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 June 30, 2015

 

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

 

Burlington, Massachusetts

01803

(Address of Principal Executive Offices)

(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 or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  

Accelerated filer  

Non-accelerated filer  

(Do not check if a smaller reporting company)

Smaller reporting company ☒

 

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 August 11, 2015 was 4,441,381.

 

 
1

 

 

Bridgeline Digital, Inc.

 

Quarterly Report on Form 10-Q

 

For the Quarterly Period ended June 30, 2015

 

Index

 

 

 

Page

 

Part I

Financial Information

 

 

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements

4

 

 

 

 

 

 

Condensed Consolidated Balance Sheets (unaudited) as of June 30, 2015 and September 30, 2014

4

 

 

 

 

 

 

Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended June 30, 2015 and 2014

5

 

       
 

Condensed Consolidated Statements of Comprehensive Loss (unaudited) for the three and nine months ended June 30, 2015 and 2014

6

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows (unaudited) for the three and nine months ended June 30, 2015 and 2014

7

 

       

 

Notes to Unaudited Interim Condensed Consolidated Financial Statements

8

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

 

 

 

 

 

Item 3.

Qualitative and Quantitative Disclosures About Market Risk

35

 

 

 

 

 

Item 4.

Controls and Procedures

35

 

 

 

 

 

Part II

Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

36

 

       
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds  36  
       

Item 5.

 Other Information

36

 

 

 

 

 

Item 6.

Exhibits

38

 

       
Signatures   39  

 

 
2

 

 

Bridgeline Digital, Inc.

 

Quarterly Report on Form 10-Q

 

For the Quarterly Period ended June 30, 2015

 

 

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, 2014 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.

 

 
3

 

 

PART I—FINANCIAL INFORMATION

 Item 1.          Condensed Consolidated Financial Statements.

 

BRIDGELINE DIGITAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 (Dollars in thousands, except share and per share data)

(Unaudited)

 

ASSETS

 

June 30,

   

September 30,

 
   

2015

   

2014

 

Current assets:

               

Cash and cash equivalents

  $ 583     $ 1,256  

Accounts receivable and unbilled receivables, net

    3,155       3,342  

Prepaid expenses and other current assets

    605       747  

Total current assets

    4,343       5,345  

Equipment and improvements, net

    1,585       2,175  

Intangible assets, net

    1,136       1,582  

Goodwill

    23,141       23,141  

Other assets

    937       1,317  

Total assets

  $ 31,142     $ 33,560  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               
                 

Current liabilities:

               

Accounts payable

  $ 1,256     $ 1,126  

Accrued liabilities

    986       957  

Accrued earnouts, current

    507       487  

Debt, current

    360       985  

Capital lease obligations, current

    399       364  

Deferred revenue

    2,191       1,990  

Total current liabilities

    5,699       5,909  
                 

Accrued earnouts, net of current portion

    76       381  

Debt, net of current portion

    7,593       5,935  

Capital lease obligations, net of current portion

    29       247  

Other long term liabilities

    1,008       1,155  

Total liabilities

    14,405       13,627  
                 

Commitments and contingencies

               
                 

Stockholders’ equity:

               

Preferred stock - $0.001 par value; 1,000,000 shares authorized; 205,132 at June 30, 2015 and 0 at September 30, 2014, issued and outstanding (liquidation preference $2,082)

    -       -  

Common stock - $0.001 par value; 50,000,000 shares authorized; 4,441,381 at June 30, 2015 and 4,388,583 at September 30, 2014, issued and outstanding

    5       5  

Additional paid-in capital

    49,993       47,790  

Accumulated deficit

    (32,904 )     (27,529 )

Accumulated other comprehensive loss

    (357 )     (333 )

Total stockholders’ equity

    16,737       19,933  

Total liabilities and stockholders’ equity

  $ 31,142     $ 33,560  

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 
4

 

  

BRIDGELINE DIGITAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 (Dollars in thousands, except share and per share data)

(Unaudited)

 

   

Three Months Ended

   

Nine Months Ended

 
   

June 30,

   

June 30,

 
   

2015

   

2014

   

2015

   

2014

 

Net revenue:

                               

Digital engagement services

  $ 2,956     $ 4,233     $ 9,227     $ 12,392  

Subscription and perpetual licenses

    1,505       1,510       4,260       4,394  

Managed service hosting

    415       409       1,188       1,181  

Total net revenue

    4,876       6,152       14,675       17,967  

Cost of revenue:

                               

Digital engagement services

    2,114       2,531       7,190       7,703  

Subscription and perpetual licenses

    473       422       1,366       1,271  

Managed service hosting

    76       66       224       218  

Total cost of revenue

    2,663       3,019       8,780       9,192  

Gross profit

    2,213       3,133       5,895       8,775  

Operating expenses:

                               

Sales and marketing

    1,245       1,992       4,590       6,030  

General and administrative

    980       1,110       3,110       3,308  

Research and development

    373       613       1,442       1,715  

Depreciation and amortization

    422       510       1,315       1,515  

Total operating expenses

    3,020       4,225       10,457       12,568  

Loss from operations

    (807 )     (1,092 )     (4,562 )     (3,793 )

Interest and other expense, net

    (278 )     (190 )     (643 )     (524 )

Loss before income taxes

    (1,085 )     (1,282 )     (5,205 )     (4,317 )

Provision for income taxes

    25       24       88       80  

Net loss

    (1,110 )     (1,306 )     (5,293 )     (4,397 )

Dividends on convertible preferred stock

    (31 )     -       (82 )     -  

Net loss applicable to common shareholders

  $ (1,141 )   $ (1,306 )   $ (5,375 )   $ (4,397 )

Net loss per share attributable to common shareholders:

                               

Basic and diluted

  $ (0.26 )   $ (0.31 )   $ (1.24 )   $ (1.16 )

Number of weighted average shares outstanding:

                               

Basic and diluted

    4,348,865       4,259,297       4,321,132       3,805,689  

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 
5

 

  

BRIDGELINE DIGITAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 (Dollars in thousands)

(Unaudited)

 

   

Three Months Ended

   

Nine Months Ended

 
   

June 30,

   

June 30,

 
   

2015

   

2014

   

2015

   

2014

 

Net Loss

  $ (1,110 )   $ (1,306 )   $ (5,293 )   $ (4,397 )
                                 

Net change in foreign currency translation adjustment

    (2 )     (18 )     (24 )     (143 )

Comprehensive loss

  $ (1,112 )   $ (1,324 )   $ (5,317 )   $ (4,540 )

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 
6

 

 

BRIDGELINE DIGITAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 (Dollars in thousands)

(Unaudited)

 

   

Nine Months Ended

 
   

June 30,

 
   

2015

   

2014

 

Cash flows from operating activities:

               

Net loss

  $ (5,293 )   $ (4,397 )

Adjustments to reconcile net loss to net cash used in operating activities:

               

Amortization of intangible assets

    447       498  

Depreciation

    814       980  

Other amortization

    490       399  

Stock-based compensation

    244       339  

Contingent earnout liability adjustment

    131       -  

Change in deferred taxes

    45       -  

Net loss on disposal of fixed assets

    58       -  

Changes in operating assets and liabilities

               

Accounts receivable and unbilled receivables

    187       (640 )

Prepaid expenses and other assets

    577       614  

Accounts payable and accrued liabilities

    (322 )     (1,139 )

Deferred revenue

    201       546  

Other liabilities

    (216 )     (78 )

Total adjustments

    2,656       1,519  

Net cash used in operating activities

    (2,637 )     (2,878 )

Cash flows used in investing activities:

               

Purchase of equipment and improvements

    (52 )     (264 )

Software development capitalization costs

    (50 )     (134 )

Contingent acquisition payments

    (417 )     (464 )

Net cash used in investing activities

    (519 )     (862 )

Cash flows provided by financing activities:

               

Proceeds from issuance of common stock, net of issuance costs

    -       2,749  

Proceeds from issuance of convertible debt, net of issuance costs

    -       913  

Proceeds from exercise of employee stock options

    -       185  

Proceeds from employee stock purchase plan

    6       21  

Proceeds from issuance of 200,000 shares of preferred stock, net of issuance costs

    1,722       -  

Proceeeds from bank term loan

    1,460       -  

Proceeds from term note from stockholder

    2,000       -  

Borrowings on bank line of credit

    825       746  

Payments on bank term loan

    (2,460 )     (273 )

Payments on bank line of credit

    (670 )     (1,336 )

Payments on subordinated promissory notes

    (21 )     (86 )

Principal payments on capital leases

    (355 )     (319 )

Net cash provided by financing activities

    2,507       2,600  

Effect of exchange rate changes on cash and cash equivalents

    (24 )     (143 )

Net decrease in cash and cash equivalents

    (673 )     (1,283 )

Cash and cash equivalents at beginning of period

    1,256       2,830  

Cash and cash equivalents at end of period

  $ 583     $ 1,547  

Supplemental disclosures of cash flow information:

               

Cash paid for:

               

Interest

  $ 163     $ 50  

Income taxes

  $ 43     $ 10  

Non cash investing and financing activities:

               

Equipment purchased under capital leases

  $ 172     $ 89  

Other assets included in accounts payable

  $ 2     $ -  

Accrued dividends on convertible preferred stock

  $ 81       -  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 
7

 

 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™, enables its customers to maximize the performance of their mission critical websites, intranets, and online stores. Bridgeline’s iAPPS® platform deeply integrates Web Content Management, eCommerce, eMarketing, Social Media management, and Web Analytics to help marketers deliver online experiences that attract, engage and convert their customers across all digital 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.

 

In fiscal 2012, Bridgeline Digital announced the release of iAPPSds (“distributed subscription”), a platform that empowers franchise and large dealer networks 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. On August 1, 2013, we acquired franchise web developer ElementsLocal, expanding Bridgeline Digital’s presence in the franchise market place.

 

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 Bridgeline’s co-managed hosting facility.

 

The iAPPS Platform is an award-winning application. Our teams of Microsoft Gold© certified developers have won over 100 industry related awards. 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 2015, the SIIA (Software and Information Industry Association) awarded iAPPS content managers the 2015 SIIA CODiE Award for Best Web Content Management Platform. 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 in Burlington, Massachusetts.  The Company maintains regional field offices serving the following geographical locations: Atlanta, GA; Baltimore, MD; Boston, MA; Chicago, IL; Dallas, TX; Denver, CO; New York, NY; San Diego, CA; San Luis Obispo, CA; and Tampa, FL.  The Company has one wholly-owned subsidiary, Bridgeline Digital Pvt. Ltd. located in Bangalore, India. 

