UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q |
(Mark One)
☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
OR
☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 333-139298
Bridgeline Digital, Inc.
(Exact name of registrant as specified in its charter)
Delaware |
52-2263942 | |
State or other jurisdiction of incorporation or organization |
IRS Employer Identification No. |
80 Blanchard Road |
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Burlington, Massachusetts |
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01803 |
(Address of Principal Executive Offices) |
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(Zip Code) |
(781) 376-5555 |
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☐ |
Accelerated filer ☐ |
Non-accelerated filer ☐ |
Smaller reporting company ☒ |
Emerging growth company ☐ |
(Do not check if a smaller reporting company) |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ☒
The number of shares of Common Stock par value $0.001 per share, outstanding as of May 10, 2017 was 20,967,876..
Bridgeline Digital, Inc.
Quarterly Report on Form 10-Q
For the Quarterly Period ended March 31, 2017
Index
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Part I |
Financial Information |
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Item 1. |
Condensed Consolidated Financial Statements |
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Condensed Consolidated Balance Sheets (unaudited) as of March 31, 2017 and September 30, 2016 |
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Condensed Consolidated Statements of Operations (unaudited) for the three and six months ended March 31, 2017 and 2016 |
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Condensed Consolidated Statements of Comprehensive Loss (unaudited) for the three and six months ended March 31, 2017 and 2016 |
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Condensed Consolidated Statements of Cash Flows (unaudited) for the three and six months ended March 31, 2017 and 2016 |
7 |
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Notes to Unaudited Interim Condensed Consolidated Financial Statements |
8 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
20 |
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Item 3. |
Qualitative and Quantitative Disclosures About Market Risk |
33 |
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Item 4. |
Controls and Procedures |
33 |
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Part II |
Other Information |
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Item 1. |
Legal Proceedings |
34 |
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Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
34 |
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Item 6. |
Exhibits |
35 |
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Signatures | 36 |
Bridgeline Digital, Inc.
Quarterly Report on Form 10-Q
For the Quarterly Period ended March 31, 2017
Statements contained in this Report on Form 10-Q that are not based on historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of forward-looking terminology such as “should,” “could,” “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intends,” “continue,” or similar terms or variations of those terms or the negative of those terms. These statements appear in a number of places in this Form 10-Q and include statements regarding the intent, belief or current expectations of Bridgeline Digital, Inc. Forward-looking statements are merely our current predictions of future events. Investors are cautioned that any such forward-looking statements are inherently uncertain, are not guaranties of future performance and involve risks and uncertainties. Actual results may differ materially from our predictions. Important factors that could cause actual results to differ from our predictions include the impact of the weakness in the U.S. and international economies on our business, our inability to manage our future growth effectively or profitably, fluctuations in our revenue and quarterly results, our license renewal rate, the impact of competition and our ability to maintain margins or market share, the limited market for our common stock, the volatility of the market price of our common stock, the ability to maintain our listing on the Nasdaq Capital market, the ability to raise capital, the performance of our products, our ability to respond to rapidly evolving technology and customer requirements, our ability to protect our proprietary technology, the security of our software, our dependence on our management team and key personnel, our ability to hire and retain future key personnel, or our ability to maintain an effective system of internal controls. Although we have sought to identify the most significant risks to our business, we cannot predict whether, or to what extent, any of such risks may be realized, nor is there any assurance that we have identified all possible issues which we might face. We assume no obligation to update our forward-looking statements to reflect new information or developments. We urge readers to review carefully the risk factors described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016 as well as in the other documents that we file with the Securities and Exchange Commission. You can read these documents at www.sec.gov.
Where we say “we,” “us,” “our,” “Company” or “Bridgeline Digital” we mean Bridgeline Digital, Inc.
PART I—FINANCIAL INFORMATION
Item 1. |
Condensed Consolidated Financial Statements. |
BRIDGELINE DIGITAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
(Unaudited)
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March 31, |
September 30, |
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2017 |
2016 |
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ASSETS | ||||||||
Current assets: |
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Cash and cash equivalents |
$ | 1,331 | $ | 661 | ||||
Accounts receivable and unbilled receivables, net |
2,219 | 2,549 | ||||||
Prepaid expenses and other current assets |
389 | 381 | ||||||
Total current assets |
3,939 | 3,591 | ||||||
Equipment and improvements, net |
308 | 512 | ||||||
Intangible assets, net |
405 | 548 | ||||||
Goodwill |
12,641 | 12,641 | ||||||
Other assets |
408 | 436 | ||||||
Total assets |
$ | 17,701 | $ | 17,728 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
$ | 916 | $ | 1,285 | ||||
Accrued liabilities |
895 | 946 | ||||||
Accrued contingent consideration |
- | 75 | ||||||
Capital lease obligations |
21 | 45 | ||||||
Deferred revenue |
1,638 | 1,360 | ||||||
Total current liabilities |
3,470 | 3,711 | ||||||
Debt |
2,232 | 2,115 | ||||||
Other long term liabilities |
339 | 400 | ||||||
Total liabilities |
6,041 | 6,226 | ||||||
Commitments and contingencies |
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Stockholders’ equity: |
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Preferred stock - $0.001 par value; 1,000,000 shares authorized; 229,614 at March 31, 2017 and 221,092 at Septermber 30, 2016, issued and outstanding (liquidation preference $2,364) |
- | - | ||||||
Common stock - $0.001 par value; 50,000,000 shares authorized; 20,967,876 at March 31, 2017 and 18,627,709 at September 30, 2016, issued and outstanding |
21 | 19 | ||||||
Additional paid-in capital |
65,429 | 64,202 | ||||||
Accumulated deficit |
(53,440 | ) | (52,366 | ) | ||||
Accumulated other comprehensive loss |
(350 | ) | (353 | ) | ||||
Total stockholders’ equity |
11,660 | 11,502 | ||||||
Total liabilities and stockholders’ equity |
$ | 17,701 | $ | 17,728 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
BRIDGELINE DIGITAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share data)
(Unaudited)
Three Months Ended |
Six Months Ended |
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March 31, |
March 31, |
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2017 |
2016 |
2017 |
2016 |
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Net revenue: |
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Digital engagement services |
$ | 2,151 | $ | 2,389 | $ | 4,177 | $ | 4,762 | ||||||||
Subscription and perpetual licenses |
1,582 | 1,522 | 3,307 | 3,045 | ||||||||||||
Managed service hosting |
261 | 320 | 501 | 667 | ||||||||||||
Total net revenue |
3,994 | 4,231 | 7,985 | 8,474 | ||||||||||||
Cost of revenue: |
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Digital engagement services |
1,144 | 1,435 | 2,272 | 2,889 | ||||||||||||
Subscription and perpetual licenses |
499 | 474 | 995 | 1,032 | ||||||||||||
Managed service hosting |
73 | 79 | 144 | 156 | ||||||||||||
Total cost of revenue |
1,716 | 1,988 | 3,411 | 4,077 | ||||||||||||
Gross profit |
2,278 | 2,243 | 4,574 | 4,397 | ||||||||||||
Operating expenses: |
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Sales and marketing |
1,174 | 1,247 | 2,468 | 2,315 | ||||||||||||
General and administrative |
803 | 764 | 1,594 | 1,626 | ||||||||||||
Research and development |
422 | 377 | 782 | 718 | ||||||||||||
Depreciation and amortization |
157 | 338 | 342 | 694 | ||||||||||||
Restructuring charges |
169 | 194 | 200 | 780 | ||||||||||||
Total operating expenses |
2,725 | 2,920 | 5,386 | 6,133 | ||||||||||||
Loss from operations |
(447 | ) | (677 | ) | (812 | ) | (1,736 | ) | ||||||||
Interest and other expense, net |
(82 | ) | (296 | ) | (113 | ) | (579 | ) | ||||||||
Loss before income taxes |
(529 | ) | (973 | ) | (925 | ) | (2,315 | ) | ||||||||
Provision for income taxes |
1 | 32 | 13 | 38 | ||||||||||||
Net loss |
(530 | ) | (1,005 | ) | (938 | ) | (2,353 | ) | ||||||||
Dividends on convertible preferred stock |
(68 | ) | (32 | ) | (136 | ) | (64 | ) | ||||||||
Net loss applicable to common shareholders |
$ | (598 | ) | $ | (1,037 | ) | $ | (1,074 | ) | $ | (2,417 | ) | ||||
Net loss per share attributable to common shareholders: |
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Basic and diluted |
$ | (0.03 | ) | $ | (0.20 | ) | $ | (0.05 | ) | $ | (0.46 | ) | ||||
Number of weighted average shares outstanding: |
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Basic and diluted |
20,449,651 | 5,267,584 | 20,254,135 | 5,216,197 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
BRIDGELINE DIGITAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Dollars in thousands)
(Unaudited)
Three Months Ended |
Six Months Ended |
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March 31, |
March 31, |
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2017 |
2016 |
2017 |
2016 |
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Net Loss |
$ | (530 | ) | $ | (1,005 | ) | $ | (938 | ) | $ | (2,353 | ) | ||||
Net change in foreign currency translation adjustment |
1 | 2 | 3 | 3 | ||||||||||||
Comprehensive loss |
$ | (529 | ) | $ | (1,003 | ) | $ | (935 | ) | $ | (2,350 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
BRIDGELINE DIGITAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended |
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March 31, |
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2017 |
2016 |
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Cash flows from operating activities: |
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Net loss |
$ | (938 | ) | $ | (2,353 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
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Provision for deferred taxes |
- | 31 | ||||||
Loss on disposal of fixed assets |
48 | 31 | ||||||
Amortization of intangible assets |
143 | 215 | ||||||
Depreciation |
163 | 439 | ||||||
Other amortization |
66 | 349 | ||||||
Stock-based compensation |
272 | 132 | ||||||
Changes in operating assets and liabilities |
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Accounts receivable and unbilled receivables |
331 | 224 | ||||||
Prepaid expenses and other assets |
(5 | ) | 173 | |||||
Accounts payable and accrued liabilities |
(466 | ) | 21 | |||||
Deferred revenue |
279 | 68 | ||||||
Other liabilities |
(48 | ) | (59 | ) | ||||
Total adjustments |
783 | 1,624 | ||||||
Net cash used in operating activities |
(155 | ) | (729 | ) | ||||
Cash flows used in investing activities: |
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Purchase of equipment and improvements |
(8 | ) | - | |||||
Software development capitalization costs |
(41 | ) | (50 | ) | ||||
Net cash used in investing activities |
(49 | ) | (50 | ) | ||||
Cash flows provided by financing activities: |
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Proceeds from issuance of 680,000 shares of common stock, net of issuance costs |
853 | 669 | ||||||
Proceeeds from bank term loan |
- | 500 | ||||||
Proceeds from term notes from stockholders |
- | 1,000 | ||||||
Borrowing on bank line of credit |
1,097 | 108 | ||||||
Payments on bank term loan |
- | (750 | ) | |||||
Payments on bank line of credit |
(980 | ) | (488 | ) | ||||
Contingent acquisition payments |
(75 | ) | (242 | ) | ||||
Principal payments on capital leases |
(24 | ) | (204 | ) | ||||
Net cash provided by financing activities |
871 | 593 | ||||||
Effect of exchange rate changes on cash and cash equivalents |
3 | 3 | ||||||
Net increase/(decrease) in cash and cash equivalents |
670 | (183 | ) | |||||
Cash and cash equivalents at beginning of period |
661 | 337 | ||||||
Cash and cash equivalents at end of period |
$ | 1,331 | $ | 154 | ||||
Supplemental disclosures of cash flow information: |
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Cash paid for: |
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Interest |
$ | 65 | $ | 198 | ||||
Income taxes |
$ | - | $ | 3 | ||||
Non cash investing and financing activities: |
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Accrued dividends on convertible preferred stock |
$ | 136 | $ | 64 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
BRIDGELINE DIGITAL, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
1. Description of Business
Overview
Bridgeline Digital, The Digital Engagement Company™, helps customers maximize the performance of their full digital experience from websites and intranets to online stores. Bridgeline’s iAPPS® platform deeply integrates Web Content Management, eCommerce, eMarketing, Social Media management, and Web Analytics to help marketers deliver digital experiences that attract, engage and convert their customers across all channels. Bridgeline’s iAPPS platform combined with its digital services assists customers in maximizing on-line revenue, improving customer service and loyalty, enhancing employee knowledge, and reducing operational costs. Our iAPPSds (“distributed subscription”), is a platform that empowers large franchise and multi-unit organizations with state-of-the-art web engagement management while providing superior oversight of corporate branding. iAPPSds deeply integrates content management, eCommerce, eMarketing and web analytics and is a self-service web platform that is offered to each authorized franchise or dealer for a monthly subscription fee.
