify Employer and will cooperate with Employer in preserving its confidentiality in connection with any legal proceeding.

The parties hereto hereby stipulate that, to the extent it is not known publicly, the information described in this Section (herein referred to as “Confidential Information”) is important, material and has independent economic value (actual or potential) from not being generally known to others and that any breach of any terms of this Section 2.3 is a material breach of this Agreement:  (i) the names, buying habits and practices of Employer’s customers or prospective customers; (ii) Employer’s sales and marketing strategy and methods and related data; (iii) the names of Employer’s vendors and suppliers; (iv) cost of materials/services; (v) the prices Employer obtains or has obtained or for which it sells or has sold its products or services; (vi) development costs; (vii) compensation paid to employees or other terms of employment; (viii) Employer's past and projected sales volumes; (ix) confidential information relating to actual products, proposed products or enhancements of existing products, including, but not limited to, source code, programming instructions, engineering methods and techniques, logic diagrams, algorithms, development environment, software methodologies, and technical specifications for the Employer’s web design and content management software.  Confidential Information shall also include all information which the Employee should reasonably understand is secret or confidential information,  Confidential Information shall also include all information which the Employee should reasonably understand is secret or confidential information, if the Employee has participated in or otherwise been involved with the development, analysis, invention or origination of such Confidential Information belonging to the Employer, including, without limitation, methods, know-how, formula, customer and supplier lists, personnel and financial data, business plans, as well as product information, product plans and product strategies. Notwithstanding the foregoing, “Confidential Information” does not include any information which (A) is now available to the public or which becomes available to the public, (B) is or becomes available to the Employee from a source other than the Employer and such disclosure is not a breach of a confidentiality agreement with the Employer, or (C) is required to be disclosed by any government agency or in connection with a court proceeding.
 
All Confidential Information, as well as all software code, methodologies, models, samples, tools, machinery, equipment, notes, books, correspondence, drawings and other written, graphical or electromagnetic records relating to any of the products of Employer or relating to any of the Confidential Information of Employer which Employee shall prepare, use, construct, observe, possess, or control shall be and shall remain the sole property of Employer and shall be returned by Employee upon termination of employment.
 
         
  Employee   Bridgeline  
 
 
2

 

(b)        During his employment and for twelve (12) months after the termination of his employment for any reason whatsoever, Employee shall not, directly or indirectly, without the written consent of the Employer:  (i) invest (except for the ownership of less than 3% of the capital stock of a publicly held company), or hold a directorship or other position of authority in any of the Company's Direct Competitors (“ Direct Competitors ” defined as: any person or entity, or a department or division of an entity, whereby more than 25% of the person’s or entity’s total revenues are derived from the Competitive Services (“ Competitive Services ” defined as design and development for third parties of: Internet/Intranet/Extranet Web sites and Web applications, content management software, document management software, analytics software, eCommerce, eMarketing, or services such as Web consulting services or Web hosting services)),  (ii) undertake preparation of or planning for an organization or offering of Competitive Services, (iii) combine or collaborate with other employees or representatives of the Employer or any third party for the purpose of organizing, engaging in, or offering Competitive Services, or (iv) be employed by, serve as a consultant to or otherwise provide services to (whether as principal, partner, shareholder, member, officer, director, stockholder, agent, joint venturer, creditor, investor or in any other capacity), or participate in the management of a Direct Competitor or participate in any other business that the Employer may be engaged or is planning to undertake in at the date of the termination of this Agreement.   Notwithstanding any to the contrary contained in this Section 2.3, in the event your employment is terminated for reasons in which economic factors are considered (specifically, a layoff or closing of the office where you are employed), then the provisions of this Section 2.3 shall not apply.  However, all other provisions of this Agreement shall remain in full force and effect, including without limitation sections 2.3(a), 2.3(c) through 2.3(f).

(c)           During his employment and for twelve (12) months after the termination of such employment for any reason whatsoever, Employee shall not become employed by, associated with, or engaged by, in any capacity whatsoever, any customer, client or account (as defined below) of the Employer whereby Employee provides services to such customer, client or account similar to those provided by the Employer to the customer, client or account during Employee’s employment.  Employee acknowledges and understands that Employer’s customers, clients and accounts have executed or will execute agreements pursuant to which the customer, client or account agrees not to hire Employer’s employees.