 

Reverse Stock Split

 

On May 4, 2015, the Company’s Shareholders and the Board of Directors approved a reverse stock split pursuant to which all classes of our issued and outstanding shares of common stock at the close of business on such date were combined and reconstituted into a smaller number of shares of common stock in a ratio of 1 share of common stock for every 5 shares of common stock (“1-for-5 reverse stock split”). The 1-for-5 reverse stock split is effective as of close of business on May 7, 2015 and the Company’s stock began trading on a split-adjusted basis on May 8, 2015.

 

 
8

 

 BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

 

 

The reverse stock split reduces the number of shares of the Company’s common stock currently outstanding from approximately 22 million shares to approximately 4.4 million shares. Proportional adjustments have been made to the conversion and exercise prices of the Company’s outstanding convertible preferred stock, warrants, restricted stock awards, convertible notes and stock options, and to the number of shares issued and issuable under the Company’s Amended and Restated Stock Incentive Plan. Upon the effectiveness of the 1-for-5 reverse stock split, each five shares of the Company’s issued and outstanding common stock have been automatically combined and converted into one issued and outstanding share of common stock, par value $.001. The Company did not issue any fractional shares in connection with the reverse stock split. Instead, fractional share interests were rounded up to the next largest whole share. The reverse stock split does not modify the rights or preferences of the common stock. The number of authorized shares of the Company’s common stock remains at 50 million shares and the par value remains $0.001.

 

The accompanying unaudited condensed consolidated financial statements and footnotes have been retroactively adjusted to reflect the effects of the 1-for-5 reverse stock split.

 

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, while also ramping down a lower margin services model. The Company has worked on reducing operating expenses during the current fiscal year and management believes it will have an appropriate cost structure for the remainder of fiscal 2015. Management believes that operating expenses will be reduced to the point where the Company can drive positive Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, preferred stock dividends, and stock-based compensation 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. The Company also maintains a Loan and Security Agreement with BridgeBank (the “BridgeBank Loan Agreement”) which provides for up to $5 million of revolving credit advances. Borrowing is limited to the lesser of the $5 million or 80% of eligible receivables. In May 2015, the Company extended the term of its BridgeBank Loan Agreement from an expiration date of March 31, 2016 to June 30, 2016 and this was further amended in August 2015 to a maturity date of September 30, 2016. Additionally, the Company can borrow up to $2 million in out of formula borrowings, which are further guaranteed by a director/shareholder of the Company. Subsequent to the quarter end, the Company received $500 in a long-term note from a director/stockholder of the Company

 

 

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 June 30, 2015 and September 30, 2014, and the interim Condensed Consolidated Statements of Operations, Comprehensive Loss, and Cash Flows for the three and nine months ended June 30, 2015 and 2014 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, 2014. 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 June 30, 2015 and September 30, 2014 and its results of operations and cash flows for the three and nine months ended June 30, 2015 and 2014. The results for the three and nine months ended June 30, 2015 are not necessarily indicative of the results to be expected for the year ending September 30, 2015. The accompanying September 30, 2014 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.

 

 
9

 

  

 BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

 

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 June 2014, the Financial Accounting Standards Board (“FASB”) issued a standards update on accounting for share-based payments when the terms of the award provide that a performance target could be achieved after a requisite service period. The standard is effective beginning January 1, 2016, with early adoption permitted. Management does not expect it to have a material impact on our consolidated financial position, results of operations or cash flows. 

 

In May 2014, the FASB issued a standard on revenue recognition providing a single, comprehensive revenue recognition model for all contracts with customers. The revenue standard is based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard is effective beginning January 1, 2017, with no early adoption permitted. The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. Management is currently evaluating the adoption method options and the impact of this new guidance on our condensed consolidated financial statements.

 

In April 2014, the FASB issued new accounting guidance on reporting discontinued operations and disclosures of disposals of components of an entity which clarifies the scope of what should be reported as discontinued operations and expands required disclosures. This new guidance is effective beginning October 1, 2015, with early adoption permitted. The impact of this guidance will be dependent on the nature and significance of any transactions within the scope of this new guidance.

 

In February 2015, the FASB issued new accounting guidance on simplifying the presentation of debt issuance costs. Debt issuance costs related to a recognized liability should be presented on the balance sheet as a direct reduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected. This new guidance is effective for reporting periods beginning after December 15, 2015. Management does not expect it to have a material impact on our consolidated financial position, results of operations or cash flows. 

 

 

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.

 

 

 

3. Accounts Receivable and Unbilled Receivables

 

Accounts receivable and unbilled receivables consists of the following:

 

   

As of

   

As of

 
   

June 30, 2015

   

September 30, 2014

 

Accounts receivable

  $ 3,044     $ 3,303  

Unbilled receivables

    311       229  

Subtotal

    3,355       3,532  

Allowance for doubtful accounts

    (200 )     (190 )

Accounts receivable and unbilled receivables, net

  $ 3,155     $ 3,342  

 

 
10

 

 

 BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

 

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 June 30, 2015 and September 30, 2014 because of their nature and durations. The carrying value of debt instruments also approximates fair value as of June 30, 2015 and September 30, 2014 based on acceptable valuation methodologies which use market data of similar size and situated debt issues.

 

 

 

 

 

 

Assets and liabilities of the Company measured at fair value on a recurring basis as of June 30, 2015 and September 30, 2014 are as follows:

 

      June 30, 2015  
                                 
   

Level 1

   

Level 2

   

Level 3

   

Total

 
                                 

Liabilities:

                               

Contingent acquisition consideration

  $ -     $ -     $ 583     $ 583  

Total Liabilities

  $ -     $ -     $ 583     $ 583  

 

      September 30, 2014  
                                 
   

Level 1

   

Level 2

   

Level 3

   

Total

 
                                 

Liabilities:

                               

Contingent acquisition consideration

  $ -     $ -     $ 868     $ 868  

Total Liabilities

  $ -     $ -     $ 868     $ 868  

 

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. The following table provides a rollforward of the fair value, as determined by Level 3 inputs, of the contingent consideration.

 

 
11

 

 

 BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

 

The following table summarizes the changes in contingent consideration for the three and nine months ended June 30, 2015 and 2014:

 

   

Three Months Ended

   

Nine Months Ended

 
   

June 30,

   

June 30,

 
   

2015

   

2014

   

2015

   

2014

 

Beginning balance

  $ 690     $ 1,511     $ 868     $ 1,511  

Adjustments

    -       -       131       -  

Payments

    (107 )     (643 )     (416 )     (643 )

Ending balance

  $ 583     $ 868     $ 583     $ 868  

 

 

 

 

5.   Intangible Assets

 

 

The components of intangible assets are as follows:

 

   

As of

   

As of

 
   

June 30, 2015

   

September 30, 2014

 

Domain and trade names

  $ 10     $ 10  

Customer related

    891       1,284  

Non-compete agreements

    235       288  

Balance at end of period

  $ 1,136     $ 1,582  

 

 

Total amortization expense related to intangible assets for the three months ended June 30, 2015 and 2014 was $141 and $157, and $447 and $498 for the nine months ended June 30, 2015 and 2014, respectively, and are reflected in operating expenses on the Condensed Consolidated Statements of Operations. The estimated amortization expense for fiscal years 2015 (remaining), 2016, 2017, and 2018 and thereafter is $108, $430, $335, and $253, respectively.

 

 
12

 

 

 BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

 

6.  Goodwill

 

Changes in the carrying amount of goodwill follows:

 

   

As of

   

As of

 
   

June 30, 2015

   

September 30, 2014

 

Balance at beginning of period

  $ 23,141     $ 23,777  

Purchase price allocation adjustments

    -       (636 )

Balance at end of period

  $ 23,141     $ 23,141  

 

 

7.   Debt

 

Debt consists of the following:

 

   

As of

   

As of

 
   

June 30, 2015

   

September 30, 2014

 

Line of credit borrowings

  $ 3,093     $ 2,938  

Bank term loan

    -       1,000  

Subordinated convertible debt

    3,000       3,000  

Term notes from shareholder

    2,000       -  

Subordinated promissory notes

    -       21  

Subtotal debt

  $ 8,093     $ 6,959  

Other (debt discount warrants)

  $ (140 )   $ (39 )

Total debt

  $ 7,953     $ 6,920  

Less current portion

  $ 360     $ 985  

Long term debt, net of current portion

  $ 7,593     $ 5,935  

  

 

Line of Credit and Bank Term Loan

 

In December 2013, the Company entered into a Loan and Security Agreement with BridgeBank (the “BridgeBank Loan Agreement”). The BridgeBank Loan Agreement replaced the Company’s prior credit facility with Silicon Valley Bank (“SVB”), which expired on December 31, 2013. The Loan Agreement has a 27 month term which expires on March 31, 2016. In May 2015, the Company extended the term to June 30, 2016 and this was further amended in August 2015 to a maturity date of September 30, 2016. The Loan Agreement provides for up to $5 million of revolving credit advances which may be used for acquisitions and working capital purposes. Borrowings are limited to the lesser of (i) $5 million and (ii) 80% of eligible receivables as defined. The Company can borrow up to $1.0 million in out of formula borrowings for specified periods of time.   Borrowings bear interest at BridgeBank’s prime plus 1.00% (4.25%) through June 1, 2015 and then increase to prime plus 5.00% (8.25%) in accordance with an amendment to the Loan and Security Agreement (see below).  The Company pays an annual commitment fee of 0.25%. Borrowings are secured by all of the Company’s assets and all of the Company’s intellectual property. The Company is also required to comply with certain financial and reporting covenants including an Asset Coverage Ratio. As of June 30, 2015, the Company had an outstanding balance under the BridgeBank Loan Agreement of $3.0 million. The Company was not compliance with all reporting covenants for the period ended May 31, 2015, but it received a waiver for this period from BridgeBank. The Company was in compliance as of June 30, 2015.

 

 
13

 

 

 BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

 

In December 2014, the Company signed an Amendment to its Loan and Security Agreement with Bridge Bank (the “Amendment”). As part of the Amendment Mr. Michael Taglich, a member of the Board of Directors, signed an unconditional guaranty (the “Guaranty”) and promise to pay the Company’s lender, Bridge Bank, N.A all indebtedness in an amount not to exceed $1 million in connection with the out of formula borrowings. The Amendment also modified certain monthly financial reporting requirements and financial covenants on a prospective basis commencing as of the effective date of the Amendment. In July 2015, the Company further amended its Loan and Security Agreement with Bridge Bank to obtain a waiver for the May 2015 reporting covenants in conjunction with further assurance from Mr. Taglich to extended the Guaranty to 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.

