Consolidated
Financial Statements
Vurv
Technology, Inc. and Subsidiaries
Years
Ended January 31, 2006, 2007 and 2008
With
Report of Independent Certified Public
Accountants
|
|
Report
of Independent Certified Public
Accountants1
|
|
Consolidated
Balance Sheets2
|
|
Consolidated
Statements of Operations3
|
|
Consolidated
Statements of Redeemable Preferred Stock and Stockholders’
Deficiency4
|
|
Consolidated
Statements of Cash Flows5
|
|
Notes
to Consolidated Financial
Statements6
|
/s/ Ernst & Young
LLP
|
Consolidated
Balance Sheets
|
||||||||
January
31
|
||||||||
2007
|
2008
|
|||||||
(In
thousands, except share and
|
||||||||
per
share information)
|
||||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 3,236 | $ | 2,014 | ||||
Accounts
receivable, net of allowances of $115 and $261 as of
January 31,
|
||||||||
2007
and 2008, respectively
|
9,010 | 11,332 | ||||||
Deferred
commissions
|
1,349 | 1,343 | ||||||
Costs
plus earnings in excess of billings
|
760 | 1,190 | ||||||
Prepaid
expenses and other current assets
|
1,450 | 1,156 | ||||||
Total
current assets
|
15,805 | 17,035 | ||||||
Property
and equipment, net
|
4,953 | 5,052 | ||||||
Restricted
cash
|
382 | 286 | ||||||
Deferred
commissions, non-current
|
1,672 | 1,186 | ||||||
Goodwill
|
9,986 | 9,966 | ||||||
Other
intangibles, net
|
2,740 | 1,694 | ||||||
Other
assets
|
– | 152 | ||||||
Total
assets
|
$ | 35,538 | $ | 35,371 | ||||
Liabilities,
redeemable preferred stock and stockholders’ deficiency
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 2,456 | $ | 2,561 | ||||
Deferred
revenue
|
18,511 | 19,742 | ||||||
Accrued
compensation and benefits
|
1,638 | 2,145 | ||||||
Sales
commissions payable
|
1,016 | 995 | ||||||
Notes
payable
|
762 | 7,738 | ||||||
Capital
lease obligations
|
434 | 1,042 | ||||||
Other
current liabilities
|
2,166 | 2,061 | ||||||
Total
current liabilities
|
26,983 | 36,284 | ||||||
Long-term
liabilities:
|
||||||||
Fair
value of redeemable preferred stock conversion feature
|
53,571 | 58,556 | ||||||
Sales
commissions payable, non-current
|
1,622 | 467 | ||||||
Notes
payable, non-current
|
5,738 | – | ||||||
Capital
lease obligations, non-current
|
552 | 1,213 | ||||||
Accrued
rent expense
|
538 | 382 | ||||||
Other
liabilities
|
– | 234 | ||||||
Total
long-term liabilities
|
62,021 | 60,852 | ||||||
Total
liabilities
|
89,004 | 97,136 | ||||||
Redeemable
preferred stock:
|
||||||||
Series
A, $0.001 par value, 17,200,000 shares authorized, issued and
outstanding
|
||||||||
as
of January 31,2007 and 2008
|
22,232 | 24,062 | ||||||
Series
B, $0.001 par value, 4,480,000 shares authorized, issued and
outstanding
|
||||||||
as
of January 31, 2007 and 2008
|
13,223 | 14,310 | ||||||
Series
C, $0.001 par value, 1,288,660 shares authorized, issued and
outstanding
|
||||||||
as
of January 31, 2007 and 2008
|
5,289 | 5,726 | ||||||
Series
D, $0.001 par value, 1,882,353 shares authorized, issued and
outstanding
|
||||||||
as
of January 31, 2007 and 2008
|
8,035 | 8,698 | ||||||
Total
redeemable preferred stock
|
48,779 | 52,796 | ||||||
Stockholders’
deficiency:
|
||||||||
Common
stock, par value $0.001, 75,000,000 shares authorized;
30,321,288
|
||||||||
and
30,372,538 shares issued; 12,971,288 and 13,022,538 shares
outstanding
|
||||||||
as
of January 31, 2007 and 2008, respectively
|
30 | 30 | ||||||
Treasury
shares, at cost, 17,350,000 shares as of January 31, 2007 and
2008
|
(7,833 | ) | (7,833 | ) | ||||
Accumulated
other comprehensive loss
|
(150 | ) | (196 | ) | ||||
Accumulated
deficiency
|
(94,292 | ) | (106,562 | ) | ||||
Total
stockholders’ deficiency
|
(102,245 | ) | (114,561 | ) | ||||
Total
liabilities, redeemable preferred stock, and stockholders’
deficiency
|
$ | 35,538 | $ | 35,371 | ||||
See
accompanying notes.
