10-K 1 blin20190930_10k.htm FORM 10-K blin20190930_10k.htm
 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 (Mark One)

☒ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 2019

 

☐ 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

IRS Employer Identification No.

   
100 Summit Drive  
Burlington, Massachusetts 01803
(Address of Principal Executive Offices) (Zip Code)

 

 

(781) 376-5555

(Registrant’s telephone number)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol

Name of exchange on which registered

Common Stock, $0.001 par value per share

BLIN

The NASDAQ Stock Market, LLC

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ☐     No   ☒

 

Indicate by check mark if the registrant in not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   ☐     No   ☒

 

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, as amended (“Exchange Act”) 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 every Interactive Data File required to be submitted 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 such files). Yes  ☒   No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer smaller reporting company, or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ☐

Accelerated filer   ☐

Non-accelerated filer   ☒

Smaller reporting company ☒

 

Emerging growth company ☐

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ☐     No   ☒

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $2,598,601 based on the closing price of $8.00 of the issuer’s common stock, par value $0.001 per share, as reported by the NASDAQ Stock Market on March 31, 2019.

 

On December 10, 2019, there were 2,798,475 shares of the registrant’s common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE: NONE

 

 

 

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Forward Looking Statement

Statements contained in this Annual Report on Form 10-K 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-K 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, dependence on third parties, the security of our software and response to cyber security risks, our ability to meet our financial obligations and commitments, our dependence on our management team and key personnel, our ability to hire and retain future key personnel, our ability to maintain an effective system of internal controls, and our ability to respond to government regulations. 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 herein and 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” or “Bridgeline Digital” we mean Bridgeline Digital, Inc.

 

PART I

 

Item 1. Business.

 

Overview

 

Bridgeline Digital, The Digital Engagement Company™, helps customers maximize the performance of their full digital experience from websites and intranets to eCommerce experiences. Bridgeline’s Unbound platform is a Digital Experience Platform that deeply integrates Web Content Management, eCommerce, eMarketing, Social Media management, and Web Analytics (Insights) with the goal of assisting marketers to deliver exceptional digital experiences that attract, engage, nurture and convert their customers across all channels. Bridgeline offers a core accelerator framework for rapidly implementing digital experiences on the Bridgeline Unbound Platform which provides customers with cost-effective solutions in addition to velocity to market.

 

Bridgeline’s Unbound platform combined with its professional services assists customers in digital business transformation, driving lead generation, increasing revenue, improving customer service and loyalty, enhancing employee knowledge, and reducing operational costs. The Bridgeline Unbound platform bridges the gaps between web content management, eCommerce, eMarketing, social and web analytics by providing all of these components in one unified and deeply integrated platform.

 

Our Unbound Franchise product empowers large franchises, healthcare networks, associations/chapters and other multi-unit organizations to manage a large hierarchy of digital properties at scale. The platform provides an easy-to-use administrative console that enables corporate marketing to provide consistency in branding and messaging while providing flexible publishing capabilities at the local-market level. The platform empowers brand networks to unify, manage, scale and optimize a hierarchy of web properties and marketing campaigns on a global, national and local level.

 

The Unbound platform is delivered through a cloud-based software as a service (“SaaS”) 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 software resides on a dedicated infrastructure in either the customer’s facility or manage-hosted by Bridgeline via a cloud-based hosted services model.

 

Bridgeline Digital was incorporated under the laws of the State of Delaware on August 28, 2000.

 

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Locations

 

The Company’s corporate office is located in Burlington, Massachusetts.  The Company maintains regional field offices serving the following geographical locations: Boston, MA; Chicago, IL; New York, NY; and Ontario, Canada.  The Company has three wholly-owned subsidiaries: Bridgeline Digital Pvt. Ltd. located in Bangalore, India, Bridgeline Digital Canada Inc. located in Ontario, Canada, and Stantive Technologies Pty Ltd. located in Australia.

 

Products and Services

 

Products

 

Bridgeline Unbound Platform

 

Subscription and Perpetual Licenses

 

Bridgeline Unbound is available as either a SaaS or perpetual license and is reported as subscription and perpetual licenses in the accompanying consolidated financial statements.

 

The Bridgeline Unbound platform provides a unified common set of shared software modules that are critical to today’s mission critical websites, on-line stores, intranets, extranets, and portals. The Bridgeline Unbound platform empowers companies and developers to create websites, web applications and online stores with advanced business logic, state-of-the-art graphical user interfaces, and improved quality.

 

The Bridgeline Unbound platform is a Digital Experience Platform (DXP) platform that unifies Content Management, eCommerce, eMarketing, and Analytic capabilities deep within the websites, intranets or online stores in which they reside, enabling customers to enhance and optimize the value of their web properties and better engage their website users. The Bridgeline Unbound platform significantly enhances WEM and Customer Experience Management (CXM) capabilities.

 

The Bridgeline Unbound Franchise offering was built specifically to support the needs of multi-unit organizations and franchises. Bridgeline's cloud-based platform allows companies to execute local marketing campaigns, follow SEO best practices, drive eCommerce initiatives, and measure results with actionable analytics.

 

The Bridgeline Unbound suite of products includes:

 

Bridgeline Unbound Experience Manager is a marketing automation engine and content management system in one – delivering the digital experiences consumers demand. Centered on robust audience segmentation and list management, the tool allows marketers to easily create personalized customer journeys. Each Bridgeline Unbound implementation incorporates a set of flexible templates and modules to get you started quickly in building your full digital experience with Bridgeline Unbound Pro. From there, you can opt to further customize these templates and incorporate any necessary custom application integrations with Bridgeline Unbound Enterprise to meet an organization’s unique business need. 

   

Bridgeline Unbound Content Manager allows non-technical users to create, edit, and publish content via a browser-based interface. The advanced, easy-to-use interface allows businesses to keep content and promotions fresh - whether for a public commercial site or a company intranet. Bridgeline Unbound Content Manager handles the presentation of content based on a sophisticated indexing and security scheme that includes management of front-end access to online applications. The system provides a robust library functionality to manage permissions, versions and organization of different content types, including multimedia files and images. Administrators are able to easily configure a simple or advanced workflow. The system can accommodate the complexity of larger companies with strict regulatory policies. Bridgeline Unbound Content Manager is uniquely integrated and unified with Bridgeline Unbound Insights, Bridgeline Unbound Commerce, and Bridgeline Unbound Marketing; providing our customers with precise information, accurate results, expansion options, and stronger user adoption.

 

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Bridgeline Unbound Commerce is an online B2B and B2C Commerce solution that allows users to maximize and manage all aspects of their domestic and international Commerce initiatives. The customizable dashboard provides customers with a real-time overview of the performance of their online stores, including sales trends, demographics, profit margins, inventory levels, inventory alerts, fulfillment deficiencies, average check out times, potential production issues, and delivery times. Bridgeline Unbound Commerce also provides backend access to payment and shipping gateways. In combining Bridgeline Unbound Commerce with Bridgeline Unbound Insights and Bridgeline Unbound Marketing, our customers can take their Commerce initiatives to an advanced level by personalizing their product offerings, improving their marketing effectiveness, providing value-added services and cross selling additional products. Bridgeline Unbound Commerce is uniquely integrated and unified with Bridgeline Unbound Insights, Bridgeline Unbound Content Manager, and Bridgeline Unbound Marketing; providing our customers with precise information, more accurate results, expansion options, and stronger user adoption.

 

Bridgeline Unbound Marketing is a powerful online marketing management solution that helps marketers drive more qualified traffic to their sites through personalized and highly targeted marketing automation flows. Marketing's powerful feature set includes end-to-end campaign administration - from drag-and-drop landing pages with our flexible form builder to behavior-based drip email campaigns, add-on dynamic contact and distribution list management, event-based response marketing, wizard-driven email campaign creation, as well as built-in goal tracking tools to measure campaign effectiveness and ROI.

 

Bridgeline Unbound Insights provides the ability to manage, measure and optimize web properties by recording detailed events and subsequently mine data within a web application for statistical analysis. Our customers have access to information regarding where their visitors are coming from, what content and products their viewers are most interested in, and how they navigate through a particular web application. Through user-definable web reports, Bridgeline Unbound Insights provides deep insight into areas like visitor usage, content access, age of content, actions taken, event triggers, and reports on both client and server-side events. Bridgeline Unbound Insight’s smart recommendation engine uses this data and identifies actionable solutions enabling our customers to optimize site content and reach their digital campaign goals.

   

Bridgeline Unbound Social is a social media management solution that empowers customers to easily set up customized watch lists tailored by social network, topic, or author to monitor relevant conversations happening on social media, popular websites and blogs. Customers can also prioritize and engage in conversations across the web and leverage the power of publishing content to department, dealer, franchise or other social media accounts.

   

Bridgeline Unbound Franchises is a web content management and eCommerce platform built specifically to support the needs of multi-unit organizations and franchises. Bridgeline Unbound Franchise deeply integrates content management, eCommerce, eMarketing, and web analytics and is a self-service web platform that is offered to each authorized franchise or multi-unit organization for a monthly subscription fee. Bridgeline Unbound Franchise acts as a control center for a large organization’s distributed websites enabling local content publishing that is managed through a workflow approval process that gives corporate marketing control of the brand and message. Bridgeline Unbound Franchise also supports responsive design that adapts to specific device screen sizes access a website, driving more positive user experiences and engagement. Bridgeline Unbound Franchise is a cloud-based SaaS solution.

 

 

In addition, Bridgeline also provides an alternative Digital Experience Platform that is 100% native on Salesforce called OrchestraCMS. This software is available as a SaaS license and is reported as subscription licenses in the accompanying consolidated financial statements.

 

 

OrchestraCMS by Bridgeline is the only content and digital experience platform built 100% native on Salesforce. OrchestraCMS helps Salesforce customers create compelling digital experiences for their customers, partners, and employees; uniquely combining content with business data, processes and applications across any channel or device including Salesforce Communities, social media, portals, intranets, websites, applications and services.

 

OrchestraCMS also has a rich set of APIs to enable development of custom solutions, third-party integrations and deliver digital transformation initiatives on the Salesforce platform helping customers drive deeper engagement and collaboration, increase efficiency and minimize risk.

 

 

Finally, Bridgeline supports an enterprise site search solution with its Celebros Search product. This software is available as a SaaS license and is reported as subscription licenses in the accompanying consolidated financial statements.

 

 

Celebros Search by Bridgeline is a commerce oriented, site search product that provides for Natural Language Processing and with artificial intelligence to present very relevant search results based on long-tail keyword searches. Celebros Search understands which word in the search query is a product, an attribute or an expression that is related to a price or product. With the use of natural language and intent algorithms, Celebros Search ensures that the customers receive the best results every time no matter the length or complexity of the search query. Celebros Search is a leading semantic search and conversion technology that is available in seven languages. Celebros Search has plug-ins into the Bridgeline Unbound Commerce offering in addition to many other third-party Commerce platforms such as Magento, Shopify, Hybris and more.

 

Celebros Search customers include many e-commerce retailers and merchants in eleven countries, including the United States, Europe and Asia. A number of these are among Internet Retailer’s Top 100/500 companies and represent a broad range of industry segments, revenue and catalog sizes.

 

 

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Services

 

Revenue from Digital Engagement Services

 

Revenue from all digital engagement services is reported as digital engagement services in the accompanying consolidated financial statements.