 

Subordinated Convertible Debt

 

On September 30, 2013, the Company entered into a Note Purchase Agreement (the "Purchase Agreement") with accredited investors pursuant to which Bridgeline Digital sold an aggregate of $2.0 million of 10% secured subordinated convertible notes (the "Notes"). The gross proceeds to Bridgeline Digital at the closing of this private placement were $2.0 million. The Notes accrue interest at a rate of ten percent (10%) per annum and mature on September 30, 2016. Interest on the Notes is payable quarterly in cash. The Notes are convertible at the election of the holder into shares of common stock of Bridgeline Digital at a conversion price equal to $6.50 per share at any time prior to the maturity date, provided that no holder may convert the Notes if such conversion would result in the holder beneficially owning more than 4.99% of the number of shares of Bridgeline Digital common stock outstanding at the time of conversion.

 

On November 6, 2013, the Company entered into an amendment (the "Amendment") to the Purchase Agreement by and among Bridgeline Digital and the accredited investors’ party thereto. The Amendment increased the aggregate amount of 10% secured subordinated convertible notes (the "New Notes") able to be sold by Bridgeline Digital to $3.0 million. On November 6, 2013, Bridgeline Digital sold an additional $1.0 million of New Notes (the "Second Closing"). The gross proceeds to Bridgeline Digital at the Second Closing of this private placement were $1.0 million. The Notes accrue interest at a rate of ten percent (10%) per annum and mature on November 6, 2016. Interest on the Notes is payable quarterly in cash. The Notes are convertible at the election of the holder into shares of common stock of Bridgeline Digital at a conversion price equal to $6.50 per share at any time prior to the maturity date, provided that no holder may convert the Notes if such conversion would result in the holder beneficially owning more than 4.99% of the number of shares of Bridgeline Digital common stock outstanding at the time of conversion.

 

The Notes are secured by all of Bridgeline Digital's assets. The security interest granted to the holders of the Notes is subordinate to the security interest held by Bridgeline Digital's senior lender, BridgeBank. Bridgeline Digital may prepay any portion of the principal amount of the outstanding Notes at any time, provided that if Bridgeline Digital prepays any principal on or before September 30, 2014, Bridgeline Digital will pay a penalty equal to 10% of the principal amount being prepaid. Under certain circumstances Bridgeline Digital has the right to force conversion of the Notes into shares of Bridgeline Digital common stock in the event the Bridgeline Digital common stock trades in excess of $13.00 per share for 20 trading days out of any 30 trading day period.

 

 
14

 

 

 BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

 

The Notes contain customary events of default. Upon the occurrence of any event of default the interest rate under the Notes will increase. In addition, upon the occurrence of a payment default under the Notes, Bridgeline Digital must pay a premium equal to 20% of the outstanding principal amount of the Notes. In the event of a change in control of Bridgeline Digital while the Notes are outstanding, Bridgeline Digital will provide the holders of the Notes with the opportunity to convert the Notes immediately prior to the change in control. In the event the holders of the Notes do not elect to convert the Notes, Bridgeline Digital may prepay all outstanding principal and accrued interest under the Notes.

 

The placement agent for both transactions was Taglich Brothers, Inc. As compensation for the initial transaction on September 30, 2013, Bridgeline Digital paid a fee of $160 and issued to Taglich Brothers, Inc., or its designees, five-year warrants to purchase an aggregate of 30,770 shares of common stock at an exercise price equal to $6.50 per share. The warrants are first exercisable on March 30, 2014, and provide the holders piggyback registration rights with respect to the shares of common stock underlying the warrants and contain a cashless exercise provision. As compensation for the Second Closing, Bridgeline Digital paid Taglich Brothers, Inc. a fee of $80 and issued to Taglich Brothers, Inc., or its designees, five-year warrants to purchase an aggregate of 15,385 shares of common stock at an exercise price equal to $6.50 per share. The warrants are first exercisable on May 6, 2014, provide the holders piggyback registration rights with respect to the shares of common stock underlying the warrants and contain a cashless exercise provision. Fair market value of the warrants are $49 and is included in current liabilities and non-current debt with the offsetting amount recorded to additional paid in capital in the Condensed Consolidated Balance Sheet. The fair market value of the warrants will be amortized on a straight-line basis over the estimated life of two years.

 

The shares of common stock issuable upon conversion of the Notes and upon exercise of the warrants are restricted securities and may be sold only pursuant to Rule 144 or in another transaction exempt from the registration requirements under the Securities Act of 1933. Pursuant to the terms of the Purchase Agreement, Bridgeline Digital has agreed to provide piggyback registration rights with respect to the shares of common stock issuable upon conversion of the Notes in the event Bridgeline Digital files a registration statement, with certain limited exceptions.

 

Term Notes from Shareholder

 

On January 7, 2015, Bridgeline issued a Term Note to Michael Taglich to document a loan by Michael Taglich to Bridgeline of $500. The funds were received in December 2014 and are reflected in Long Term Debt on the Balance Sheet. The terms of the Note provide that Bridgeline will pay interest at a rate of 7% per annum and the note will mature on June 30, 2016. On February 9, 2015, the Company entered into a second Term Note (“Second Note”) for $500 with Mr. Taglich. The terms of the Second Note provide that Bridgeline will pay interest at a rate of 7% per annum and the note will mature on September 1, 2016. On May 12, 2015, the Company entered into a third Term Note (“Third Note”) for $500 with Mr. Taglich. The terms of the Third Note provide that Bridgeline will pay interest at a rate of 7% per annum and the note will mature on September 1, 2016. Subsequent to the end of the quarter, the Company entered into a fourth Term Note (“Fourth Note”) for $500 with Mr. Taglich. The terms of the Fourth Note provide that Bridgeline will pay interest at a rate of 8% per annum and the note will mature on July 21, 2016.

 

In consideration of the loan by Michael Taglich and a personal guaranty delivered by Michael Taglich to Bridge Bank, N.A. for the benefit of Bridgeline on December 19, 2014 (the “Guaranty”), on January 7, 2015 the Company issued Michael Taglich a warrant to purchase 60,000 shares of Common Stock of the Company at a price equal to $4.00 per share. Mr. Taglich was also issued additional warrants in the amount of 60,000 in conjunction with the Second note of $500. The warrants have a term of five years and are exercisable six months after the date of issuance. Bridgeline agreed to provide piggyback registration rights with respect to the shares of common stock underlying the warrants. On January 7, 2015, Bridgeline also entered into a side letter with Michael Taglich pursuant to which Bridgeline agreed in the event the 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. In May 2015, Mr. Taglich was issued additional warrants in the amount of 60,000 at an exercise price of $4.00 in conjunction with the Third note of $500. In July 2015, Mr. Taglich was issued warrants in the amount of 160,000 at an exercise price of $1.75 in conjunction with the Fourth note of $500.

 

The fair value of the warrants issued to Mr. Taglich is $180 which is reflected as a debt discount in current liabilities with the offsetting amount recorded to additional paid in capital in the Condensed Consolidated Balance Sheet. Amortization of the debt discount is $52 through June 30, 2015.

 

 
15

 

 

 BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

 

Subordinated Promissory Notes

 

In May 2012, the Company assumed two Promissory Notes in connection with the acquisition of MarketNet, Inc. The first Promissory Note in the amount of $63 is payable in eight equal installments of $8, including interest accrued at 5%, and matured in May 2014. This note was paid in full as of September 30, 2014. The second Promissory Note in the amount of $80 is payable in twelve equal installments of $7, including interest accrued at 5%. This note was paid in full as of May 31, 2015.

 

 

 

8.   Other Long Term Liabilities

 

Deferred Rent

 

In connection with the leases in Massachusetts, New York, and in San Luis Obispo, the Company made investments in leasehold improvements at these locations of approximately $1.6 million, of which the respective landlords funded approximately $857. The capitalized leasehold improvements are being amortized over the initial lives of each lease. The improvements funded by the landlords are treated as lease incentives. Accordingly, the funding received from the landlords was recorded as fixed asset additions and a deferred rent liability on the Condensed Consolidated Balance Sheet. As of June 30, 2015, $211 was reflected in Accrued Liabilities and $516 is reflected in Other Long Term Liabilities. The deferred rent liability is being amortized as a reduction of rent expense over the lives of the leases.

 

 

9.   Shareholders Equity

 

 

 
16

 

 

 BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

 

Preferred Stock

 

On October 27, 2014, the Company sold 40,000 shares of Series A convertible preferred stock (the “Preferred Stock”) at a purchase price of $50.00 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, multiplies by the stated value of $50.00 (the “Stated Value”) and (ii) divided by the conversion price in effect at the time of conversion. The initial conversion price is $3.25, 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 $6.50 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.

 

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.

 

Cumulative dividends are payable at a rate of 6% 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. If, after two years, any Preferred Stock are outstanding the cash dividend rate will increase to 12.0% per year. 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 $6.50 per share. The Preferred Shares shall vote with the Common on an as converted basis.

 

In December 2014, the Company elected to declare a stock dividend (PIK election) for the first dividend payment date of January 2, 2015. The Company issued 2,132 preferred convertible shares in January 2015 to the preferred shareholders. In March 2015, the Company elected to declare a stock dividend (PIK election) for the second dividend payment date of April 1, 2015. The Company issued 3,000 preferred convertible shares in April 2015 to the preferred shareholders. In July 2015, the Company elected to declare a stock dividend (PIK election) for the third dividend payment of July 1, 2015. The Company issued 3,090 preferred convertible shares in July 2015 to the preferred shareholders.

 

Common Stock

 

In June 2013, the Company sold 460,000 shares of common stock at $5.00 per share for gross proceeds of $2.3 million in a private placement. Net proceeds to the Company after offering expenses were approximately $2.1 million. In addition, the Company issued the investors and placement agent and its affiliates five year warrants to purchase an aggregate of 92,000 and 46,000 shares, respectively, of Bridgeline’s common stock at a price equal to $6.25 per share. There are no plans to register the common stock issued in this offering, however in the event the Company does register other Common stock, the Company agreed to provide piggyback registration rights with respect to the shares of common stock sold in the offering and underlying the warrants.