(d)           During his employment and for twelve (12) months after the termination of such employment for any reason whatsoever, Employee shall not, directly or indirectly, without the consent of the Employer:  contact, recruit, solicit, induce or employ, or attempt to contact, recruit, solicit, induce or employ, any employee, consultant, agent, director or officer of the Employer to terminate his/her employment with, or otherwise cease any relationship with, the Employer; or contact, solicit, divert, take away or accept business from, or attempt to contact, solicit, divert or take away, any clients, customers or accounts, or prospective clients, customers or accounts, of the Employer, or any of the Employer’s business with such clients, customers or accounts which were, directly or indirectly, contacted, solicited or served by Employee, or were directly or indirectly under his responsibility, while Employee was employed by the Company, or the identity of which Employee became aware during the term of  his employment.

As used in this agreement the term "client," "customer," or "accounts" shall include: (i) any person or entity that is a client, customer or account of the Employer on the date hereof or becomes a client, customer or account of the Employer during the Employee’s employment; (ii) any person or entity that was a client, customer or account of the Employer at anytime during the two-year period preceding the date of Employee’s termination; and (iii) any prospective client, customer or account to whom the Employer has made a presentation (or similar offering of services) within a period of 180 days preceding the date of the termination of Employee’s employment.

(e)           The covenants of this Section 2.3 shall be construed as separate covenants covering their subject matter in each of the separate counties and states in the United States in which Employer (or its Affiliates) transacts its business.  If at any time the foregoing provisions shall be deemed to be invalid or unenforceable or are prohibited by the laws of the state or place where they are to be enforced, by reason of being vague or unreasonable as to duration or place of performance, this Section shall be considered divisible and shall become and be immediately amended to include only such time and such area as shall be determined to be reasonable and enforceable by the court or other body having jurisdiction over this Agreement; and the Employer and the Employee expressly agree that this Section, as so amended, shall be valid and binding as though any invalid or unenforceable provision had not been included herein.
 
         
  Employee   Bridgeline  
 
 
3

 

(f)           The Employee represents and warrants that Employee is free to enter into this Agreement and to perform each of the terms and covenants contained herein, and that doing so will not violate the terms or conditions of any agreement between Employee and any third party.

Section 2.4              Inventions and Original Works .
 
(a)           Subject to Section 2.4(b) below, the Employee agrees that he will promptly make full written disclosure to Employer, will hold in trust for the sole right and benefit of Employer, and hereby irrevocably assigns to Employer without any additional compensation all of  his right, title and interest in and to any and all inventions (and patent rights with respect thereto), original works of authorship (including all copyrights with respect thereto), developments, improvements or trade secrets which Employee may solely or jointly conceive or develop or reduce to practice, or cause to be conceived or developed or reduced to practice, relating to or concerning the business of the Employer, whether or not conceived, developed or reduced to practice: (i) during working hours, (ii) while on Employer premises, (iii) with use of Company equipment, materials or facilities, or (iv) while performing his duties under this Agreement (“Employer Intellectual Property”).

Employee acknowledges that all original works of authorship relating to the business of Employer which are made by him (solely or jointly with others) within the scope of his duties under this Agreement and which are protectable by copyrights are “works made for hire” as that term is defined in the United States Copyright Act (17 U.S.C.A., Section 101), and that Employee is an employee as defined under that Act. Employee further agrees from time to time to execute written transfers to Employer of ownership or specific original works or authorship (and all copyrights therein) made by Employee (solely or jointly with others) which may, despite the preceding sentence, be deemed by a court of law not to be “works made for hire” in such form as is acceptable to Employer in its reasonable discretion. Employee hereby waives in favor of Employer and its assigns and licensees any and all artist’s or moral rights Employee  may have in respect of any Invention pursuant to any local, state or federal laws or statutes of the United States and all similar rights under the laws of all jurisdictions.

