Attached files
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8-K - BRIDGELINE DIGITAL, INC. (MAY 11, 2010) - Bridgeline Digital, Inc. | form8-k_16869.htm |
EX-99.2 - UNAUDITED COMBINED PRO FORMA - Bridgeline Digital, Inc. | exh99-2_16869.htm |
EXHIBIT 99.1
TMX Interactive, Inc.
Report of Clairmont Paciello & Co., P.C.
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F-2
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Balance Sheets at December 31, 2009 and 2008
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F-3
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Statements of Operations for the Years Ended December 31, 2009 and 2008
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F-4
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Statements of Stockholders’ Deficit and Preferred Stock for the Years Ended December 31, 2008 and 2009
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F-5
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Statements of Cash Flows for the Years Ended December 31, 2009 and 2008
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F-6
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Notes to Consolidated Financial Statements
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F-7
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors
TMX Interactive, Inc.
Conshohocken, PA 19428
We have audited the accompanying balance sheet of TMX Interactive, Inc. as of December 31, 2009 and 2008 restated and the related statements of operations, stockholders' deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of TMX Interactive, Inc. as of December 31, 2009 and 2008 restated and the results of operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that TMX Interactive, Inc. will continue as a going concern. As discussed in Note B of the financial statements, under existing circumstances, there is substantial doubt about the ability of TMX Interactive, Inc. to continue as a going concern at December 31, 2010. Management’s plans in regard to that matter also are described in Note B. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules of general and administrative expenses on page 23 is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
/s/ Clairmont, Paciello & Co., P.C.
King of Prussia, Pennsylvania
July 26, 2010
F-2
TMX INTERACTIVE, INC.
BALANCE SHEETS
DECEMBER 31,
ASSETS
2009 |
2008
RESTATED
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|||||||
CURRENT ASSETS
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||||||||
Cash
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$ | 159,466 | $ | 61,843 | ||||
Accounts receivable
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844,615 | 782,460 | ||||||
Prepaid expenses
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20,543 | 90,670 | ||||||
TOTAL CURRENT ASSETS
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1,024,624 | 934,973 | ||||||
PROPERTY AND EQUIPMENT
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161,997 | 161,997 | ||||||
Less accumulated depreciation
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( 60,491 | ) | ( 36,811 | ) | ||||
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101,506 | 125,186 | ||||||
OTHER ASSETS
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||||||||
Deposits
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16,010 | 16,010 | ||||||
Patents(net of accumulated amortization of $101,293 and $90,609 for the years ended December 31, 2009 and 2008
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5,546 | 16,230 | ||||||
TOTAL OTHER ASSETS
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21,556 | 32,240 | ||||||
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$ | 1,147,686 | $ | 1,092,399 | ||||
LIABILITIES AND STOCKHOLDERS' DEFICIT
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||||||||
CURRENT LIABILITIES
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||||||||
Accounts payable
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$ | 83,106 | $ | 293,856 | ||||
Accrued expenses
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— | 27,395 | ||||||
Accrued interest
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12,740 | 12,771 | ||||||
Current portion of long-term debt
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14,385 | 12,515 | ||||||
Deferred revenue
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908,482 | 683,925 | ||||||
Due to factor
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603,692 | 591,560 | ||||||
TOTAL CURRENT LIABILITIES
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1,622,405 | 1,622,022 | ||||||
LONG-TERM DEBT
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||||||||
Accrued interest
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2,280,071 | 1,555,796 | ||||||
Mandatory redeemable preferred stock
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29,773,425 | 28,093,425 | ||||||
Notes payable – net of current portion
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5,920,906 | 4,193,958 | ||||||
TOTAL LONG-TERM DEBT
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37,974,402 | 33,843,179 | ||||||
TOTAL LIABILITIES
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39,596,807 | 35,465,201 | ||||||
STOCKHOLDERS' DEFICIT
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||||||||
Preferred stock
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2,518,129 | 2,368,129 | ||||||
Common stock, $.001 par value, 12,000,000 authorized 3,966,250 issued and outstanding
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3,966 | 3,966 | ||||||
Accumulated deficit
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(40,971,216 | ) | (36,744,897 | ) | ||||
TOTAL STOCKHOLDERS’ DEFICIT
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(38,449,121 | ) | (34,372,802 | ) | ||||
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$ | 1,147,686 | $ | 1,092,399 |
See notes to financial statements.
