BakBone Slips Again

BakBone Software Inc. (Toronto: BKB) CFO John Fitzgerald says the company has nothing to hide, even though the CEO revealed today that accounting problems could drag on until June.

In an open letter to customers, shareholders, and partners, BakBone CEO Jim Johnson said the accounting problems could take another five months to clear up. The letter says the latest delay is due to a review to determine whether income should be counted as licensing revenue or maintenance revenue. What we do know at this point is that the analysis and review could take as long as five months, or until the end of June,” he writes.

Following up with Byte and Switch today, CFO Fitzgerald says five months is a "worst-case scenario." Still, he notes, a lot of people have assumed the worst, as BakBone's accounting mess has gone on since May.

"Frankly, we've had quite a bit of pressure from customers, partners, and the competition saying these guys are going out of business," he says. "People have said, 'Tell us something, what's going on with the company? Maybe you're trying to hide something.' And that's completely not the case. We have nothing to hide."

So what is going on? BakBone has not filed earnings reports for its last two quarters, and the company is in the process of restating its audited fiscal year 2004 financial statements (see BakBone Needs to Restate). Trading of BakBone’s stock has been suspended on the Toronto Stock Exchange (TSE). (See BakBone Slapped in Toronto.)BakBone's problems began with a struggle to restate earnings because of mistakes made while moving to U.S. GAAP standards from Canadian GAAP earlier this year (see BakBone Slip Called Temporary and Bakbone Reports Restated). In the fall, KPMG abruptly quit as the company’s auditor and was replaced by Deloitte & Touche LLP. Following that, Johnson replaced Keith Rickard as CEO November 1, 2004, in the middle of the accounting muddle (see BakBone Gets New Head).

Problems continued after the CEO and accounting changes. The TSE suspended trading of BakBone’s stock in December because it missed the November 15 deadline for filing results of the quarter ended in September with the U.S. Securities and Exchange Commission (SEC). Two weeks later, BakBone said it would restate earnings from fiscal year 2004 (see BakBone Needs to Restate).

There appear to be ongoing problems related to the change of accountants. KPMG and Deloitte & Touche used different methods for recognizing vendor discounts. Also, the company is reviewing whether it has to change nearly $500,000 of revenue from a deal last April to deferred revenue that would spread it over three years. Fitzgerald says another problem is "a good-faith error in calculation" discovered in mid December that involves the price of preferred stock sold to a single outside investor in July 2003.

BakBone has never publicly given a reason for the accounting change -- and Fitzgerald says that's because KPMG never gave one. He says BakBone received a one-sentence letter in October saying "the client-auditor relationship" between BakBone and KPMG had ceased. "And that's good news, that there was no reason," he says. "Because if there was a [negative] reason, they would've had to file it."

Fitzgerald says he suspects it was because KPMG, like other major accounting firms, has been dropping smaller companies due to an increased workload caused by having to deal with compliance issues. But that didn't stop Deloitte & Touche, another major accountancy firm, from picking up BakBone.Johnson tried to downplay the accounting woes during a January 6 appearance at the RBC Capital Markets investors’ conference, claiming it took up less than 10 percent of his time and BakBone’s partners weren’t overly concerned (see BakBone Boss Soldiers On). But in today’s letter, Johnson addressed the toll the problems are taking on the company’s reputation.

“Coming into an organization that had recently restated prior financial statements, changed its independent audit firm, and continues to face delays in its financial reporting has been a challenge, but not an insurmountable one,” Johnson states. “As a result of these delays, some shareholders, customers, and especially competitors have questioned the viability of our business and our growth prospects.”

Johnson writes that BakBone will apply to resume trading on the TSE after it restates earnings. The company also has a February 9 meeting set with the National Association of Securities Dealers Inc. (NASD) board of governors to determine whether its stock can still trade on the OTC bulletin board. Johnson says if BakBone’s stock is removed from the OTCBB, it will continue to trade on the pink sheets.

Johnson’s letter said BakBone has $19.2 million on its balance sheet,and there were highlights fom his three months on the job. He listed as positives nearly 1,800 new customers since June, a partnership agreement with distributor Arrow Electronics Inc. (NYSE: ARW), and an enhanced management team including marketing VP Bharat Kumar, CTO Fabrice Helliker, and R&D VP Douglas Spencer. (See BakBone Names Marketing VP, BakBone Gets CTO, R&D VP , and Arrow, BakBone Forge Agreement.)

“We continue to operate our business completely free of debt, and we are in the enviable position of having achieved positive cash flows from operations through the first nine months of the fiscal year,” says Johnson.— Dave Raffo, Senior Editor, Byte and Switch