(b)           The parties agree that the “business of the Employer” for the purposes of this Section 2.4 is acting as a designer and developer for third parties of Internet/Intranet/Extranet Web sites and Web applications, content management software, document management software, analytics software, eCommerce, eMarketing, or services such as Web consulting services or Web hosting services” . Employee shall provide to Employer, and attach hereto as Exhibit 2.4(b), a list identifying and describing in reasonable detail all inventions (and patent rights with respect thereto), original works of authorship (including all copyrights with respect thereto), developments, improvements, concepts or trade secrets which Employee has solely or jointly conceived or developed or reduced to practice, or caused to be conceived or developed or reduced to practice to date, and other intellectual property of the Employee.  For the avoidance of doubt, Employee will identify on Exhibit 2.4(b) with sufficient detail any intellectual property belonging to the Employee prior to the date hereof, including that related to the business of the Employer (collectively the “Employee's Personal Intellectual Property”).  Employer acknowledges and agrees that the provisions of Section 2.4(a) shall not apply to Employee’s Personal Intellectual Property or to any inventions (and patent rights with respect thereto), original works of authorship (including all copyrights with respect thereto), developments, improvements, concepts or trade secrets conceived of or developed by Employee during the term of this Agreement that is not Employer Intellectual Property.

Section 2.5             Maintenance of Records .  Except with respect to the Intellectual Property for which the Employer has no rights, Employee agrees to keep and maintain reasonable written records of all inventions, original works of authorship, trade secrets developed or made by him (solely or jointly with others) during the employment term.  The Employee also agrees to make and maintain adequate and reasonable written records customarily maintained by corporate managers, including, without limitation, lists and telephone numbers of persons and companies he has contacted during his engagement by the Employer.  Immediately upon the Employer’s request and promptly upon termination of the Employee’s engagement with the Employer, the Employee shall deliver to the Employer all written records as described in this Section, together with all memoranda,   notes, records, reports, photographs, drawings, plans, papers, computer storage media, Confidential Information or other documents made or compiled by the Employee or made available to the Employee during the course of his engagement by the Employer, and any copies or abstracts thereof, whether or not of a secret or confidential nature, and all of such records, memoranda or other documents shall, during and after the   engagement of the Employee by the Employer, be and shall be deemed to be the property of the Employer.
 
         
  Employee   Bridgeline  
 
 
4

 

Section 2.6              Obtaining Letters Patent and Copyright Registration .  During the employment term hereunder, Employee agrees to assist Employer, at Employer’s expense, to obtain United States or foreign letters patent, and copyright registrations (as well as any transfers of ownership thereof) covering inventions and original works of authorship assigned hereunder to Employer. Such obligation shall continue beyond the termination of this Agreement for a reasonable period of time not to exceed one (1) year subject to Employer’s obligation to compensate Employee at such rates as may be mutually agreed upon by the Employer and Employee at the time, but not exceeding the annualized rate provided for in Section 4.1 of this Agreement, and reimbursement to Employee of all expenses incurred.

If Employer is unable for any reason whatsoever, including Employee’s mental or physical incapacity to secure Employee’s signature to apply for or to pursue any application for any United States of foreign letters, patent or copyright registrations (or any document transferring ownership thereof) covering inventions or original works or authorship assigned to Employer under this Agreement, Employee hereby irrevocably designates and appoints Employer and its duly authorized officers and agents as Employee's agent and attorney-in-fact to act for and in his behalf and stead to execute and file any such applications and documents and to do all other lawfully permitted acts to further the prosecution and issuance of letters patent or copyright registrations or transfers thereof with the same legal force and effect as if executed by Employee.  This appointment is coupled with an interest in and to the inventions and works of authorship and shall survive Employee's death or disability.  Employee hereby waives and quitclaims to Employer any and all claims of any nature whatsoever which Employee now or may hereafter have against third parties for infringement of any patents or copyrights resulting from or relating to any such application for letters, patent or copyright registrations assigned hereunder to Employer.
 
 
ARTICLE 3
COMPENSATION OF EMPLOYEE

Section 3.1              Annual Salary .  As compensation for his services hereunder, Employee shall be paid a salary at the rate of $10,416.66 semi monthly (the equivalent of two hundred and fifty thousand 00/100 Dollars ($250,000) per year) (“Salary”) from the Commencement Date.  Salary shall be paid in equal installments not less frequently than twice each month.

Section 3.2              Quarterly Bonus .  The Employee shall be eligible to be paid a quarterly bonus earned in accordance with the terms set forth on Exhibit 3.2.

Section 3.3              Tax Withholding .  Employer shall have the right to deduct or withhold from the compensation due to Employee hereunder any and all sums required for federal income and social security taxes and all state or local taxes now applicable or that may be enacted and become applicable in the future, for which withholding is required by law.