F-3
TMX INTERACTIVE, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
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2008
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|||||||
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2009
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RESTATED
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||||||
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SALES
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$ | 2,230,298 | $ | 4,790,095 | ||||
COST OF GOODS SOLD
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1,479,402 | 2,305,844 | ||||||
GROSS PROFIT
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750,896 | 2,484,251 | ||||||
GENERAL AND ADMINISTRATIVE EXPENSES
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2,346,694 | 2,963,478 | ||||||
LOSS FROM OPERATIONS
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(1,595,798 | ) | ( 479,227 | ) | ||||
OTHER INCOME (EXPENSES)
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||||||||
Interest income
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— | 24 | ||||||
Interest expense
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( 800,521 | ) | ( 568,562 | ) | ||||
Interest expense – mandatorily Redeemable preferred stock
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(1,680,000 | ) | (1,680,000 | ) | ||||
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(2,480,521 | ) | (2,248,538 | ) | ||||
NET LOSS
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$ | (4,076,319 | ) | $ | (2,727,765 | ) |
See notes to financial statements.
F-4
TMX INTERACTIVE, INC.
STATEMENTS OF STOCKHOLDERS’ DEFICIT AND PREFERRED STOCK
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008 RESTATED
Total | ||||||||||||||||||||||||
Class D | Accumulated | Members’ and | ||||||||||||||||||||||
Preferred Stock | Common Stock | Deficit | Stockholders’ | |||||||||||||||||||||
Shares | Amount | Shares | Amount | Stockholders’ | Deficit | |||||||||||||||||||
Balance at
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||||||||||||||||||||||||
January 1, 2008
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1,172,682 | $ | 2,218,129 | 3,966,250 | $ | 3,966 | $ | (33,867,132 | ) | $ | (31,645,037 | ) | ||||||||||||
Accretion of
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||||||||||||||||||||||||
Preferred Stock
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||||||||||||||||||||||||
To redemption
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||||||||||||||||||||||||
Value
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150,000 | ( 150,000 | ) | |||||||||||||||||||||
Net loss
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( 2,727,765 | ) | ( 2,727,765 | ) | ||||||||||||||||||||
Balance at
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December 31, 2008
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1,172,682 | 2,368,129 | 3,966,250 | 3,966 | (36,744,897 | ) | (34,372,802 | ) | ||||||||||||||||
Accretion of
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Preferred Stock
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||||||||||||||||||||||||
To redemption
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||||||||||||||||||||||||
Value
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150,000 | ( 150,000 | ) | |||||||||||||||||||||
Net loss
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( 4,076,319 | ) | ( 4,076,319 | ) | ||||||||||||||||||||
Balance at
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December 31, 2009
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1,172,682 | $ | 2,518,129 | 3,966,250 | $ | 3,966 | $ | (40,971,216 | ) | $ | (38,449,121 | ) |
See notes to financial statements.
F-5
TMX INTERACTIVE, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
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2008
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2009
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RESTATED
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OPERATING ACTIVITIES
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Net loss
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$ | (4,076,319 | ) | $ | (2,727,765 | ) | ||
Adjustments to reconcile net
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loss to net cash used in
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operating activities:
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Depreciation and amortization
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34,364 | 75,994 | ||||||
Accretion of mandatorily redeemable
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preferred stock
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1,680,000 | 1,680,000 | ||||||
Changes in operating assets
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and liabilities
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(Increase) decrease in:
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Accounts receivable
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( 62,155 | ) | ( 376,089 | ) | ||||
Other assets
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70,127 | ( 72,657 | ) | |||||
Increase (decrease) in:
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Accounts payable
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( 210,750 | ) | 161,530 | |||||
Accrued expenses
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( 27,395 | ) | ( 29,921 | ) | ||||
Accrued interest
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724,244 | 465,620 | ||||||
Deferred revenue
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224,557 | 439,550 | ||||||
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NET CASH USED IN OPERATING ACTIVITIES
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(1,643,327 | ) | ( 383,738 | ) | ||||
INVESTING ACTIVITIES
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Purchase of property and equipment
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— | ( 7,915 | ) | |||||
NET CASH USED IN INVESTING ACTIVITIES
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— | ( 7,915 | ) | |||||
FINANCING ACTIVITIES
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Due to factor
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12,132 | 116,840 | ||||||
Repayment of notes payable
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( 12,516 | ) | ( 10,888 | ) | ||||
Proceeds from long-term debt
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1,741,334 | — | ||||||
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NET CASH PROVIDED BY (USED IN)
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||||||||
FINANCING ACTIVITIES
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1,740,950 | 105,952 | ||||||
INCREASE (DECREASE) IN CASH
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97,623 | ( 285,701 | ) | |||||
CASH AT BEGINNING OF YEAR
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61,843 | 347,544 | ||||||
CASH AT END OF YEAR
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$ | 159,466 | $ | 61,843 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
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||||||||
Cash paid for:
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||||||||
Income taxes
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$ | — | $ | — | ||||
Interest
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$ | 76,356 | $ | 99,830 |
See notes to financial statements.