 

Digital Engagement Services

 

Digital engagement services address specific customer needs such as digital strategy, web design and web development, usability engineering, information architecture, and Search Engine Optimization (SEO) for their mission critical web site, intranet or online store. Application development engagements are often sold as part of a multiple element arrangement that includes our software products, hosting arrangements (i.e. Managed Service Hosting) that provide for the use of certain hardware and infrastructure through our partnership with Amazon Web Services, or retained professional services subsequent to completion of the application development.

 

Digital Strategy Services

 

Bridgeline helps customers maximize the effectiveness of their online marketing activities to ensure that their web applications can be exposed to the potential customers that use search engines to locate products and services. Bridgeline’s SEO services include competitive analysis, website review, keyword generation, proprietary leading page technology, ongoing registration, monthly reports, and monitoring. Bridgeline’s web analytics experts offer consulting and assistance in implementing Bridgeline Unbound Insights or any other type of web analytics package.

 

Usability Design

 

By integrating usability into traditional development life cycles, we believe our usability experts can significantly enhance a user’s experience. Our usability professionals provide the following services: usability audits, information architecture, process analysis and optimization, interface design and user testing. Our systematic and user-centered approach to application development focuses on developing applications that are intuitive, accessible, engaging, and effective. Our goal is to produce a net effect of increased traffic, improved visitor retention, increased user productivity, reduced user error, lower support cost, and reduced long-term development cost.

 

Information Architecture

 

Information Architecture is a design methodology focused on structuring information to ensure that users can find the appropriate data and can complete their desired transactions within a website or application. Understanding users and the context in which users will be initiating with a web application is central to information architecture. Information architects try to put themselves in the position of a typical user of an application to better understand a user’s characteristics, behaviors, intentions and motivations. At the same time, the information architect develops an understanding of a web application’s functionality and data structures. The understanding of these components enables the architect to make customer centric decisions about the end user and then translate those decisions into site maps, wire frames and clickable prototypes.

 

Information architecture forms the foundation of a web application’s usability. The extent to which a web application is user-friendly and is widely adopted by a user base is primarily dependent on the success of the information architecture. Information architecture defines how well users can navigate through a website or application and how easily they can find the desired information or function. As digital engagement becomes more standard and commoditized, information architecture will increase as a differentiator for application developers.

 

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Managed Service Hosting

 

Revenue from Managed Service Hosting

 

Revenue from managed service hosting is reported as managed service hosting in the accompanying consolidated financial statements.

 

A large number of our customers engage Bridgeline to host and manage the mission critical web sites and web stores we develop. Through our partnership with Amazon Web Services, we provide 24/7 application monitoring, emergency response, version control of application control, load balancing, managed firewall security and virus protection services, and secure UDS environments. We provide shared hosting, dedicated hosting, and SaaS hosting for our customers.

 

Sales and Marketing

 

Overview

 

Bridgeline employs a direct sales force to sell enterprise Bridgeline Unbound engagements. Our direct sales force focuses its efforts selling to mid-sized and large companies. These companies are generally categorized in the following vertical markets: financial services, retail brand names, health services and life sciences, technology (software and hardware), credit unions and regional banks, as well as associations and foundations.

 

We also pursue strategic alliances that will enhance the sales and distribution opportunities of Bridgeline Unbound related intellectual property.

 

Engagement Methodology

 

We use an accountable, strategic engagement process developed specifically for target companies that require a technology based professional approach. We believe it is critical to qualify each opportunity and to assure our skill set and tools match up well with customer’s needs. As an essential part of every engagement, we believe our engagement methodology streamlines our customer qualification process, strengthens our customer relationships, ensures our skill set and tools match the customer’s needs, and results in the submission of targeted proposals.

 

Organic Growth from Existing Customer Base

 

Our business development professionals seek ongoing business opportunities within our existing customer base and within other operating divisions or subsidiaries of our existing customer base.

 

New Customer Acquisition

 

We identify customers within our vertical expertise (financial services, franchise/dealer networks, retail brand names, health services and life sciences, high technology, credit unions and regional banks, as well as associations and foundations). Our business development professionals create an annual territory plan identifying various strategies to engage our target customers.

 

Customer Retention Programs

 

We use digital marketing capabilities when marketing to our customer base. We make available via email and on our website Bridgeline authored Whitepapers, featured case studies, and/or Company related announcements to our customers on a bimonthly basis. We also host educational on-line webinars, face to face seminars and training.

 

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New Lead Generation Programs

 

We generate targeted leads and new business opportunities by leveraging on-line marketing strategies. We receive leads by maximizing the SEO capabilities of our own website. Through our website, we provide various educational Whitepapers and promote upcoming on-line seminars. In addition, we utilize banner advertisements on various independent newsletters and paid search advertisements that are linked to our website. We also participate and exhibit at targeted events.

 

Social Media Programs

 

We market Bridgeline’s upcoming events, Whitepapers, blogs, case studies, digital product tutorials, announcements, and related articles frequently on leading social media platforms such as Twitter, LinkedIn, YouTube and Facebook.

 

Acquisitions

 

On February 13, 2019, the Company entered into an Asset Purchase Agreement with Seevolution Inc., a Delaware corporation, Celebros, Inc., a Delaware corporation, and Elisha Gilboa, an individual and shareholder of Seevolution, (the “Seevolution Asset Purchase Agreement”). The Seevolution Asset Purchase Agreement sets forth the terms and conditions pursuant to which the Company acquired certain assets in exchange for consideration paid consisting of (1) $418 in cash at the time of purchase, (ii) the payment of $100 of additional cash to be paid out $10 per month for ten months starting April 30, 2019 and (iii) 40,000 shares of Bridgeline Digital common stock. Costs to complete the transaction were approximately $18 thousand.

 

On March 13, 2019, the Company entered into an Asset Purchase Agreement with Stantive Technologies Group Inc. (“Stantive”), a corporation organized under the laws of Ontario, Canada to purchase substantially all of the assets of Stantive and assume certain liabilities. The Company also acquired all of the outstanding stock of Stantive Technologies Group, Pty, a company incorporated in Australia, which was a subsidiary of Stantive. The total purchase price, including cure costs, for Stantive and its Australian subsidiary was approximately $5.2 million in cash.

 

There were no acquisitions during the fiscal year ended September 30, 2018.

 

Research and Development

 

We have research and development activities focusing on creating new products and innovations, product enhancements, and funding future market opportunities. Research and development expenses were approximately $2.2 million or 22% of revenues and $1.6 million or 12% of revenues during fiscal 2019 and 2018, respectively.

 

Employees

 

We had 72 employees worldwide as of September 30, 2019. All of these employees were full time employees.

 

Customers

 

We primarily serve the following vertical markets that we believe have a history of investing in information technology enhancements and initiatives:

     
 

Franchises/Multi-unit Organizations

 

Health Services and Life Sciences

 

Technology (software and hardware)

 

Credit Unions and Regional Banks

 

Associations and Foundations

 

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For the year ended September 30, 2019, two customers each generated approximately 11 - 15% of our revenue. For the year ended September 30, 2018, three customers each generated approximately 10% - 14% of our revenue.

 

Competition

 

The markets for our products and services, including software for web content management, eCommerce platform software, eMarketing software, web analytics software and digital engagement services are highly competitive, fragmented, and rapidly changing. Barriers to entry in such markets remain relatively low. The markets are significantly affected by new product introductions and other market activities of industry participants. With the introduction of new technologies and market entrants, we expect competition to persist and intensify in the future.

 

We believe we compete adequately with others and we distinguish ourselves from our competitors in a number of ways, including:

 

 

We believe our competitors generally offer their web application software typically as a single point of entry type product (such as content management only, or commerce only) as compared to the deeply integrated approach as provided by the Bridgeline Unbound platform.

 

 

We believe our competitors can generally only deploy their solutions in either a Cloud/SaaS environment or in a dedicated server environment. The Bridgeline Unbound platform’s architecture is flexible and is capable of being deployed in either a Cloud/SaaS or dedicated server environment.

 

 

We believe the majority of our competitors do not provide interactive technology development services that complement their software products. Our ability to develop mission critical web sites and online stores on our own deeply integrated Bridgeline Unbound platform provides a quality end-to-end solution that distinguishes us from our competitors.

 

 

We believe the interface of the Bridgeline Unbound platform has been designed for ease of use without substantial technical skills.

 

 

Finally, we believe the Bridgeline Unbound platform offers a competitive price-to-functionality ratio when compared to our competitors.

 

Patents, Trademarks, and Trade Secrets

 

We own a number of trade secrets, licenses and trademarks related to Bridgeline products and services and their loss could have a material adverse effect on the Company. We do not own any patents. For additional information see Risk Factor – If we are unable to protect our proprietary technology and other intellectual property rights, our ability to compete in the marketplace may be substantially reduced.

 

Available Information

 

This Annual Report on Form 10-K, as well as our quarterly reports on Form 10-Q and current reports on Form 8-K, along with any amendments to those reports, are made available upon request, on our website www.bridgeline.com as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). Copies of the following are also available through our website on the “About Us - Investor Information” page and are available in print to any shareholder who requests it:

 

 

Code of Business Ethics

 

   

Committee Charters for the following Board Committees:

   

o Nominating and Corporate Governance Committee

o Audit Committee

o Compensation Committee

 

The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information regarding the SEC’s Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information and can be found at http://www.sec.gov.

 

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Item 1A. Risk Factors

 

This report contains forward-looking statements that involve risks and uncertainties, such as statements of our objectives, expectations and intentions. The cautionary statements made in this report are applicable to all forward-looking statements wherever they appear in this report. Our actual results could differ materially from those discussed herein. In addition to the risks discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our business is subject to the risks set forth below.

 

We operate in a rapidly changing environment that involves certain risks and uncertainties, some of which are beyond our control. The risks described below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition and/or operating results.

 

If we are unable to manage our future growth efficiently, our business, liquidity, revenues and profitability may suffer.

 

We anticipate that continued expansion of our core business will require us to address potential market opportunities. For example, we may need to expand the size of our research and development, sales, corporate finance or operations staff. There can be no assurance that our infrastructure will be sufficiently flexible and adaptable to manage our projected growth or that we will have sufficient resources, human or otherwise, to sustain such growth. If we are unable to adequately address these additional demands on our resources, our profitability and growth might suffer. Also, if we continue to expand our operations, management might not be effective in expanding our physical facilities and our systems, and our procedures or controls might not be adequate to support such expansion. Our inability to manage our growth could harm our business and decrease our revenues.

 

We may require additional financing to execute our business plan and further expand our operations.

 

We may require additional funding to further expand our operations. We depend on financing sources, either debt or equity, or a combination thereof, which may not be available to us in a timely basis if at all, or on terms acceptable to us. Further, our ability to obtain financing may be limited by rules of the Nasdaq Capital Market. If we fail to obtain acceptable funding when needed, we may not have sufficient resources to fund our operations, and this would have a material adverse effect on our business.

 

Our operating lease commitments may adversely affect our financial condition and cash flows from operations.

 

We have contractual commitments in operating lease arrangements, which are not reflected on our consolidated balance sheets. Our ability to meet our expenses and contractual commitments will depend on our future performance, which will be affected by financial, business, economic, regulatory and other factors. We will not be able to control many of these factors, such as economic conditions and governmental regulations. Further, our operations may not generate sufficient cash to enable us to service our working capital needs or contractual obligations resulting from our leases. If we are at any time unable to generate sufficient cash flows from operations, we may be required to obtain additional sources of financing. There can be no assurance that we would be able to successfully renegotiate such terms, that additional financing could be obtained on terms that are favorable or acceptable to us.