Section 3.4              Stock Options .  The Employer may, at the Employer’s sole discretion, issue Stock Options to the Employee.  All stock options granted the Employee shall be subject to a stock option agreement, a stock option plan and such other restrictions as are generally applicable   to stock options issued to employees of the Employer, as each may be amended from time to time.


ARTICLE 4
EMPLOYEE BENEFITS

Section 4.1              Annual Vacation .     Employee shall be entitled to twenty (20) business days of paid vacation during each year of this Agreement. Employee may be absent from his employment for vacation at such times as are pre-approved by the Employer’s Chief Executive Officer.  Unused vacation shall not be carried over into the next year, and will not be paid in the form   of cash.
 
         
  Employee   Bridgeline  
 
 
5

 

Section 4.2              Benefits .   Employee shall be eligible to participate in benefit plans provided by Employer, including health, and life insurance coverage should Employer elect to participate in any such plans.

Section 4.3              Business Expenses .  Employer shall reimburse Employee for all appropriate expenses for travel and entertainment by Employee for legitimate business purposes, provided that they are approved in writing by the Company’s Chief Executive Officer or his designee, and provided that Employee furnishes to Employer adequate records and documentary evidence for the substantiation of each such expenditure, as required by the Internal Revenue Code of 1986, as amended.  Per the Company’s policy’s, expense reports must be submitted each month to ensure reimbursement.

 
ARTICLE 5
TERMINATION OF EMPLOYMENT

Section 5.1              Termination .   Employee’s employment hereunder may be terminated by Employee or Employer as herein provided, without further obligation or liability, except as expressly provided in this Agreement.
 
Section 5.2              Resignation, Retirement, Death or Disability .     Employee’s employment hereunder shall be terminated at any time by Employee’s resignation, or by Employee’s retirement, death, or his inability to perform the essential functions of his position under this Agreement, with or without reasonable accommodation, for a total of ninety (90) days or more in any continuous two hundred (200) day period because of a substantial physical or mental impairment (“ Disability ”).  Employer shall not be liable for payment of base or bonus compensation during any period of disability, though benefits shall continue to accrue.

Section 5.3              Termination for Cause .  Employee’s employment hereunder may be terminated for Cause.  "Cause" is conduct, as determined by the Chief Executive Officer, or his designee, involving one or more of the following: (i) gross misconduct by the Employee; or (ii) the willful disregard of the rules or policies of the Company, provided that the Company must provide Employee with written notice from the Company of such willful disregard of the rules or policies of the Company and Employee fails to cure (if curable) such willful disregard of the rules or policies of the Company within five business days of such notice; or (iii) the violation of any noncompetition or nonsolicitation covenant with, or assignment of inventions obligation to, the Company; or (iv) the formal charge of the Employee of a felony; or (v) the commission of an act of embezzlement, fraud or breach of fiduciary duty against the Company  (vi) engagement in a specific act or pattern of behavior which, in the reasonable opinion of the Company, impugns the reputation of the Company or which creates an environment materially non-conducive to the growth and development of the Company, (vii) the failure of the Employee to perform in a material respect his employment obligations as set forth in this Agreement without proper cause and the continuation thereof after delivery to Employee of written notice from the Employer specifying in reasonable detail the nature of such failure.   For purposes of this Section, no act, or failure to act, on the Employee’s part shall be considered “willful” unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in the best interest of the Employer.

Section 5.4              Termination Without Cause; Termination for Good Reason .  Employee’s employment hereunder may be terminated without Cause upon ten (10) business days’ notice for any reason. Employee's employment may be terminated by Employee at any time for Good Reason.   For purposes of this Agreement, the term “Good Reason” shall mean the occurrence of any of the following events:  (i) failure of the Employer to continue the Employee in the position of Executive Vice President and Chief Technology Officer of the Employer; (ii) material diminution in the nature or scope of the Employee’s responsibilities, duties or authority; provided however, any diminution of the business of the Employer or any sale or transfer of any or all of the equity, property or other assets of the Employer shall not constitute “Good Reason”; (iii) material failure of the Employer to provide the Employee the compensation and benefits in accordance with the terms of this Agreement, excluding an inadvertent failure which is cured within ten (10) business days following notice from the Employee specifying in detail the nature of such failure; or (iv) the requirement by the Employer that Employee relocate his principal place of employment to a location more than thirty (30) miles from his current principal place of employment.   The Employee is required to provide notice to the Employer of the existence of the Good Reason within 60 days of its initial existence and the Employer shall have 30 days within which to remedy the Good Reason condition.
 