 

In January 2014, the Company issued 11,380 shares of common stock at $5.80 per share to four members of its Board of Directors in lieu of cash payments for their services as board members. The shares vested in equal installments on a monthly basis through the end of the service period of September 30, 2014. The aggregate fair value of the shares is $66 and was expensed over the service period. In March 2015, the Company issued 20,417 shares of common stock at $2.40 per share to four members of its Board of Directors in lieu of cash payments for their services as board members. The shares vested in equal installments on a monthly basis through the end of the service period of September 30, 2015. The aggregate fair value of the shares is $50 and is being expensed over the service period.

 

In March 2014, the Company sold 640,000 shares of common stock at $4.75 per share for gross proceeds of $3 million in a private placement. Net proceeds to the Company after offering expenses were approximately $2.7 million. In addition, the Company issued the placement agent five year warrants to purchase an aggregate of 64,000 shares of Bridgeline’s common stock at a price equal to $5.25 per share. There are no plans to register the common stock issued in this offering, however in the event the Company does register other common stock, the Company agreed to provide piggyback registration rights with respect to the shares of common stock sold in the offering and underlying the warrants.

 

In March 2015, the Company issued 40,834 shares of common stock at $2.40 per share to four members of our Board of Directors in lieu of cash payments for their services as board members. The shares vest in equal installments on a monthly basis through the end of the service period of September 30, 2015. The aggregate fair value of the shares is $98 and will be expensed over the service period. A total of $25 and $74 was recorded as expense in the three and nine months ended June 30, 2015.

 

 
17

 

 

 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 is contingently issuable to the sellers of ElementsLocal. The contingent consideration is payable quarterly over the 12 consecutive calendar quarters following the acquisition, contingent upon the acquired business achieving certain revenue targets. Through June 30, 2015, the stockholders of ElementsLocal earned 65,801 shares of common stock.

 

In connection with the acquisition of MarketNet on May 31, 2012, contingent consideration of 40,867 shares of Bridgeline Digital common stock is contingently issuable to the sole stockholder of MarketNet. The contingent consideration is payable quarterly over the 12 consecutive calendar quarters following the acquisition, contingent upon the acquired business achieving certain operating and revenue targets. The common stock has been issued and is being held in escrow pending satisfaction of the applicable earnout targets. Through June 30, 2015, the sole stockholder of MarketNet earned 37,462 shares of common stock.

 

In connection with the acquisition of Magnetic Corporation on October 3, 2011, contingent consideration of 33,334 shares of Bridgeline Digital common stock was contingently issuable to the sole stockholder of Magnetic. The contingent consideration was payable quarterly over the 12 consecutive calendar quarters following the acquisition, contingent upon the acquired business achieving certain operating and revenue targets. As of June 30, 2015, the sole stockholder of Magnetic earned the full value or 33,334 shares of common stock. 

 

Amended and Restated Stock Incentive Plan

 

Effective August 2014, the Company’s Amended and Restated Stock Incentive Plan (the “Plan”) provides for the issuance of up 900,000 shares of common stock. The 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. Options granted under the Plan may be granted with contractual lives of up to ten years. There were 719,212 options outstanding reserved under the Plan as of June 30, 2015 and 180,788 shares available for future issuance.

 

Employee Stock Purchase Plan

 

On April 12, 2012, the Company’s stockholders approved and adopted the Bridgeline Digital, Inc. 2012 Employee Stock Purchase Plan (the “ESPP”). Under the terms of the ESPP, the Company will grant eligible employees the right to purchase shares of Bridgeline common stock through payroll deductions at a price equal to 85% of the fair market value of Bridgeline common stock on the purchase termination date of defined offering or purchase periods. Each offering period is six months in duration. The ESPP permits the Company to offer up to 60,000 shares of common stock. The maximum number of shares of common stock that may be purchased by all participants in any purchase period may not exceed 30,000 shares. During the nine months ended June 30, 2015, employees purchased 2,958 shares for the most recent offering period and have purchased 3,443 for during the fiscal year.

 

 

Common Stock Warrants

 

On October 21, 2010, the Company issued 10,000 common stock warrants to purchase shares of the Company’s common stock to a non-employee consultant as compensation for services rendered. The warrants vested over a one year period and expire on October 15, 2015. Of the warrants issued, 5,000 are exercisable at an exercise price of $5.00 per share and 5,000 are exercisable at an exercise price of $10.00 per share.  

 

 
18

 

 

 BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

 

On May 31, 2012, the Company issued five year warrants to the placement agent in the Company’s private placement. The warrants are exercisable to purchase 43,587 shares of the Company’s common stock at a price equal to $7.00 per share.  

 

On June 19, 2013, the Company issued five year warrants to the investors and placement agent in the Company’s private placement. The warrants are exercisable to purchase 92,000 and 46,000 shares, respectively, of the Company’s common stock at a price equal to $6.25 per share.  

 

On September 30, 2013, the Company issued five year warrants to the placement agent in the Company’s placement of subordinated convertible debt. The warrants are exercisable to purchase 30,770 of the Company’s common stock at a price equal to $6.50 per share.   The warrants are first exercisable on March 30, 2014, provide the holders piggyback registration rights with respect to the shares of common stock underlying the warrants and contain a cashless exercise provision.

 

On November 1, 2013, the Company issued five year warrants to the placement agent in the Company’s placement of subordinated convertible debt. The warrants are exercisable to purchase 15,385 shares of the Company’s common stock at a price equal to $6.50 per share. The warrants are first exercisable on May 6, 2014, provide the holders piggyback registration rights with respect to the shares of common stock underlying the warrants and contain a cashless exercise provision.

 

In March 2014, the Company issued five year warrants to the investors and placement agent in the Company’s private placement. The warrants are exercisable to purchase 64,000 shares of the Company’s common stock at a price equal to $5.25 per share.  

 

On October 28, 2014, the Company issued five year warrants to the placement agent in the Company’s private placement of series A convertible preferred stock. The warrants are exercisable to purchase 61,539 shares of the Company’s common stock at a price equal to $3.25 per share.

 

In connection with a $1 million term notes issued in the three months ended June 30, 2015, the Company issued warrants to an investor shareholder. The warrants are exercisable to purchase 60,000 shares of the Company’s common stock at a price equal to $4.00 per share with a five year term and 160,000 shares of the Company’s common stock at a price equal to $1.75 per share with a three year term.

 

As of June 30, 2015: (i) placement agent warrants to purchase 43,587, 46,000, 46,155, 28,460, and 61,539 shares at an exercise price of $7.00, $6.25, $6.50, $5.25 and $3.25, respectively are outstanding; (ii) investor warrants to purchase 92,000, 35,540, 180,000 and 160,000 shares at an exercise price of $6.25, $5.25, $4.00and $1.75, and (iii) warrants issued to a non-employee consultant to purchase 5,000 shares at an exercise price of $5.00 and 5,000 shares at an exercise price of $10.00 are outstanding.

 

 

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, 2014

    707,128     $ 4.90       301,742     $ 6.23  

Granted

    139,300     $ 2.75       401,539     $ 2.99  

Forfeited or expired

    (127,216 )   $ 5.04       -       -  

Outstanding, June 30, 2015

    719,212     $ 4.43       703,281     $ 4.38  

 

 
19

 

 

 BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

 

10.  Accumulated Other Comprehensive Loss

 

The following table presents changes in accumulated other comprehensive loss for three and nine months June 30, 2015 and 2014:

 

   

Three Months Ended

   

Nine Months Ended

 
   

June 30,

   

June 30,

 
   

2015

   

2014

   

2015

   

2014

 

Balance at beginning of period

  $ (355 )   $ (287 )   $ (333 )   $ (162 )

Foreign currency translation adjustment

    (2 )     (18 )     (24 )     (143 )

Balance at end of period

  $ (357 )   $ (305 )   $ (357 )   $ (305 )

 

 

 

 

11.   Net Loss Per Share

 

 

Basic and diluted net loss per share is computed as follows:

 

   

Three Months Ended

   

Nine Months Ended

 

(in thousands, except per share data)

 

June 30,

   

June 30,

 
   

2015

   

2014

   

2015

   

2014

 

Net loss

  $ (1,110 )   $ (1,306 )   $ (5,293 )   $ (4,397 )

Dividends on convertible preferred stock

    (31 )     -       (82 )     -  

Net loss applicable to common shareholders

  $ (1,141 )   $ (1,306 )   $ (5,375 )   $ (4,397 )
                                 

Weighted average common shares outstanding - basic

    4,348,865       4,259,297       4,321,132       3,805,689  

Effect of dilutive securities

    -       -       -       -  

Weighted average common shares outstanding - diluted

    4,348,865       4,259,297       4,321,132       3,805,689  
                                 

Net loss per share attributable to common shareholders:

                               

Basic and diluted

  $ (0.26 )   $ (0.31 )   $ (1.24 )   $ (1.16 )

 

 

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 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 nine months ended June 30, 2015, 196,416 and 394,506 options were excluded from the computation of diluted net loss per share as the effect was anti-dilutive to the Company’s net loss.  For the three and nine months ended June 30, 2014, options to purchase shares of 66,795 and 100,713 were excluded from the computation of diluted net loss per share as the effect was anti-dilutive to the Company’s net loss. All warrants to purchase 708,281 shares of common stock and contingent shares to be issued in connection with prior acquisitions of Marketnet, Magnetic and 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.

 

 

12.  Income Taxes

 

Income tax expense was $25 and $24 for the three months ended June 30, 2015 and 2014 and $88 and $80 for the nine months ended June 30, 2015 and 2014. 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.

 

 
20

 

 

 BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

 

13.  Related Party Transactions

 

In October 2013, Mr. Michael Taglich joined the Board of Directors. Mr. Taglich is the Chairman and President of Taglich Brothers, Inc. a New York based securities firm. Taglich Brothers, Inc. was the agent for the private placement of convertible preferred stock in October 2014. Fees paid to Taglich Brothers, Inc. in connection with the October 2014 convertible preferred stock were $160. Mr. Taglich personally owns more than 5% of Bridgeline stock. Other employees, affiliates and clients of Taglich Brothers, Inc. own approximately 600,000 shares of Bridgeline common stock and 40,427 shares of convertible preferred stock. The Company has issued $2 million in interest bearing term notes to Mr. Taglich with maturity dates ranging from June 2016 to September 2016. Mr. Taglich has also guaranteed $2 million in connection with the Company’s out of formula borrowings on its credit facility with Bridge Bank.