F-6
TMX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE A - SUMMARY OF ACCOUNTING POLICIES
A summary of the Company's significant accounting policies consistently applied in the preparation of the accompanying statements follows:
1. Nature of operations
TMX Interactive, Inc. (the “Company”) was incorporated as a Pennsylvania Limited Liability Corporation (LLC) in January 1999. In May 2000, the Company converted to a Delaware Corporation, and the membership interests were converted into shares of common stock. The Company is a full service digital communications and technology agency. The Company uses patented communications technologies in concert with strategic planning and creative talent to build brands and market for their customers throughout the United States. The Company provides website and microsite design, development and hosting services as well as Interactive Learning Programs (ILP), marketing programs, custom applications, and more.
2. Accounts receivable
Accounts receivable is factored without recourse, the factor is responsible for collections and assumes all credit risk, and obtains all of the rights and remedies against Company’s customers. Factor reviews Company submitted funding requests of customer invoices on an case by case basis, reviewing items including but not limited to signed agreements authorizing TMX invoices and establishing customer’s obligations to pay such invoices, customer confirmations of receipt of invoices for payment processing, and other backup information as factor deems necessary and sufficient to approve funding under Company’s agreement with factor. The decision to accept an invoice to fund under Company’s agreement with factor, is the sole decision of factor, who has performed successful annual audits with Company to ensure best practices and compliance with factor policies and procedures.
3. Allowance for doubtful accounts
Bad debts are recorded by the direct write-off method and are charged to operations when in management's opinion the account receivable becomes uncollectible. The effects of using this method approximate those of the allowance method.
4. Property and equipment
Property and equipment are stated at cost. Depreciation is provided by straight-line method over the estimated useful lives of the related assets. Depreciation amounted to $23,680 and $65,310 for the years ended December 31, 2009 and 2008.
5. Use of estimates
Management uses estimates and assumptions in preparing financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ from those estimates.
F-7
TMX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
6.
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Cash equivalents
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For purposes of preparing the statement of cash flows, the Company considers all short-term debt securities purchased with an original maturity of three months or less to be cash or cash equivalents.
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7.
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Fair Value of Financial Instruments
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The Company’s financial instruments consist of cash, security deposits, due to shareholders, accounts payables, accrued expenses and a convertible debenture. The carrying values of these financial instruments approximate the fair value due to their short term maturities.
8.
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Amortization
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Patent fees are being amortized on a straight-line basis over a period of seven years. Amortization expense was $10,684 for 2009 and 2008.
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9.
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Advertising
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Advertising costs are expensed as incurred. Advertising expense was $5,291 and $35,549 in 2009 and 2008.
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10.
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Shipping and handling costs
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The Company records the amount of shipping and handling costs billed to customers as revenue. The cost incurred for shipping and handling has been included in cost of sales.
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11.
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Revenue recognition
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Web application development services are contracted for on either a fixed price or time and materials basis. For its fixed price engagements, the Company applies the proportional performance model to recognize revenue based on hours incurred in relation to total hours at completion. The Company has determined that hours 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 hours 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.
F-8
TMX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
11. Revenue recognition (continued)
These arrangements do not require formal customer acceptance and do not grant any future right to labor hours contracted for but not used.
NOTE B – GOING CONCERN
As shown in the accompanying financial statements, the Company incurred a net loss of $4,076,000 during the year ended December 31, 2009, and as of that date, the Company's current liabilities exceeded its current assets by $1,600,000 and its total liabilities exceeded its total assets by $36,827,000. Those factors create an uncertainty about the Company's ability to continue as a going concern. Management of the Company is developing a plan to reduce its liabilities through sales of assets. The ability of the Company to continue as a going concern is dependent on acceptance of the plan by the Company's creditors and the plan's success. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
On May 11, 2010, the Company agreed to sell certain assets to Bridgeline Digital, Inc., as described in Note U.