 

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We have incurred significant net losses since inception and expect to continue to incur operating losses for the foreseeable future. We may never achieve or sustain profitability, which would depress the market price of our common stock and could cause you to lose all or a part of your investment.

 

We have incurred net losses in each fiscal year since our inception in 2000, including net losses of $9.5 million (inclusive of goodwill impairment charge of $3.7 million) and $7.2 million for the fiscal years ended September 30, 2019 and 2018, respectively. As of September 30, 2019, we had an accumulated deficit of approximately $71.5 million. We do not know whether or when we will become profitable. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ equity (deficit) and working capital. Because of the numerous risks and uncertainties associated with our business, we are unable to predict the extent of any future losses or when we will become profitable, if at all. Even if we do become profitable, we may not be able to sustain or increase our profitability on a quarterly or annual basis.

 

Our revenue and quarterly results may fluctuate, which could adversely affect our stock price.

 

We have experienced, and may in the future experience, significant fluctuations in our quarterly operating results that may be caused by many factors. These factors include, among others:

 

 

changes in demand for our products;

 

introduction, enhancement or announcement of products by us or our competitors;

 

market acceptance of our new products;

 

the growth rates of certain market segments in which we compete;

 

size and timing of significant orders;

 

budgeting cycles of customers;

 

mix of products and services sold;

 

changes in the level of operating expenses;

 

completion or announcement of acquisitions; and

 

general economic conditions in regions in which we conduct business.

 

The length of our sales cycle can fluctuate significantly, which could result in significant fluctuations in license revenues being recognized from quarter to quarter.

 

The decision by a customer to purchase our products often involves the development of a complex implementation plan across a customer’s business. This process often requires a significant commitment of resources both by prospective customers and us. Given the significant investment and commitment of resources required in order to implement our software, it may take several months, or even several quarters, for marketing opportunities to materialize. If a customer’s decision to purchase our products is delayed or if the installation of our products takes longer than originally anticipated, the date on which we may recognize revenue from these sales would be delayed. Such delays and fluctuations could cause our revenue to be lower than expected in a particular period and we may not be able to adjust our costs quickly enough to offset such lower revenue, potentially negatively impacting our results of operations.

 

A reduction in our license renewal rate could reduce our revenue.

 

Our customers have no obligation to renew their subscription licenses, and some customers have elected not to do so. Our license renewal rates may decline or fluctuate as a result of a number of factors, including customer dissatisfaction with our products and services, our failure to update our products to maintain their attractiveness in the market, or constraints or changes in budget priorities faced by our customers. A decline in license renewal rates could cause our revenue to decline which would have a material adverse effect on our operations.

 

We are dependent upon a small number of major customers, and a failure to renew our licenses with such customers could reduce our revenue.

 

During fiscal year 2019, two of our customers in aggregate accounted for approximately 26% of total sales. Our customers have no obligation to renew their subscription licenses, and some customers have elected not to do so, including a number of our large customers in the recent two fiscal years. Our license renewal rates may decline or fluctuate as a result of a number of factors, including customer dissatisfaction with our products and services, our failure to update our products to maintain their attractiveness in the market, or constraints or changes in budget priorities faced by our customers. A decline in license renewal rates could cause our revenue to decline which would have a material adverse effect on our operations.

 

11

 

 

We face intense and growing competition, which could result in price reductions, reduced operating margins and loss of market share.

 

We operate in a highly competitive marketplace and generally encounter intense competition to create and maintain demand for our services and to obtain service contracts. If we are unable to successfully compete for new business and license renewals, our revenue growth and operating margins may decline. The market for our Bridgeline Unbound platform (Content Manager, Insights, Commerce, Marketer, Social) and web development services are competitive and rapidly changing. Barriers to entry in such markets are relatively low. With the introduction of new technologies and market entrants, we expect competition to intensify in the future. Some of our principal competitors offer their products at a lower price, which may result in pricing pressures. Such pricing pressures and increased competition generally could result in reduced sales, reduced margins or the failure of our product and service offerings to achieve or maintain more widespread market acceptance.

 

The web development/services market is highly fragmented with a large number of competitors and potential competitors. Our prominent public company competitors are Big Commerce, Salesforce (Commerce Cloud), EPiServer, HubSpot, Sitecore, and Adobe (Experience Manager). We face competition from customers and potential customers who develop their own applications internally. We also face competition from potential competitors that are substantially larger than we are and who have significantly greater financial, technical and marketing resources, and established direct and indirect channels of distribution. As a result, they are able to devote greater resources to the development, promotion and sale of their products than we can.

 

There may be a limited market for our common stock, which may make it more difficult for you to sell your stock and which may reduce the market price of our common stock.

 

The average shares traded per day in fiscal 2019 was approximately 264,000 shares per day compared to approximately 406,000 shares for fiscal 2018, 26,000 for fiscal 2017 and 38,000 for fiscal 2016. Our average trading volume of our common stock can be very sporadic and may impair the ability of holders of our common stock to sell their shares at the time they wish to sell them or at a price that they consider reasonable. A low trading volume may also reduce the fair market value of the shares of our common stock. Accordingly, there can be no assurance that the price of our common stock will reflect our actual value. There can be no assurance that the daily trading volume of our common stock will increase or improve either now or in the future.

 

The market price of our common stock is volatile which could adversely affect your investment in our common stock.

 

The market price of our common stock is volatile and could fluctuate significantly for many reasons, including, without limitation: as a result of the risk factors listed in this annual report on Form 10-K; actual or anticipated fluctuations in our operating results; and general economic and industry conditions. During fiscal 2019, the closing price of our common stock as reported by NASDAQ fluctuated between $1.76 and $59. We are required to meet certain financial criteria in order to maintain our listing on the NASDAQ Capital Market. One such requirement is that we maintain a minimum closing bid price of at least $1.00 per share for our common stock. If we fail this requirement then NASDAQ will issue a notice that we are not in compliance and we will need to take corrective actions in order to not be delisted. Such corrective actions could be a reverse stock split.

 

If our products fail to perform properly due to undetected errors or similar problems, our business could suffer, and we could face product liability exposure.

 

We develop and sell complex web engagement software which may contain undetected errors or bugs. Such errors can be detected at any point in a product’s life cycle but are frequently found after introduction of new software or enhancements to existing software. We continually introduce new products and new versions of our products. Despite internal testing and testing by current and potential customers, our current and future products may contain serious defects. If we detect any errors before we ship a product, we might have to delay product shipment for an extended period of time while we address the problem. We might not discover software errors that affect our new or current products or enhancements until after they are deployed, and we may need to provide enhancements to correct such errors. Therefore, it is possible that, despite our testing, errors may occur in our software. These errors could result in the following:

 

 

harm to our reputation;

 

lost sales;

 

12

 

 

 

delays in commercial release;

 

product liability claims;

 

contractual disputes;

 

negative publicity;

 

delays in or loss of market acceptance of our products;

 

license terminations or renegotiations; or

 

unexpected expenses and diversion of resources to remedy errors.

 

Furthermore, our customers may use our software together with products from other companies. As a result, when problems occur, it might be difficult to identify the source of the problem. Even when our software does not cause these problems, the existence of these errors might cause us to incur significant costs, divert the attention of our technical personnel from our product development efforts, impact our reputation, or cause significant customer relations problems.

 

Technology and customer requirements evolve rapidly in our industry, and if we do not continue to develop new products and enhance our existing products in response to these changes, our business could suffer.

 

We will need to continue to enhance our products in order to maintain our competitive position. We may not be successful in developing and marketing enhancements to our products on a timely basis, and any enhancements we develop may not adequately address the changing needs of the marketplace. Overlaying the risks associated with our existing products and enhancements are ongoing technological developments and rapid changes in customer requirements. Our future success will depend upon our ability to develop and introduce in a timely manner new product that take advantage of technological advances and respond to new customer requirements. The development of new products is increasingly complex and uncertain, which increases the risk of delays. We may not be successful in developing new products and incorporating new technology on a timely basis, and any new products may not adequately address the changing needs of the marketplace. Failure to develop new products and product enhancements that meet market needs in a timely manner could have a material adverse effect on our business, financial condition and operating results.

 

If we are unable to protect our proprietary technology and other intellectual property rights, our ability to compete in the marketplace may be substantially reduced.

 

If we are unable to protect our intellectual property, our competitors could use our intellectual property to market products similar to our products, which could decrease demand for such products, thus decreasing our revenue. We rely on a combination of copyright, trademark and trade secret laws, as well as licensing agreements, third-party non-disclosure agreements and other contractual measures to protect our intellectual property rights. These protections may not be adequate to prevent our competitors from copying or reverse-engineering our products. Our competitors may independently develop technologies that are substantially similar or superior to our technology. To protect our trade secrets and other proprietary information, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements. These agreements may not provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. The protective mechanisms we include in our products may not be sufficient to prevent unauthorized copying. Existing copyright laws afford only limited protection for our intellectual property rights and may not protect such rights in the event competitors independently develop similar products. In addition, the laws of some countries in which our products are or may be licensed do not protect our products and intellectual property rights to the same extent as do the laws of the United States.

 

Policing unauthorized use of our products is difficult and litigation could become necessary in the future to enforce our intellectual property rights. Any litigation could be time consuming and expensive to prosecute or resolve, result in substantial diversion of management attention and resources, and materially harm our business or financial condition.

 

13

 

 

If a third party asserts that we infringe upon its proprietary rights, we could be required to redesign our products, pay significant royalties or enter into license agreements.

 

Claims of infringement are becoming increasingly common as the software industry develops and as related legal protections, including but not limited to patents, are applied to software products. Although we do not believe that our products infringe on the rights of third parties, a third party may assert that our technology or technologies of entities we acquire violates its intellectual property rights. As the number of software products in our markets increases and the functionality of these products further overlap, we believe that infringement claims will become more common. Any claims against us, regardless of their merit, could:

 

 

be expensive and time consuming to defend;

 

result in negative publicity;

 

force us to stop licensing our products that incorporate the challenged intellectual property; 

 

require us to redesign our products; 

 

divert management’s attention and our other resources; and/or 

 

require us to enter into royalty or licensing agreements in order to obtain the right to use necessary technologies, which may not be available on terms acceptable to us, if at all.

 

We believe that any successful challenge to our use of a trademark or domain name could substantially diminish our ability to conduct business in a particular market or jurisdiction and thus decrease our revenue and result in possible losses to our business.

 

We depend on a third-party cloud platform provider to host our Bridgeline Unbound SaaS environment and managed services business and if we were to experience a disruption in service, our business and reputation could suffer.

 

We host our SaaS and managed hosting customers via a third-party, Amazon Web Services. If upon renewal date our third-party provider does not provide commercially reasonable terms, we may be required to transfer our services to a new provider, such as data center facility, and we may incur significant equipment costs and possible service interruption in connection with doing so. Interruptions in our services might reduce our revenue, cause us to issue credits or refunds to customers, subject us to potential liability, or harm our renewal rates.

 

If our security measures or those of our third-party cloud computing platform provider are breached and unauthorized access is obtained to a customer’s data, our services may be perceived as not being secure, and we may incur significant legal and financial exposure and liabilities.

