Pink Sheets

Basics
Incorp in Canada (TO exchange, BKB), offices in San Diego. Was in minerals, empty shell purchased (for public company status?). One trick pony: NetValue (MagnaVault sunsetted in 2002). Googles pretty well (NetVault holds its own), did they ever address the recent heap overflow security issue? March 31 end of year.

Subsidiaries ("The Company" was never defined, shoddy work)

• BakBone Software, Inc
• BakBone Software, LTD
• BakBone Software KK
• BakBone Acquisition Corp (non operating)
  

Approx 200 resellers. OEM relations with NCR Teradata, Network Appliance, Sony: all have integrated products. Snap Appliance newer OEM arrangement.

Three primary regions:

• North America (39% in 04, 42% in 03)
  
• Pacific Rim (37% in 04, 38% in 03)
  
• Europe/Middle East/Africa (EMEA) (24% in 04, 20% in 03)
  

NetVault
Two parts: 1) core product, 2) application plug-in modules (APMs). Don't call them strap-ons no matter how funny it may seem (hat tip: Jason H).
APMs = hardware convergence.
Distribution includes over the net.
Huge Linux market share. 10 Linux distributions (how often do they do regression testing on all 10?)
They support 900 combinations of databases, applications, OSs, versions, and releases (ugh!)
perpetual licenses, but use 1 year maintenence contracts.
Various types of end user customers.
No system integrator relationships yet.
Reliance on single customers: 12% NCR Teradata
Core development is in Poole, UK
APM development in San Diego
Some localization in Japan
Research expenses have been consistent at around $5 million.

Headcount increased primarily in the Pacific Rim and EMEA as we expanded our sales operations in those regions

Copyright and trade secrets for IP protection
Competitors: Veritas, EMC, IBM Tivoli, Computer Associates, CommVault Systems.
175 employees: 44 R&D, 76 sales, 24 apps, 31 admin. No unions.
CEO Keith G. Rickard, 57 (Sterling Software, storage mgmt div. 97-99, BS Math UofLondon)
CFO John Fitzgerald: 33 (consulting for SEC reporting, IPOs, etc., Arthur Andersen, BS Bus Admin San Diego State) How incompetant is this guy?
VP Eng Fabrice Helliker, 36 (mostly stayed within BKBO, CS Brighton U in UK)
VP North Am sales Scott Petersen, 48 (VP sales Actionpoint/Captiva Software, VP sales Sterling Software, storage mgmt div. which was acquired by Computer Associates, BS Finance/Marketing Old Dominion)
VP EMEA sales, Patrick Clarke, 39, VP EMEA for Overland Storage, Dir sales and board member Asbis Enterprises)
SrVP OEMs, Adrian Michael Jones, 38, VP Worldwide sales Quantum Corp, Oxford College
Managing Director, Asia, Howard Weiss, 36, director Phoenix Technologies, sales manager at MCM Japan, BA Univ Mich
VP Customer Support, Ken Hudak, 46, VP tech support Orchestria in Sacramento, sales director Action Point, Sterling Software, Landmark Systems.

Leases: 25k-sq-ft San Diego (will need to expand), 7.8k-sq-ft Poole, 6k-sq-ft Tokyo.

No material legal proceedings.

Securities sales:
July 03: placed 22 million Series A convertable pf for $15.7 million.

Selling to resellers: includes a bundle of software, post contractual support, and/or professional services (implementation and training) ("multiple element arrangements"). Includes unspecified upgrades and enhancements, phone support.
Pricing is weird: Vendor Specific Objective Evidence (VSOE) of fair value. Revenue is assigned to each piece based on their relative values, and the price charged when sold separately. "We determine VSOE of fair value of post-contractual support based on substantive renewal rates for the same term post-contractual support." This sounds like accounting hell.

OEM sales: two methods of revenue recognition:

Certain OEM arrangements involve multiple elements where VSOE of fair value exists for all undelivered elements but VSOE of fair value does not exist for one or more delivered elements. Under these arrangements revenue is recognized using the residual method, whereby, the fair value of undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue, assuming the price is fixed or determinable, delivery has occurred and collectibility is probable. Revenue allocated to post-contractual support is recognized ratably over the arrangement period, which is generally one year. One OEM customer has a specific right of return, whereby the customer is contractually permitted to return our product during the arrangement period. We account for potential returns from this customer in accordance with Statement of Financial Accounting Standards, or SFAS, 48, “Revenue Recognition When Right of Return Exists”. We use historical returns experience with this customer to estimate potential returns and to establish the appropriate sales returns allowance.

And then there's this method:

We have also entered into multiple element arrangements with certain OEM customers under which, in addition to providing software licenses and maintenance services, we make a commitment to the customer to provide unspecified future software products. As VSOE of fair value cannot be determined for the unspecified future software products, all sales amounts procured under these arrangements are initially deferred and subsequently recognized ratably over the arrangement period. Revenue recognized under these arrangements is included under “Development Software Solutions” in Note 15 to the consolidated financial statements.