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
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2009
|
2008
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||||||
Computer software and hardware
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$ | 40,999 | $ | 40,999 | ||||
Furniture and fixtures
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9,228 | 9,228 | ||||||
Leasehold improvements
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111,770 | 111,770 | ||||||
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161,997 | 161,997 | ||||||
Less: Accumulated depreciation
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60,491 | 36,811 | ||||||
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$ | 101,506 | $ | 125,186 | ||||
Depreciation expense
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$ | 23,680 | $ | 65,310 |
NOTE D – LEASE COMMITTMENTS
The Company signed a five year lease for office space that expires on the last day of August, 2012.
Rent expense was $197,142 and $211,806 for 2009 and 2008.
F-9
TMX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE D – LEASE COMMITMENTS (CONTINUED)
The following is a schedule of future minimum lease payments:
Year ending
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||||
December 31
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Amount
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|||
2010
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$ | 204,718 | ||
2011
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205,683 | |||
2012
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137,686 | |||
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$ | 548,087 |
Bridgeline Digital, Inc. assumed the lease obligations and security deposit of the Company upon the sale of assets on May 11, 2010.
NOTE E – LONG-TERM DEBT
The Company's obligation under notes payable consists of the following:
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2009
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2008
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||||||
12.5% note, with stated maturity date of June 30, 2011. The note is secured by intellectual property with a negative pledge agreement and is payable to a revocable trust Debt was forgiven on May 10, 2010.
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$ | 250,000 | $ | 250,000 | ||||
8% note, with a stated maturity date of March 12, 2012. The note is payable to a venture capital group. Debt was forgiven on May 10, 2010.
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250,000 | 250,000 | ||||||
15% note payable with an open maturity date. The note is payable to a revocable trust. Debt was forgiven on May 10, 2010.
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850,000 | 849,666 | ||||||
15% note payable with an open maturity date. The note is payable to a venture capital group. Debt was forgiven on May 10, 2010.
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1,651,000 | 1,651,000 | ||||||
Convertible note with a 6% interest rate. The note is payable to a corporate entity.
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500,000 | 500,000 | ||||||
Line of credit bearing a 10% annual interest rate with a maturity date of February 5, 2011. The line is payable to a revocable trust. Debt was forgiven on May 10, 2010.
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125,000 | 125,000 |
F-10
TMX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE E – LONG-TERM DEBT (CONTINUED)
|
2009
|
2008
|
||||||
Line of credit bearing a 10% annual interest rate with an open maturity date. The line is payable to a revocable trust. Debt was forgiven on May 10, 2010.
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$ | 175,000 | $ | 175,000 | ||||
Line of credit bearing a 10% annual interest rate with an open maturity date. The line is payable to a revocable trust. Debt was forgiven on May 10, 2010.
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200,000 | 200,000 | ||||||
Line of credit bearing a 10% annual interest rate with a stated maturity of February 5, 2011. The line is payable to a revocable trust. Debt was forgiven on May 10, 2010.
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150,000 | 150,000 | ||||||
Note payable in monthly installments of $1,629 including interest of 14% through August, 2012; secured by leasehold improvements. Debt was forgiven on May 10, 2010.
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43,291 | 55,807 | ||||||
10% note, with stated maturity date of July 7, 2009. The note is collateralized by property and is payable to a venture capital group. Debt was forgiven on May 10, 2010.
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129,000 | — | ||||||
20% note, with stated maturity date of February 5, 2011. The note is collateralized by property and is payable to a venture capital group. Debt was forgiven on May 10, 2010
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250,000 | — | ||||||
20% note, with stated maturity date of February 5, 2011. The note is payable to a venture capital group. Debt was forgiven on May 10, 2010.
|
35,000 | — | ||||||
20% note, with stated maturity date of February 5, 2011. The note is payable to a venture capital group Debt was forgiven on May 10, 2010.
|
252,000 | — | ||||||
Line of credit bearing a 20% annual interest rate with a maturity date of February 5, 2011. The line is payable to a corporate entity. Debt was forgiven on May 10, 2010.
|
100,000 | — |
F-11
TMX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE E – LONG-TERM DEBT (CONTINUED)
2009
|
2008
|
|||||||
Note payable on September 1, 2011. The note is payable to a revocable trust.
|
$ | 300,000 | $ | — | ||||
Note payable on September 11, 2011. The note is payable to a revocable trust.
|
100,000 | — | ||||||
Note payable on September 12, 2011. The note is payable to a revocable trust.
|
100,000 | — | ||||||
20% note, with stated maturity date of February 5, 2011. The note is payable to a venture capital group. Debt was forgiven on May 10, 2010.
|
475,000 | — | ||||||
|
$ | 5,935,291 | $ | 4,206,473 | ||||
Less current portion
|
( 14,385 | ) | ( 12,515 | ) | ||||
|
$ | 5,920,906 | $ | 4,193,958 |
Future maturities of long-term debt are as follows:
Year ending
|
||||
December 31
|
Amount
|
|||
2010
|
$ | 14,385 | ||
2011
|
2,282,534 | |||
2012
|
262,372 | |||
Thereafter
|
3,376,000 | |||
|
$ | 5,935,291 |
Interest expense was $800,521 and $568,562 for 2009 and 2008.