|
||||||||
Consolidated
Statements of Operations
|
||||||||||||
Year
Ended January 31
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
(In
thousands)
|
||||||||||||
Revenue:
|
||||||||||||
Subscription
and support
|
$ | 13,914 | $ | 22,606 | $ | 34,419 | ||||||
Professional
services and other
|
12,109 | 13,259 | 13,282 | |||||||||
License
|
8,039 | 3,900 | 1,328 | |||||||||
Total
revenue
|
34,062 | 39,765 | 49,029 | |||||||||
Cost
of revenue:
|
||||||||||||
Subscription
and support(1)
|
5,925 | 6,946 | 9,880 | |||||||||
Professional
services and other(1)
|
11,667 | 11,190 | 8,688 | |||||||||
License
|
369 | 114 | 106 | |||||||||
Total
cost of revenue
|
17,961 | 18,250 | 18,674 | |||||||||
Gross
profit
|
16,101 | 21,515 | 30,355 | |||||||||
Operating
expenses:
|
||||||||||||
Sales
and marketing(1)
|
12,321 | 14,669 | 13,520 | |||||||||
Research
and development(1)
|
8,164 | 9,439 | 8,086 | |||||||||
General
and administrative(1)
|
10,213 | 10,132 | 11,427 | |||||||||
Total
operating expenses
|
30,698 | 34,240 | 33,033 | |||||||||
Other
operating income (expense):
|
||||||||||||
Gain
(loss) on disposal of operating assets
|
5,290 | – | (55 | ) | ||||||||
Operating
loss
|
(9,307 | ) | (12,725 | ) | (2,733 | ) | ||||||
Other
income (expense):
|
||||||||||||
Decrease
(increase) in fair value of redeemable preferred
|
||||||||||||
stock
conversion feature
|
(21,450 | ) | 536 | (4,986 | ) | |||||||
Loss
on issuance of Series C redeemable convertible
|
||||||||||||
preferred
stock
|
– | (3,399 | ) | – | ||||||||
Interest
income
|
68 | 102 | 84 | |||||||||
Interest
expense
|
(171 | ) | (524 | ) | (811 | ) | ||||||
Other
expense, net
|
(21,553 | ) | (3,285 | ) | (5,713 | ) | ||||||
Loss
before provision for income taxes
|
(30,860 | ) | (16,010 | ) | (8,446 | ) | ||||||
Income
taxes
|
(1 | ) | (6 | ) | (241 | ) | ||||||
Net
loss
|
(30,861 | ) | (16,016 | ) | (8,687 | ) | ||||||
Preferred
stock dividend requirements
|
(2,498 | ) | (2,969 | ) | (4,017 | ) | ||||||
Net
loss attributable to common stockholders
|
$ | (33,359 | ) | $ | (18,985 | ) | $ | (12,704 | ) | |||
(1)Includes
stock-based compensation expense as follows:
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
Subscription
and support
|
$ | – | $ | 34 | $ | 33 | ||||||
Professional
services
|
– | 43 | 35 | |||||||||
Sales
and marketing
|
– | 79 | 94 | |||||||||
Research
and development
|
– | 69 | 51 | |||||||||
General
and administrative
|
– | 430 | 160 | |||||||||
See
accompanying notes.