 

 

14.  Legal Proceedings

 

The Company is subject to ordinary routine litigation and claims incidental to its business. As of June 30, 2015 the Company was not engaged with any material legal proceedings.

 

 
21

 

 

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 risks described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2014 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.

 

This section should be read in combination with the accompanying unaudited consolidated financial statements and related notes prepared in accordance with United States generally accepted accounting principles.

 

Overview

 

Bridgeline Digital, The Digital Engagement Company™, enables its customers to maximize the performance of their mission critical websites, intranets, and online stores. Bridgeline’s iAPPS® platform deeply integrates Web Content Management, eCommerce, eMarketing, Social Media management, and Web Analytics to help marketers deliver online experiences that attract, engage and convert their customers across all digital 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.

 

In fiscal 2012, Bridgeline Digital announced the release of iAPPSds (“distributed subscription”), a platform that empowers franchise and large dealer networks 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 or annual subscription fee. On August 1, 2013, we acquired franchise web developer ElementsLocal, expanding Bridgeline Digital’s presence in the franchise market place.

 

In November 2014, we released iAPPS version 5.2 which includes enhancements to iAPPS Marketier, the platform's native email solution. Among the upgrades to the integrated email solution is a new Communication Dashboard with intuitive features that empower corporate marketing teams to develop, manage and execute effective email campaigns. Now, with the latest release customers can build campaigns with custom email designs or use new email templates available to them out-of-the-box. Additionally, new dynamic list segmentation capabilities allow customers to easily nurture specific audiences with targeted communications. Other lead-generation and CRM upgrades to iAPPS 5.2 include a brand new Form Builder.

 

In February 2015, we released iAPPSdsr, a customizable pre-templated, mobile-friendly web platform developed for growing franchises and distributed brand networks. Following the successful adoption of iAPPS ds, this product is scalable to the smaller multi-unit organizations.

 

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 Bridgeline’s co-managed hosting facility.

 

The iAPPS Platform is an award-winning application. Our teams of Microsoft Gold© certified developers have won over 100 industry related awards. 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. Most recently, in 2015, the SIIA (Software and Information Industry Association) awarded iAPPS Content Manager the 2015 CODiE Award for Best Web Content Management Platform. 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.

 

 
22

 

 

Customer Information

 

We currently have over 2,500 customers, the majority of which are iAPPSds customers who pay a monthly subscription fee. For the three and nine months ended June 30, 2015 and 2014 no customer represented 10% or more of total revenue.

 

 

Results of Operations for the Three and Nine Months Ended June 30, 2015 compared to the Three and Nine Months Ended June 30, 2014

 

Total revenue for the three months ended June 30, 2015 was $4.9 million compared with $6.2 million for the three months ended June 30, 2014.  We had a net loss of ($1.1) million for the three months ended June 30, 2015 compared with net loss of ($1.3) million for the three months ended June 30, 2014.  Net loss per share was ($0.26) for the three months ended June 30, 2015 and ($.31) for the three months ended June 30, 2014.

 

Total revenue for the nine months ended June 30, 2015 was $14.7 million compared with $18.0 million for the nine months ended June 30, 2014.  We had a net loss of ($5.3) million for the nine months ended June 30, 2015 compared with net loss of ($4.4) million for the nine months ended June 30, 2014.  Net loss per share was ($1.24) for the nine months ended June 30, 2015 and ($1.16) for the nine months ended June 30, 2014.

 

Reverse Stock Split

 

On May 4, 2015, the Company’s Shareholders and the Board of Directors approved a reverse stock split pursuant to which all classes of our issued and outstanding shares of common stock at the close of business on such date were combined and reconstituted into a smaller number of shares of common stock in a ratio of 1 share of common stock for every 5 shares of common stock (“1-for-5 reverse stock split”). The 1-for-5 reverse stock split is effective as of close of business on May 7, 2015 and the Company’s stock began trading on a split-adjusted basis on May 8, 2015.

 

The reverse stock split reduced the number of shares of the Company’s common stock currently outstanding from approximately 22 million shares to approximately 4.4 million shares. Proportional adjustments have been made to the conversion and exercise prices of the Company’s outstanding convertible preferred stock, warrants, restricted stock awards, convertible notes and stock options, and to the number of shares issued and issuable under the Company’s Amended and Restated Stock Incentive Plan. Upon the effectiveness of the 1-for-5 reverse stock split, each five shares of the Company’s issued and outstanding common stock have been automatically combined and converted into one issued and outstanding share of common stock, par value $.001. The Company did not issue any fractional shares in connection with the reverse stock split. Instead, fractional share interests were rounded up to the next largest whole share. The reverse stock split does not modify the rights or preferences of the common stock. The number of authorized shares of the Company’s common stock remains at 50 million shares and the par value remains $0.001.

 

All financial information has been retroactively adjusted to reflect the effects of the 1-for-5 reverse stock split.

 

Revenue

 

Our revenue is derived from three sources: (i) digital engagement services (ii) subscription and perpetual licenses and (iii) managed service hosting.

 

 
23

 

 

   

Three Months

   

Three Months

                   

Nine Months

   

Nine Months

                 
   

Ended

   

Ended

                   

Ended

   

Ended

                 
   

June 30

   

June 30

           

%

   

June 30

   

June 30

           

%

 

Net revenue:

 

2015

   

2014

   

Change

   

Change

   

2015

   

2014

   

Change

   

Change

 

Digital engagement services

                                                               

iAPPS digital enagement services

  $ 2,808     $ 3,737       (929 )     (25% )   $ 8,466     $ 10,738       (2,272 )     (21% )

% of total net revenue

    58 %     61 %                     58 %     60 %                

Other digital engagement services

    148       496       (348 )     (70% )     761       1,654       (893 )     (54% )

% of total net revenue

    3 %     8 %                     5 %     9 %                

Subtotal digital engagement services

    2,956       4,233       (1,277 )     (30% )     9,227       12,392       (3,165 )     (26% )

% of total net revenue

    61 %     69 %                     63 %     69 %                
                                                                 

Subscription and perpetual licenses

    1,505       1,510       (5 )     (0% )     4,260       4,394       (134 )     (3% )

% of total net revenue

    31 %     25 %                     29 %     24 %                

Managed service hosting

    415       409       6       1 %     1,188       1,181       7       1 %

% of total net revenue

    9 %     7 %                     8 %     7 %                

Total net revenue

  $ 4,876     $ 6,152     $ (1,276 )     (21% )   $ 14,675     $ 17,967     $ (3,292 )     (18% )

 

 

 

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 iAPPS digital engagement services decreased $929 thousand, or 25% to $2.8 million for the three months ended June 30, 2015 compared to $3.7 million for the three months ended June 30, 2014. The decrease in iAPPS digital engagements services is related to a decrease in new engagements combined with project delays on existing engagements. We also sold some new iAPPSds services engagements at lower margins in order to compete in this market. Revenue from non-iAPPS digital engagement services decreased $348 thousand, or 70%, to $148 thousand for the three months ended June 30, 2015 compared to $496 thousand for the three months ended June 30, 2014. The decrease compared to the prior period is due to a decrease in non-iAPPS engagement services as we continue to concentrate on selling higher-margin iAPPS digital engagements to both new and existing customers. In total, revenue from digital engagement services decreased $1.3 million, or 30%, to $3.0 million for the three months ended June 30, 2015 compared to $4.2 million for the three months ended June 30, 2014.  

 

Revenue from iAPPS digital engagement services decreased $2.3 million, or 21% to $8.5 million for the nine months ended June 30, 2015 compared to $10.7 million for the nine months ended June 30, 2014. The decrease in iAPPS digital engagements services is related to a decrease in new engagements combined with project delays on existing engagements. We also sold some new iAPPSds services engagements at lower margins in order to compete in this market. Revenue from non-iAPPS digital engagement services decreased $893 thousand, or 54%, to $761 thousand for the three months ended June 30, 2015 compared to $1.7 million for the nine months ended June 30, 2014. The decrease compared to the prior period is due to a decrease in non-iAPPS engagement services as we continue to concentrate on selling higher-margin iAPPS digital engagements to both new and existing customers. In total, revenue from digital engagement services decreased $3.3 million, or 18%, to $9.3 million for the nine months ended June 30, 2015 compared to $12.4 million for the nine months ended June 30, 2014.  

 

Digital engagement services revenue as a percentage of total revenue decreased to 63% from 69% for the nine months ended June 30, 2015 compared to the prior period.  The decrease is attributable to the decreases in both iAPPS and non iAPPS digital engagement services revenue, a decrease in new engagements, and lower margin new iAPPSds engagements.

 

Subscription and Perpetual Licenses

 

Revenue from subscription and perpetual licenses remained relatively flat for the three months ended June 30, 2015 compared to the three months ended June 30, 2014 and decreased $134 thousand, or 3%, to $4.3 million for the nine months ended June 30, 2015 compared to $4.4 million for the nine months ended June 30, 2014.  The decrease for the nine months ended June 30, 2015 is due to a decrease in license revenue recognized as compared to the previous period.

 

 
24

 

 

Subscription and perpetual license revenue as a percentage of total revenue increased to 31% for the three months ended June 30, 2015 from 25% compared to the three months ended June 30, 2014. The increase as a percentage of revenues is attributable to the decreases in iAPPS digital engagement services revenues. Subscription and perpetual license revenue as a percentage of total revenue increased to 29% for the nine months ended June 30, 2015 from 24% compared to the nine months ended June 30, 2014. The increase as a percentage of revenues is attributable to the decreases in iAPPS digital engagement services revenues.

 

 

Managed Service Hosting

 

Revenue from managed service hosting remained flat for both the three and nine months ended June 30, 2015 compared to the three and nine months ended June 30, 2014. We continue to provide services for smaller hosting customers acquired through acquisitions with expected attrition to continue to increase.

 

Managed services revenue as a percentage of total revenue increased to 9% for the three months ended June 30, 2015 from 7% for three months ended June 30, 2014 and increased to 8% for the nine months ended June 30, 2015 from 7% for nine months ended June 30, 2014. The increase as a percentage of revenues is attributable to the decreases in iAPPS digital engagement services revenues.

 

Costs of Revenue

 

Total cost of revenue decreased $356 thousand to $2.7 million for the three months ended June 30, 2015 compared to $3.0 million for the three months ended June 30, 2014. Total cost of revenue decreased $412 thousand to $8.8 million for the nine months ended June 30, 2015 compared to $9.2 million for the nine months ended June 30, 2014. The decreases for the three and nine months ended June 30, 2015 compared to the three and nine months ended June 30, 2014 are primarily attributable to decreases in non-iAPPS labor costs in conjunction with the decrease in non-iAPPS digital engagement services.