No currency hedging.
Canadian GAAP vs US GAAP: they use US for 10-K, 10-Q, 8-K with reconcilliations noted.
Prior financial report restatements: During the 04 report, they discovered the mistakes in 03 and 02 (deferred stock compensation and revenue recognition).

In connection with the audit of our financial statements for the fiscal year ended March 31, 2004, our independent auditors have issued a letter to our Audit Committee in which they noted certain matters involving our internal controls and operation that they consider to be “reportable conditions”, as defined under standards established by the American Institute of Certified Public Accountants, or AICPA, including our revenue recognition practices for certain customer contracts and our accounting for domestic and international income taxes. In addition, our independent auditors have advised us that they consider these matters to be “material weaknesses” that, by themselves or in combination, result in a more than remote likelihood that a material misstatement in our financial statements will not be prevented or detected by our employees in the normal course of performing their assigned functions.

So things are going to be a lot too fuzzy and, well, wrong. Given the incentives of senior managenement of a small public company who hold stock options, well... they have the means, motive, and opportunity to deceive.

Allowance for doubtful accounts:

We determine the adequacy of this allowance by evaluating individual customer accounts receivable, considering the customer’s financial condition, credit history and current economic conditions. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

...pretty standard stuff.

Valuation allowance for deffered tax assets

we estimate our income tax liability in each of the jurisdictions in which we operate by estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and financial statement purposes [meaning that earnings on the financial statements may differ from what governments view as earnings]. These differences result in deferred tax assets and liabilities. Significant management judgment is required in assessing.... The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in each tax jurisdiction during the periods in which those temporary differences become deductible [any assets means possibly overstated earnings, liabilities mean possibly understated earnings]. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. In the event that actual results differ from our estimates or we adjust our estimates in future periods, we may need to reduce our valuation allowance, which could materially impact our financial position and results of operations.

This means they're really just guessing when it comes to tax liabilities, or it may mean they're playing games.

During the years ended March 31, 2003 and 2004, we recorded provisions for income taxes of $510,000 and $951,000, respectively.

Rather than having operating segments with different lines of business, these guys report geographic reporting entities (shown above) and evaluate them for impairment.

2004 vs 2003:
revenue increased 51%

• licensing revenue: $21.2 million
• service revenue: $5.3 million
• devel software solutions revenue: $0.59 million
  

MagnaVault was sunset Jan 1, 2003. But they still did some business in 2004: $0.56 licensing, $0.2 service (prior year was $0.9 licensing, $0.46 service). By now, this is a dead product line.

NCR TeraData

Data Warehousing [i.e. TeraData] revenue increased 12% in 2004 from 2003 due to both an increase in product sales and support services. Foreign currency fluctuations provided a 4 percentage point benefit to 2004 revenue. The strong growth is indicative of customers valuing the superior analytical capabilities of our Data Warehousing solutions and the return on investment they can provide. The increase in operating income from 2003 to 2004 reflects the increases in sales and support services.

Data Warehousing revenue declined 1% in 2003 from 2002 due to the constrained capital expenditure environment....

NCR views this is as an important, growing part of their business. It's hard to tell if IBM is beating them, but if so, it doesn't seem like a rout. NCR claims to have some solid niches. I don't know. It would be good if BakBone got in with IBM. If that happens, then they win regardless. (NOTE: revenues from NCR dropped in June of 2004 in North America). There is a risk of this getting dropped.

BakBone licensing revenues grew in all three segment regions: 24% in NA (Teradata was a big part of this, but has been dropping subsequently), 38% PacRim, 70% EMEA. Service revenues are growing even faster in all three segments.

Development Software Solutions:

During fiscal 2003 and 2004, we entered into OEM arrangements, under which, we committed to provide unspecified additional software products to the OEM partners during the respective arrangement periods. As such, revenue from the arrangements is classified as “Development Software Solutions” and is recognized ratably over the applicable arrangement period. Through March 31, 2004, we had billed and collected $4.4 million under these arrangements, $589,000 of which was recognized as revenue during fiscal 2004, resulting in $3.8 million of deferred revenue as of March 31, 2004. We expect to recognize annual revenues of approximately $850,000 through fiscal 2008 from these arrangements.

2003 vs 2002:
Revenue increases were hugely affected by the new consolidation of the Japanese subsidiary (>50% acquired in Q4 2002). They still had organic growth. Expanded into China and Korea.

• 2002 revenue: $5.2 million licensing [actually $8.1 million], $1.4 million service [actually $1.8 million]
  
• 2003 revenue: $9.0 million licensing, $2.1 million service (plus Japanese subsidary contribution of $6.3 million licensing, $0.5 million service).

2003 vs 2002:
Revenue increases were hugely affected by the new consolidation of the Japanese Subsid. (>50% acquired in Q4 2002). They still had organic growth in the area. Expanded into China and Korea.

• 2003 revenue: $9.0 million licensing, $2.1 million service (plus Japanese sub contribution of $6.3 million licensing, $0.5 million service).
• 2002 revenue: $5.2 million licensing, $1.4 million service

(continued in another posting)