The iAPPS platform is delivered through a cloud-based SaaS (“Software as a Service”) multi-tenant business model, whose flexible architecture provides customers with state of the art deployment providing maintenance, daily technical operation and support; or via a traditional perpetual licensing business model, in which the iAPPS software resides on a dedicated server in either the customer’s facility or hosted by Bridgeline via a cloud-based hosted services model or a Tier 1 facility.
The iAPPS Platform is an award-winning application recognized around the globe. Our teams of Microsoft Gold© certified developers have won over 100 industry related awards. In 2016, CIO Review selected iAPPS as one of the 20 Most Promising Digital Marketing Solution Providers. This followed accolades from the SIIA (Software and Information Industry Association), which recognized iAPPS Content Manager with the 2015 SIIA CODiE Award for Best Web Content Management Platform. Also in 2015, EContent magazine named iAPPS Digital Engagement Platform to its Trendsetting Products list. The list of 75 products and platforms was compiled by EContent’s editorial staff, and selections were based on each offering’s uniqueness and importance to digital publishing, media, and marketing. We were also recognized in 2015 as a strong performer by Forrester Research, Inc in its independence report, “The Forrester Wave ™: Through-Channel Marketing Automation Platforms, Q3 2015.” In recent years, our iAPPS Content Manager and iAPPS Commerce products were selected as finalists for the 2014, 2013, and 2012 CODiE Awards for Best Content Management Solution and Best Electronic Commerce Solution, globally. In 2014 and 2013, Bridgeline Digital won twenty-five Horizon Interactive Awards for outstanding development of web applications and websites. Also in 2013, the Web Marketing Association sponsored Internet Advertising Competition honored Bridgeline Digital with three awards for iAPPS customer websites and B2B Magazine selected Bridgeline Digital as one of the Top Interactive Technology companies in the United States. KMWorld Magazine Editors selected Bridgeline Digital as one of the 100 Companies That Matter in Knowledge Management and also selected iAPPS as a Trend Setting Product in 2013.
Bridgeline Digital was incorporated under the laws of the State of Delaware on August 28, 2000.
Locations
The Company’s corporate office is located north of Boston, Massachusetts. The Company maintains regional field offices serving the following geographical locations: Boston, MA; Chicago, IL; Denver, CO; San Luis Obispo, CA; and Tampa, FL. The Company has one wholly-owned subsidiary, Bridgeline Digital Pvt. Ltd. located in Bangalore, India.
Liquidity
The Company has incurred operating losses and used cash in its operating activities for the past several years. Cash was used to fund acquisitions to broaden our geographic footprint, develop new products, and build infrastructure. During the past two fiscal years and continuing into the first half of the current fiscal year, the Company has executed on a restructuring plan that included a reduction of workforce and office space, which significantly reduced operating expenses. The Company’s management believes it will have an appropriate cost structure for its anticipated sales in fiscal 2017 and will have made the anticipated reductions to positive Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, stock-based compensation charges and other one-time charges). As such, management believes that the Company will provide sufficient cash flows to fund its operations in the ordinary course of business through at least the next twelve months. However, there can be no assurance that the anticipated sales level will be achieved.
BRIDGELINE DIGITAL, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
The Company also has a Loan and Security Agreement with Heritage Bank of Commerce (“Heritage Bank”). The Heritage Bank Agreement (“Heritage Agreement”) has a term of 24 months and will expire on June 9, 2018. The Heritage Agreement currently provides for $2.5 million of revolving credit advances and may be used for acquisitions and working capital purposes. The credit advances may not exceed the monthly borrowing base capacity, which will fluctuate based on monthly accounts receivable balances. The Company may request credit advances if the borrowing capacity is more than the current outstanding loan advance, and must pay down the outstanding loan advance if it exceeds the borrowing capacity. As of March 31, 2017, the Company had an outstanding balance under the Heritage Agreement of $2.2 million.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.
Unaudited Interim Financial Information
The accompanying interim Condensed Consolidated Balance Sheets as of March 31, 2017 and September 30, 2016, and the interim Condensed Consolidated Statements of Operations, Comprehensive Loss, and Cash Flows for the three and six months ended March 31, 2017 and 2016 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), and with the same instructions to Form 10-Q and Regulation S-X, and in the opinion of the Company’s management have been prepared on the same basis as the audited consolidated financial statements as of and for the year ended September 30, 2016. These interim condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments and accruals, necessary for the fair presentation of the Company’s financial position at March 31, 2017 and September 30, 2016 and its results of operations and cash flows for the three and six months ended March 31, 2017 and 2016. The results for the three and six months ended March 31, 2017 are not necessarily indicative of the results to be expected for the year ending September 30, 2017. The accompanying September 30, 2016 Condensed Consolidated Balance Sheet has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by US GAAP for complete financial statements.
Subsequent Events
The Company evaluated subsequent events through the date of this filing and concluded there were no material subsequent events requiring adjustment to or disclosure in these interim condensed consolidated financial statements, except as already disclosed in these financial statements.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In July 2015, the FASB approved a one-year delay in the effective date. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Management is currently evaluating the impact of the adoption of ASU 2014-09 on its consolidated financial statements.
BRIDGELINE DIGITAL, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, (the “Update”), which eliminates the current requirement to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, entities will be required to classify all deferred tax assets and liabilities as noncurrent. The Update is effective for financial statements issued for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Management does not expect the adoption of this Update to have a material impact on its consolidated financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU No. 2016-02, which is guidance on accounting for leases. ASU No, 2016-02 requires lessees to recognize most leases on their balance sheets for the rights and obligations created by those leases. The guidance requires enhanced disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases and will be effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The guidance requires the use of a modified retrospective approach. The Company is evaluating the impact of the guidance on its consolidated financial position, results of operations and related disclosures.
In March 2016, the FASB issued ASU No. 2016-09, which amended guidance related to employee share-based payment accounting. The new guidance simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public companies, the amendments in this standard are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. Management does not expect the adoption of this Standard to have a material impact on our consolidated financial position, results of operations or cash flows.
In August 2016, the FASB issued ASU 2016-15, which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows, specifically certain cash receipts and cash payments. The standard is effective for public business entities financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective method. Management does not expect the adoption of this Standard to have a material impact on our consolidated cash flows.
In November 2016, the FASB issued ASU No. 2016-18 which requires entities to include in their cash and cash-equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents. As a result, companies will no longer present transfers between cash and cash equivalents, and restricted cash and restricted cash equivalents in the statement of cash flows. The guidance is effective for annual and interim periods beginning after December 15, 2017. Early adoption of ASU 2016-18 is permitted, including adoption in an interim period. Management is currently evaluating the adoption of ASU 2016-18 on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04 to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance will be applied prospectively and is effective for annual reporting periods ending December 31, 2020 and thereafter with early adoption permitted. Management is currently evaluating the impact of the new guidance its consolidated financial statements.
All other Accounting Standards Updates issued but not yet effective are not expected to have a material effect on the Company’s future financial statements.
BRIDGELINE DIGITAL, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
3. Accounts Receivable and Unbilled Receivables
Accounts receivable and unbilled receivables consists of the following:
As of |
As of |
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March 31, 2017 |
September 30, 2016 |
|||||||
Accounts receivable |
$ | 2,051 | $ | 2,627 | ||||
Unbilled receivables |
301 | 60 | ||||||
Subtotal |
2,352 | 2,687 | ||||||
Allowance for doubtful accounts |
(133 | ) | (138 | ) | ||||
Accounts receivable and unbilled receivables, net |
$ | 2,219 | $ | 2,549 |
4. Fair Value Measurement and Fair Value of Financial Instruments
The Company’s other financial instruments consist principally of accounts receivable, accounts payable, and debt. The Company believes the recorded values for accounts receivable and accounts payable approximate current fair values as of March 31, 2017 and September 30, 2016 because of their nature and durations. The carrying value of debt instruments also approximates fair value as of March 31, 2017 and September 30, 2016 based on acceptable valuation methodologies which use market data of similar size and situated debt issues. The Company no longer has any other assets or liabilities to be measured at fair value on a recurring basis as of March 31, 2017.