 

Security breaches could expose us to a risk of loss of our customers’ information, litigation and possible liability. While we have security measures in place, they may be breached as a result of third-party action, including intentional misconduct by computer hackers, employee error, malfeasance or otherwise and result in someone obtaining unauthorized access to our IT systems, our customers’ data or our data, including our intellectual property and other confidential business information. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to implement adequate preventative measures. In addition, our customers may authorize third-party technology providers to access their customer data, and some of our customers may not have adequate security measures in place to protect their data that is stored on our services. Because we do not control our customers or third-party technology providers, or the processing of such data by third-party technology providers, we cannot ensure the integrity or security of such transmissions or processing. Malicious third parties may also conduct attacks designed to temporarily deny customers access to our services. Any security breach could result in a loss of confidence in the security of our services, damage our reputation, negatively impact our future sales, disrupt our business and lead to legal liability.

 

We rely on encryption and authentication technology from third parties to provide the security and authentication to effectively secure transmission of confidential information, including consumer payment card numbers. Such technology may not be sufficient to protect the transmission of such confidential information or these technologies may have material defects that may compromise the confidentiality or integrity of the transmitted data. Any imposition of liability, particularly liability that is not covered by insurance or is in excess of insurance coverage, could harm our reputation, business and operating results. We might be required to expend significant capital and other resources to protect further against security breaches or to rectify problems caused by any security breach, which, in turn could divert funds available for corporate growth and expansion or future acquisitions.

 

14

 

 

We are dependent upon our management team and the loss of any of these individuals could harm our business.

 

We are dependent on the efforts of our key management personnel. The loss of any of our key management personnel, or our inability to recruit and train additional key management and other personnel in a timely manner, could materially and adversely affect our business, operations and future prospects. We maintain a key man insurance policy covering our Chief Executive Officer.

 

Because competition for highly qualified personnel is intense, we might not be able to attract and retain the employees we need to support our planned growth.

 

We will need to increase the size and maintain the quality of our sales force, software development staff and professional services organization to execute our growth plans. To meet our objectives, we must attract and retain highly qualified personnel with specialized skill sets. Competition for qualified personnel can be intense, and we might not be successful in attracting and retaining them. Our ability to maintain and expand our sales, product development and professional services teams will depend on our ability to recruit, train and retain top quality people with advanced skills who understand sales to, and the specific needs of, our target customers. For these reasons, we have experienced, and we expect to again experience in the future, challenges in hiring and retaining highly skilled employees with appropriate qualifications for our business. In addition to hiring services personnel to meet our needs, we may also engage additional third-party consultants as contractors, which could have a negative impact on our financial results. If we are unable to hire or retain qualified personnel, or if newly hired personnel fail to develop the necessary skills or reach productivity slower than anticipated, it would be more difficult for us to sell our products and services, and we could experience a shortfall in revenue and not achieve our planned growth.

 

Future acquisitions may be difficult to integrate into our existing operations, may disrupt our business, dilute stockholder value, divert management’s attention, or negatively affect our operating results.

 

We have acquired multiple businesses since our inception in 2000. Future acquisitions could involve substantial investment of funds or financings by issuance of debt or equity securities and could result in one-time charges and expenses and have the potential to either dilute the interests of existing shareholders or result in the issuance or assumption of debt. Any such acquisition may not be successful in generating revenues, income or other returns to us, and the resources committed to such activities will not be available to us for other purposes. Moreover, if we are unable to access capital markets on acceptable terms or at all, we may not be able to consummate acquisitions, or may have to do so based upon less than optimal capital structure. Our inability to take advantage of growth opportunities for our business or to address risks associated with acquisitions or investments in businesses may negatively affect our operating results. Additionally, any impairment of goodwill or other intangible assets acquired in an acquisition or in an investment, or charges to earnings associated with any acquisition or investment activity, may materially reduce our earnings which, in turn, may have an adverse material effect on the price of our common stock.

 

We are also subject to anti-takeover provisions under Delaware law, which could delay or prevent a change of control. Together these provisions may make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities. Provisions in our amended and restated bylaws and Delaware law may have the effect of discouraging lawsuits against our directors and officers.

 

Our amended and restated bylaws require that derivative actions brought in our name, actions against our directors, officers, other employees or stockholders for breach of fiduciary duty and other similar actions may be brought only in the Court of Chancery in the State of Delaware. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to the forum provisions in our amended and restated bylaws.

 

This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, other employees or stockholders, which may discourage lawsuits with respect to such claims. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, operating results and financial condition.

 

15

 

 

Increasing government regulation could affect our business and may adversely affect our financial condition.

 

We are subject not only to regulations applicable to businesses generally, but also to laws and regulations directly applicable to electronic commerce. In addition, an inability to satisfy the standards of certain voluntary third-party certification bodies that our customers may expect, such as an attestation of compliance with the Payment Card Industry (“PCI”) Data Security Standards, may have an adverse impact on our business and results. Further, there are various statutes, regulations, and rulings relevant to the direct email marketing and text-messaging industries, including the Telephone Consumer Protection Act (“TCPA”), the CAN-SPAM Act and related Federal Communication Commission (“FCC”) orders. The interpretation of many of these statutes, regulations, and rulings is evolving in the courts and administrative agencies and an inability to comply may have an adverse impact on our business and results. If in the future we are unable to achieve or maintain industry-specific certifications or other requirements or standards relevant to our customers, it may harm our business and adversely affect our results.

 

We may also expand our business in countries that have more stringent data protection laws than those in the United States, and such laws may be inconsistent across jurisdictions and are subject to evolving and differing interpretations. In particular, the European Union has passed the General Data Protection Regulation (“GDPR”), which came into force on May 25, 2018. The GDPR includes more stringent operational requirements for entities that receive or process personal data (as compared to U.S. privacy laws and previous EU laws), along with significant penalties for non-compliance, more robust obligations on data processors and data controllers, greater rights for data subjects, and heavier documentation requirements for data protection compliance programs. Additionally, both laws regulating privacy and third-party products purporting to address privacy concerns could negatively affect the functionality of, and demand for, our products and services, thereby reducing our revenue.

 

We have issued preferred stock with rights senior to our common stock, and may issue additional preferred stock in the future, in order to consummate a merger or other transaction necessary to continue as a going concern.

 

Our Certificate of Incorporation authorizes the issuance of up to 1.0 million shares of preferred stock, par value $0.001 per share, without shareholder approval and on terms established by our board of directors, of which 264,000 shares have been designated as Series A Preferred, 5,000 shares have been designated as Series B Preferred and 11,000 shares have been designated as Series C Preferred. We may issue additional shares of preferred stock in order to consummate a financing or other transaction, in lieu of the issuance of common stock. The rights and preferences of any such class or series of preferred stock would be established by our board of directors in its sole discretion and may have dividend, voting, liquidation and other rights and preferences that are senior to the rights of our common stock.

 

We have never paid dividends on our common stock and we do not anticipate paying dividends in the future.

 

We have never paid cash dividends and do not believe that we will pay any cash dividends on our common stock in the future. Since we have no plan to pay cash dividends, an investor would only realize income from his investment in our shares if there is a rise in the market price of our common stock, which is uncertain and unpredictable.

 

 

Item 1B. Unresolved Staff Comments

 

Not required. 

 

  

Item 2.   Properties.

 

The following table lists our offices, all of which are leased: 

 

Geographic Location

 

Address

 

Size

  Boston, Massachusetts

 

100 Summit Drive

 

6,360 square feet,

 

 

Burlington, Massachusetts 01803

 

professional office space

  Chicago, Illinois

 

318 W Adams Street

 

875 square feet,

 

 

Chicago, IL  60606

 

professional office space

  Woodbury, New York

 

150 Woodbury Road

 

1,605 square feet,

 

 

Woodbury, NY  11797

 

professional office space

  Kingston, Ontario

 

61 Hyperion Court

 

9,654 square feet,

 

 

Kingston, ON, K7K 7K7

 

professional office space

Sydney, Australia

 

L20 201 Sussex St.

 

PO Box 

 

 

Sydney,  NSW 2000

 

 

Karnataka, India

 

No. 14 15th Cross

 

PO Box

 

 

NR Vidyappeta Circle

 

 

 

 

Ashok Nagar, BLR South

 

 

 

 

Karnataka 560050

 

 

 

 

Item 3.  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.

 

16

 

 

Item 4.  Mine Safety Disclosures

 

Not applicable.

  

PART II

 

Item 5.   Market for Common Equity Related Stockholder Matters and Issuer Purchase of Equity Securities.

 

The following table sets forth, for the periods indicated, the range of high and low sale prices for our common stock. Our common stock trades on the NASDAQ Capital Market under the symbol BLIN.

 

Year Ended September 30, 2019

 

High

   

Low

 
                 

Fourth Quarter

  $ 3.11     $ 1.76  

Third Quarter

  $ 16.00     $ 2.25  

Second Quarter

  $ 15.50     $ 7.70  

First Quarter

  $ 59.00     $ 11.00  

 

 

Year Ended September 30, 2018

 

High

   

Low

 
                 

Fourth Quarter

  $ 3.75     $ 0.79  

Third Quarter

  $ 3.50     $ 1.03  

Second Quarter

  $ 2.89     $ 1.81  

First Quarter

  $ 4.45     $ 2.11  

 

We have not declared or paid cash dividends on our common stock and do not plan to pay cash dividends to our common shareholders in the near future. During fiscal 2018, we did issue stock dividends to holders of our Series A preferred stock. As of December 10, 2019, our common stock was held of record by approximately 2,440 shareholders. Most of the Company’s shares of common stock are held in street name through one or more nominees.

 

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

 

The following summarizes all sales of our unregistered securities during the year ended September 30, 2019 for which more information is disclosed on our Form 8-Ks. 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(a)(2), 4(a)(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.

 

 

(1)

On February 13, 2019, the Company entered into an Asset Purchase Agreement with Seevolution, Inc., a Delaware corporation, and Elisha Gilboa, an individual and shareholder of Seevolution (the “Asset Purchase”). The Company issued 40,000 shares of Bridgeline Digital common stock as partial consideration for the Asset Purchase.

 

 

Item 6.   Selected Financial Data.

 

Not required.

 

17

 

 

Item 7. 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 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, dependence on third parties, the security of our software and response to cyber security risks, our ability to meet our financial obligations and commitments, our dependence on our management team and key personnel, our ability to hire and retain future key personnel, our ability to maintain an effective system of internal controls, and our ability to respond to government regulations. These and other risks are more fully described herein and in our other filings with the Securities and Exchange Commission.

 

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

 

Overview

 

Bridgeline Digital, The Digital Engagement Company™, helps customers maximize the performance of their full digital experience from websites and intranets to eCommerce experiences. Bridgeline’s Unbound platform integrates Web Content Management, eCommerce, eMarketing, Social Media management, and Web Analytics (Insights) with the goal of assisting marketers to deliver digital experiences that attract, engage, nurture, and convert their customers across all channels. Bridgeline offers a core accelerator framework for rapidly implementing digital experiences on the Bridgeline Unbound Platform which provides customers with cost-effective solutions in addition to velocity to market.

 

Bridgeline’s Unbound platform combined with its professional services assists customers in digital business transformation, driving lead generation, increasing revenue, improving customer service and loyalty, enhancing employee knowledge, and reducing operational costs. The Bridgeline Unbound platform bridges the gaps between web content management, eCommerce, eMarketing, social and web analytics by providing all of these components in one unified and deeply integrated platform.

 

Our Unbound Franchise product empowers large franchises, healthcare networks, associations/chapters and other multi-unit organizations to manage a large hierarchy of digital properties at scale. The platform provides an easy-to-use administrative console that enables corporate marketing to provide consistency in branding and messaging while providing flexible publishing capabilities at the local-market level. The platform empowers brand networks to unify, manage, scale and optimize a hierarchy of web properties and marketing campaigns on a global, national and local level.