 

   

Three Months

   

Three Months

                   

Nine Months

   

Nine Months

                 
   

Ended

   

Ended

                   

Ended

   

Ended

                 
   

June 30

   

June 30

           

%

   

June 30

   

June 30

           

%

 

Cost of revenue:

 

2015

   

2014

   

Change

   

Change

   

2015

   

2014

   

Change

   

Change

 

Digital engagement services

                                                               

iAPPS digital engagement costs

    2,059       2,297       (238 )     -10 %     6,747       6,777       (30 )     0 %

% of iAPPS digital engagement services revenue

    73 %     61 %                     80 %     63 %                

Other digital engagement costs

    55       234       (179 )     (76 %)     443       926       (483 )     (52 %)

% of other digital engagement services revenue

    37 %     47 %                     58 %     56 %                

Subtotal digital engagement costs

    2,114       2,531       (417 )     (16 %)     7,190       7,703       (513 )     (7 %)

% of digital engagement services revenue

    72 %     60 %                     78 %     62 %                
                                                                 

Subscription and perpetual licenses

    473       422       51       12 %     1,366       1,271       95       7 %

% of subscription and perpetual revenue

    31 %     28 %                     32 %     29 %                

Managed service hosting

    76       66       10       15 %     224       218       6       3 %

% of managed service hosting revenue

    18 %     16 %                     19 %     18 %                

Total cost of revenue

    2,663       3,019       (356 )     (12 %)     8,780       9,192       (412 )     (4 %)

Gross profit

  $ 2,213     $ 3,133     $ (920 )     (29 %)   $ 5,895     $ 8,775     $ (2,880 )     (33 %)

Gross profit margin

    45 %     51 %                     40 %     49 %                

 

 
25

 

 

Cost of Digital Engagement Services

 

Cost of digital engagement services decreased $417 thousand, or 16%, to $2.1 million for the three months ended June 30, 2015 compared to $2.5 million for the three months ended June 30, 2014. The decrease in iAPPS and non-iAPPS digital related costs are attributable to decreases in labor in line with the decreases in revenue.

 

Cost of digital engagement services decreased $513 thousand, or 7%, to $7.2 million for the nine months ended June 30, 2015 compared to $7.7 million for the nine months ended June 30, 2014. The decrease in iAPPS digital related costs is attributable decreases in labor in line with the decreases in revenue partially offset by some iAPPS ds projects sold at lower margins. Costs associated with non-iAPPS related engagements decreased in line with the decrease in non-iAPPS digital engagement services.

 

Cost of Subscription and Perpetual License

 

Cost of subscription and perpetual licenses increased $51 thousand, or 12%, to $473 thousand for the three months ended June 30, 2015 compared to $422 thousand for the three months ended June 30, 2014. Cost of subscription and perpetual licenses increased $95 thousand, or 7%, to $1.4 million for the nine months ended June 30, 2015 compared to $1.3 million for the nine months ended June 30, 2014. The increases for the three and nine months ended June 30, 2015 compared to the three and nine months ended June 30, 2014 are attributable to fixed costs to support our network operations center.

 

The cost of subscription and perpetual licenses as a percentage of subscription and perpetual license revenue increased to 31% from 28% compared to the three months ended June 30, 2014.  This is due to an decrease in perpetual revenue recognized in the current quarter compared to the previous. The cost of subscription and perpetual licenses as a percentage of subscription and perpetual license revenue increased to 32% from 29% compared to the nine months ended June 30, 2014.  This is due to a decrease in perpetual revenue recognized in the current period compared to the previous.

 

Cost of Managed Service Hosting

 

Cost of managed service hosting increased $10 thousand, or 15%, to $76 thousand for the three months ended June 30, 2015 compared to $66 thousand for the three months ended June 30, 2014. The cost of managed services as a percentage of managed services revenue increased to 18% from 16% compared to the three months ended June 30, 2014. The percentage increases are attributable to fixed costs to support the network operations center.

 

Cost of managed service hosting increased $6 thousand, or 3%, to $224 thousand for the nine months ended June 30, 2015 compared to $218 thousand for the nine months ended June 30, 2014. The cost of managed services as a percentage of managed services revenue increased to 19% from 18% compared to the nine months ended June 30, 2014. The percentage increases are attributable to fixed costs to support the network operations center.

 

 

Operating Expenses

 

   

Three Months

   

Three Months

                   

Nine Months

   

Nine Months

                 
   

Ended

   

Ended

                   

Ended

   

Ended

                 
   

June 30

   

June 30

           

%

   

June 30

   

June 30

           

%

 

Operating expenses:

 

2015

   

2014

   

Change

   

Change

   

2015

   

2014

   

Change

   

Change

 

Sales and marketing

    1,245       1,992       (747 )     (38% )     4,590       6,030       (1,440 )     (24% )

% of total revenue

    26 %     32 %                     31 %     34 %                

General and administrative

    980       1,110       (130 )     (12% )     3,110       3,308       (198 )     (6% )

% of total revenue

    20 %     18 %                     21 %     18 %                

Research and development

    373       613       (240 )     (39% )     1,442       1,715       (273 )     (16% )

% of total revenue

    8 %     10 %                     10 %     10 %                

Depreciation and amortization

    422       510       (88 )     (17% )     1,315       1,515       (200 )     (13% )

% of total revenue

    9 %     8 %                     9 %     8 %                

Total operating expenses

    3,020       4,225       (1,205 )     (29% )     10,457       12,568       (2,111 )     (17% )

 

 

Sales and Marketing Expenses

 

Sales and marketing expenses decreased $747 thousand to $1.3 million, or 38%, for the three months ended June 30, 2015 compared to $2.0 million for the three months ended June 30, 2014 and decreased 24% to $4.6 million for the three months ended June 30, 2015 compared to $6.0 million for the nine months ended June 30, 2014.  Sales and marketing expenses represented 26% and 32% of total revenue for the three months ended June 30, 2015 and 2014, respectively, and 31% of total revenue for the nine months ended June 30, 2015 and 2014. The decreases as a percentage of revenues for the three and nine months ended June 30, 2015 compared to the prior periods is primarily attributable to decreases in headcount, sales commissions, and marketing expenses.

 

 
26

 

 

General and Administrative Expenses

 

General and administrative expenses decreased $130 thousand, or 12%, to $980 thousand for the three months ended June 30, 2015 compared to $1.1 million for the three months ended June 30, 2014 and decreased $198 thousand, or 6%, to $3.1 million for the nine months ended June 30, 2015 compared to $3.3 million for the nine months ended June 30, 2014.   The decreases in expense for the three and nine months ended June 30, 2015 compared to the prior periods are due to decreases in headcount. Partially offsetting the overall decrease for the nine months ended June 30, 2015 was a charge of $131 for an adjustment to an earnout accrual. General and administrative expenses represented 20% and 18% of total revenue for the three months ended June 30, 2015 and 2014, respectively, and 21% and 18% of total revenue for the nine months ended June 30, 2015 and 2014, respectively.

 

Research and Development

 

Research and development expense decreased by $240 thousand, or 39%, to $373 thousand for the three months ended June 30, 2015 compared to $613 thousand for the three months ended June 30, 2014 and decreased $273 thousand, or 16% to $1.4 million for the nine months ended June 30, 2015 compared to $1.7 million for the previous quarter. The decreases in research and development expense for the three and nine months ended June 30, 2015 compared to prior periods is due to decreases in headcount and personnel expenses.

 

Research and development expense represented 8% and 10% of total revenue for the three months ended June 30, 2015 and 2014, respectively, and 10% of total revenue for both the nine months ended June 30, 2015 and 2014. The decrease in expense as a percentage of revenues for the three and nine months ended June 30, 2015 compared to the prior periods is due to the decreases in headcount and personnel expenses.

 

 

Depreciation and Amortization

 

Depreciation and amortization expense decreased $88 thousand, or 17%, to $422 thousand for the three months ended June 30, 2015 compared to $510 thousand for the three months ended June 30, 2014. Equipment related depreciation and amortization related to leasehold improvements declined due to retirements and assets reaching their expected useful lives. Depreciation and amortization represented 9% and 8% of revenue for the three months ended June 30, 2015 and 2014.   

 

Depreciation and amortization decreased $200 thousand, or 13%, to $1.3 million for the nine months ended June 30, 2015 compared to $1.5 million for the nine months ended June 30, 2014.  Equipment related depreciation and amortization related to leasehold improvements declined due to retirements and assets reaching their expected useful lives. Depreciation and amortization represented 9% and 8% of revenue for the nine months ended June 30, 2015 and 2014.   

 

 

 

Net Loss

 

   

Three Months

   

Three Months

                   

Nine Months

   

Nine Months

                 
   

Ended

   

Ended

                   

Ended

   

Ended

                 
   

June 30

   

June 30

           

%

   

June 30

   

June 30

           

%

 
   

2015

   

2014

   

Change

   

Change

   

2015

   

2014

   

Change

   

Change

 
                                                                 

Loss from operations

    (807 )     (1,092 )     285       (26% )     (4,562 )     (3,793 )     (769 )     20 %

Interest and other income (expense), net

    (278 )     (190 )     (88 )     46 %     (643 )     (524 )     (119 )     23 %

Loss before income taxes

    (1,085 )     (1,282 )     197       (15% )     (5,205 )     (4,317 )     (888 )     21 %

Provision for income taxes

    25       24       1       4 %     88       80       8       10 %
                                                                 

Net loss

  $ (1,110 )   $ (1,306 )   $ 196       (15% )   $ (5,293 )   $ (4,397 )   $ (896 )     20 %
                                                                 

Non-GAAP Measure:

                                                               

Adjusted EBITDA

  $ (190 )   $ (336 )   $ 146       (43% )   $ (2,646 )   $ (1,639 )   $ (1,007 )     61 %

 

 
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Loss from operations

 

The loss from operations was ($807) thousand for three months ended June 30, 2015, compared to a loss of ($1.1) million in the prior period and a loss of ($4.6) million for the nine months ended June 30, 2015 compared to ($3.8) million for the prior year. Contributing to the overall loss for the three and nine months ended June 30, 2015 was a decrease in gross profit margin as we maintained fixed costs to support our revenue base. The decline in the gross profit margin the three and nine months ended June 30, 2015 was partially offset by a decrease in overall operating expenses, as we streamlined costs in line with the expected revenue shortfall.