On May 10, 2010, most of the Company’s debt obligation and accrued interest were forgiven and the Company will recognize $7,464,019 of income.
NOTE F - MANDATORILY REDEEMABLE PREFERRED STOCK
|
2009
|
2008
|
||||||
Mandatorily redeemable preferred stock:
|
||||||||
Class D redeemable, convertible preferred stock, ($.001 par value) 1,172,682 shares issued and outstanding
|
$ | 2,518,129 | $ | 2,368,129 | ||||
Class C redeemable, convertible preferred stock, ($.001 par value) 462,326 shares issued and outstanding
|
22,391,936 | 21,191,936 |
F-12
TMX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE F - MANDATORILY REDEEMABLE PREFERRED STOCK (CONTINUED)
|
2009
|
2008
|
||||||
Class A redeemable preferred stock, ($.001 par value) 17,280 shares issued and outstanding
|
$ | 3,362,110 | $ | 3,189,310 | ||||
Class B redeemable, convertible preferred stock, ($.001 par value) 108,000 shares issued and outstanding
|
140,088 | 132,888 | ||||||
Class B-1 redeemable, convertible preferred stock, ($.001) par value 200,000 shares issued and outstanding
|
5,559,291 | 5,259,291 |
NOTE G - CONCENTRATION OF RISK
Certain financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily of cash. The Company maintains its cash investments in high credit quality financial institutions. At various times, the Company has deposits in excess of the Federal Deposit Insurance Corporation limit. The balances of cash and cash equivalents at a financial banking institution did not exceed the federally insured limit of $250,000 in 2009 and $100,000 in 2008. The Company has not experienced any losses on these accounts.
NOTE H - RELATED PARTY TRANSACTIONS
A revocable trust advancing funds to the Company is owned by a relative of the former CEO of the Company. The amount outstanding was $1,749,666 with accrued interest of $693,842 and $594,204 in 2009 and 2008. On May 10, 2010 the trust forgave $1,249,666 in loans and $744,398 in accrued interest.
NOTE I - CONTINGENCIES
Management asserts that for the years ended December 31, 2009 and 2008, there were no pending or threatened litigation claims or assessments against the Company. Management also indicated that there were no existing unasserted claims and assessments that needed to be disclosed in accordance with Statement of Financial Accounting Standards No. 5.
NOTE J - TRADE ACCOUNTS RECEIVABLE AND AMOUNTS DUE TO FACTOR
Pursuant to the terms of an agreement between company and a factor, the Company may choose to submit for funding selected customer invoices (trade accounts receivable) to the factor on a pre-approved non-recourse basis. For the invoices accepted and funded by the factor without recourse, the factor is responsible for collection, assumes all credit risk, and obtains all of the rights and remedies against the Company’s customers. Under the terms of the agreement, the factor advances the Company 80% of the receivables outstanding and collects a fee of .375% per month on the receivables balance. Upon customer payment of invoices, factor releases to Company the remaining 20% minus applicable fees and interest.
NOTE M - PREFERRED STOCK (CONTINUED)
F-13
TMX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE J - TRADE ACCOUNTS RECEIVABLE AND AMOUNTS DUE TO FACTOR (CONTINUED)
Factor reviews Company submitted funding requests of customer invoices on an case by case basis, reviewing items including but not limited to signed agreements authorizing TMX invoices and establishing customer’s obligations to pay such invoices, customer confirmations of receipt of invoices for payment processing, and other backup information as factor deems necessary and sufficient to approve funding under Company’s agreement with factor. The decision to accept an invoice to fund under Company’s agreement with factor, is the sole decision of factor.
As of December 31, 2009 and 2008, the amount due factor was $603,692 and $591,560. Due to the receipt of a payment of $295,000 on December 31, 2007, the amount due to the factor is greater than 80% of the non-recourse balance. This is due to a timing difference with the factor recognition of the receipt of the payment until January 2008.