|
||||||||||||
Vurv
Technology, Inc. and Subsidiaries
|
||||||||||||||||||||||||||||||||
Consolidated
Statements of Redeemable Preferred Stock and Stockholders’
Deficiency
|
||||||||||||||||||||||||||||||||
For
the Years Ended January 31, 2006, 2007 and 2008
|
||||||||||||||||||||||||||||||||
(In
thousands, except for share and per share information)
|
||||||||||||||||||||||||||||||||
Accumulated
|
||||||||||||||||||||||||||||||||
Redeemable
|
Other
|
Total
|
||||||||||||||||||||||||||||||
Preferred
Stock
|
Common
Stock
|
Treasury
|
Comprehensive
|
Accumulated
|
Stockholders’
|
|||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Stock
|
Loss
|
Deficiency
|
Deficiency
|
|||||||||||||||||||||||||
Balance,
January 31, 2005
|
21,680,000 | $ | 30,253 | 29,904,851 | $ | 30 | $ | (7,833 | ) | $ | (32 | ) | $ | (43,510 | ) | $ | (51,345 | ) | ||||||||||||||
Series
A redeemable preferred stock dividend
|
– | 1,566 | – | – | – | – | (1,566 | ) | (1,566 | ) | ||||||||||||||||||||||
Series
B redeemable preferred stock dividend
|
– | 932 | – | – | – | – | (932 | ) | (932 | ) | ||||||||||||||||||||||
Issuance
of common stock in conjunction with business acquisitions
|
– | – | 405,000 | – | – | – | 1,143 | 1,143 | ||||||||||||||||||||||||
Comprehensive
loss:
|
||||||||||||||||||||||||||||||||
Foreign
currency translation adjustments
|
– | – | – | – | – | (72 | ) | – | – | |||||||||||||||||||||||
Net
loss
|
– | – | – | – | – | – | (30,861 | ) | – | |||||||||||||||||||||||
Total
comprehensive loss
|
– | – | – | – | – | – | – | (30,933 | ) | |||||||||||||||||||||||
Balance,
January 31, 2006
|
21,680,000 | 32,751 | 30,309,851 | 30 | (7,833 | ) | (104 | ) | (75,726 | ) | (83,633 | ) | ||||||||||||||||||||
Series
A redeemable preferred stock dividend
|
– | 1,696 | – | – | – | – | (1,696 | ) | (1,696 | ) | ||||||||||||||||||||||
Series
B redeemable preferred stock dividend
|
– | 1,008 | – | – | – | – | (1,008 | ) | (1,008 | ) | ||||||||||||||||||||||
Issuance
of Series C preferred stock at $3.88 per share
|
1,288,660 | 5,000 | – | – | – | – | – | – | ||||||||||||||||||||||||
Allocation
of Series C convertible redeemable preferred stock
|
||||||||||||||||||||||||||||||||
proceeds
to fair value of embedded derivative
|
– | (7 | ) | – | – | – | – | – | – | |||||||||||||||||||||||
Stock-based
compensation associated with Series C convertible
|
||||||||||||||||||||||||||||||||
redeemable
preferred stock issuance
|
– | 256 | – | – | – | – | – | – | ||||||||||||||||||||||||
Series
C redeemable preferred stock dividend
|
– | 40 | – | – | – | – | (40 | ) | (40 | ) | ||||||||||||||||||||||
Issuance
of Series D Junior preferred stock at $4.25 per share in
|
||||||||||||||||||||||||||||||||
conjunction
with a business acquisition
|
1,882,353 | 8,600 | – | – | – | – | – | – | ||||||||||||||||||||||||
Allocation
of Series D Junior convertible redeemable preferred
|
||||||||||||||||||||||||||||||||
stock
proceeds to fair value of embedded derivative
|
– | (790 | ) | – | – | – | – | – | – | |||||||||||||||||||||||
Series
D redeemable preferred stock dividend
|
– | 225 | – | – | – | – | (225 | ) | (225 | ) | ||||||||||||||||||||||
Stock-based
compensation expense
|
– | – | – | – | – | – | 399 | 399 | ||||||||||||||||||||||||
Exercise
of stock options
|
– | – | 11,437 | – | – | – | 20 | 20 | ||||||||||||||||||||||||
Comprehensive
loss:
|
||||||||||||||||||||||||||||||||
Foreign
currency translation adjustments
|
– | – | – | – | – | (46 | ) | – | – | |||||||||||||||||||||||
Net
loss
|
– | – | – | – | – | – | (16,016 | ) | – | |||||||||||||||||||||||
Total
comprehensive loss
|
– | – | – | – | – | – | – | (16,062 | ) | |||||||||||||||||||||||
Balance,
January 31, 2007
|
24,851,013 | 48,779 | 30,321,288 | 30 | (7,833 | ) | (150 | ) | (94,292 | ) | (102,245 | ) | ||||||||||||||||||||
Series
A redeemable preferred stock dividend
|
– | 1,830 | – | – | – | – | (1,830 | ) | (1,830 | ) | ||||||||||||||||||||||
Series
B redeemable preferred stock dividend
|
– | 1,087 | – | – | – | – | (1,087 | ) | (1,087 | ) | ||||||||||||||||||||||
Series
C redeemable preferred stock dividend
|
– | 437 | – | – | – | – | (437 | ) | (437 | ) | ||||||||||||||||||||||
Series
D redeemable preferred stock dividend
|
– | 663 | – | – | – | – | (663 | ) | (663 | ) | ||||||||||||||||||||||
Stock-based
compensation expense
|
– | – | – | – | – | – | 373 | 373 | ||||||||||||||||||||||||
Exercise
of stock options
|
– | – | 51,250 | – | – | – | 58 | 58 | ||||||||||||||||||||||||
Comprehensive
loss:
|
||||||||||||||||||||||||||||||||
Foreign
currency translation adjustments
|
– | – | – | – | – | (46 | ) | 3 | – | |||||||||||||||||||||||
Net
loss
|
– | – | – | – | – | – | (8,687 | ) | – | |||||||||||||||||||||||
Total
comprehensive loss
|
– | – | – | – | – | – | – | (8,730 | ) | |||||||||||||||||||||||
Balance,
January 31, 2008
|
24,851,013 | $ | 52,796 | 30,372,538 | $ | 30 | $ | (7,833 | ) | $ | (196 | ) | $ | (106,562 | ) | $ | (114,561 | ) | ||||||||||||||
See
accompanying notes.