Assets and liabilities to be measured at fair value on a recurring basis as of September 30, 2016 consisted only of contingent acquisition consideration, as follows:
September 30, 2016 | ||||||||||||||||
Level 1 |
Level 2 |
Level 3 |
Total |
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Liabilities: |
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Contingent acquisition consideration |
- | - | $ | 75 | $ | 75 | ||||||||||
Total Liabilities |
- | - | $ | 75 | $ | 75 |
The Company determines the fair value of acquisition-related contingent consideration based on assessment of the probability that the Company would be required to make such future payments. Changes to the fair value of contingent consideration are recorded in general and administrative expenses.
BRIDGELINE DIGITAL, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
The following table provides a roll forward of the fair value, as determined by Level 3 inputs, of the contingent consideration.
Changes in the fair value of the contingent consideration liability were as follows:
Contingent Consideration |
||||
Balance, October 1, 2016 |
$ | 75 | ||
Payment of contingent consideration |
(75 | ) | ||
Balance, March 31, 2017 |
$ | - |
5. Intangible Assets
The components of intangible assets are as follows:
As of |
As of |
|||||||
March 31, 2017 |
September 30, 2016 | |||||||
Domain and trade names |
$ | 10 | $ | 10 | ||||
Customer related |
285 | 392 | ||||||
Non-compete agreements |
110 | 146 | ||||||
Balance at end of period |
$ | 405 | $ | 548 |
Total amortization expense related to intangible assets for the three months ended March 31, 2017 and 2016 was $72 and $108, respectively, and $143 and $215 for the six months ended March 31, 2017, respectively. Amortization expense related to intangible assets is reflected in operating expenses on the Condensed Consolidated Statements of Operations. The estimated amortization expense for fiscal years 2017 (remaining), 2018, and 2019 is $142, $242, and $21, respectively.
6. Goodwill
For fiscal 2016, the Company performed the annual assessment of goodwill during the fourth quarter of 2016 and concluded that goodwill was not impaired. In estimating fair value, the Company performed a discounted cash flow analysis on the reporting unit to determine fair value. The inputs to the discounted cash flow model are considered level 3 in the fair value hierarchy. The impairment test performed by the Company indicated that the estimated fair value of the reporting unit was more than its corresponding carrying amount. As a result of the analyses performed, the Company assessed that goodwill was not impaired. The Company did not have an impairment charge in the six months ended March 31, 2017.
7. Restructuring
During the fiscal 2015 and 2016 and through the first half of the current fiscal year, the Company’s management approved, committed to and initiated plans to restructure and further improve efficiencies by implementing cost reductions in line with expected decreases in revenue. The Company renegotiated several office leases and relocated to smaller space, while also negotiating sub-leases for the original space. In addition, the Company executed a general work-force reduction and recognized costs for severance and termination benefits. These restructuring charges and accruals require estimates and assumptions, including contractual rental commitments or lease buy-outs for vacated office space and related costs, and estimated sub-lease income. The Company’s sub-lease assumptions include the rates to be charged to a sub-tenant and the timing of the sub-lease arrangement. All of the vacated lease space is currently contractually occupied by a new sub-tenant for the remaining life of the lease. In the second quarter of fiscal 2017, the Company initiated a plan to shut down its operations in India. All of these estimates and assumptions will be monitored on a quarterly basis for changes in circumstances with the corresponding adjustments reflected in the consolidated statement of operations.
BRIDGELINE DIGITAL, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
As part of these restructuring initiatives, the Company recorded restructuring expenses of $169 thousand and $194 thousand in the three months ended March 31, 2017 and 2016, respectively, and $200 thousand and $780 thousand in the six months ended March 31, 2017 and 2016, respectively.
The following table summarizes the restructuring activity for the six months ended March 31, 2017:
Employee Severence and Benefits |
Facility Related and Other Costs |
Total |
||||||||||
Balance at beginning of period, October 1, 2016 |
$ | 193 | $ | 247 | $ | 440 | ||||||
Charges to operations |
- | 31 | $ | 31 | ||||||||
Cash disbursements |
(99 | ) | (71 | ) | $ | (170 | ) | |||||
Changes in estimates |
- | - | $ | - | ||||||||
Balance at end of period, December 31, 2016 |
$ | 94 | $ | 207 | $ | 301 | ||||||
Charges to operations |
- | 169 | 169 | |||||||||
Cash disbursements |
(104 | ) | (124 | ) | (228 | ) | ||||||
Changes in estimates |
- | - | - | |||||||||
Accretion expense |
10 | - | 10 | |||||||||
Balance at end of period, March 31, 2017 |
$ | - | $ | 252 | $ | 252 |
The components of the accrued restructuring liabilities is as follows:
As of |
As of |
|||||||
March 31, 2017 |
September 30, 2016 | |||||||
Facilities and related |
$ | 192 | $ | 195 | ||||
Employee related |
- | 193 | ||||||
Other |
60 | 52 | ||||||
Total |
$ | 252 | $ | 440 |
As of March 31, 2017, $155 was reflected in Accrued Liabilities and $97 in Other Long Term Liabilities in the Condensed Consolidated Balance Sheet. As of September 30, 2016, $331 was reflected in Accrued Liabilities and $109 in Other Long Term Liabilities in the Condensed Consolidated Balance Sheet.
8. Debt
Debt at March 31, 2017 and September 30, 2016 consists of the borrowings on the bank line of credit.
Line of Credit
In June 2016, the Company replaced its Loan and Security Agreement with BridgeBank (the “Bridgebank Agreement”) with a new Loan and Security Agreement with Heritage Bank of Commerce. The Heritage Agreement has a term of 24 months and will expire on June 9, 2018. The Company will pay an annual commitment fee of 0.4% of the commitment amount in the first year and 0.2% in the second year. Borrowings are secured by all of the Company’s assets and all of the Company’s intellectual property. The Company will be required to comply with certain financial and reporting covenants including an Asset Coverage Ratio and an Adjusted EBITDA metric. The Heritage Agreement currently provides for up to $2.5 million of revolving credit advances which may be used for acquisitions and working capital purposes. Borrowings are limited to the lesser of (i) $2.5 million and (ii) 75% of eligible receivables as defined. The Company can borrow up to $1.0 million in out of formula borrowings for specified periods of time. The borrowings or credit advances may not exceed the monthly borrowing base capacity, which will fluctuate based on monthly accounts receivable balances. The Company may request credit advances if the borrowing capacity is more than the current outstanding loan advance, and must pay down the outstanding loan advance if it exceeds the borrowing capacity. Borrowings accrue interest at Wall Street Journal Prime Rate plus 1.75%, (currently 5.50%).
BRIDGELINE DIGITAL, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
An amendment to the Heritage Agreement (“First Amendment”) was executed on August 15, 2016 and included a waiver for the Adjusted EBITDA metric for the quarter ended June 30, 2016. The First Amendment also included a decrease in the revolving line of credit from $3.0 million to $2.5 million and the Adjusted EBITDA metric for the quarter ended September 30, 2016. The First Amendment also included a minimum cash requirement of $500 in the Company’s accounts at Heritage, which was waived for the period ended September 30, 2016. On December 14, 2016, a second amendment to the Heritage Agreement (“Second Amendment”) was executed. The Second Amendment included a minimum cash requirement of $250 in the Company’s accounts at Heritage and the Adjusted EBITDA metrics for fiscal 2017. As of March 31, 2017, the Company had an outstanding balance under the Heritage Agreement of $2.2 million. All financial covenants were met for the quarter ended March 31, 2017.
Similar to the Bridgebank Agreement, a Director and Shareholder of the Company, Michael Taglich, signed an unconditional guaranty (the “Guaranty”) and promise to pay Heritage Bank all indebtedness in an amount not to exceed $2 million in connection with the out of formula borrowings. Under the terms of the Guaranty, the Guarantor authorizes Lender, without notice or demand and without affecting its liability hereunder, from time to time to: (a) renew, compromise, extend, accelerate, or otherwise change the time for payment, or otherwise change the terms, of the Indebtedness or any part thereof, including increase or decrease of the rate of interest thereon, or otherwise change the terms of the Indebtedness; (b) receive and hold security for the payment of this Guaranty or any Indebtedness and exchange, enforce, waive, release, fail to perfect, sell, or otherwise dispose of any such security; (c) apply such security and direct the order or manner of sale thereof as Lender in its discretion may determine; and (d) release or substitute any Guarantor or any one or more of any endorsers or other guarantors of any of the Indebtedness.
To secure all of Guarantor's obligations hereunder, Guarantor assigns and grants to Lender a security interest in all moneys, securities, and other property of Guarantor now or hereafter in the possession of Lender, all deposit accounts of Guarantor maintained with Lender, and all proceeds thereof. Upon default or breach of any of Guarantor's obligations to Lender, Lender may apply any deposit account to reduce the Indebtedness, and may foreclose any collateral as provided in the Uniform Commercial Code and in any security agreements between Lender and Guarantor.
9. Other Long Term Liabilities
Deferred Rent
In connection with the lease in Massachusetts, the Company made an investment in leasehold improvements at this location of approximately $1.4 million, of which approximately $657 was funded by the landlord. The capitalized leasehold improvements are being amortized over the initial life of the lease. The improvements funded by the landlord are treated as lease incentives. Accordingly, the funding received from the landlord was recorded as a fixed asset addition and a deferred rent liability on the Condensed Consolidated Balance Sheets. As of March 31, 2017, $147 was reflected in Accrued Liabilities and $123 is reflected in Other Long Term Liabilities on the Consolidated Balance Sheet. As of September 30, 2016, $141 was reflected in Accrued Liabilities and $197 is reflected in Other Long Term Liabilities on the Consolidated Balance Sheet. The deferred rent liability is being amortized as a reduction of rent expense over the life of the lease.