 

Income Taxes

 

The provision for income tax expense was $25 thousand and $24 thousand for the three months ended June 30, 2015 and 2014, respectively, and $88 thousand and $80 thousand for the nine months ended June 30, 2015 and 2014, 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, impairment of goodwill and intangible assets, and preferred stock dividends (“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, preferred stock dividends, 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) income (which is the most directly comparable GAAP operating performance measure) to EBITDA, and EBITDA to Adjusted EBITDA

 

   

Three Months Ended

   

Nine Months Ended

 
   

June 30,

   

June 30,

 

(in thousands)

 

2015

   

2014

   

2015

   

2014

 

Net loss applicable to common shareholders

  $ (1,141 )   $ (1,306 )   $ (5,375 )   $ (4,397 )

Provision for income tax

    25       24       88       80  

Interest expense (income), net

    220       190       585       524  

Amortization of intangible assets

    141       157       447       498  

Depreciation

    258       333       814       980  

Net loss on disposal of fixed assets

    58       -       58       -  

EBITDA

    (439 )     (602 )     (3,383 )     (2,315 )

Other amortization

    137       132       411       375  

Stock-based compensation

    81       134       244       301  
Preferred stock dividends     31       -       82       -  

Adjusted EBITDA

  $ (190 )   $ (336 )   $ (2,646 )   $ (1,639 )

 

 
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The decrease in Adjusted EBITDA for the three months ended June 30, 2015 compared to the three months ended June 30, 2014 is primarily due to the decrease in operating expenses, including depreciation and amortization, offset by the decrease in revenues. The decrease in Adjusted EBITDA for the nine months ended June 30, 2015 compared to the nine months ended June 30, 2014 is primarily due to the decrease in revenues and gross profit margin.

 

 

Liquidity and Capital Resources

 

Cash Flows

 

Operating Activities

 

Cash used in operating activities was $2.6 million for the nine months ended June 30, 2015 compared to cash used in operating activities of $2.9 million for the nine months ended June 30, 2014. This increase compared to the prior period was due to payments made to vendors in the current period, the adjustments for non-cash items such as amortization and depreciation for the period, and the higher net loss for the period.

  

Investing Activities

 

Cash used in investing activities was $519 thousand for the nine months ended compared to $862 thousand for the nine months ended June 30, 2014.   In the nine months ended June 30, 2015, we purchased additional equipment to support our network operations center and made contingent acquisition payments.

 

Financing Activities

 

Cash provided by financing activities was $2.5 million for the nine months ended June 30, 2015 compared to cash provided by financing activities of $2.6 million for the nine months ended June 30, 2014.  During the nine months ended June 30, 2015, we raised $1.8 million in connection with a private placement of 40,000 shares of Series A convertible preferred stock in October 2014, as well as $2 million received from Mr. Taglich for term notes with maturity dates of June 2016, July 2016, and September 2016, and short term loans from BridgeBank of $1.5 million. Offsetting these proceeds, were payments of $670 thousand on the Bridge Bank line of credit and $2.5 million on a short term loans from BridgeBank.

 

Capital Resources and Liquidity Outlook

 

During the current fiscal year, we issued $2 million of term notes to Mr. Michael Taglich, a shareholder and investor, and raised $1.8 million in connection with a private placement of 40,000 shares of Series A convertible preferred stock. In May 2015, the Company extended the term of its BridgeBank Loan from an expiration date of March 31, 2016 to June 30, 2016.

 

We believe that cash generated from operations, proceeds from the bank line of credit, the sale of common stock and sale of preferred stock, and term loans from shareholders will be sufficient to fund the Company’s working capital and capital expenditure needs in the foreseeable future. However, we currently have a borrowing facility with Bridge 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 June 30, 2015, we had an accrued contingent earnout liability of $583 thousand from acquisitions completed in prior fiscal years, which are scheduled to be paid out through fiscal 2016. Contingent earnout payments related to acquisitions are paid when and if certain revenue and earnings targets are achieved.

 

 
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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”).

 

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) managed service hosting; and (iii) subscriptions and perpetual licenses.

 

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.

 

 
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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 on either a fixed price or time and materials basis.  For its 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.  For time and materials contracts, revenues are recognized as the services are provided.  

 

Digital engagement services also include retained professional services contracted for on an “on call” basis or for a certain amount of hours each month. Such arrangements generally provide for a guaranteed availability of a number of professional services hours each month on a “use it or lose it” basis.   For retained professional services sold on a stand-alone basis we recognize revenue as the services are delivered or over the term of the contractual retainer period. 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 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.  

 

Customers may also 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 either annual or month-to-month arrangements that provide for termination for convenience by either party upon 90 days’ notice.  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.  

 

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 either annual or month-to-month 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.

 

 
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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 ASC Topic 605-985.  In assessing the hierarchy of relative selling price for PCS, we have determined that VSOE is established for PCS. VSOE for PCS is based on the price of PCS when sold separately, which has been established via annual renewal rates. Similarly, when the Company licenses its software on a perpetual basis in a multiple element arrangement that also includes managed service hosting (“hosting”), we have determined that VSOE is established for hosting based on the price of the hosting when sold separately, which has been established based on renewal rates of the hosting contract.  Revenue recognition for perpetual licenses sold with application development services are considered on a case by case basis.  The Company has not established VSOE for perpetual licenses or fixed price development services and therefore in accordance with ASC Topic 605-985, when perpetual licenses are sold in multiple element arrangements including application development services where VSOE for the services has not been established, the license revenue is deferred and recognized using contract accounting. The Company has determined that services are not essential to the functionality of the software and it has the ability to make estimates necessary to apply proportional performance model. In those cases where perpetual licenses are sold in a multiple element arrangement that includes application development services where VSOE for the services has been established, the license revenue is recognized under the residual method and the application services are recognized upon delivery.  

 

In determining VSOE for the digital engagement services element, the separability of the services from the software license and the value of the services when sold on a standalone basis are considered.  The Company also considers the categorization of the services, the timing of when the services contract was signed in relation to the signing of the perpetual license contract and delivery of the software, and whether the services can be performed by others.  The Company has concluded that its application development services are not required for the customer to use the product but, rather enhance the benefits that the software can bring to the customer.  In addition, the services provided do not result in significant customization or modification of the software and are not essential to its functionality, and can also be performed by the customer or a third party.  If an application development services arrangement does qualify for separate accounting, the Company recognizes the perpetual license on a residual basis.  If an application development services arrangement does not qualify for separate accounting, the Company recognizes the perpetual license under the proportional performance model as described above.

 

 
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When subscription arrangements are sold with application development services, the Company uses its judgment as to whether the application development services qualify as a separate unit of accounting. When subscription service arrangements involve multiple elements that qualify as separate units of accounting, the Company allocates arrangement consideration in multiple-deliverable arrangements at the inception of an arrangement to all deliverables based on the relative selling price model in accordance with the selling price hierarchy, which includes: (i) VSOE when available; (ii) TPE if VSOE is not available; and (iii) ESP if neither VSOE or TPE is available. For those subscription arrangements sold with multiple elements whereby the application development services do not qualify as a separate unit of accounting, the application services revenue is recognized ratably over the subscription period. Subscriptions also include a PCS component, and the Company has determined that the two elements cannot be separated and must be recognized as one unit over the applicable service period. Set up fees paid by customers in connection with subscription arrangements are deferred and recognized ratably over the longer of the life of the hosting period or the expected lives of customer relationships, which generally range from two to three years. We continue to evaluate the length of the amortization period of the set up fees as we gain more experience with customer contract renewals and our newer product offerings.

 

Customer Payment Terms

 

Payment terms with customers typically require payment 30 days from invoice date. Payment terms may vary by customer but generally do not exceed 45 days from invoice date.  Invoicing for digital engagement services are either monthly or upon achievement of milestones and payment terms for such billings are within the standard terms described above. Invoicing for subscriptions and hosting are typically issued monthly and are generally due in the month of service. The Company’s subscription and hosting agreements provide for refunds when service is interrupted for an extended period of time and are reserved for in the month in which they occur if necessary.

 

Our digital engagement services agreements with customers do not provide for any refunds for services or products and therefore no specific reserve for such is maintained. In the infrequent instances where customers raise a concern over delivered products or services, we have endeavored to remedy the concern and all costs related to such matters have been insignificant in all periods presented.

 

Warranty

 

Certain arrangements include a warranty period, which is generally 30 days from the completion of work. In hosting arrangements, we provide warranties of up-time reliability. We continue to monitor the conditions that are subject to the warranties to identify if a warranty claim may arise. If we determine that a warranty claim is probable, then any related cost to satisfy the warranty obligation is estimated and accrued. Warranty claims to date have been immaterial.

 

Reimbursable Expenses

 

In connection with certain arrangements, reimbursable expenses are incurred and billed to customers and such amounts are recognized as both revenue and cost of revenue.

 

Allowance for Doubtful Accounts

 

We maintain an allowance for doubtful accounts which represents estimated losses resulting from the inability, failure or refusal of our clients to make required payments.

 

We analyze historical percentages of uncollectible accounts and changes in payment history when evaluating the adequacy of the allowance for doubtful accounts. We use an internal collection effort, which may include our sales and services groups as we deem appropriate. Although we believe that our allowances are adequate, if the financial condition of our clients deteriorates, resulting in an impairment of their ability to make payments, or if we underestimate the allowances required, additional allowances may be necessary, resulting in increased expense in the period in which such determination is made.

 

 

Accounting for Cost of Computer Software to be Sold, Leased or Otherwise Marketed   

 

We charge research and development expenditures for technology development to operations as incurred.  However, in accordance with Codification 985-20 Costs of Software to be Sold Leased or Otherwise Marketed, we capitalize certain software development costs subsequent to the establishment of technological feasibility.  Based on our product development process, technological feasibility is established upon completion of a working model. Certain costs incurred between completion of a working model and the point at which the product is ready for general release is capitalized if significant. Once the product is available for general release, the capitalized costs are amortized in cost of sales.