|
||||||||||||||||||||||||||||||||
Consolidated
Statements of Cash Flows
|
||||||||||||
Year
Ended January 31
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
(In
Thousands, Except for
|
||||||||||||
Share
and per Share Information)
|
||||||||||||
Cash
flows from operating activities
|
||||||||||||
Net
loss
|
$ | (30,861 | ) | $ | (16,016 | ) | $ | (8,687 | ) | |||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||||||
Depreciation
and amortization
|
2,623 | 2,872 | 3,585 | |||||||||
Provision
for doubtful accounts
|
2 | 117 | 261 | |||||||||
Increase
(decrease) in fair value of redeemable preferred stock conversion
feature
|
21,450 | (536 | ) | 4,986 | ||||||||
Loss
on issuance of Series C redeemable convertible preferred
stock
|
– | 3,399 | – | |||||||||
Net
(gain) loss on sale of operating assets
|
(5,190 | ) | – | 55 | ||||||||
Stock-based
compensation expense
|
– | 655 | 373 | |||||||||
Changes
in operating assets and liabilities which (used) provided
cash:
|
||||||||||||
Accounts
receivable
|
(1,134 | ) | (3,308 | ) | (2,582 | ) | ||||||
Deferred
commissions
|
(1,183 | ) | 178 | 492 | ||||||||
Cost
plus earnings in excess of billings
|
1,527 | (79 | ) | (430 | ) | |||||||
Prepaid
expenses and other current assets
|
(90 | ) | (226 | ) | 143 | |||||||
Accounts
payable
|
1,951 | (666 | ) | (41 | ) | |||||||
Accrued
compensation and benefits
|
19 | (254 | ) | 507 | ||||||||
Other
accrued liabilities
|
(18 | ) | 1,287 | (28 | ) | |||||||
Deferred
revenue
|
1,874 | 3,504 | 1,231 | |||||||||
Accrued
sales commissions
|
794 | (447 | ) | (1,177 | ) | |||||||
Net
cash used in operating activities
|
(8,236 | ) | (9,520 | ) | (1,312 | ) | ||||||
Cash
flows from investing activities
|
||||||||||||
Purchases
of property and equipment
|
(2,825 | ) | (1,070 | ) | (647 | ) | ||||||
Cash
paid for acquired business, net of cash acquired
|
(133 | ) | (49 | ) | – | |||||||
Cash
received from sale of operating assets
|
6,318 | – | – | |||||||||
Decrease
in restricted cash
|
550 | 95 | 95 | |||||||||
Net
cash provided by (used in) investing activities
|
3,910 | (1,024 | ) | (552 | ) | |||||||
Cash
flows from financing activities
|
||||||||||||
Repayment
of capital lease obligations
|
(864 | ) | (973 | ) | (606 | ) | ||||||
Proceeds
from notes payable
|
920 | 9,801 | 2,000 | |||||||||
Repayments
of notes payable
|
(1,866 | ) | (4,221 | ) | (762 | ) | ||||||
Proceeds
from exercise of stock options
|
– | 20 | 58 | |||||||||
Proceeds
from the issuance of preferred stock
|
– | 5,000 | – | |||||||||
Net
cash (used in) provided by financing activities
|
(1,810 | ) | 9,627 | 690 | ||||||||
Effect
of foreign currency exchange rate changes on cash and cash
equivalents
|
(72 | ) | (25 | ) | (48 | ) | ||||||
Net
decrease in cash and cash equivalents
|
(6,208 | ) | (942 | ) | (1,222 | ) | ||||||
Cash
and cash equivalents – beginning of period
|
10,386 | 4,178 | 3,236 | |||||||||
Cash
and cash equivalents – end of period
|
$ | 4,178 | $ | 3,236 | $ | 2,014 | ||||||
Supplemental
disclosures of cash flow information
|
||||||||||||
Interest
paid
|
$ | 117 | $ | 469 | $ | 778 | ||||||
Taxes
paid
|
77 | 62 | 44 | |||||||||
Supplemental
schedule of non-cash investing and financing activities
|
||||||||||||
Capital
lease purchases of property and equipment
|
696 | 1,056 | 1,873 | |||||||||
Preferred
stock dividend requirements
|
2,498 | 2,969 | 4,017 | |||||||||
Accrued
property and equipment purchases
|
527 | 102 | 147 | |||||||||
Issuance
of equity in connection with acquisitions
|
1,143 | 8,600 | – | |||||||||
See
accompanying notes.