 

The Unbound platform is delivered through a cloud-based software as a service (“SaaS”) 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 software resides on a dedicated server in either the customer’s facility or hosted by Bridgeline via a cloud-based hosted services model.

 

Bridgeline Digital was incorporated under the laws of the State of Delaware on August 28, 2000.

 

Locations

 

The Company’s corporate office is located in Burlington, Massachusetts. The Company maintains regional field offices serving the following geographical locations: Boston, MA; Chicago, IL; and New York, NY.  The Company has three wholly-owned subsidiaries: Bridgeline Digital Pvt. Ltd. located in Bangalore, India, Bridgeline Digital Canada, Inc. located in Ontario, Canada, and Stantive Technologies Pty, Ltd. located in Australia.

 

18

 

 

Increase in Authorized Shares and Reverse Stock Split

 

On April 26, 2019, the Company’s Shareholders and the Board of Directors approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to increase the total number of shares of Common Stock, par value $0.001 per share (“Common Stock”), authorized for issuance thereunder from 50 million shares to 2.5 billion shares (the “Increase in Authorized”). On the same date the Company’s Shareholders and the Board of Directors also approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to effect a reverse stock split of both its issued and outstanding and authorized shares of Common Stock, par value $0.001 per share, at a ratio of one (1) share of Common Stock for every fifty (50) shares of Common Stock at any time prior to December 31, 2019 (the “Reverse Split”) pursuant to which all classes of the Company’s 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 one (1) share of Common Stock for every fifty (50) shares of Common Stock (“1-for-50 reverse stock split”). The 1-for-50 reverse stock split was effective as of close of business on May 1, 2019 (the “Effective Date”) and the Company’s stock began trading on a split-adjusted basis on May 2, 2019.

 

The reverse stock split reduced the number of shares of the Company’s Common Stock authorized from 2.5 billion shares to 50 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, and stock options, and to the number of shares issued and issuable under the Company’s Stock Incentive Plans. The Company did not issue any fractional shares in connection with the reverse stock split. Instead, any stockholder who would otherwise be entitled to receive a fractional share of Common Stock as a result of the reverse stock split is entitled to receive a cash payment in lieu thereof based on the average of the closing sales prices of a share of the Company’s Common Stock on the Nasdaq Capital Market during regular trading hours for the five consecutive trading days immediately preceding the Effective Date. 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 is 50 million shares and the par value remain $0.001.

 

Sales and Marketing

 

Bridgeline employs a direct sales force and each sale takes on average three to six months to complete. Each franchise/multi-unit organization sale takes on average one year to complete. Our direct sales force focuses its efforts selling to medium-sized and large companies. These companies are generally categorized in the following vertical markets: (i) financial services; (ii) franchises/multi-unit organizations; (iii) retail brand names; (iv) health services and life sciences; (v) technology (software and hardware); (vi) credit unions and regional banks and (vii) associations and foundations. We have five sales geographic locations in the United States.

 

Acquisitions

 

Bridgeline will continue to evaluate expanding its distribution of Bridgeline Unbound and its interactive development capabilities through acquisitions. We may make additional acquisitions in the foreseeable future. These potential acquisitions will be consistent with our growth strategy by providing Bridgeline with new geographical distribution opportunities, an expanded customer base, an expanded sales force and an expanded developer force. In addition, integrating acquired companies into our existing operations allows us to consolidate the finance, human resources, legal, marketing, research and development of the acquired businesses with our own internal resources, hence reducing the aggregate of these expenses for the combined businesses and resulting in improved operating results.

 

Customer Information

 

We currently have over 210 active customers. For the year ended September 30, 2019, two customers each represented approximately 11% - 15% of the Company’s total revenue. For the year ended September 30, 2018, three customers each represented approximately 10% - 14% of the Company’s total revenue.

 

19

 

 

Summary of Results of Operations

 

Total revenue for the fiscal year ended September 30, 2019 (“fiscal 2019”) decreased to $10.0 million from $13.6 million for the fiscal year ended September 30, 2018 (“fiscal 2018”). Loss from operations for fiscal 2019 was ($11.1) million, which included a goodwill impairment charge of $3.7 million, compared with loss from operations of ($7.0) million, which included a goodwill impairment charge of $4.9 million, for fiscal 2018. We had a net loss for fiscal 2019 of ($9.5) million, including a goodwill impairment charge of $3.7 million, compared with a net loss of ($7.2) million, including a goodwill impairment charge of $4.9 million, for fiscal 2018. Basic net loss per share calculation attributable to common shareholders for fiscal 2019 was ($8.16) compared with the equivalent basic net loss per share attributable to common shareholders of ($89.05) for fiscal 2018.

 

(in thousands)

 

Years Ended September 30,

 
                    $    

%

 

Revenue

 

2019

   

2018

   

Change

   

Change

 

Digital engagement services

  $ 4,117     $ 6,914       (2,797 )     (40 %)

% of total net revenue

    41 %     51 %                

Subscription and perpetual licenses

    4,837       5,609       (772 )     (14 %)

% of total net revenue

    49 %     41 %                

Managed service hosting

    998       1,045       (47 )     (4 %)

% of total net revenue

    10 %     8 %                

Total net revenue

  $ 9,952     $ 13,568     $ (3,616 )     (27 %)
                                 

Cost of revenue

                               

Digital engagement services

    2,591       4,473       (1,882 )     (42 %)

% of digital engagement services revenue

    63 %     65 %                

Subscription and perpetual licenses

    2,486       2,011       475       24 %

% of subscription and perpetual revenue

    51 %     36 %                

Managed service hosting

    283       264       19       7 %

% of managed service hosting revenue

    28 %     25 %                

Total cost of revenue

    5,360       6,748       (1,388 )     (21 %)

Gross profit

    4,592       6,820       (2,228 )     (33 %)

Gross profit margin

    46 %     50 %                
                                 

Operating expenses

                               

Sales and marketing

    4,824       3,951       873       22 %

% of total revenue

    48 %     29 %                

General and administrative

    3,022       2,852       170       6 %

% of total revenue

    30 %     21 %                

Research and development

    2,185       1,604       581       36 %

% of total revenue

    22 %     12 %                

Depreciation and amortization

    620       356       264       74 %

% of total revenue

    6 %     3 %                

Goodwill impairment

    3,732       4,859       (1,127 )     (23 %)

% of total revenue

    38 %     36 %                

Restructuring and acquisition related expenses

    1,277       187       1,090       583 %

% of total revenue

    13 %     1 %                

Total operating expenses

    15,660       13,809       1,851       13 %
                                 
                                 

Loss from operations

    (11,068 )     (6,989 )     (4,079 )     58 %

Interest expense, net

    (304 )     (265 )     (39 )     15 %

Amortization of debt discount

    (231 )     (129 )     (102 )     79 %

Other income, net

    2,133       161       1,972       1,225 %

Loss before income taxes

    (9,470 )     (7,222 )     (2,248 )     31 %

Provision for (benefit from) income taxes

    4       (3 )     7       (233 %)
                                 

Net income/(loss)

  $ (9,474 )   $ (7,219 )   $ (2,255 )     31 %
                                 

Non-GAAP Measure:

                               

Adjusted EBITDA

  $ (5,160 )   $ (1,059 )   $ (4,101 )     387 %

 

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Revenue

 

Total revenue for the fiscal year ended September 30, 2019 decreased $3.6 million, or 27%, to $10.0 million from $13.6 million in fiscal 2018. Our revenue is derived from three sources: (i) digital engagement services; (ii) subscription and perpetual licenses; and (iii) managed service hosting.

 

Digital Engagement Services

 

Digital engagement services revenue is comprised of Bridgeline Unbound implementation and retainer related services. Total revenue from digital engagement services decreased $2.8 million, or 40%, to $4.1 million in fiscal 2019 from $6.9 million in fiscal 2018. Digital engagement services revenue as a percentage of total revenue decreased to 41% in fiscal 2019 from 51% in fiscal 2018. The decreases compared to the prior period is primarily due to a decrease in new service engagements. Digital engagement services revenues from acquisitions was $747 thousand for fiscal 2019.

 

Subscription and Perpetual Licenses

 

Revenue from subscription (SaaS) and perpetual licenses decreased $0.8 million, or 14%, to $4.8 million in fiscal 2019 from $5.6 million in fiscal 2018. The decrease compared to the prior period is primarily due to a decline in SaaS license revenue due to the loss of a large customer that we previously disclosed. Subscription and perpetual license revenue as a percentage of total revenue increased to 49% in fiscal 2019 from 41% in fiscal 2018. The increase as a percentage of total revenue is attributable to the overall decreases in digital engagement services revenue. Subscription and perpetual license revenue from acquisitions was $657 thousand for fiscal 2019.

 

Managed Service Hosting

 

Revenue from managed service hosting remained constant at $1.0 million for both fiscal 2019 and fiscal 2018. We were able to maintain renewals for hosting service contracts sold in previous periods.

 

Managed services revenue as a percentage of total revenue increased to 10% in fiscal 2019 from 8% in fiscal 2018. The increases as a percentage of revenue is attributable to the overall decreases in other revenue streams, primarily digital engagement services.

 

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Cost of Revenue

 

Total cost of revenue for fiscal 2019 decreased $1.4 million, or 21%, to $5.4 million from $6.7 million in fiscal 2018. The gross profit margin decreased to 46% for the fiscal 2019 compared to 50% for fiscal 2018. The decline in the gross profit margin for fiscal 2019 compared to fiscal 2018 is attributable to the decrease in digital engagement services revenue.

 

Cost of Digital Engagement Services

 

Cost of digital engagement services decreased $1.9 million, or 42%, to $2.6 million in fiscal 2019 from $4.5 million in fiscal 2018. The cost of total digital engagement services as a percentage of total digital engagement services revenue decreased to 63% in fiscal 2019 from 65% in fiscal 2018. The decrease in cost of digital engagement services in fiscal 2019 compared to fiscal 2018 is primarily due to a decrease in headcount.

 

Cost of Subscription and Perpetual License

 

Cost of subscription and perpetual licenses increased $475 thousand, or 24%, to $2.5 million in fiscal 2019 compared to $2.0 million in fiscal 2018. Costs to support SaaS licenses are primarily fixed costs.

 

The cost of subscription and perpetual licenses as a percentage of subscription and perpetual license revenue increased to 51% in fiscal 2019 from 36% in fiscal 2018. The increase is due to fixed costs to operate our cloud-based hosting model with Amazon Web Services without a commensurate increase in license revenue.

 

Cost of Managed Service Hosting

 

Cost of managed service hosting increased $19 thousand, or 7%, in fiscal 2019 to $283 thousand compared to $264 thousand in fiscal 2018. The cost of managed services as a percentage of managed services revenue increased to 28% in fiscal 2019 from 25% in fiscal 2018. These increases are attributable to fixed costs to operate our cloud-based hosting model with Amazon Web Services and variable internal support costs.

 

Gross Profit

 

Gross profit decreased $2.2 million, or 33%, in fiscal 2019 to $4.6 million compared to $6.8 million in fiscal 2018. The decrease in fiscal 2019 is primarily attributable to the decrease in revenues, as, overall costs decreased by 21%.