On May 10, 2010, the Company sold the accounts receivable and the amounts due to factor were assumed in accordance with the sale of its assets and liabilities to Bridgeline Digital, Inc.
NOTE K - DERERRED REVENUE
Upon issuing customer invoices (included in Trade AR), Company places into deferred revenue any amount of such invoices deemed appropriate to represent work yet-to-be performed or milestones yet to be reached. This includes but is not limited to deposits, license fees, maintenance which may be amortized over a fixed term.
On May 11, 2010, Bridgeline Digital, Inc. assumed the deferred revenue of the Company.
NOTE L - PREFERRED STOCK - ACCRETIONS
Redeemable preferred stock is initially recorded in an amount equal to the net proceeds from its issuance. The carrying value of redeemable preferred stock is then increased by periodic accretions under the interest method so that the carrying amount will equal the redemption amount at the redemption date. These increases are effected through charges against retained earnings, if available, then additional paid in capital, if available, then accumulated deficit. Charges to retained earnings were $150,000 for 2009 and 2008.
NOTE M - PREFERRED STOCK
In July 2000, the Company authorized 250,000 shares of preferred stock and designated and issued 17,280 shares of Class A redeemable preferred stock (the Class A Preferred”), and 720 shares as Class B convertible preferred stock (the “Class B Preferred”) to investors for $1,728,000 and $72,000, respectively. On September 5, 2000, the Company increase authorized preferred stock to 5,000,000 and designated 200,000 shares as Class B-1 convertible preferred stock (the “Class B-1 Preferred”) and 462,326 shares as Class C convertible preferred stock (the “Class C Preferred”). Additionally, on September 5, 2000, 179,964 shares of Class B-1 Preferred were issued to investors for $3,000,000 less issuance costs of $48,210.
F-14
TMX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE M - PREFERRED STOCK (CONTINUED)
On September 5, 2000, the Company’s Class B Preferred split 150:1, resulting in a total of 108,000 shares outstanding. On October 18, 2000, the common shares split 5:1 (retroactive application, see note 6); accordingly, the convertible preferred shares of Class B Preferred, Class B-1 Preferred and Class C Preferred are to be adjusted for the split upon conversion.
NOTE N - VOTING
The holders of the outstanding shares of the Company’s convertible preferred stock are entitled to vote, together with the holders of common stock, on all matters to be submitted to stockholders for a vote. Each convertible preferred stockholder is entitled to the number of votes equal to the number of shares of common stock into which each preferred share is convertible at the time of such vote.
NOTE O - DIVIDENDS
The holders of the Class A, Class B, Class B-1, Class C and Class D Preferred are entitled to receive cumulative annual dividends of $10.00, $0.67, $0.33, $2.60, and $0.13 per share.
These dividends are payable upon the earliest of (i) declaration by the Board of Directors (ii) upon sale, merger or liquidation of Company. Cumulative dividends shall not be payable upon conversion of the Class B, Class B-1, Class C and Class D Preferred Stock; Class A Preferred Stock is not convertible.
As of December 31, 2009 Class A, Class B, Class B-1, Class C, and Class D Preferred have cumulative unpaid dividends of $252,000, $1,055, $376,675, $826,408 and $568,129.
The dividends were forgiven upon the sale of assets on May 11, 2010 to Bridgeline Digital, Inc.
NOTE P - LIQUIDATION PREFERENCE
In the event of any liquidation event, whether voluntary or involuntary and including a change in control, the holders of the then outstanding Preferred Stock shall receive liquidation preferences, in the following order Class D Preferred, Class C Preferred, Class A Preferred, Class B Preferred, and then Class B-1 Preferred, in the amount of the original purchase price, plus all accumulated but unpaid dividends (the “respective “Liquidation Preferences”).
Distribution within each class is to be based pro rata on the number of shares then outstanding. Any remaining proceeds from liquidation shall be distributed among the holders of the Company’s common stock and Class D and C Preferred on a pro rata basis as if the Class D and C Preferred had been converted into common stock (the “Participation Element”).
F-15
TMX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE P - LIQUIDATION PREFERENCE (CONTINUED)
In lieu of receiving their Liquidation Preference, the holders of any series of the Company’s preferred stock may elect to share with the holders of the Company’s common stock on an as-if converted basis.
NOTE Q - CONVERSION
Each share of the Company’s convertible preferred stock, at the option of the holder, is convertible into a number of fully paid shares of common stock as determined by dividing by the respective preferred stock issue by the conversion price in effect at the time. The conversion price is adjustable for stock splits and dilutive events as described in the Company’s certificated of incorporation.