|
||||||||||||
|
1.
Business Description, Liquidity Risk and Summary of Significant Accounting
Policies (continued)
|
|
1.
Business Description, Liquidity Risk and Summary of Significant Accounting
Policies (continued)
|
·
|
evidence
of an arrangement exists;
|
·
|
delivery
has occurred;
|
·
|
the
fees are fixed or determinable; and
|
·
|
collection
is considered probable.
|
|
1.
Business Description, Liquidity Risk and Summary of Significant Accounting
Policies (continued)
|
·
|
Monthly
fees paid for subscription
services;
|
·
|
Amortization
of fees paid for software maintenance and hosting services under software
license arrangements where VSOE exists for all undelivered elements;
and
|
·
|
The
amortized portion of related license, hosting, maintenance and consulting
fees in certain multiple element arrangements where VSOE does not exist
for an undelivered element.
|
|
1.
Business Description, Liquidity Risk and Summary of Significant Accounting
Policies (continued)
|
|
1.
Business Description, Liquidity Risk and Summary of Significant Accounting
Policies (continued)
|
|
1.
Business Description, Liquidity Risk and Summary of Significant Accounting
Policies (continued)
|
|
1.
Business Description, Liquidity Risk and Summary of Significant Accounting
Policies (continued)
|
|
1.
Business Description, Liquidity Risk and Summary of Significant Accounting
Policies (continued)
|
|
1.
Business Description, Liquidity Risk and Summary of Significant Accounting
Policies (continued)
|
|
1.
Business Description, Liquidity Risk and Summary of Significant Accounting
Policies (continued)
|
|
1.
Business Description, Liquidity Risk and Summary of Significant Accounting
Policies (continued)
|
Depreciable
|
||||
Life
|
||||
in
Years
|
||||
Computer
hardware and software
|
3 | |||
Furniture
and fixtures
|
5-7 | |||
Leasehold
improvements
|
3-6 |
|
1.
Business Description, Liquidity Risk and Summary of Significant Accounting
Policies (continued)
|
|
1.
Business Description, Liquidity Risk and Summary of Significant Accounting
Policies (continued)
|
|
1.
Business Description, Liquidity Risk and Summary of Significant Accounting
Policies (continued)
|
Knowledge
|
||||
Description
|
Point
|
|||
Net
cash received
|
$ | 4,410 | ||
Plus
liabilities assumed:
|
||||
Note
payable
|
1,500 | |||
Accrued
expenses
|
250 | |||
Accrued
interest
|
90 | |||
Sale
price
|
6,250 | |||
Less
assets/liabilities purchased/written off:
|
||||
Deferred
revenue
|
100 | |||
Inventory
|
(20 | ) | ||
Transaction
costs
|
(110 | ) | ||
Goodwill
|
(678 | ) | ||
Existing
technology, net
|
(152 | ) | ||
Customer
relationships, net
|
(100 | ) | ||
Gain
on sale
|
$ | 5,290 |
|
Acquisition
of Substantially all of the Assets of and Assumption of Select Liabilities
from Infotechworks, Inc.
|
Tangible
current assets
|
$ | 6 | ||
Current
assets
|
23 | |||
Goodwill
|
267 | |||
Current
liabilities
|
(146 | ) | ||
Net
assets acquired
|
$ | 150 |
|
Acquisition
of Substantially all of the Assets of and Assumption of Select Liabilities
From InScope, Inc.
|
Tangible
current assets
|
$ | 8 | ||
Goodwill
|
509 | |||
Existing
technology
|
610 | |||
Net
assets acquired
|
$ | 1,127 |
|
Acquisition
of Substantially all of the Assets of and Assumption of Select Liabilities
From People Business Network, Inc.