 

Operating Expenses

 

Sales and Marketing Expenses

 

Sales and marketing expenses increased $873 thousand, or 22%, to $4.7 million in fiscal 2019 from $4.0 million in fiscal 2018. The decrease is primarily attributable to decreases in headcount and facility costs and travel related expenditures, partially offset by increases in marketing expenses. Sales and marketing expense as a percentage of total revenue increased to 48% in fiscal 2019 compared to 29% in fiscal 2018. The increases compared to the prior period are primarily attributable to the overall decrease in revenue and an increase in headcount from acquisitions.

 

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General and Administrative Expenses

 

General and administrative expenses increased $170 thousand, or 6%, to $3.0 million in fiscal 2019 from $2.9 million in fiscal 2018. The decrease is attributable to decreases in headcount and overall administration expenses. General and administrative expense as a percentage of revenue increased to 30% in fiscal 2019 compared to 21% in fiscal 2018. The increases compared to the prior period are primarily attributable to an increase in headcount from recent acquisitions.

 

Research and Development

 

Research and development expense increased $581 thousand, or 36%, to $2.2 million in fiscal 2019 from $1.6 million in fiscal 2018. The increases compared to the prior period are primarily attributable to an increase in headcount from acquisitions. Research and development expense as a percentage of total revenue increased to 22% in fiscal 2019 compared to 12% for fiscal 2018. The increase as a percentage of total revenues in fiscal 2019 is a function of the decrease in total revenues in fiscal 2019.

 

Depreciation and Amortization

 

Depreciation and amortization expense increased by $264 thousand, or 74%, to $620 thousand in fiscal 2019 from $356 thousand in fiscal 2018. Depreciation and amortization as a percentage of total revenue increased to 6% in fiscal 2019 from 3% in fiscal 2018. The increase is primarily due to amortization of intangible assets resulting from acquisitions.

 

Goodwill Impairment

 

The carrying value of goodwill is not amortized, but it typically tested for impairment annually as of September 30, as well as, on an interim basis whenever events or changes in circumstances indicate that the carrying amount of a reporting unit may not be recoverable. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. Goodwill is assessed at the consolidated level as one reporting unit. During fiscal 2019 and 2018, the Company performed impairment tests and recognized an aggregated impairment charge, for all test dates during the respective periods, of $3.7 million and $4.9 million, respectively.

 

Restructuring and Acquisition Related Expenses

 

Commencing in fiscal 2015 and through fiscal 2018, the Company’s management approved, committed to and initiated plans to restructure and further improve efficiencies by implementing cost reductions in line with expected decreases in revenue. The Company renegotiated several office leases and relocated to smaller space, while also negotiating sub-leases for the original space. In addition, the Company executed a general work-force reduction and recognized costs for severance and termination benefits. These restructuring charges and accruals require estimates and assumptions, including contractual rental commitments or lease buy-outs for vacated office space and related costs, and estimated sub-lease income. The Company’s sub-lease assumptions include the rates to be charged to a sub-tenant and the timing of the sub-lease arrangement. All of the vacated lease space is currently contractually occupied by a new sub-tenant for the remaining life of the lease. In the second quarter of fiscal 2017, the Company initiated a plan to shut down its operations in India, which is expected to be completed in early fiscal 2020. 

 

In total, restructuring expenses were $625 thousand and $187 thousand in fiscal 2019 and fiscal 2018, respectively. These charges consist of the total lease expenses less sub-lease rental income, other miscellaneous lease termination costs, loss on disposal of fixed assets.

 

Acquisition related expenses related to the acquisition of Stantive Technologies Group Inc. consummated in March 2019 were $428 thousand.

 

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Loss from Operations

 

The loss from operations was ($11.1) million for fiscal 2019 compared to a loss from operations of ($7.0) million for fiscal 2018, a decrease of ($4.0) million or 58% for fiscal 2019. The loss from operations included a goodwill impairment charge of $3.7 million and $4.9 million in fiscal 2019 and 2018, respectively.

 

Other income (expense), net

 

During the year ended September 30, 2019, we recognized an expense of $11.3 million related to the allocation of proceeds from the sale of Preferred Series C stock and Series C Preferred warrants. The expense was entirely offset by the aggregate other income recognized related to the change in fair value of the associated warrant liabilities of $13.4 million during fiscal 2019. During fiscal 2018, there were no similar expense charges recognized upon issuance of warrants and the aggregate other income recognized related to the change in fair value of warrant liabilities was $160 thousand.

 

Provision for Income Taxes

 

We recorded an income tax expense of $4 thousand for fiscal 2019 compared to an income tax benefit of ($3) thousand for fiscal 2018. The Company has net operating loss carryforwards and other deferred tax benefits, subject to the limitations discussed below, that are available to offset future taxable income. A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. The Company established a valuation allowance against its net deferred tax assets, excluding the portion attributable to the alternative minimum tax of $22 thousand at September 30, 2019 and 2018.

 

The Federal net operating loss (NOL) carryforward of approximately $34 million as of September 30, 2019 expires on various dates through 2039. Internal Revenue Code Section 382 places certain limitations on the amount of taxable income that can be offset by NOL carryforwards after a change in control of a loss corporation. Generally, after a change in control, a loss corporation cannot deduct NOL carryforwards in excess of the Section 382 limitation. Due to these “change of ownership” provisions, utilization of NOL carryforwards may be subject to an annual limitation on utilization against taxable income in future periods. The Company has not performed a Section 382 analysis. However, if performed, Section 382 may be found to limit potential future utilization of our NOL carryforwards. The Company also has approximately $30 million in state NOLs which expire on various dates through 2038.

 

Adjusted EBITDA

 

We also measure our performance based on a non-U.S. GAAP (“Generally Accepted Accounting Principles”) measurement of earnings before interest, taxes, depreciation, amortization, stock-based compensation expense, impairment of goodwill and intangible assets, non-cash warrant related expenses, change in fair value of derivative instruments, and restructuring and acquisition related charges (“Adjusted EBITDA”).

 

We believe this non-U.S. GAAP financial measure of Adjusted EBITDA is useful to management and investors in evaluating our operating performance for the periods presented and provides a tool for evaluating our ongoing operations.

 

Adjusted EBITDA, however, is not a measure of operating performance under U.S. GAAP and should not be considered as an alternative or substitute for U.S. 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 U.S. GAAP. Adjusted EBITDA as an operating performance measure has material limitations because it excludes the financial statement impact of income taxes, net interest expense, amortization of intangibles, depreciation, goodwill impairment, restructuring charges, loss on disposal of assets, 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 U.S. 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 U.S. GAAP.

 

24

 

 

The following table reconciles net loss (which is the most directly comparable U.S. GAAP operating performance measure) to Adjusted EBITDA:

 

   

Years Ended September 30,

 
   

2019

   

2018

 

Net loss

  $ (9,474 )   $ (7,219 )

Provision for income tax

    4       (3 )

Interest expense, net

    304       244  

Change in fair value of warrants/warrant expense

    (2,132 )     (161 )

Amortization of debt discount

    231       129  

Amortization of intangible assets

    544       242  

Depreciation

    66       105  

Goodwill impairment

    3,732       4,859  

Restructuring and acquisition related charges

    1,277       187  

Other amortization

    39       66  

Stock based compensation

    249       492  

Adjusted EBITDA

  $ (5,160 )   $ (1,059 )

 

Adjusted EBITDA was ($5.2) million for fiscal 2019 compared with ($1.1) million for fiscal 2018. This was primarily due to the decline in revenues.

 

Liquidity and Capital Resources

 

Cash Flows

 

Operating Activities

 

Cash used in operating activities was $4.2 million for fiscal 2019 compared to cash used in operating activities of $1.1 million for fiscal 2018.  This increase in use of cash was driven by decreases with our accounts receivables collections, fair market value of our warrant liabilities, goodwill impairment charge and increases with our accounts payable and accrued liabilities.

 

Investing Activities

 

Cash used in investing activities was $5.7 million for fiscal 2019 compared with $50 thousand for fiscal 2018. We primarily used cash to acquire the assets of Stantive and Seevolution.

 

Financing Activities

 

Cash provided by financing activities was $9.5 million for fiscal 2019 compared with $1.1 million for fiscal 2018. In fiscal 2019, cash provided by financing activities was attributable to the public offering in October 2018 and private offering in March 2019. In October 2018, we sold an aggregate of 28,480 Class A Units (the “Class A Units”) at a price of $25.00 per Class A Unit, consisting of (i) one share of the Company’s common stock and one five-year warrant to purchase one share of the Company’s common stock at an exercise price of $25.00 and (ii) Preferred stock of 4,288 Class B Units, with each Class B Unit, convertible into 40 shares of the Company’s common stock at a conversion price of $25.00. The net proceeds to the Company after deducting the underwriter’s fees and expenses was approximately $5.0 million. The proceeds of the October public offering were used to paydown the Promissory Term Notes of $941 thousand. In a private offering in March 2019, the Company sold Preferred stock of 10,227.50 Class C Units, with each Class C Unit convertible into 1,136,390 shares of the Company’s common stock at a conversion price of $9.00, for net proceeds of $9.1 million. The proceeds of the March 2019 private offering were used to pay down the Heritage Bank of Commerce line of credit by $2.2 million leaving a zero balance at March 31, 2019, as well as, the loan due to Montage Capital in the amount of $922 thousand. The proceeds also funded the asset purchase of Stantive Technologies Group Inc. for $5.2 million.

 

25

 

 

In fiscal 2018, we raised funds from a term note with Montage Capital II, L.P. and the promissory term notes, issued in September 2018. We made net payments on our bank line of credit of $419 thousand.

 

Capital Resources, Liquidity Outlook and Going Concern

 

In the second quarter of fiscal 2019, the Company concluded a private offering that raised net cash proceeds of $9.2 million. Proceeds were used to pay-off in full the outstanding amounts on our Heritage Bank of Commerce line of credit and Montage Capital II, L.P. loan. At September 30, 2019, the Company had no debt. Further, in the second quarter of fiscal 2019, the Company used cash to purchase the assets of Seevolution, Inc. and Stantive Technologies Group Inc., which assets included technology and customers. While the Company believes the future revenues and cash flows from these newly acquired customers will supplement its working capital and the Company believes it has an appropriate cost structure to support future revenue growth, based upon its current working capital and projected cash flows in the next twelve months, the Company will need additional sources of financing in place in order to ensure its operations are adequately funded. No definitive agreements for additional financing are in place as of the date of this annual report and there can be no assurances that that additional sources of financing could be obtained on terms that are favorable or acceptable to us and that revenue growth and improvement in cash flows can be achieved. Accordingly, management believes that there is substantial doubt about the Company’s ability to continue as a going concern for at least twelve months following the issuance of this annual report.

 

Inflation

 

Inflationary increases can cause pressure on wages and the cost of benefits offered to employees. We believe that the relatively moderate rates of inflation in recent years have not had a significant impact on our operations.  

 

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.

 

Contractual Obligations

 

We lease our facilities in the United States. We currently have no future commitments that extend past fiscal 2021.

 

The following summarizes our future contractual obligations:

 

(in thousands)

 

As of September 30, 2019

 
                         

Payment obligations by year

 

FY20

   

FY21

   

Total

 

Operating Leases (a)

  $ 79     $ 12     $ 91  

 

(a) Net of sublease income

 

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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 (“U.S. GAAP”).

 

The preparation of financial statements in accordance U.S. 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

 

The Company derives its revenue from three sources: (i) Software Licenses, which are comprised of subscription fees (“SaaS”), perpetual software licenses, and maintenance for post-customer support (“PCS”) on perpetual licenses, (ii) Digital Engagement Services, which are professional services to implement our products such as web development, digital strategy, information architecture and usability engineering and (iii) hosting perpetual licenses. Customers who license the software on a subscription basis, which can be described as “Software as a Service” or “SaaS”, do not take possession of the software.