10. Shareholders’ Equity
Preferred Stock
On October 27, 2014, the Company sold 200,000 shares of Series A convertible preferred stock (the “Preferred Stock”) at a purchase price of $10.00 per share for gross proceeds of $2.0 million in a private placement. Net proceeds to the Company after offering expenses were approximately $1.8 million. The shares of Preferred Stock may be converted, at the option of the holder at any time, into such number of shares of common stock (“Conversion Shares”) equal (i) to the number of shares of Preferred Stock to be converted, multiplied by the stated value of $10.00 (the “Stated Value”) and (ii) divided by the conversion price in effect at the time of conversion. The initial conversion price is $0.65, and is subject to adjustment in the event of stock splits or stock dividends. Any accrued but unpaid dividends on the shares of Preferred Stock to be converted shall also be converted in common stock at the conversion price. A mandatory provision also may provide that the Company will have the right to require the holders to convert shares of Preferred Stock into Conversion Shares if (i) the Company’s common stock has closed at or above $1.30 per share for ten consecutive trading days and (ii) the Conversion Shares are (A) registered for resale on an effective registration statement or (B) may be resold pursuant to Rule 144. As of March 31, 2017, a total of 1,636 shares have been converted to 5,034 shares of common stock.
BRIDGELINE DIGITAL, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
In the event of any liquidation, dissolution, or winding up of the Company, the holders of shares of Preferred Stock will be entitled to receive in preference to the holders of common stock, the amount equal to the stated value per share of Series A Preferred Stock plus declared and unpaid dividends, if any. After such payment has been made, the remaining assets of the Company will be distributed ratably to the holders of common stock.
The Company may pay dividends in cash or Preferred Stock. Effective January 1, 2017, cumulative dividends are payable at a rate of 12% per year, as after two years, any Preferred Stock dividends increase from 6% to 12.0% per year. If the Company does not pay the dividends in cash, then the Company may pay dividends in any quarter by delivery of additional shares of Preferred Stock (“PIK Election”). If the Company shall make the PIK Election with respect to the dividend payable, it shall deliver a number of shares of Preferred Stock equal to (A) the aggregate dividend payable to such holder as of the end of the quarter divided by (B) the lesser of (x) the then effective Conversion Price or (y) the average VWAP for the five (5) consecutive Trading Days prior to such dividend payment date. The Company shall have the right to force conversion of the Preferred Stock into shares of Common Stock at any time after the Common Stock trades in excess of $1.30 per share. The Preferred Shares shall vote with the Common on an as converted basis.
As of March 2017, the Company has issued 31,250 preferred convertible shares (PIK shares) to the preferred shareholders of which 6,792 shares were issued in January 2017 and 3,366 were issued in October 2016. The Company elected to declare a PIK dividend for the next quarterly payment due April 1, 2017. The total PIK dividend declared for April 1, 2017 is 6,824 preferred stock shares at a dividend rate of 12%.
Common Stock
On November 3, 2016, the Company entered into Securities Purchase Agreements (“November 2016 Private Placement”) with certain institutional and accredited investors (the “Purchasers”) to sell an aggregate total of 2,135,362 shares of common stock for $0.48 per share (the “Purchaser Shares”) for gross proceeds of $1.0 million. The Company’s President and CEO (Roger Kahn) and two of the Company’s directors (Michael Taglich and Robert Taglich) purchased shares of common stock in this private offering. Roger Kahn purchased 86,000 common shares and Michael and Robert Taglich each purchased 153,846 common shares. Also, as additional consideration, the Company issued to the Purchasers, warrants to purchase an aggregate total of 1,067,681 shares common stock (the “Purchaser Warrant Shares”).
Registration Rights and Piggyback Registration
The Company and the Purchasers also entered into a Registration Rights Agreement, wherein the Company agreed to file a registration statement (“Registration” or “Form S-3”) to register the Purchaser Shares and Purchaser Warrant Shares under the Securities Act of 1933, as amended. The Registration was filed with the Securities and Exchange Commission on November 14, 2016 and further amended on December 23, 2016. A total of 1,741,670 Purchaser Shares and 870,835 Purchaser Warrant Shares were registered with the Form S-3 filing. Roger Kahn, Michael Taglich, and Robert Taglich did not participate in the Registration.
Also included in the Registration were other securities that had been purchased prior to the November 2016 Private Placement, namely private placements of our common stock and warrants to purchase common stock. As a part of these private placement transactions, the Company had offered certain investors piggyback registration rights such that, in the event the Company filed a registration statement to register its securities under the Securities Act, the shares of common stock issued or issuable to those investors would be eligible to also be included in the registration statement to be registered under the Securities Act. Accordingly, in addition to the Purchaser Shares and Purchaser Warrants from the November 2016 Private Placement, 3,082,661 common shares and warrants were included in the registration statement pursuant to these previously granted piggyback registration rights. In total, the Registration included 5,695,165 shares of common stock and warrants to purchase common stock. Net proceeds to the Company after the completion of the November 2016 Private Placement and the Form S-3 was $853.
BRIDGELINE DIGITAL, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Contingent Consideration
In connection with the acquisition of ElementsLocal on August 1, 2013, the Company issued 105,288 common shares to the sellers of ElementsLocal. In addition, contingent consideration not to exceed 67,693 shares of Bridgeline Digital common stock was contingently issuable to the sellers of ElementsLocal. The contingent consideration was payable quarterly over the 12 consecutive calendar quarters following the acquisition, contingent upon the acquired business achieving certain revenue targets. As of March 31, 2017, the stockholders of ElementsLocal earned the full earnout of 67,693 shares of common stock, of which the final earnout shares totaling 5,642 were issued in November 2016.
Stock Incentive Plans
The Company has granted common stock, common stock warrants, and common stock option awards (the “Equity Awards”) to employees, consultants, advisors and debt holders of the Company and to former owners and employees of acquired companies that have become employees of the Company. On April 29, 2016, the stockholders approved a new stock incentive plan, The 2016 Stock Incentive Plan (the “2016 Plan”). The 2016 Plan replaced an older plan that had expired in August 2016. The 2016 Plan authorizes the award of incentive stock options, non-statutory stock options, restricted stock, unrestricted stock, performance shares, stock appreciation rights and any combination thereof to employees, officers, directors, consultants, independent contractors and advisors of the Company. Initially, a total of 2,500,000 shares of the Company’s Common Stock will be reserved for issuance under this new plan. As of March 31, 2017, there are 1,454,170 shares available for future issuance.
Common Stock Warrants
The Company typically issues warrants to individual investors and placement agents to purchase shares of the Company’s common stock in connection with private placement fund raising activities. Warrants may also be issued to individuals or companies in exchange for services provided for the company. The warrants are typically exercisable six months after the issue date, expire in five years, and contain a cashless exercise provision and piggyback registration rights.
In connection with the November 2016 Private Placement, the Company issued to the Purchasers warrants to purchase an aggregate total of 1,067,681 shares common stock. Each Purchaser Warrant Share expires five and one-half years from the date of issuance and is exercisable for $0.70 per share beginning six-months from the date of issuance, or May 9, 2017. The warrants expire May 9, 2022. Purchaser Warrant Shares were also issued to Roger Kahn (43,000 shares) and Michael and Robert Taglich (76,923 shares each).
On January 7, 2015, Bridgeline also entered into a side letter with Michael Taglich pursuant to which Bridgeline agreed in the event the Bank Guaranty remains outstanding for a period of more than 12 months, on each anniversary of the date of issuance of the Guaranty while the Guaranty remains outstanding Bridgeline will issue Michael Taglich a warrant to purchase 30,000 shares of common stock, which warrant shall contain the same terms as the warrant issued to Michael Taglich on January 7, 2015. Since the Guaranty was still outstanding at December 31, 2016, a warrant to purchase 30,000 shares of common stock was issued to Michael Taglich in January 2017 at a price of $4.00.
As of March 31, 2017, the total warrants outstanding were issued as follows: 1,181,724 warrants were issued to the placement agents in connection with private placements and 1,159,681 warrants were issued to individual investors in connection with private placements, and 400,000 warrants were issued to a Director/Shareholder for debt issuances and bank guarantees. Warrants have been issued to certain directors and officers for their participation in some private placements, debt issuances and bank guarantees. Included in the total warrants outstanding are warrants to purchase 43,000 shares of common stock issued to the Company’s President and CEO, Roger Kahn, in connection with the November 2016 Private Placement, in which he purchased shares of common stock. Also included in the total warrants outstanding are warrants to purchase 764,056 shares of common stock issued to Michael Taglich. Michael Taglich is a member of the Board of Directors and a shareholder. Michael Taglich has been issued warrants in connection with his participation as an investor in private offerings and issuance of loans to the Company. He has also guaranteed $2.0 million in connection with the Company’s out of formula borrowings on its credit facility. Also included in the total warrants outstanding are warrants to purchase 320,274 shares of common stock issued to Robert Taglich. Robert Taglich is a member of the Board of Directors and a shareholder. Robert Taglich has been issued warrants in connection with his participation as an investor in private offerings of the Company. Michael Taglich and Robert Taglich are also the principals of Taglich Brothers, Inc who have been the placement agents for many of the Company’s private placements.