|
Tangible
current assets
|
$ | 159 | ||
Current
assets
|
508 | |||
Non-current
assets
|
63 | |||
Favorable
lease
|
47 | |||
Existing
technology
|
1,415 | |||
Customer
relationships
|
380 | |||
Goodwill
|
6,921 | |||
Current
liabilities
|
(840 | ) | ||
Net
assets acquired
|
$ | 8,653 |
Weighted-
|
||||||||||||
Average
|
||||||||||||
January
31
|
Amortization
|
|||||||||||
2007
|
2008
|
Period
|
||||||||||
Goodwill
|
$ | 9,986 | $ | 9,966 | – | |||||||
Trademark
|
120 | 120 |
42
months
|
|||||||||
Existing
technology
|
2,872 | 2,872 |
46
months
|
|||||||||
Customer
relationships
|
934 | 934 |
49
months
|
|||||||||
Favorable
lease
|
47 | 47 |
43
months
|
|||||||||
13,959 | 13,939 | |||||||||||
Accumulated
amortization
|
(1,233 | ) | (2,279 | ) | ||||||||
$ | 12,726 | $ | 11,660 |
2009
|
$ | 644 | ||
2010
|
607 | |||
2011
|
291 | |||
2012
|
152 | |||
$ | 1,694 |
January
31
|
||||||||
2007
|
2008
|
|||||||
Goodwill
balance at beginning of period
|
$ | 3,045 | $ | 9,986 | ||||
Goodwill
acquired during the period
|
6,941 | – | ||||||
Goodwill
adjustment
|
– | (20 | ) | |||||
Goodwill
related to disposition
|
– | – | ||||||
Goodwill
balance at end of period
|
$ | 9,986 | $ | 9,966 |
January
31
|
||||||||
2007
|
2008
|
|||||||
Computer
hardware and software
|
$ | 7,232 | $ | 9,045 | ||||
Furniture
and fixtures
|
1,204 | 1,248 | ||||||
Leasehold
improvements
|
1,275 | 1,288 | ||||||
Total
property and equipment
|
9,711 | 11,581 | ||||||
Accumulated
depreciation and amortization
|
(4,758 | ) | (6,529 | ) | ||||
Property
and equipment – net
|
$ | 4,953 | $ | 5,052 |
January
31
|
||||||||
2007
|
2008
|
|||||||
Revolving
credit facility issued on November 27, 2006, bearing interest at
Prime plus Applicable Margin based on EBITDA due in full July 31,
2008
|
$ | 2,500 | $ | 4,500 | ||||
Bank
note of $4,000 issued on November 27, 2006, bearing interest at Prime
plus Applicable Margin based on EBITDA due in full July 31,
2008
|
4,000 | 3,238 | ||||||
6,500 | 7,738 | |||||||
Less
current portion
|
(762 | ) | (7,738 | ) | ||||
Notes
payable, excluding current portion
|
$ | 5,738 | $ | – |
Title
|
Number
of
|
Issuance
|
|||||||||||||||
Date
Authorized
|
of
Preferred
|
Shares
|
Price
|
Value
|
Issuance
|
||||||||||||
and
Issued
|
Stock
Issuance
|
Issued
|
per
Share
|
Received
|
Costs
|
||||||||||||
November
6, 2003
|
Series
A (1)
|
17,200,000 | $ | 1.00 | $ | 17,200 | $ | 74 | |||||||||
December
28, 2004
|
Series
B (2)
|
4,480,000 | 2.50 | 11,200 | 34 | ||||||||||||
May
15, 2006
|
Series
C (3)
|
1,288,660 | 3.88 | 5,000 | – | ||||||||||||
January
11, 2007
|
Series
D Junior (4)
|
1,882,353 | 4.57 | 8,600 | 49 |
(1)
|
In
November 2003, immediately following the sale of the Series A Convertible
Redeemable Preferred Stock (Series A), the Company repurchased 16,750,000
shares of its common stock, from two stockholders, in the amount of $0.40
per share, $6.7 million in aggregate, using a portion of the net proceeds
from the Series A issuance.
|
(2)
|
During
December 2004, using a portion of the proceeds from the Series B
Convertible Redeemable Preferred Stock (Series B), the Company repurchased
600,000 shares of its common stock at $2 per share, $1.2 million in
aggregate.
|
(3)
|
On
May 15, 2006, the Company completed the sale and issuance of
1,288,660 shares of Series C Convertible Redeemable Preferred Stock
(Series C) to a group of 11 purchasers, including 90,206 Series C shares
that were purchased by four executive officers of the Company and
1,131,572 Series C shares that were purchased by affiliates of two of the
Company’s directors (see Note 12 – Related-Party Transactions). As a
result, the Company recorded a loss on the issuance of the stock of $3.4
million and $256,000 compensation expense related to certain
officers.