 

Revenue is recognized when control of these services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. If the consideration promised in a contract includes a variable amount, for example, overage fees, contingent fees or service level penalties, the Company includes an estimate of the amount it expects to receive for the total transaction price if it is probable that a significant reversal of cumulative revenue recognized will not occur. The Company’s subscription service arrangements are non-cancelable and do not contain refund-type provisions. Revenue is reported net of applicable sales and use tax.

 

27

 

 

The Company recognizes revenue from contracts with customers using a five-step model, which is described below:

 

 

Identify the customer contract;

 

Identify performance obligations that are distinct;

 

Determine the transaction price;

 

Allocate the transaction price to the distinct performance obligations; and

 

Recognize revenue as the performance obligations are satisfied.

 

Identify the customer contract

 

A customer contract is generally identified when there is approval and commitment from both the Company and its customer, the rights have been identified, payment terms are identified, the contract has commercial substance and collectability and consideration is probable.

 

Identify performance obligations that are distinct

 

A performance obligation is a promise to provide a distinct good or service or a series of distinct goods or services. A good or service that is promised to a customer is distinct if the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and a company’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.

 

Determine the transaction price

 

The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer, excluding sales taxes that are collected on behalf of government agencies.

 

Allocate the transaction price to distinct performance obligations

 

The transaction price is allocated to each performance obligation based on the relative standalone selling prices (“SSP”) of the goods or services being provided to the customer. The Company determines the SSP of its goods and services based upon the historical average sales prices for each types of software license and professional services sold.

 

Recognize revenue as the performance obligations are satisfied

 

Revenues are recognized when or as control of the promised goods or services is transferred to customers. Revenue from SaaS licenses is recognized ratably over the subscription period beginning on the date the license is made available to customers. Most subscription contracts are three-year terms. 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”). PCS revenue is recognized ratably on a straight-line basis over the period of performance and the perpetual license is recognized upon delivery. The Company also offers hosting services for those customers who purchase a perpetual license and do not want to run the software in their environment. Revenue from hosting is recognized ratably over the service period, ranging from one to three-year terms. The Company recognizes revenue from professional services as the services are provided.

 

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.

 

28

 

 

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.

 

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.

 

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. The purpose of an impairment test is to identify any potential impairment by comparing the carrying value of a reporting unit including goodwill to its fair value. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.  

 

Factors that could lead to a future impairment include material uncertainties such as operational, economic and competitive factors specific to the key assumptions underlying the fair value estimate we use in our impairment testing that have reasonable possibility of changing. This could include a significant reduction in projected revenues, a deterioration of projected financial performance, future acquisitions and/or mergers, and a decline in our market value as a result of a significant decline in our stock price.

 

29

 

 

Accounting for Stock-Based Compensation

 

At September 30, 2019, we maintained two stock-based compensation plans, one of which has expired but still contains vested and unvested stock options. The two plans are more fully described in Note 13 of these consolidated financial statements.

 

The Company accounts for stock-based compensation awards in accordance with ASC 718 Compensation-Stock 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 straight-line 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.

 

We record current tax expense for incentive 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 7A. Quantitative and Qualitative Disclosures About Market Risk.

 

Not required. 

 

30

 

 

Item 8.   Financial Statements and Supplementary Data.

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Shareholders and Board of Directors of

Bridgeline Digital, Inc.

 

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Bridgeline Digital, Inc., and subsidiaries (the “Company”) as of September 30, 2019 and 2018, the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the two years in the period ended September 30, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended September 30, 2019, in conformity with accounting principles generally accepted in the United States of America.

 

Explanatory Paragraph - Going Concern 

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company has a significant working capital deficiency, has incurred significant losses and may need to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

/s/ Marcum LLP

 

Marcum LLP

 

We have served as the Company’s auditor since 2006.

 

Boston, MA
December 27, 2019

 

31

 

 

 

BRIDGELINE DIGITAL, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

 

 

As of September 30,

 
   

2019

   

2018

 
ASSETS                
                 

Current assets:

               

Cash and cash equivalents

  $ 296     $ 644  

Accounts receivable, net

    979       1,721  

Prepaid expenses

    351       452  

Other current assets

    49       21  

Total current assets

    1,675       2,838  

Property and equipment, net

    299       80  

Intangible assets, net

    3,509       20  

Goodwill

    5,557       7,782  

Other assets

    115       280  

Total assets

  $ 11,155     $ 11,000  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               
                 

Current liabilities:

               

Accounts payable

  $ 1,740     $ 1,577  

Accrued liabilities

    835       580  

Debt, current

    -       1,017  

Deferred revenue

    1,262       594  

Total current liabilities

    3,837       3,768  
                 

Debt, net of current portion

    -       2,574  

Warrant liabilities

    3,514       180  

Other long-term liabilities

    8       54  

Total liabilities

    7,359       6,576  
                 

Commitments and contingencies (Note 12)

               
                 

Stockholders’ equity:

               

Preferred stock - $0.001 par value; 1,000,000 shares authorized;

               
Series C Convertible Preferred stock:                

11,000 shares authorized; 441 shares issued and outstanding at September 30, 2019

    -       -  

Series A Convertible Preferred stock:

               

264,000 shares and 262,310 shares at September 30, 2019 and 264,000 shares and 262,364 shares at September 30, 2018, issued and outstanding (liquidation preference $2,623 at September 30, 2019)

    -       -  

Common stock - $0.001 par value; 50,000,000 shares authorized;

               

2,798,475 shares at September 30, 2019 and 84,005 shares at September 30, 2018, issued and outstanding

    3       -  

Additional paid-in capital

    75,620       66,553  

Accumulated deficit

    (71,489 )     (61,778 )

Accumulated other comprehensive loss

    (338 )     (351 )

Total stockholders’ equity

    3,796       4,424  

Total liabilities and stockholders’ equity

  $ 11,155     $ 11,000  

 

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

 

32

 

 

 

BRIDGELINE DIGITAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

 

   

Years Ended September 30,

 
   

2019

   

2018

 

Net revenue:

               

Digital engagement services

  $ 4,117     $ 6,914  

Subscription and perpetual licenses

    4,837       5,609  

Managed service hosting

    998       1,045  

Total net revenue

    9,952       13,568  

Cost of revenue:

               

Digital engagement services

    2,591       4,473  

Subscription and perpetual licenses

    2,486       2,011  

Managed service hosting

    283       264  

Total cost of revenue

    5,360       6,748  

Gross profit

    4,592       6,820  

Operating expenses:

               

Sales and marketing

    4,824       3,951  

General and administrative

    3,246       2,852  

Research and development

    2,185       1,604  

Depreciation and amortization

    620       356  

Goodwill impairment

    3,732       4,859  

Restructuring and acquisition related expenses

    1,053       187  

Total operating expenses

    15,660       13,809  

Loss from operations

    (11,068 )     (6,989 )

Interest expense, net

    (304 )     (265 )

Amortization of debt discount

    (231 )     (129 )

Other income, net

    2,133       161  

Loss before income taxes

    (9,470 )     (7,222 )

Provision for (benefit from) income taxes

    4       (3 )

Net loss

    (9,474 )     (7,219 )

Dividends on convertible preferred stock

    (315 )     (310 )

Net loss applicable to common shareholders

  $ (9,789 )   $ (7,529 )

Net loss per share attributable to common shareholders:

               

Basic net loss per share

  $ (8.16 )   $ (89.05 )

Diluted net loss per share

  $ (8.16 )   $ (89.05 )

Number of weighted average shares outstanding:

               

Basic

    1,199,322       84,549  

Diluted

    1,199,322       84,549  

 

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

 

33

 

 

 

BRIDGELINE DIGITAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands) 

 

   

Years Ended September 30,

 
   

2019

   

2018

 

Net loss

  $ (9,474 )   $ (7,219 )

Other comprehensive loss:

               

Net change in foreign currency translation adjustment

    13       (1 )

Comprehensive loss

  $ (9,461 )   $ (7,220 )

 

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

 

34

 

 

 

BRIDGELINE DIGITAL, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in thousands)

 

                                                   

Accumulated

         
   

Preferred Stock

   

Common Stock

   

Additional

           

Other

   

Total

 
                                   

Paid-in

   

Accumulated

   

Comprehensive

   

Stockholders’

 
   

Shares

   

Amount

   

Shares

   

Amount

   

Capital

   

Deficit

   

Loss

   

Equity

 

Balance at October 1, 2017

    244     $ -       84     $ -     $ 65,873     $ (54,249 )   $ (350 )   $ 11,274  

Issuance of common stock

                                                            -  

Stock-based compensation expense

                                    491                       491  

Issuance of common stock - restricted shares

                    1               1                       1  

Stock-dividends issued

    18                               188       (310 )             (122 )

Net loss

                                            (7,219 )             (7,219 )

Foreign currency translation

                                                    (1 )     (1 )

Balance at September 30, 2018

    262       -       85       -       66,553       (61,778 )     (351 )     4,424  

Issuance of common and preferred stock, net of issuance costs

    15               1,415       3       8,338                       8,341  

Stock-based compensation expense

                                    249                       249  

Preferred B stock conversion to common

    (4 )             171                                       -  

Series C Convertible Preferred stock and conversion to common

    (10 )             1,087                                       -  

Common stock issued in connection with acquisition of business

                    40               480                       480  

Dividends on Series A convertible preferred stock

                                            (315 )             (315 )

Net loss

                                            (9,474 )             (9,474 )

Cumulative effect of the adoption of ASC 606

                                            78               78  

Foreign currency translation

                                                    13       13  

Balance at September 30, 2019

    263     $ -       2,798     $ 3     $ 75,620     $ (71,489 )     (338 )   $ 3,796  

 

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

 

35

 

 

 

BRIDGELINE DIGITAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands) 

 

   

Years Ended September 30,

 
   

2019

   

2018

 

Cash flows from operating activities:

               

Net loss

  $ (9,474 )   $ (7,219 )

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

               

Loss on disposal of property and equipment

    9       60  

Amortization of intangible assets

    544       242  

Depreciation

    66       105  

Other amortization

    39       66  

Goodwill impairment

    3,732       4,859  

Amortization of debt discount

    231       129  

Warrant liability expense

    11,272       -  

Change in fair value of warrant liabilities

    (13,404 )     (160 )

Stock-based compensation

    249       491  

Changes in operating assets and liabilities

               

Accounts receivable and unbilled receivables

    1,306       1,305  

Prepaid expenses

    127       (74 )

Other current assets and other assets

    116       3  

Accounts payable and accrued liabilities

    448       (41 )

Deferred revenue

    478       (872 )

Other liabilities

    58       (8 )

Total adjustments

    5,271       6,105  

Net cash used in operating activities

    (4,203 )     (1,114 )

Cash flows from investing activities:

               

Software development capitalization costs

    (11 )     (15 )

Purchase of property and equipment

    (20 )     (35 )

Acquisition of businesses

    (5,668 )     -  

Net cash used in investing activities

    (5,699 )     (50 )

Cash flows from financing activities:

               

Proceeds from issuance of common stock, net of issuance costs

    4,757       -  

Proceeds from issuance of preferred stock, net of issuance costs

    9,049       -  

Proceeds from term notes from Montage Capital, net of issuance costs

    -       953  

Proceeds from promissory term notes

    -       800  

Borrowing on bank line of credit

    75       920  

Payments on bank line of credit

    (2,156 )     (1,339 )

Payments on term notes from Montage Capital

    (922 )     (78 )

Payments on promissory term notes

    (941 )     -  

Cash dividends paid on Series A convertible preferred stock

    (315 )     (195 )

Net cash provided by financing activities

    9,547       1,061  

Effect of exchange rate changes on cash and cash equivalents

    7       (1 )

Net decrease in cash and cash equivalents

    (348 )     (104 )

Cash and cash equivalents at beginning of year

    644       748  

Cash and cash equivalents at end of year

  $ 296     $ 644  

Supplemental disclosures of cash flow information:

               

Cash paid for:

               

Interest

  $ 88     $ 250  

Income taxes

  $ 3     $ 14  

Non cash investing and financing activities:

               

Consideration paid in common stock in connection with acquisition of business

  $ 480     $ -  

Dividends on convertible preferred stock

  $ -     $ 115  

 

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

 

36

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

 

1.   Description of Business

 

Overview

 

Bridgeline Digital, The Digital Engagement Company™ (the “Company” or “Bridgeline”), helps customers with their digital experience from websites and intranets to online stores and campaigns and integrates Web Content Management, eCommerce, Marketing Automation, Site Search, Authenticated Portals, Social Media Management, Translation and Web Analytics to help organizations deliver digital experiences. The Bridgeline Unbound platform is delivered through a cloud-based SaaS (“Software as a Service”) multi-tenant business model, providing maintenance, daily technical operation and support; or via a traditional perpetual licensing business model, in which the software resides on a dedicated server in either the customer’s facility or hosted by Bridgeline via a cloud-based hosted services model.