BRIDGELINE DIGITAL, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Total warrants outstanding as of March 31, 2017 were as follows:
Issue |
|||||||||||
Description |
Date |
Shares |
Price |
Expiration | |||||||
Placement Agent |
5/31/2012 |
43,479 | $ | 7.00 |
5/31/2017 | ||||||
Investors |
6/19/2013 |
92,000 | $ | 6.25 |
6/19/2018 | ||||||
Placement Agent |
6/19/2013 |
46,000 | $ | 6.25 |
6/19/2018 | ||||||
Placement Agent |
9/30/2013 |
30,770 | $ | 6.50 |
9/30/2018 | ||||||
Placement Agent |
11/6/2013 |
15,385 | $ | 6.50 |
11/6/2018 | ||||||
Placement Agent |
3/28/2014 |
64,000 | $ | 5.25 |
3/28/2019 | ||||||
Placement Agent |
10/28/2014 |
61,539 | $ | 3.25 |
10/28/2019 | ||||||
Director/Shareholder |
12/31/2014 |
60,000 | $ | 4.00 |
12/31/2019 | ||||||
Director/Shareholder |
2/12/2015 |
60,000 | $ | 4.00 |
2/12/2020 | ||||||
Director/Shareholder |
5/12/2015 |
60,000 | $ | 4.00 |
5/12/2020 | ||||||
Director/Shareholder |
7/21/2015 |
160,000 | $ | 1.75 |
7/21/2018 | ||||||
Director/Shareholder |
12/31/2015 |
30,000 | $ | 4.00 |
12/31/2020 | ||||||
Placement Agent |
5/17/2016 |
433,883 | $ | 0.73 |
5/17/2021 | ||||||
Placement Agent |
5/11/2016 |
266,668 | $ | 0.75 |
5/11/2021 | ||||||
Placement Agent |
7/15/2016 |
220,000 | $ | 0.92 |
7/15/2021 | ||||||
Investors |
11/9/2016 |
1,067,681 | $ | 0.70 |
5/9/2022 | ||||||
Director/Shareholder |
12/31/2016 |
30,000 | $ | 4.00 |
12/31/2021 | ||||||
Total | 2,741,405 |
BRIDGELINE DIGITAL, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Summary of Option and Warrant Activity and Outstanding Shares
Stock Options |
Stock Warrants |
|||||||||||||||
Weighted |
Weighted |
|||||||||||||||
Average |
Average |
|||||||||||||||
Exercise |
Exercise |
|||||||||||||||
Options |
Price |
Warrants |
Price |
|||||||||||||
Outstanding, September 30, 2016 |
2,242,919 | $ | 1.51 | 1,643,724 | $ | 2.34 | ||||||||||
Granted |
51,000 | $ | 0.61 | 1,097,681 | $ | 0.79 | ||||||||||
Exercised |
- | $ | - | - | - | |||||||||||
Forfeited or expired |
(61,500 | ) | $ | 3.47 | - | - | ||||||||||
Outstanding, March 31, 2017 |
2,232,419 | $ | 1.43 | 2,741,405 | $ | 1.72 |
11. Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss were as follows:
Accumulated Other |
||||
Comprehensive Loss |
||||
Balance, October 1, 2016 |
$ | (353 | ) | |
Foreign currency translation adjustment |
2 | |||
Balance, December 31, 2016 |
$ | (351 | ) | |
Foreign currency translation adjustment |
1 | |||
Balance, March 31, 2017 |
$ | (350 | ) |
12. Net Loss Per Share
Basic and diluted net loss per share is computed as follows:
Three Months Ended |
Six Months Ended |
|||||||||||||||
(in thousands, except per share data) |
March 31, |
March 31, |
||||||||||||||
2017 |
2016 |
2017 |
2016 |
|||||||||||||
Net loss |
$ | (530 | ) | $ | (1,005 | ) | $ | (938 | ) | $ | (2,353 | ) | ||||
Accrued dividends on convertible preferred stock |
(68 | ) | (32 | ) | (136 | ) | (64 | ) | ||||||||
Net loss applicable to common shareholders |
$ | (598 | ) | $ | (1,037 | ) | $ | (1,074 | ) | $ | (2,417 | ) | ||||
Weighted average common shares outstanding - basic |
20,450 | 5,268 | 20,254 | 5,216 | ||||||||||||
Effect of dilutive securities |
- | - | - | - | ||||||||||||
Weighted average common shares outstanding - diluted |
20,450 | 5,268 | 20,254 | 5,216 | ||||||||||||
Net loss per share attributable to common shareholders: |
||||||||||||||||
Basic and diluted |
$ | (0.03 | ) | $ | (0.20 | ) | $ | (0.05 | ) | $ | (0.46 | ) |
BRIDGELINE DIGITAL, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Basic net loss per share is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding. Diluted net income per share is computed using the weighted average number of common shares outstanding during the period plus the dilutive effect of outstanding stock options and warrants and preferred stock using the “treasury stock” method. The computation of diluted earnings per share does not include the effect of outstanding stock options and warrants that are anti-dilutive.
For the three and six months ended March 31, 2017, there were no options to purchase shares of the Company’s common stock considered as dilutive, as the options were all valued at less than the current market price. Warrants to purchase 2,741,405 shares of common stock and the Series A convertible preferred stock shares have also been excluded as they are anti-dilutive to the Company’s net loss.
For the three and six months ended March 31, 2016, there were no options to purchase shares of the Company’s common stock considered as dilutive, as the options were all valued at less than the current market price. Warrants to purchase 723,281 shares of common stock and contingent shares to be issued in connection with prior acquisitions of ElementsLocal have also been excluded as they are anti-dilutive to the Company’s net loss. Also, excluded in the computation of diluted loss per share are the Series A convertible preferred stock shares as they are anti-dilutive to the Company’s net loss.
13. Income Taxes
Income tax expense was $1 and $32 for the three months ended March 31, 2017 and 2016 and $13 and $38 for the six months ended March 31, 2017 and 2016. Income tax expense consists of the estimated liability for federal and state income taxes owed by the Company, including the alternative minimum tax. Net operating loss carry forwards are estimated to be sufficient to offset additional taxable income for all periods presented.
The Company does not provide for U.S. income taxes on the undistributed earnings of its Indian subsidiary, which the Company considers to be a permanent investment.
14. Related Party Transactions
Michael Taglich and Robert Taglich are both members of the Company’s Board of Directors. Michael Taglich is the Chairman and President of Taglich Brothers, Inc. a New York based securities firm, which he co-founded with his brother Robert. Robert Taglich is Senior Director of Taglich Brothers, Inc. The Taglich Brothers, Inc. were the Placement Agents for many of the Company’s private offerings in 2012, 2013, 2014, and 2016. They were also the Placement Agent for the Company’s $3.0 million subordinated debt offering in 2013 and the Series A Preferred stock sale in 2015. Michael Taglich beneficially owns approximately 24% of Bridgeline stock. Michael Taglich has also guaranteed $2.0 million in connection with the Company’s out of formula borrowings on its credit facility with Heritage Bank. Robert Taglich beneficially owns approximately 8% of Bridgeline stock. The Company also has an annual service contract for $18 with Taglich Brothers, Inc to perform market research.
15. Legal Proceedings
The Company is subject to ordinary routine litigation and claims incidental to its business. As of March 31, 2017, the Company was not engaged with any material legal proceedings.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This section contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of a variety of factors and risks including the impact of the weakness in the U.S. and international economies on our business, our inability to manage our future growth effectively or profitably, fluctuations in our revenue and quarterly results, our license renewal rate, the impact of competition and our ability to maintain margins or market share, the limited market for our common stock, the ability to maintain our listing on the Nasdaq Capital Market, the volatility of the market price of our common stock, the ability to raise capital, the performance of our products, our ability to respond to rapidly evolving technology and customer requirements, our ability to protect our proprietary technology, the security of our software, our dependence on our management team and key personnel, our ability to hire and retain future key personnel, or our ability to maintain an effective system of internal controls. These and other risks are more fully described herein and in our other filings with the Securities and Exchange Commission.
This section should be read in combination with the accompanying audited consolidated financial statements and related notes prepared in accordance with United States generally accepted accounting principles.
Overview
Bridgeline Digital, The Digital Engagement Company™, helps customers maximize the performance of their full digital experience from websites and intranets to online stores. Bridgeline’s iAPPS® platform deeply integrates Web Content Management, eCommerce, eMarketing, Social Media management, and Web Analytics to help marketers deliver digital experiences that attract, engage and convert their customers across all channels. Bridgeline’s iAPPS platform combined with its digital services assists customers in maximizing on-line revenue, improving customer service and loyalty, enhancing employee knowledge, and reducing operational costs. Our iAPPSds (“distributed subscription”), is a platform that empowers large franchise and multi-unit organizations with state-of-the-art web engagement management while providing superior oversight of corporate branding. iAPPSds deeply integrates content management, eCommerce, eMarketing and web analytics and is a self-service web platform that is offered to each authorized franchise or dealer for a monthly subscription fee.
The iAPPS platform is delivered through a cloud-based SaaS (“Software as a Service”) multi-tenant business model, whose flexible architecture provides customers with state of the art deployment providing maintenance, daily technical operation and support; or via a traditional perpetual licensing business model, in which the iAPPS software resides on a dedicated server in either the customer’s facility or via a cloud-based hosted services model or a Tier 1 facility.
The iAPPS Platform is an award-winning application recognized around the globe. Our teams of Microsoft Gold© certified developers have won over 100 industry related awards. In 2016, CIO Review selected iAPPS as one of the 20 Most Promising Digital Marketing Solution Providers. This followed accolades from the SIIA (Software and Information Industry Association), which recognized iAPPS Content Manager with the 2015 SIIA CODiE Award for Best Web Content Management Platform. Also in 2015, EContent magazine named iAPPS Digital Engagement Platform to its Trendsetting Products list. The list of 75 products and platforms was compiled by EContent’s editorial staff, and selections were based on each offering’s uniqueness and importance to digital publishing, media, and marketing. We were also recognized in 2015 as a strong performer by Forrester Research, Inc in its independence report, “The Forrester Wave ™: Through-Channel Marketing Automation Platforms, Q3 2015.” In recent years, our iAPPS Content Manager and iAPPS Commerce products were selected as finalists for the 2014, 2013, and 2012 CODiE Awards for Best Content Management Solution and Best Electronic Commerce Solution, globally. In 2014 and 2013, Bridgeline Digital won twenty-five Horizon Interactive Awards for outstanding development of web applications and websites. Also in 2013, the Web Marketing Association sponsored Internet Advertising Competition honored Bridgeline Digital with three awards for iAPPS customer websites and B2B Magazine selected Bridgeline Digital as one of the Top Interactive Technology companies in the United States. KMWorld Magazine Editors selected Bridgeline Digital as one of the 100 Companies That Matter in Knowledge Management and also selected iAPPS as a Trend Setting Product in 2013.
Bridgeline Digital was incorporated under the laws of the State of Delaware on August 28, 2000.
Locations
The Company’s corporate office is located in Burlington, Massachusetts. The Company maintains regional field offices serving the following geographical locations: Boston, MA; Chicago, IL; Denver, CO; San Luis Obispo, CA; and Tampa, FL. The Company has one wholly-owned subsidiary, Bridgeline Digital Pvt. Ltd. located in Bangalore, India.