         
  Employee   Bridgeline  
 
 
6

 

Section 5.5              Expiration .  Employee's employment hereunder shall be terminated upon expiration of the Term of Employment as provided in Sections 1.1 and 1.2, unless the parties agree that the Employee's employment shall become “at will.”

Section 5.6              Notice of Termination .  Any termination of the Employee’s employment by the Employer or by the Employee (other than termination by reason of resignation, retirement, or death), shall be communicated by written Notice of Termination to the other party hereto.  For purposes of this Agreement, a “Notice of Termination” shall mean a notice which shall include the specific termination provision in this Agreement relied upon, and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee's employment under the provision so indicated.

Section 5.7              Date of Termination .  The “Date of Termination” shall be:  (a) if the Employee’s employment is terminated by his death, the date of his death; (b) if the Employee’s employment is terminated by reason of Employee’s disability, thirty (30) days after Notice of Termination is given; (c) if the Employee's employment is terminated for Cause, the date the Notice of Termination is given or after if so specified in such Notice of Termination;  (d) if the Employee's employment is terminated for any other reason, the date on which a Notice of Termination is given.

ARTICLE 6
PAYMENTS TO EMPLOYEE UPON TERMINATION

Section 6.1              Death, Disability or Retirement .   In the event of Employee’s Retirement, Death or Disability, all benefits generally available to Employer's employees as of the date of such an event shall be payable to Employee or Employee's estate, in accordance with the terms of any plan, contract, understanding or arrangement forming the basis for such payment.  Neither Employer nor any affiliate shall have any further obligation to Employee under this Agreement or otherwise, except for payment to Employee of any and all accrued salary and bonuses, provision of the opportunity to elect COBRA health care continuation and otherwise as may be expressly required by law.
 
Section 6.2              Termination for Cause or Resignation .  In the event Employee is terminated by Employer for Cause or Employee resigns (other than a Termination by Employee for Good Reason), neither Employer nor any affiliate shall have any further obligation to Employee under this Agreement or otherwise, except for payment to Employee of any and all accrued salary and bonuses, provision of the opportunity to elect COBRA health care continuation and otherwise as may be expressly required by law.

Section 6.3              Termination Without Cause; Termination for Good Reason .  Subject to other provisions in this Article 6 to the contrary and during the Initial Term and any Succeeding Annual Terms only, upon the occurrence of a termination without Cause by Employer or a Termination for Good Reason by Employee, Employer shall:

(a)   Pay to Employee any and all accrued salary, bonuses and vacation;

(b)  Pay to Employee, or in the event of Employee's subsequent death, to Employee's surviving spouse, or if none, to Employee's estate, as severance pay or liquidated damages, or both, a sum equal to (i) the monthly rate of Salary payable under this Agreement for a period of six (6) months, and (ii) an amount equal to the quarterly bonus paid to Employee for the preceding quarter immediately prior to Employee's termination; provided, however, in the event of a termination without Cause by Employer or Termination for Good Reason by Employee which occurs during the first twelve months after a Change in Control of the Company the Employer shall instead pay to Employee, or in the event of Employee's subsequent death, to Employee's surviving spouse, or if none, to Employee's estate, as severance pay or liquidated damages, or both, a sum equal to $750,000 in one lump sum payment;
 
         
  Employee   Bridgeline  
 
 
7

 

(c)  Cause any stock options issued to Employee which have not lapsed and which are not otherwise exercisable to be accelerated so as to immediately exercisable by Employee;

(d)  Pay the Employer’s portion of the COBRA health insurance continuation premium in the same amount Employer contributed for Employee’s health insurance as of the date of Employee’s termination for a period of six (6) months and thereafter provide Employee the opportunity to continue to elect  COBRA health care continuation at Employee’s cost (provided that the Employee makes the required premium contributions); provided, however, that Employer's obligation to contribute its portion of the COBRA insurance premium during this three month period  will cease immediately in the event Employee becomes employed following termination.  Employee agrees to notify Employer immediately regarding such new employment; and

(e)   Provide to Employee such other payments or benefits as may be expressly required by law.