The conversion price of the Class B, Class B-1, Class C and Class D Preferred was $0.13, $3.07, $4.68 and $1.28. Upon conversion, no adjustment to the conversion price shall be made for any declared or unpaid dividends on the shares. Conversion is automatic immediately upon (i) the closing firm commitment public offering in which the gross proceeds to the Company are at least $30,000,000, or (ii) the written consent or agreement of the holders of at least two-thirds (2/3) of the outstanding shares of such series to convert such shares to common stock.
NOTE R - MANDATORY REDEMPTION
On each of the fifth (5th), sixth (6th) and seventh (7th) anniversaries, the Company shall redeem 4,320 shares of Class A Preferred for an amount equal to the Class A Preferred Liquidation Preference. The Company may at any time redeem all or any portion of the Class A Preferred for an amount equal to the Class A Liquidation Preference. These shares are recorded as debt for reporting purposes.
At any time after January 28, 2006, the holders of a majority of the shares of Class B or Class B-1 Preferred may elect for the Company to redeem their series of preferred stock for the respective Class B and B-1 Preferred Liquidation Preference. These shares are recorded as debt for reporting purposes.
At any time after January 28, 2006, the holders of a majority of the shares of Class C Preferred may elect for the Company to redeem their class of preferred stock for the greater of the Class C Preferred Liquidation Preference or the fair market value of the Class C Preferred at the time of redemption as determined by an independent appraiser. These shares are recorded as debt for reporting purposes.
F-16
TMX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE S - COMMON STOCK
On May 26, 2000, the Company converted from a Limited Liability Corporation to a Delaware Corporation, issuing 792,000 shares of common stock to the then members. On September 5, 2000, the Company increased the authorized number of common shares by 10,000,000, to a total of 12,000,000. On October 18, 2000, the Company authorized a 5:1 stock split, increasing the total shares issued and outstanding to 3,966,250. As of December 31, 2009 the number of common stock authorized and outstanding remained unchanged. Each share of common stock is entitled to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by the Board of Directors, subject to the prior rights of holders of all classes of stock outstanding.
T - INCOME TAXES
Under the asset and liability method of ACS 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance, when in the Company's opinion it is likely that some portion or the entire deferred tax asset will not be realized. After consideration of all the evidence, both positive and negative, management has recorded a full valuation allowance due to the uncertainty of realizing the deferred tax assets.
Utilization of the Company's net operating loss carryforwards are limited based on changes in ownership as defined in Internal Revenue Code Section 382. Due to ongoing losses and the establishment of a valuation allowance to offset deferred tax assets, the Company did not record a tax provision for the period ended December 31, 2009 and 2008.
ACS 740 requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carryforwards. ACS 740 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets.
The Company has a net operating loss carryforward for tax purposes totaling $27,609,803 and $26,461,000 at December 31, 2009 and 2008 expiring through the year 2025 and state net operating losses of $19,699,000 which will begin expiring in 2009. Internal Revenue Code Section 382 places a limitation on the amount of taxable income that can be offset by carryforwards after a change in control (generally greater than a 50% change in ownership).
F-17
TMX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009 AND 2008
T - INCOME TAXES (CONTINUED)
Significant deferred tax assets at December 31, 2009 and 2008 are as follows:
|
2009
|
2008
|
||||||
Gross deferred tax assets:
|
||||||||
Net operating loss carry forwards
|
$ | (27,609,803 | ) | $ | (26,461,000 | ) | ||
Total deferred tax assets
|
$ | 11,441,502 | $ | 10,965,438 | ||||
Less: valuation allowance
|
11,441,502 | 10,965,438 | ||||||
|
||||||||
Deferred tax asset - net
|
$ | — | $ | — |
The valuation allowance at December 31, 2008 was $10,965,438. The net change in valuation allowance during the year ended December 31, 2009 was an increase of $476,064. In assessing the reliability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on consideration of these items, management has determined that enough uncertainty exists relative to the realization of the deferred income tax asset balances to warrant the application of a full valuation allowance as of December 31, 2009.