Customer Information
We currently have over 3,000 active customers. For the three months ended March 31, 2017, two customers represented approximately 13% and 11% of the Company’s total revenue and for the six months ended March 31, 2017, two customers represented approximately 12% and 10% of the Company’s total revenue. For the three and six months ended March 31, 2016, no customers represented more than 10% of the Company’s total revenue.
Results of Operations for the Three and Six Months Ended March 31, 2017 compared to the Three and Six Months Ended March 31, 2016
Total revenue for the three months ended March 31, 2017 was $4.0 million compared with $4.2 million for the three months ended March 31, 2016. We had a net loss of ($530) for the three months ended March 31, 2017 compared with net loss of ($1.0) million for the three months ended March 31, 2016. Net loss per share applicable to common shareholders was ($0.03) for the three months ended March 31, 2017 and ($0.20) for the three months ended March 31, 2016.
Total revenue for the six months ended March 31, 2017 was $8.0 million compared with $8.5 million for the six months ended March 31, 2016. We had a net loss of ($938) for the six months ended March 31, 2017 compared with net loss of ($2.4) million for the six months ended March 31, 2016. Net loss per share applicable to common shareholders was ($0.05) for the six months ended March 31, 2017 and ($0.46) for the six months ended March 31, 2016.
Results of Operations
Three Months |
Three Months |
Six Months |
Six Months |
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Ended |
Ended |
Ended |
Ended |
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March 31, |
March 31, |
$ |
% |
March 31, |
March 31, |
$ |
% |
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|
2017 |
2016 |
Change |
Change |
2017 |
2016 |
Change |
Change |
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Net revenue: | ||||||||||||||||||||||||||||||||
Digital enagement services |
$ | 2,151 | $ | 2,389 | (238 | ) | (10 | %) | $ | 4,177 | $ | 4,762 | (585 | ) | (12 | %) | ||||||||||||||||
% of total net revenue |
54 | % | 56 | % | 52 | % | 56 | % | ||||||||||||||||||||||||
Subscription and perpetual licenses |
1,582 | 1,522 | 60 | 4 | % | 3,307 | 3,045 | 262 | 9 | % | ||||||||||||||||||||||
% of total net revenue |
40 | % | 36 | % | 41 | % | 36 | % | ||||||||||||||||||||||||
Managed service hosting |
261 | 320 | (59 | ) | (18 | %) | 501 | 667 | (166 | ) | (25 | %) | ||||||||||||||||||||
% of total net revenue |
6 | % | 8 | % | 7 | % | 8 | % | ||||||||||||||||||||||||
Total net revenue |
$ | 3,994 | $ | 4,231 | $ | (237 | ) | (6 | %) | $ | 7,985 | $ | 8,474 | $ | (489 | ) | (6 | %) | ||||||||||||||
Cost of revenue: |
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Digital engagement costs |
1,144 | 1,435 | (291 | ) | (20 | %) | 2,272 | 2,889 | (617 | ) | (21 | %) | ||||||||||||||||||||
% of digital engagement services revenue |
53 | % | 60 | % | 54 | % | 61 | % | ||||||||||||||||||||||||
Subscription and perpetual licenses |
499 | 474 | 25 | 5 | % | 995 | 1,032 | (37 | ) | (4 | %) | |||||||||||||||||||||
% of subscription and perpetual revenue |
32 | % | 31 | % | 30 | % | 34 | % | ||||||||||||||||||||||||
Managed service hosting |
73 | 79 | (6 | ) | (8 | %) | 144 | 156 | (12 | ) | (8 | %) | ||||||||||||||||||||
% of managed service hosting revenue |
28 | % | 25 | % | 29 | % | 23 | % | ||||||||||||||||||||||||
Total cost of revenue |
1,716 | 1,988 | (272 | ) | (14 | %) | 3,411 | 4,077 | (666 | ) | (16 | %) | ||||||||||||||||||||
Gross profit |
$ | 2,278 | $ | 2,243 | $ | 35 | 2 | % | $ | 4,574 | $ | 4,397 | $ | 177 | 4 | % | ||||||||||||||||
Gross profit margin |
57 | % | 53 | % | 57 | % | 52 | % | ||||||||||||||||||||||||
Operating expenses: |
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Sales and marketing |
1,174 | 1,247 | (73 | ) | (6 | %) | 2,468 | 2,315 | 153 | 7 | % | |||||||||||||||||||||
% of total revenue |
29 | % | 29 | % | 31 | % | 27 | % | ||||||||||||||||||||||||
General and administrative |
803 | 764 | 39 | 5 | % | 1,594 | 1,626 | (32 | ) | (2 | %) | |||||||||||||||||||||
% of total revenue |
20 | % | 18 | % | 20 | % | 19 | % | ||||||||||||||||||||||||
Research and development |
422 | 377 | 45 | 12 | % | 782 | 718 | 64 | 9 | % | ||||||||||||||||||||||
% of total revenue |
11 | % | 9 | % | 10 | % | 8 | % | ||||||||||||||||||||||||
Depreciation and amortization |
157 | 338 | (181 | ) | (54 | %) | 342 | 694 | (352 | ) | (51 | %) | ||||||||||||||||||||
% of total revenue |
4 | % | 8 | % | 4 | % | 8 | % | ||||||||||||||||||||||||
Restructuring charges |
169 | 194 | (25 | ) | (13 | %) | 200 | 780 | (580 | ) | (74 | %) | ||||||||||||||||||||
% of total revenue |
4 | % | 5 | % | 3 | % | 9 | % | ||||||||||||||||||||||||
Total operating expenses |
2,725 | 2,920 | (195 | ) | (7 | %) | 5,386 | 6,133 | (747 | ) | (12 | %) | ||||||||||||||||||||
Loss from operations |
(447 | ) | (677 | ) | 230 | (34 | %) | (812 | ) | (1,736 | ) | 924 | (53 | %) | ||||||||||||||||||
Interest income (expense) net |
(82 | ) | (296 | ) | 214 | (72 | %) | (113 | ) | (579 | ) | 466 | (80 | %) | ||||||||||||||||||
Loss before income taxes |
(529 | ) | (973 | ) | 444 | (46 | %) | (925 | ) | (2,315 | ) | 1,390 | (60 | %) | ||||||||||||||||||
Provision for income taxes |
1 | 32 | (31 | ) | (97 |
%) |
13 | 38 | (25 | ) | (66 | %) | ||||||||||||||||||||
Net loss |
$ | (530 | ) | $ | (1,005 | ) | $ | 475 | (47 | %) | $ | (938 | ) | $ | (2,353 | ) | $ | 1,415 | (60 | %) | ||||||||||||
Non-GAAP Measure: |
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Adjusted EBITDA |
$ | 22 | $ | 25 | $ | (3 | ) | (12 | %) | $ | 32 | $ | 90 | $ | (58 | ) | (64 | %) |
Revenue
Our revenue is derived from three sources: (i) digital engagement services (ii) subscription and perpetual licenses and (iii) managed service hosting.
Digital Engagement Services
Digital engagement services revenue is comprised of iAPPS digital engagement related services and other digital engagement related services generated from non-iAPPS related engagements. Revenue from digital engagement services decreased $238 thousand, or 10%, to $2.2 million for the three months ended March 31, 2017 compared to $2.4 million for the three months ended March 31, 2016 and decreased $585 thousand, or 12%, to $4.2 million for the six months ended March 31, 2017 compared to $4.8 million for the six months ended March 31, 2016. The decreases in iAPPS digital engagements services revenues is a result of a decline in new iAPPS engagements.
Digital engagement services revenue as a percentage of total revenue decreased to 54% from 56% for the three months ended March 31, 2017 compared to the three months ended March 31, 2016 and decreased to 52% from 56% for the six months ended March 31, 2017 compared to the six months ended March 31, 2016. The decreases are attributable to the decreases in both iAPPS and non- iAPPS digital engagement services revenue.
Subscription and Perpetual Licenses
Revenue from subscription and perpetual licenses increased $60 thousand, or 4%, to $1.6 million for the three months ended March 31, 2017 compared to $1.5 million for the three months ended March 31, 2016 and increased $262 thousand, or 9%, to $3.3 million for the six months ended March 31, 2017 compared to $3.0 million for the six months ended March 31, 2016. The increases are primarily due to increases in new iAPPS subscription licenses (“SaaS”) and new perpetual licenses.
Subscription and perpetual license revenue as a percentage of total revenue increased to 40% for the three months ended March 31, 2017 from 36% compared to the three months ended March 31, 2016. The increase as a percentage of revenues is attributable to the increases in iAPPS subscriptions and perpetual licenses. Subscription and perpetual license revenue as a percentage of total revenue increased to 41% for the six months ended March 31, 2017 from 36% compared to the six months ended March 31, 2016. The increase as a percentage of revenues is attributable to the increases in iAPPS subscriptions and perpetual licenses.
Managed Service Hosting
Revenue from managed service hosting decreased $59 thousand, or 18%, to $261 thousand for the three months ended March 31, 2017 compared to $320 thousand for the three months ended March 31, 2016 and decreased $166 thousand, or 25%, to $501 thousand for the six months ended March 31, 2017 compared to $667 thousand for the six months ended March 31, 2016. The decreases are due a concentrated effort to discontinue hosting services to non-iAPPS customers, the majority of whom were obtained through previous acquisitions, as well as attrition from existing iAPPS customers.
Managed services revenue as a percentage of total revenue decreased to 6% for the three months ended March 31, 2017 from 8% compared to the three months ended March 31, 2016. Managed services revenue as a percentage of total revenue decreased to 7% for the six months ended March 31, 2017 from 8% compared to the six months ended March 31, 2016. The decrease as a percentage of revenue is attributable to the decrease in non-iAPPS customer hosting contracts as described above.
Costs of Revenue
Total cost of revenue decreased $272 thousand to $1.7 million or 14% for the three months ended March 31, 2017 compared to $2.0 million for the three months ended March 31, 2016 and decreased $666 thousand to $3.4 million or 16% for the six months ended March 31, 2017 compared to $4.1 million for the six months ended March 31, 2016. The gross profit margin improved to 57% for the three months ended March 31, 2017 compared to 53% for the three months ended March 31, 2016, as well as improved to 57% for the six months ended March 31, 2017 compared to 52% for the six months ended March 31, 2016. The improvement in the gross profit margin for the three and six months ended March 31, 2017 compared to the comparable periods is attributable to reductions in facilities and overhead costs combined with an increase in utilization from a more efficient billable services team.