 

 
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Accounting for Goodwill and Intangible Assets

 

Goodwill is tested for impairment annually during the fourth quarter of every year and more frequently if events and circumstances indicate that the asset might be impaired.  In assessing goodwill for impairment, an entity has the option to assess qualitative factors to determine whether events or circumstances indicate that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount. We assess goodwill at the consolidated level as one reporting unit. If this is the case, then performing the quantitative two-step goodwill impairment test is unnecessary. An entity can choose not to perform a qualitative assessment for any or all of its reporting units, and proceed directly to the use of the two-step impairment test. In assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we assess relevant events and circumstances that may impact the fair value and the carrying amount of a reporting unit. The identification of relevant events and circumstances and how these may impact a reporting unit’s fair value or carrying amount involve significant judgments by management. These judgments include the consideration of macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, events which are specific to Bridgeline, and trends in the market price of our common stock. Each factor is assessed to determine whether it impacts the impairment test positively or negatively, and the magnitude of any such impact.

 

For fiscal 2014, we performed the annual assessment of our goodwill during the fourth quarter of 2014, using the qualitative approach described above. Based on our qualitative assessment, we concluded that it was not more likely than not that the fair values of any of our reporting units were less than their carrying amounts, and therefore it was not necessary to perform the quantitative two-step impairment test. The key qualitative factors that led to our conclusion included the following: (i) Positive access to capital with two recent stock offerings totaling $5 million in capital; (ii) Positive market acceptance of our multi-unit products; and (iii) Fair market value of Company is in excess of book value.

 

Accounting for Stock-Based Compensation

 

At June 30, 2015, we maintained one stock-based compensation plan and one employee stock purchase plan which are more fully described in Note 12 to the Consolidated Financial Statements of our Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 29, 2014.

 

The Company accounts for stock compensation awards in accordance with the Compensation-Stock Compensation Topic of the Codification.  Share-based payments (to the extent they are compensatory) are recognized in our consolidated statements of operations based on their fair values.

 

We recognize stock-based compensation expense for share-based payments issued or assumed after October 1, 2006 that are expected to vest on a graded, accelerated basis over the service period of the award, which is generally three years.  We recognize the fair value of the unvested portion of share-based payments granted prior to October 1, 2006 over the remaining service period, net of estimated forfeitures.  In determining whether an award is expected to vest, we use an estimated, forward-looking forfeiture rate based upon our historical forfeiture rate and reduce the expense over the recognition period. Estimated forfeiture rates are updated for actual forfeitures quarterly.  We also consider, each quarter, whether there have been any significant changes in facts and circumstances that would affect our forfeiture rate.  Although we estimate forfeitures based on historical experience, actual forfeitures in the future may differ.  In addition, to the extent our actual forfeitures are different than our estimates, we record a true-up for the difference in the period that the awards vest, and such true-ups could materially affect our operating results.

 

We estimate the fair value of employee stock options using the Black-Scholes-Merton option valuation model.  The fair value of an award is affected by our stock price on the date of grant as well as other assumptions including the estimated volatility of our stock price over the term of the awards and the estimated period of time that we expect employees to hold their stock options.  The risk-free interest rate assumption we use is based upon United States treasury interest rates appropriate for the expected life of the awards.  We use the historical volatility of our publicly traded options in order to estimate future stock price trends.  In order to determine the estimated period of time that we expect employees to hold their stock options, we use historical trends of employee turnovers.  Our expected dividend rate is zero since we do not currently pay cash dividends on our common stock and do not anticipate doing so in the foreseeable future. The aforementioned inputs entered into the option valuation model we use to fair value our stock awards are subjective estimates and changes to these estimates will cause the fair value of our stock awards and related stock-based compensation expense we record to vary.

 

 
34

 

 

We record deferred tax assets for stock-based awards that result in deductions on our income tax returns, based on the amount of stock-based compensation recognized and the statutory tax rate in the jurisdiction in which we will receive a tax deduction.  

 

 

Item 3.                                   Qualitative and Quantitative Disclosures About Market Risk.

 

Not required.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our President and Chief Executive Officer (Principal Executive Officer) and our Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer), as appropriate, to allow timely decisions regarding required disclosure.  In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

As of June 30, 2015 we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in enabling us to record, process, summarize and report information required to be included in our periodic filings with the Securities and Exchange Commission within the required time period.

 

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal controls over financial reporting that occurred during the quarter ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 
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PART II – OTHER INFORMATION

 

Item 1.                                    Legal Proceedings.

 

From time to time we are subject to ordinary routine litigation and claims incidental to our business. We are not currently involved in any legal proceedings that we believe are material beyond those previously disclosed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 29, 2014.

 

 

Item 2.                                   Unregistered Sales of Equity Securities and Use of Proceeds.

 

The following summarizes all sales of our unregistered securities during the quarter ended March 31, 2015. The securities in the below-referenced transactions were (i) issued without registration and (ii) were subject to restrictions under the Securities Act and the securities laws of certain states, in reliance on the private offering exemptions contained in Sections 4(2), 4(6) and/or 3(b) of the Securities Act and on Regulation D promulgated there under, and in reliance on similar exemptions under applicable state laws as transactions not involving a public offering. Unless stated otherwise, no placement or underwriting fees were paid in connection with these transactions.

 

Stock Options

 

During the fiscal quarter ended June 30, 2015, the Company granted 500 stock options under its Amended and Restated Stock Incentive Plan at a weighted average exercise price of $1.71 per share.

 

The securities were issued exclusively to our directors, executive officers and employees. The issuance of options and the shares of common stock issuable upon the exercise of such options as described above were issued pursuant to written compensatory plans or arrangements with our employees, directors and consultants, in reliance on the exemptions from the registration provisions of the Securities Act set forth in Section 4(2) thereof relative to sales by an issuer not involving any public offering, to the extent an exemption from such registration was required. 

 

Warrants

 

During the fiscal quarter ended June 30, 2015, the Company issued five year warrants to purchase an aggregate of 60,000 shares of Common Stock with an exercise price of $4.00 per share and three year warrants to purchase an aggregate of 160,000 shares of Common Stock with an exercise price of $1.75 per share. There are no plans to register the common stock issued in this offering, however in the event the Company does register other Common stock, we agreed to provide piggyback registration rights with respect to the shares of common stock sold in the offering and underlying the warrants.

 

The warrants were issued in reliance on the exemptions from the registration provisions of the Securities Act set forth in Section 4(2) thereof relative to sales by an issuer not involving any public offering, to the extent an exemption from such registration was required. 

 

 

Item 5. Other Information

 

Amendment to Bank Loan Agreement

 

On May 12, 2015, the Company entered into an amendment to its Loan Agreement with BridgeBank to extend the term of the loan from an expiration date of March 31, 2016 to June 30, 2016 (the “Loan Amendment”). In August 2015, the loan was further extended to a maturity date of September 30, 2016. On July 21, 2016, the Loan Agreement with Bridgebank was further amended to obtain a waiver for certain reporting covenants for the month of May 2015. In addition, BridgeBank increased the borrowing rate from prime plus 1.00% (4.25%) to prime plus 5.00% (8.25%).

 

 

Entry into a Material Definitive Agreement; Creation of a Direct Financial Obligation

 

On July 21, 2015, the Company issued a Term Note to Michael Taglich to document a loan by Mr. Taglich to the Company of $500,000. The terms of this note provide that the Company will pay interest at a rate of 8% per annum and the note will mature on July 21, 2016.

 

 
36

 

 

In consideration of the loan by Mr. Taglich, the Company issued Mr. Taglich a warrant to purchase 160,000 shares of Common Stock of the Company at a price equal to $1.75 per share on July 21, 2015. The July warrant has a term of three years and is exercisable upon date of issuance. The Company agreed to provide piggyback registration rights with respect to the shares of common stock underlying the warrants.

 

Mr. Taglich is a member of the Board of Directors of the Company.

 

The foregoing description of the Loan Amendment, Note and warrant does not purport to be complete and is qualified in its entirety by reference to the full text of such documents, copies of which are filed as exhibits to this Report on Form 10-Q.

 

 
37

 

 

 

Item 6.                                   

Exhibits.

 

Exhibit No.

 

Description of Document

     

3.1

 

 

Certificate of Amendment to Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on May 5, 2015)

     

10.1

 

Term Note in the principal amount of $500,000, dated July 21, 2015 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 24, 2015)

     

10.2

 

Common Stock Purchase Warrant issued by the Company to Michael Taglich, dated July 21, 2015 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on July 24, 2015)

     

10.3

 

Amendment to Loan and Security Agreement with BridgeBank (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on July 24, 2015)

     
10.4   Amendment to Loan and Security Agreement with BridgeBank
     

31.1

 

Certification required by Rule 13a-14(a) or Rule 15d-14(a).

     
31.2

 

Certification required by Rule 13a-14(a) or Rule 15d-14(a).

     

32.1

 

Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).

 

 

 

32.2

 

Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).

 

 

 

101.INS*    XBRL Instance
     
101.SCH*   XBRL Taxonomy Extension Schema
     
101.CAL*   XBRL Taxonomy Extension Calculation
     
101.DEF*   XBRL Taxonomy Extension Definition
     
101.LAB*   XBRL Taxonomy Extension Labels
     
101.PRE*   XBRL Taxonomy Extension Presentation

 

*XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 and 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

 
38

 

 

 

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

   

Bridgeline Digital, Inc.

    (Registrant)

 

 

 

 

 

 

 

 

 August 14, 2015

 

/s/ Thomas L. Massie  

 Date

 

Thomas L. Massie  

 

 

President and Chief Executive Officer  

    (Principal Executive Officer)

 

 

 

 

 

 

 

 

 

 

 

 

 August 14, 2015

 

/s/ Michael D. Prinn  

 Date

 

Michael D. Prinn  

 

 

Executive Vice President and Chief Financial Officer  

    (Principal Financial and Accounting Officer)

 

 

 
39

 

 

INDEX OF EXHIBITS

 

 

 Exhibit No.

 

 Description of Document

     

10.4

 

Amendment to Loan and Security Agreement with BridgeBank

 

31.1

 

 

Certification required by Rule 13a-14(a) or Rule 15d-14(a).

 

 

 

31.2

 

Certification required by Rule 13a-14(a) or Rule 15d-14(a).

 

 

 

32.1

 

Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).

 

 

 

32.2

 

Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).

 

 

 

101.INS*    XBRL Instance
     
101.SCH*   XBRL Taxonomy Extension Schema
     
101.CAL*   XBRL Taxonomy Extension Calculation
     
101.DEF*   XBRL Taxonomy Extension Definition
     
101.LAB*   XBRL Taxonomy Extension Labels
     
101.PRE*   XBRL Taxonomy Extension Presentation

 

*XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 and 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

40