|
(4)
|
The
Series D Convertible Redeemable Junior Preferred Stock (the Series D
Junior) was issued, in its entirety, as consideration for substantially
all of the net assets of People Business Network, Inc. (see Note 2 –
Acquisitions and Dispositions).
|
|
•
|
In
general, Series A and Series B, Series C, and Series D Junior (the
Preferred Stock) holders carry certain voting rights, given certain
restrictions and limitations, including but not limited to, prohibition
from collectively voting to effect a change in control, increase or
decrease the number of authorized shares of the Series A, Series B and
Series C (Senior Preferred Stock), incur any indebtedness and materially
change the nature of the Company’s
business.
|
|
•
|
In
certain circumstances, the preferred stockholders have contractual
registration rights as well as preemptive rights to purchase shares of
common stock issued by the Company.
|
|
•
|
All
preferred stock shares earn dividends of 8% of the original issue price
per share of the respective offerings on an annual basis. Dividends are
cumulative and paid when and if declared by the Company’s Board of
Directors. For fiscal years 2006, 2007 and 2008, the Series A had
dividends in arrears of $3.1 million, $4.5 million and $5.8 million,
respectively. For fiscal years 2006, 2007 and 2008, the Series B had
dividends in arrears of $979,000, $1.9 million and $2.8 million,
respectively. For fiscal years 2007 and 2008, the Series C had dividends
in arrears of $286,000 and $686,000, respectively. For fiscal years 2007
and 2008, the Series D Junior had dividends in arrears of $35,000 and
$675,000, respectively. No dividends can be paid to the holders of common
stock if any dividends on the Series A, B, C preferred stock, or D Junior
preferred stock are outstanding and unpaid. All dividends in arrears have
been accrued in the consolidated financial statements in accordance with
EITF Topic D-98.
|
Weighted-average
risk-free rate (1)
|
3.88 | % | ||
Expected
term (2)
|
7 years
|
|||
Dividend
yield
|
0 | % | ||
Stock
price volatility
|
0 | % |
(1)
|
The
risk-free interest rate is based on the U.S. treasury security rate
estimated for the expected life of the options at the date of
grant.
|
(2)
|
The
expected term is based upon an average of the contractual life and the
vesting period of the options.
|
2007
|
2008
|
|||||||
Weighted-average
expected term (in years)(1)
|
7.0 | 7.0 | ||||||
Expected
stock volatility (2)
|
48 | % | 46 | % | ||||
Risk-free
interest rate (3)
|
4.73 – 4.88 | % | 3.41-4.97 | % | ||||
Expected
dividend yield
|
0 | % | 0 | % |
(1)
|
The
expected life is based upon an average of the contractual life and the
vesting period of the options.
|
(2)
|
Expected
volatility is based primarily on that of similar competitor companies that
the Company believes produces an estimate that is representative of our
expectations of the future volatility over the expected term of our
option.
|
(3)
|
The
risk-free interest rate is based on the U.S. treasury security rate
estimated for the expected life of the options at the date of
grant.
|
Weighted-
|
Weighted-
|
||||||||
Average
|
Average
|
||||||||
Exercise
|
Remaining
|
||||||||
Outstanding
|
Price
per
|
Contractual
|
|||||||
Options
|
Share
|
Life
(Years)
|
|||||||
Balance,
February 1, 2006
|
2,599,125 | $ | 1.80 | ||||||
Granted
|
1,568,750 | 3.65 | |||||||
Exercised
|
(11,437 | ) | 1.90 | ||||||
Forfeited,
expired, exchanged, or canceled
|
(976,563 | ) | 2.25 | ||||||
Balance,
January 31, 2007
|
3,179,875 | 2.55 | |||||||
Granted
|
1,039,250 | 3.88 | |||||||
Exercised
|
(51,250 | ) | 1.13 | ||||||
Forfeited,
expired, exchanged, or canceled
|
(599,375 | ) | 2.02 | ||||||
Balance,
January 31, 2008
|
3,568,500 | 3.05 |
8.0
|
||||||