Cost of Digital Engagement Services
Cost of digital engagement services decreased $291 thousand, or 20%, to $1.1 million for the three months ended March 31, 2017 compared to $1.4 million for the three months ended March 31, 2016 and decreased $617 thousand, or 21%, to $2.3 million for the six months ended March 31, 2017 compared to $2.9 million for the six months ended March 31, 2016. The cost of digital engagement services as a percentage of digital engagement services revenue decreased to 53% from 60% for the three months ended March 31, 2017 compared to the three months ended March 31, 2016 and decreased to 54% from 61% for the six months ended March 31, 2017 compared to the six months ended March 31, 2016. The decreases for the three and six months ended March 31, 2017 compared to the prior periods are due to a reduction in facilities and overhead costs combined with an increase in utilization from a more efficient billable services team.
Cost of Subscription and Perpetual License
Cost of subscription and perpetual licenses increased $25 thousand, or 5%, to $499 thousand for the three months ended March 31, 2017 compared to $474 thousand for the three months ended March 31, 2016. The cost of subscription and perpetual licenses as a percentage of subscription and perpetual license revenue increased to 32% from 31% compared to the three months ended March 31, 2016. The increases are due to the costs to transition our network operations center from a co-managed facility at Internap to a cloud-based model with Amazon Web Services, partially offset by cessation of amortization costs related to the capitalization of software.
Cost of subscription and perpetual licenses decreased $37 thousand, or 4%, to $995 thousand for the six months ended March 31, 2017 compared to $1.0 million for the six months ended March 31, 2016. The cost of subscription and perpetual licenses as a percentage of subscription and perpetual license revenue decreased to 30% from 34% for the six months ended March 31, 2017 compared to the six months ended March 31, 2016. The decreases are due to cessation of amortization costs related to the capitalization of software, partially offset by costs to transition our network operations center from a co-managed facility at Internap to a cloud-based model with Amazon Web Services.
Cost of Managed Service Hosting
Cost of managed service hosting decreased $6 thousand, or 8%, to $73 thousand for the three months ended March 31, 2017 compared to $79 thousand for the three months ended March 31, 2016 and decreased $12 thousand, or 8%, to $144 thousand for the six months ended March 31, 2017 compared to $156 thousand for the six months ended March 31, 2016. The decreases are attributable to a decrease in non-iAPPS hosting customers and the corresponding costs to support them.
The cost of managed services as a percentage of managed services revenue increased to 28% from 25% compared to the three months ended March 31, 2016 and increased to 29% from 23% compared to the six months ended March 31, 2016. The percentage increases for the three and six months ended March 31, 2017 compared to the prior periods are attributable to the decreases in hosting revenues in proportion to fixed costs for our third party hosting providers.
Operating Expenses
Sales and Marketing Expenses
Sales and marketing expenses decreased $73 thousand to $1.2 million, or 6%, for the three months ended March 31, 2017 compared to $1.2 for the three months ended March 31, 2016. The decreases for the three months ended March 31, 2017 compared to the three months ended March 31, 2016 are attributable to decreases in sales commissions and a decrease in marketing expenses. Sales and marketing expenses represented 29% total revenue for the three months ended March 31, 2017 and 2016, respectively.
Sales and marketing expenses increased $153 thousand to $2.5 million, or 7%, for the six months ended March 31, 2017 compared to $2.3 million for the six months ended March 2016. Sales and marketing expenses represented 31% and 27% of total revenue for the six months ended March 31, 2017 and 2016, respectively. The increases for the six months ended March 31, 2017 compared to the six months ended March 31, 2016 are attributable to increases in sales personnel and marketing expenses in order to create and build a direct and inside sales team to position the Company for growth.
General and Administrative Expenses
General and administrative expenses increased $39 thousand, or 5%, to $803 thousand for the three months ended March 31, 2017 compared to $764 thousand for the three months ended March 31, 2016. General and administrative expenses represented 20% and 18% of total revenue for the three months ended March 31, 2017 and 2016, respectively. The increase in expense for the three months ended March 31, 2017 compared to the three months ended March 31, 2016 was due to increases in professional fees.
General and administrative expenses decreased $32 thousand, or 2%, to $1.6 million for the six months ended March 31, 2017 compared to the $1.6 million for the six months ended March 2016. General and administrative expenses represented 20% and 19% of total revenue for the six months ended March 31, 2017 and 2016, respectively. The decrease in expense for the six months ended March 31, 2017 compared to the six months ended March 31, 2016 was due to decreases in headcount and personnel expenses.
Research and Development
Research and development expense increased $45 thousand, or 12%, to $422 thousand for the three months ended March 31, 2017 compared to $377 thousand for the three months ended March 31, 2016 and increased $64 thousand, or 9%, to $782 thousand for the six months ended March 31, 2017 compared to $718 thousand for the six months ended March 31, 2016. Research and development expenses represented 11% and 9% of total revenue for the three months ended March 31, 2017 and 2016, respectively, and 10% and 8% of total revenue for the six months ended March 31, 2017 and 2016, respectively. The increases in research and development expense for the three and six months ended March 31, 2017 compared to the three and six months ended March 31, 2016 is due to an increase in personnel expenses.
Depreciation and Amortization
Depreciation and amortization expense decreased $181 thousand, or 54% to $157 for the three months ended March 31, 2017 compared to $338 thousand for the three months ended March 31, 2016 and decreased $352 thousand, or 51%, to $342 thousand for the six months ended March 31, 2017 compared to $694 thousand for the six months ended March 31, 2016. Depreciation and amortization represented 4% and 8% of revenue for the three months ended March 31, 2017 and 2016, respectively, and 4% and 8% of total revenue for the six months ended March 31, 2017 and 2016, respectively. Depreciation and amortization has decreased due to asset retirements related to the termination and closing of offices, as well as reductions in capital expenditures.
Restructuring Expenses
During the fiscal 2015 and 2016 and through the first half of the current fiscal year, the Company’s management approved, committed to and initiated plans to restructure and further improve efficiencies by implementing cost reductions in line with expected decreases in revenue. The restructuring efforts included the renegotiation of several office leases and relocations to smaller spaces, while also negotiating sub-leases for the original space. In addition, the Company executed a general work-force reduction and recognized costs for severance and termination benefits. In the second quarter of fiscal 2017, the Company initiated a plan to shut down its operations in India. As part of these restructuring initiatives, we recorded $169 thousand and $194 thousand in the three months ended March 31, 2017 and 2016, respectively, and $200 thousand and $780 thousand in the six months ended March 31, 2017 and 2016, respectively.
Net Loss
Loss from operations
The loss from operations was ($447) thousand for three months ended March 31, 2017, compared to a loss of ($677) thousand in the prior period and a loss of ($812) thousand for the six months ended March 31, 2017 compared to a loss of ($1.7) million for the prior year. The gross profit margin increased to 57% for the three months ended March 31, 2017 compared to the 53% for the three months ended March 31, 2016 and increased to 57% for the six months ended March 31, 2017 compared to the 52% for the six months ended March 31, 2016. Operating expenses also decreased $195 thousand or 7% for the three months ended March 31, 2017 compared to the three months ended March 31, 2016 and decreased $747 thousand or 12% for the six months ended March 31, 2017 compared to the six months ended March 31, 2016. We have made concerted efforts to bring our operating expenses in line with projected revenues.
Income Taxes
The provision for income tax expense was $1 thousand and $32 thousand for the three months ended March 31, 2017 and 2016, respectively, and $13 thousand and $38 thousand for the six months ended March 31, 2017 and 2016, respectively. Income tax expense represents the estimated liability for federal and state income taxes owed, including the alternative minimum tax. We have net operating loss carryforwards and other deferred tax benefits that are available to offset future taxable income.
Adjusted EBITDA
We also measure our performance based on a non-GAAP (“Generally Accepted Accounting Principles”) measurement of earnings before interest, taxes, depreciation and amortization, and before stock-based compensation expense, restructuring charges, and losses on disposal of fixed assets (“Adjusted EBITDA”).
We believe this non-GAAP financial measure of Adjusted EBITDA is useful to management and investors in evaluating our operating performance for the periods presented and provide a tool for evaluating our ongoing operations.
Adjusted EBITDA, however, is not a measure of operating performance under GAAP and should not be considered as an alternative or substitute for GAAP profitability measures such as (i) income from operations and net income, or (ii) cash flows from operating, investing and financing activities, both as determined in accordance with GAAP. Adjusted EBITDA as an operating performance measure has material limitations since it excludes the financial statement impact of income taxes, net interest expense, amortization of intangibles, depreciation, loss on disposal of fixed assets, restructuring charges, other amortization and stock-based compensation, and therefore does not represent an accurate measure of profitability. As a result, Adjusted EBITDA should be evaluated in conjunction with net income for a complete analysis of our profitability, as net income includes the financial statement impact of these items and is the most directly comparable GAAP operating performance measure to Adjusted EBITDA. Our definition of Adjusted EBITDA may also differ from and therefore may not be comparable with similarly titled measures used by other companies, thereby limiting its usefulness as a comparative measure. Because of the limitations that Adjusted EBITDA has as an analytical tool, investors should not consider it in isolation, or as a substitute for analysis of our operating results as reported under GAAP.
The following table reconciles net loss (which is the most directly comparable GAAP operating performance measure) to Adjusted EBITDA (in thousands):
Three Months Ended |
Six Months Ended |
|||||||||||||||
March 31, |
March 31, |
|||||||||||||||
2017 |
2016 |
2017 |
2016 |
|||||||||||||
Net loss |
$ | (530 | ) | $ | (1,005 | ) | $ | (938 | ) | $ | (2,353 | ) | ||||
Provision for income tax |
1 | 32 | 13 | 38 | ||||||||||||
Interest expense, net |
34 | 296 | 65 | 579 | ||||||||||||
Amortization of intangible assets |
72 | 108 | 143 | 215 | ||||||||||||
Depreciation |
74 | 208 | 163 | 439 | ||||||||||||
Loss on disposal of fixed assets |
48 | - | 48 | - | ||||||||||||
Restructuring charges |
169 | 194 | 200 | 780 | ||||||||||||
Other amortization |
27 | 132 | 66 | 260 | ||||||||||||
Stock based compensation |
127 | 60 | 272 | 132 | ||||||||||||
Adjusted EBITDA |
$ | 22 | $ | 25 | $ | 32 | $ | 90 |
Adjusted EBITDA for the quarter ended March 31, 2017 decreased slightly compared to the quarter ended March 31, 2016. For the six months ended March 31, 2017 compared to the six months ended March 31, 2016, gross profit and gross margin have improved and operating expenses have significantly decreased.