Section 6.4              Definition .  A “Change in Control" will be deemed to have occurred only if any of the following events occur:

(i) any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportion as their ownership of stock of the Company) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities;

(ii) individuals who constitute the Board (as of the date hereof, the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company' stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A under the Exchange Act) will be, for purposes of this Agreement, considered as though such person were a member of the Incumbent Board; or

(iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, and such merger or consolidation is consummated, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 50% of the combined voting power of the Company's then outstanding securities; or

(iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets.
 
         
  Employee   Bridgeline  
 
 
8

 
 
ARTICLE 7
GENERAL PROVISIONS
 
Section 7.1             Notices .  Any notices to be given hereunder by either party to the other shall be in writing and may be transmitted by personal delivery or by mail, first class, postage prepaid, or by electronic facsimile or email transmission (with verification of receipt).  Mailed notices shall be addressed to the parties at their respective addresses set forth herein.  Each party may change that address by written notice in accordance with this section. Notices delivered personally shall be deemed communicated as of the date of actual receipt. Mailed notices shall be deemed communicated as of one day after the date of mailing.

Section 7.2              Governing Law; Jurisdiction .  This Agreement shall be governed by, construed and interpreted in accordance with the laws of the Commonwealth of Massachusetts, without regard to its principles of conflicts of laws.  Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement or any of the transactions contemplated hereby, shall be brought against any of the parties in the courts of the Commonwealth of Massachusetts, and each of the parties irrevocably submits to the exclusive jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding, waives any objection to venue laid therein, agrees that all claims in respect of any action or proceeding shall be heard and determined only in any such court and agrees not to bring any action or proceeding arising out of or relating to this Agreement or any transaction contemplated hereby in any other court.  Process in any action or proceeding referred to in the preceding sentence may be served on any party anywhere in the world.

Section 7.3             Attorney’s Fees and Costs .  If Employer or Employee commences any action at law or in equity against arising out of or relating to this Agreement (other than any statutory cause of action relating to employment, including but not limited to claims under state and federal employment laws) and Employer prevails in such action, Employee shall reimburse Employer its reasonable attorneys’ fees, costs and necessary disbursements in addition to any other relief to which Employer may be entitled.  This provision shall be construed as applicable to the entire contract.

Section 7.4              Entire Agreement .  This Agreement supersedes any and all other agreements, either oral or in writing, between the parties hereto with respect to the subject matter contained herein and contains all of the covenants and agreements between the parties with respect to that subject matter, including without limitation, any prior Employment Agreement between Employer and Employee. Each party to this Agreement acknowledges that no representations, inducements, promises or agreements, orally or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not embodied herein, and that no other agreement, statement or promise not contained in this Agreement shall be valid or binding on either party.

Section 7.5              Modification .  Any modification of this Agreement will be effective only if it is in writing and signed by the Employee and properly authorized by Employer's Board of Directors and signed by the Chief Executive Officer of Employer.

Section 7.6              Effect of Waiver .  The failure of either party to insist on strict compliance with any of the terms, covenants or conditions of this Agreement by the other party shall not be deemed a waiver of that term, covenant or condition, nor shall any waiver or relinquishment of any right or power at any one time or times be deemed a waiver or relinquishment of that right or power for all or any other times.

Section 7.7              Partial Invalidity .  If any provision in this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions shall nevertheless continue in full force without being impaired or invalidated in any way.

Section 7.8              Assignment .  The rights and obligations of the parties hereto shall inure to the benefit of, and shall be binding upon, the successors and assigns of each of them; provided, however, that the Employee shall not, during the continuance of this Agreement, assign this Agreement without the previous written consent of the Employer, and provided, further, that nothing contained in this Agreement shall restrict or limit the Employer in any manner whatsoever from assigning any or all of its rights, benefits or obligations under this Agreement to any successor corporation or entity or to any affiliate of the Employer without the necessity of obtaining the consent of the Employee. “Affiliate” as used throughout this Agreement means any person or entity which directly or indirectly controls, or is controlled by, or is under common control with, the Employer.
 
         
  Employee   Bridgeline  
 
 
9

 

Section 7.9              Specific Performance .   If there is any violation of the Employee's obligations herein contained, the Employer, or any of its Affiliates, shall have the right to specific performance in addition to any other remedy which may be available at law or at equity.