Expected
to Vest at January 31, 2008
|
1,264,655 | 3.55 |
8.7
|
||||||
Exercisable
at January 31, 2008
|
1,882,293 | 2.60 |
7.3
|
Capital
|
Operating
|
|||||||
Leases
|
Leases
|
|||||||
Years
ending January 31:
|
||||||||
2009
|
$ | 1,289 | $ | 1,122 | ||||
2010
|
995 | 948 | ||||||
2011
|
297 | 662 | ||||||
2012
|
54 | – | ||||||
Future
minimum lease payments
|
2,635 | $ | 2,732 | |||||
Amount
representing interest
|
380 | |||||||
Present
value of future minimum lease payments
|
2,255 | |||||||
Less
current portion
|
1,042 | |||||||
Long-term
portion
|
$ | 1,213 |
Years
ending January 31:
|
||||
2009
|
$ | 636 | ||
2010
|
288 |
January
31
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
Loss
before provision for income taxes:
|
||||||||||||
Domestic
|
$ | (28,699 | ) | $ | (14,737 | ) | $ | (8,980 | ) | |||
Foreign
|
(2,161 | ) | (1,273 | ) | 534 | |||||||
Total
|
$ | (30,860 | ) | $ | (16,010 | ) | $ | (8,446 | ) |
Year
Ended January 31
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
Current
taxes:
|
||||||||||||
Federal
|
$ | – | $ | – | $ | – | ||||||
State
|
1 | 6 | 7 | |||||||||
Foreign
|
– | – | – | |||||||||
1 | 6 | 7 | ||||||||||
Deferred
taxes:
|
||||||||||||
Federal
|
– | – | 209 | |||||||||
State
|
– | – | 25 | |||||||||
Foreign
|
– | – | – | |||||||||
– | – | 234 | ||||||||||
Total
taxes
|
$ | 1 | $ | 6 | $ | 241 |
January
31
|
||||||||||||||||||||||||
2006
|
2007
|
2008
|
||||||||||||||||||||||
Federal
tax at statutory tax rate
|
$ | (10,492 | ) | (34.0 | )% | $ | (5,443 | ) | (34.0 | )% | $ | (2,872 | ) | (34.0 | )% | |||||||||
State
tax, net of federal benefit
|
(1,142 | ) | (3.7 | ) | (608 | ) | (3.8 | ) | (321 | ) | (3.8 | ) | ||||||||||||
Fair
value of embedded derivative
|
8,151 | 26.4 | (204 | ) | (1.3 | ) | 1,895 | 22.4 | ||||||||||||||||
Loss
on issuance of Series C redeemable convertible preferred
stock
|
– | – | 1,292 | 8.1 | – | – | ||||||||||||||||||
Increase
in valuation allowance
|
3,250 | 10.5 | 4,959 | 31.0 | 1,457 | 17.3 | ||||||||||||||||||
Nondeductible
items
|
68 | 0.2 | 61 | 0.4 | 63 | 0.8 | ||||||||||||||||||
Other
|
166 | 0.6 | (51 | ) | (0.4 | ) | 19 | 0.2 | ||||||||||||||||
Effective
income tax rate
|
$ | 1 | – | % | $ | 6 | – | % | $ | 241 | 2.9 | % |
January
31
|
||||||||
2007
|
2008
|
|||||||
Deferred
tax assets:
|
||||||||
Federal
operating loss carryforwards
|
$ | 9,477 | $ | 11,086 | ||||
State
operating loss carryforwards
|
1,217 | 1,152 | ||||||
Foreign
operating loss carryforwards
|
1,528 | 1,187 | ||||||
Charitable
contributions carryforwards
|
24 | 5 | ||||||
Accounts
receivable
|
54 | 79 | ||||||
Compensation
|
2 | – | ||||||
Stock-based
compensation
|
274 | 348 | ||||||
Acquired
intangible assets
|
– | – | ||||||
Property
and equipment
|
103 | 149 | ||||||
Total
deferred tax assets
|
12,679 | 14,006 | ||||||
Deferred
tax liability:
|
||||||||
Property
and equipment
|
– | – | ||||||
Acquired
intangible assets
|
(332 | ) | (434 | ) | ||||
Net
deferred tax assets
|
12,347 | 13,572 | ||||||
Valuation
allowance
|
(12,347 | ) | (13,806 | ) | ||||
Net
deferred tax liabilities
|
$ | – | $ | (234 | ) |
|
•
|
the
Company’s current and historical operating
performance;
|
|
•
|
the
Company’s expected future operating
performance;
|
|
•
|
the
Company’s financial condition;
|
|
•
|
the
liquidation rights and other preferences of the Company’s preferred
stock;
|
|
•
|
any
recent privately negotiated sales of the Company’s securities to third
parties;
|
|
•
|
the
Company’s then-current book value per
share;
|
|
•
|
the
lack of marketability of the Company’s common
stock;
|
|
•
|
the
potential future marketability of the Company’s common stock;
and
|
|
•
|
the
business risks inherent in the Company’s business and in high technology
companies generally.
|