Liquidity and Capital Resources
Cash Flows
Operating Activities
Cash used in operating activities was $155 thousand for the six months ended March 31, 2017 compared to cash used in operating activities of $729 thousand for the six months ended March 31, 2016. We have reduced operating expenses which is reflected in the reduction of liabilities.
Investing Activities
Cash used in investing activities was $49 thousand for the six months ended March 31, 2017 compared to $50 thousand for the six months ended March 31, 2016. In the six months ended March 31, 2017, we capitalized $41 thousand in costs related to iAPPS software development.
Financing Activities
Cash provided by financing activities was $871 thousand for the six months ended March 31, 2017 compared to $593 thousand for the six months ended March 31, 2016. Cash provided by financing activities for the six months ended March 31, 2017 is primarily attributable to the sale and registration of 2,135,362 shares of common stock in November 2016, which raised a net $853 thousand in funds for current and future operations. We also borrowed $1.1 million on our line of credit with Heritage Bank. Partially offsetting these proceeds, we made payments of $980 thousand on the Heritage Bank line of credit, contingent acquisition payments of $75 thousand and capital lease payments of $24 thousand.
Capital Resources and Liquidity Outlook
In the first quarter of fiscal 2017, we entered into Securities Purchase Agreements with certain institutional and accredited investors to sell an aggregate total of 2,135,362 shares of our common stock for $0.48 per share. Concurrently, we filed a Form S-3 to register the majority of these shares, as well as shares purchased in previous private offerings. In total, we received net proceeds of $853 thousand as a result of these transactions. The proceeds will be used to fund current and future operations. We believe that the proceeds from the November 2016 Private Placement, cash generated from operations, and proceeds from our bank line of credit will be sufficient to fund the Company’s working capital and capital expenditure needs in the foreseeable future. We have a borrowing facility with Heritage Bank from which we can borrow, and this line is subject to financial covenants that must be met. It is not certain that all or part of this line will be available to us in the future; and other sources of financing may not be available to us in a timely basis if at all, or on terms acceptable to us. If we fail to obtain acceptable funding when needed, we may not have sufficient resources to fund our normal operations, and this would have a material adverse effect on our business.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, financings or other relationships with unconsolidated entities or other persons, other than our operating leases and contingent acquisition payments.
We currently do not have any variable interest entities. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Therefore, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Commitments and Contingencies
As of March 31, 2017, we have no material commitments or contingencies, other than those disclosed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 19, 2016.
Critical Accounting Policies
Critical Accounting Policies
These critical accounting policies and estimates by our management should be read in conjunction with Note 2 Summary of Significant Accounting Policies to the Consolidated Financial Statements that were prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and filed with our Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 19, 2016.
The preparation of financial statements in accordance US GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period. We regularly make estimates and assumptions that affect the reported amounts of assets and liabilities. The most significant estimates included in our financial statements are the valuation of accounts receivable and long-term assets, including intangibles, goodwill and deferred tax assets, stock-based compensation, amounts of revenue to be recognized on service contracts in progress, unbilled receivables, and deferred revenue. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected.
We consider the following accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment:
● |
Revenue recognition; | |
● |
Allowance for doubtful accounts; |
|
● |
Accounting for cost of computer software to be sold, leased or otherwise marketed; |
|
● |
Accounting for goodwill and other intangible assets; and |
|
● |
Accounting for stock-based compensation. |
Revenue Recognition
Overview
We enter into arrangements to sell digital engagement services (professional services), software licenses or combinations thereof. Revenue is categorized into (i) digital engagement services; (ii) subscriptions and perpetual licenses; and (iii) managed service hosting. We recognize revenue as required by the Revenue Recognition Topic of the Codification. Revenue is generally recognized when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) delivery has occurred or the services have been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of the fees is reasonably assured. Billings made or payments received in advance of providing services are deferred until the period these services are provided.
We maintain a reseller channel to supplement our direct sales force for our iAPPS platform. Resellers are generally located in territories where we do not have a direct sales force. Customers generally sign a license agreement directly with us. Revenue from perpetual licenses sold through resellers is recognized upon delivery to the end user as long as evidence of an arrangement exists, collectability is probable, and the fee is fixed and determinable. Revenue for subscription licenses is recognized monthly as the services are delivered.
Digital Engagement Services
Digital engagement services include professional services primarily related to the Company’s web development solutions that address specific customer needs such as digital strategy, information architecture and usability engineering, .Net development, rich media development, back end integration, search engine optimization, quality assurance and project management.
Digital engagement services are contracted for primarily on a time and materials basis and to a lesser extent on a fixed price basis. For time and materials contracts, revenues are recognized as the services are performed. For fixed price engagements, after assigning the relative selling price to the elements of the arrangement, the Company applies the proportional performance model (if not subject to contract accounting) to recognize revenue based on cost incurred in relation to total estimated cost at completion. The Company has determined that labor costs are the most appropriate measure to allocate revenue among reporting periods, as they are the primary input when providing application development services. Customers are invoiced monthly or upon the completion of milestones. For milestone based projects, since milestone pricing is based on expected hourly costs and the duration of such engagements is relatively short, this input approach principally mirrors an output approach under the proportional performance model for revenue recognition on such fixed priced engagements.
Digital engagement services also include professional services contracted for on a retainer basis or for a certain amount of hours each month. Such arrangements generally provide for a guaranteed availability of a number of professional services hours each month on a “use it or lose it” basis. For retained professional services sold on a stand-alone basis we recognize revenue as the services are delivered or over the term of the contractual retainer period. These arrangements do not require formal customer acceptance and do not grant any future right to labor hours contracted for but not used.
Subscriptions and Perpetual Licenses
The Company licenses its software on either a perpetual or subscription basis. Customers may license the software on a subscription basis, which can be described as “Software as a Service” or “SaaS”. SaaS is a model of software deployment where an application is hosted as a service provided to customers across the Internet. Subscription agreements include access to the Company’s software application via an internet connection, the related hosting of the application, and PCS. Customers receive automatic updates and upgrades, and new releases of the products as soon as they become available. Customers cannot take possession of the software. Subscription agreements are typically thirty-six month term arrangements that automatically renew unless either party terminates upon 90 days’ notice of renewal. Revenue is recognized monthly as the services are delivered. Set up fees paid by customers in connection with subscription services are deferred and recognized ratably over the longer of the life of subscription period or the expected lives of customer relationships. We continue to evaluate the length of the amortization period of the set up fees as we gain more experience with customer contract renewals.
Customers who license the software on a perpetual basis receive rights to use the software for an indefinite time period and an option to purchase Post-Customer Support (“PCS”). For arrangements that consist of a perpetual license and PCS, as long as Vendor Specific Objective Evidence (“VSOE”) exists for the PCS, then PCS revenue is recognized ratably on a straight-line basis over the period of performance and the perpetual license is recognized on a residual basis. Under the residual method, the fair value of the undelivered elements are deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and recognized as revenue, assuming all other revenue recognition criteria have been met.
Managed Service Hosting
Managed service hosting includes hosting arrangements that provide for the use of certain hardware and infrastructure for those customers who do not wish to host our applications independently. Hosting agreements are typically annual arrangements that provide for termination for convenience by either party generally upon 30-days’ notice. Revenue is recognized monthly as the hosting services are delivered. Set up fees paid by customers in connection with managed hosting services are deferred and recognized ratably over the longer of the life of the hosting period or the expected lives of customer relationships. We continue to evaluate the length of the amortization period of the set up fees as we gain more experience with customer contract renewals.
Multiple Element Arrangements
In accounting for multiple element arrangements, we follow either ASC Topic 605-985 Revenue Recognition Software or ASC Topic 605-25 Revenue Recognition Multiple Element Arrangements, as applicable.
In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Revenue Recognition: Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”). ASU 2009-13 provides amendments to certain paragraphs of previously issued ASC Subtopic 605-25 – Revenue Recognition: Multiple-Deliverable Revenue Arrangements. In accordance with ASU 2009-13, each deliverable within a multiple-deliverable revenue arrangement is accounted for as a separate unit of accounting if both of the following criteria are met (1) the delivered item has value to the customer on a standalone basis and (2) for an arrangement that includes a right of return relative to the delivered item, delivery or performance of the delivered item is considered probable and within our control. If the deliverables do not meet the criteria for being a separate unit of accounting then they are combined with a deliverable that does meet that criterion. The accounting guidance also requires that arrangement consideration be allocated at the inception of an arrangement to all deliverables using the relative selling price method. The accounting guidance also establishes a selling price hierarchy for determining the selling price of a deliverable. We determine selling price using VSOE, if it exists; otherwise, we use Third-party Evidence (“TPE”). If neither VSOE nor TPE of selling price exists for a unit of accounting, we use Estimated Selling Price (“ESP”).
VSOE is generally limited to the price at which we sell the element in a separate stand-alone transaction. TPE is determined based on the prices charged by our competitors for a similar deliverable when sold separately. It is difficult for us to obtain sufficient information on competitor pricing, so we may not be able to substantiate TPE. If we cannot establish selling price based on VSOE or TPE then we will use ESP. ESP is derived by considering the selling price for similar services and our ongoing pricing strategies. The selling prices used in our allocations of arrangement consideration are analyzed at minimum on an annual basis and more frequently if our business necessitates a more timely review. We have determined that we have VSOE on our SaaS offerings, certain application development services, managed hosting services, and PCS because we have evidence of these elements sold on a stand-alone basis.
When the Company licenses its software on a perpetual basis in a multiple element arrangement that arrangement typically includes PCS and application development services, we follow the guidance of