The actual tax benefit differs from the expected tax benefit for the years ended December 31, 2009 and 2008 as follows:
|
2009
|
2008
|
||||||
Expected tax benefit - Federal
|
$ | ( 8,708,131 | ) | $ | ( 8,345,799 | ) | ||
Expected tax benefit - State
|
( 2,733,371 | ) | ( 2,619,639 | ) | ||||
Total deferred tax assets
|
$ | (11,441,502 | ) | $ | (10,965,438 | ) | ||
Change in valuation allowance
|
$ | 476,064 | $ | 292,840 | ||||
F-18
TMX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE T - INCOME TAXES (CONTINUED)
The table below summarizes the differences between the Company’s effective tax rate and the statutory federal rate as follows for fiscal years 2009 and 2008:
|
2009
|
2008
|
||||||
Computed “expected” tax benefit
|
(31.50 | )% | (31.50 | )% | ||||
State taxes net of “expected” tax benefit
|
( 9.99 | )% | ( 9.99 | )% | ||||
Permanent differences
|
— | % | — | % | ||||
Change in valuation allowance
|
41.49 | % | 41.49 | % | ||||
Effective tax rate
|
— | % | — | % |
NOTE U - SUBSEQUENT EVENTS
On May 11, 2010, the Company sold certain assets and relinquished certain liabilities to Bridgeline Digital, Inc., located in Woburn, MA. The sale price consisted of (i) cash of $100,000, (ii) the assumption of $642,016 of deferred revenue, (iii) a note in the amount of $500,000 payable over three years beginning January, 2011 with interest at 1% per annum (the note is unsecured and subordinated to the Company’s primary lender) and (iv) contingent consideration of up to $500,000 payable quarterly beginning with the quarter ending December 31, 2010, based on the achievement of certain defined operating metrics.
The assets excluded from the sale include patent #6,789,108 B1, Communicator Platform, and Campaign Manager.
NOTE V – RESTATEMENT OF 2008 FINANCIAL STATEMENTS
The Company has restated the mandatorily redeemable preferred stock as debt instead of equity in accordance with FAS 150.
The effect of this change was to record an interest expense of $1,860,000 on the statement of operations instead of on the statement of stockholders’ deficit. The financial statements have been restated accordingly.
F-19
SUPPLEMENTAL INFORMATION
TMX INTERACTIVE, INC.
SCHEDULES OF GENERAL AND ADMINISTRATIVE EXPENSES
YEAR ENDED DECEMBER 31,
|
2008
|
|||||||
|
2009
|
Restated
|
||||||
Advertising
|
$ | 5,291 | $ | 35,549 | ||||
Agent fees
|
— | — | ||||||
Amortization
|
10,684 | 10,684 | ||||||
Bad debt expense
|
92,750 | 62,500 | ||||||
Bank charges
|
6,022 | 1,115 | ||||||
Bonus
|
3,000 | 5,000 | ||||||
Commissions
|
10,186 | — | ||||||
Computer expenses
|
33,436 | 60,363 | ||||||
Contracted services
|
80,808 | 739 | ||||||
Delivery and freight
|
3,070 | 4,876 | ||||||
Depreciation
|
23,680 | 65,310 | ||||||
Dues and subscriptions
|
3,353 | 5,398 | ||||||
Employee benefits
|
104,067 | 124,258 | ||||||
Factoring Expense
|
59,549 | 45,442 | ||||||
Insurance
|
46,202 | 59,848 | ||||||
Internet
|
69,983 | 91,848 | ||||||
Legal and professional
|
112,771 | 73,651 | ||||||
Meals and entertainment
|
12,828 | 33,055 | ||||||
Moving expense
|
— | 3,610 | ||||||
Office expense
|
15,271 | 25,040 | ||||||
Parking and tolls
|
1,438 | 3,143 | ||||||
Payroll service
|
— | 4,653 | ||||||
Recruiting
|
28,877 | 80,755 | ||||||
Rent
|
197,142 | 211,806 | ||||||
Repairs and maintenance
|
2,291 | 6,533 | ||||||
Salaries
|
||||||||
Officers
|
833,684 | 1,002,237 | ||||||
Office
|
96,363 | 133,541 | ||||||
Sales
|
193,744 | 409,523 | ||||||
Security
|
— | 2,549 | ||||||
Seminars
|
3,675 | 1,200 | ||||||
Small Equipment
|
124 | 1,941 | ||||||
Taxes
|
||||||||
Payroll
|
164,074 | 246,261 | ||||||
Other
|
13,715 | 6,137 | ||||||
Telephone
|
34,178 | 44,658 | ||||||
Travel
|
70,285 | 82,111 | ||||||
Utilities
|
14,153 | 18,144 | ||||||
|
$ | 2,346,694 | $ | 2,963,478 |
F-20