 

The Company was incorporated under the laws of the State of Delaware on August 28, 2000.

 

Locations

 

The Company’s corporate office is located in Burlington, Massachusetts.  The Company maintains regional field offices serving the following geographical locations: Boston, Massachusetts; Chicago, Illinois; New York, New York; and Ontario, Canada. The Company has three wholly-owned subsidiaries: Bridgeline Digital Pvt. Ltd. located in Bangalore, India, Bridgeline Digital Canada, Inc. located in Ontario, Canada, and Stantive Technologies Pty. Ltd. located in Australia.

 

Increase in Authorized Shares and Reverse Stock Split

 

On April 26, 2019, the Company’s Shareholders and the Board of Directors approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to increase the total number of shares of Common Stock, par value $0.001 per share (“Common Stock”), authorized for issuance thereunder from 50 million shares to 2.5 billion shares (the “Increase in Authorized”). On the same date the Company’s Shareholders and the Board of Directors also approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to effect a reverse stock split of both its issued and outstanding and authorized shares of Common Stock, par value $0.001 per share, at a ratio of one (1) share of Common Stock for every fifty (50) shares of Common Stock at any time prior to December 31, 2018 (the “Reverse Split”) pursuant to which all classes of the Company’s 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 one (1) share of Common Stock for every fifty (50) shares of Common Stock (“1-for-50 reverse stock split”). The 1-for-50 reverse stock split was effective as of close of business on May 1, 2019 (the “Effective Date”) and the Company’s stock began trading on a split-adjusted basis on May 2, 2019.

 

The reverse stock split reduced the number of shares of the Company’s Common Stock authorized from 2.5 billion shares to 50 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, and stock options, and to the number of shares issued and issuable under the Company’s Stock Incentive Plans. The Company did not issue any fractional shares in connection with the reverse stock split. Instead, any stockholder who would otherwise be entitled to receive a fractional share of Common Stock as a result of the reverse stock split is entitled to receive a cash payment in lieu thereof based on the average of the closing sales prices of a share of the Company’s Common Stock on the Nasdaq Capital Market during regular trading hours for the five consecutive trading days immediately preceding the Effective Date. 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 is 50 million shares and the par value remain $0.001.

 

The accompanying consolidated financial statements and footnotes have been retroactively adjusted to reflect the effects of the 1-for-50 reverse stock split.

 

37

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Going Concern

 

The Company has incurred operating losses and used cash in its operating activities for the past several years. Cash has been used to fund operations, develop new products, and build infrastructure. During the prior fiscal years and continuing into the current fiscal year, the Company has executed a restructuring plan that included a reduction of workforce and office space, which significantly reduced operating expenses. The Company is continuing to maintain tight control over discretionary spending in the current fiscal year.

 

In the second quarter of fiscal 2019, the Company concluded a private offering that raised net cash proceeds of $9.2 million.  Proceeds were used to pay-off in full the outstanding amounts on our Heritage Bank of Commerce line of credit and Montage Capital II, L.P. loan.  At September 30, 2019, the Company had no debt. Further, in the second quarter of fiscal 2019, the Company used cash to purchase the assets of Seevolution, Inc. and Stantive Technologies Group Inc., which assets included technology and customers. While the Company believes the future revenues and cash flows from these newly acquired customers will supplement its working capital and the Company believes it has an appropriate cost structure to support future revenue growth, based upon its current working capital and projected cash flows in the next twelve months, the Company will need additional sources of financing in place in order to ensure its operations are adequately funded. No definitive agreements for additional financing are in place as of the date of this annual report and there can be no assurances that that additional sources of financing could be obtained on terms that are favorable or acceptable to us and that revenue growth and improvement in cash flows can be achieved. Accordingly, management believes that there is substantial doubt about the Company’s ability to continue as a going concern for at least twelve months following the issuance of this annual report. No adjustments have been made to accompanying consolidated financial statements as a result of this uncertainty.  

 

 

2.   Summary of Significant Accounting Policies

 

 Basis of Presentation and Principles of Consolidation

 

The Company’s fiscal year end is September 30. The 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.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. The most significant estimates included in these consolidated financial statements are the valuation of accounts receivable, including the adequacy of the allowance for doubtful accounts, and fair value measurements related to the valuation of warrants. The complexity of the estimation process and factors relating to assumptions, risks and uncertainties inherent with the use of the estimates affect the amount of revenue and related expenses reported in the Company’s consolidated financial statements. Internal and external factors can affect the Company’s estimates. Actual results could differ from these estimates under different assumptions or conditions. 

 

Reclassifications

 

Certain amounts in the prior period financial statements have been reclassified to conform to the presentation in the current period financial statements. These reclassifications had no effect on the previously reported net loss.

 

38

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Cash and Cash Equivalents

 

The Company considers all highly liquid instruments with original maturity of three months or less from the date of purchase to be cash equivalents.

 

The Company’s cash is maintained with what management believes to be a high-credit quality financial institution.  At times, deposits held at this bank may exceed the federally insured limits.  Management believes that the financial institutions that hold the Company’s deposits are financially sound and have minimal credit risk. Risks associated with cash and cash equivalents are mitigated by the Company’s investment policy, which limits the Company’s investing of excess cash into only money market mutual funds.

 

Concentration of Credit Risk, Significant Customers, and Off-Balance Sheet Risk

 

Financial instruments, which potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents, and accounts receivable.

 

The Company extends credit to customers on an unsecured basis in the normal course of business.  Management performs ongoing credit evaluations of its customers’ financial condition and limits the amount of credit when deemed necessary.  Accounts receivable are carried at original invoice amount, less an estimate for doubtful accounts based on a review of all outstanding amounts.

 

The Company has no off-balance sheets risks such as foreign exchange contracts, interest rate swaps, option contracts or other foreign hedging agreements.

 

Allowance for Doubtful Accounts

 

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. For all customers, the Company recognizes allowances for doubtful accounts based on the length of time that the receivables are past due, current business environment and its historical experience. If the financial condition of the Company’s customers were to deteriorate, resulting in impairment of their ability to make payments, additional allowances may be required.

 

Revenue Recognition

 

Adoption of New Revenue Recognition Accounting Principles

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09 or ASC 606), to supersede nearly all existing revenue recognition guidance under U.S. GAAP, which became effective for the Company on October 1, 2018. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under the previous revenue recognition accounting principles, including identifying performance obligation in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. Under ASC 606, revenue is recognized when a customer obtains control of a promised good or service and is recognized in an amount that reflects the consideration that the entity expects to receive in exchange for the good or service. In addition, ASC 606 also includes subtopic ASC 340-40, Other Assets and Deferred Costs – Contracts with Customers, referred to herein as ASC 340-40, which provides guidance on accounting for certain revenue related costs including costs associated with obtaining and fulfilling a contract, discussed further below.

 

39

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

The Company adopted the new revenue guidance using the modified retrospective method applied to those contracts which were not completed as of October 1, 2018. Results for reporting periods beginning after September 30, 2018 are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with historic revenue guidance. The Company applied the new standard using certain allowable practical expedients where:

 

 

the measurement of the transaction price excludes all taxes assessed by governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer;

 

the new revenue guidance has been applied to portfolios of contracts with similar characteristics;

 

the modified retrospective approach has been applied only to contracts that are not completed contracts at the date of initial adoption; and

 

the value of unsatisfied performance obligations for contracts with an original expected length of one year or less has not been disclosed.

 

Revenue recognition from the Company’s primary revenue streams remained substantially unchanged following adoption of ASC 606 and therefore did not have a material impact on its revenues. The impact of applying the new guidance in fiscal 2019 versus the prior guidance resulted in a change to the period over which sales commissions are amortized to incorporate an estimated customer life. This resulted in a longer amortization period for deferred commission expense, which reduces expense compared to the application of the prior guidance.

 

Upon adoption, Other current assets increased by $59 due to the capitalization of the current portion of sales commissions and Other assets increased by $27 due to the capitalization of the noncurrent portion of sales commissions. Accumulated deficit decreased by $78 as a net result of these adjustments. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

 

The following tables summarize the impact of adopting ASC 606 on the Company’s consolidated financial statements as of and for the year ended September 30, 2019:

 

   

As of September 30, 2019

 
                         
   

As Reported

   

Adjustments

   

As If Presented Under

ASC 605

 

Consolidated Balance Sheet

                       

Assets

                       

Other current assets

  $ 49     $ 27     $ 76  

Other assets

    115       (34 )     81  

Equity

                       

Accumulated deficit

  $ (71,489 )   $ (7 )   $ (71,496 )

 

40

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

   

Year Ended September 30, 2019

 
                 
   

As Reported

   

As If Presented Under

ASC 605

 

Consolidated Statement of Operations

               

Sales and Marketing

  $ 4,824     $ 4,817  

Net income/(loss)

  $ (9,474 )   $ (9,467 )

Net income/(loss) per share

               

Basic

  $ (8.09 )   $ (8.08 )

Diluted

  $ (8.09 )   $ (8.08 )

 

 

   

Year Ended September 30, 2019

 
                         
   

As Reported

   

Adjustments

   

As If Presented Under

ASC 605

 

Consolidated Statement of Cash Flows

                       

Cash flows from operating activities

                       

Net loss

  $ (9,474 )   $ (7 )   $ (9,481 )

Other current assets and other assets

  $ 116     $ 7     $ 123  

 

 

Overview

 

The Company derives its revenue from three sources: (i) Software Licenses, which are comprised of subscription fees (“SaaS”), perpetual software licenses, and maintenance for post-customer support (“PCS”) on perpetual licenses, (ii) Digital Engagement Services, which are professional services to implement our products such as web development, digital strategy, information architecture and usability engineering and (iii) hosting perpetual licenses. Customers who license the software on a subscription basis, which can be described as “Software as a Service” or “SaaS,” do not take possession of the software.

 

Revenue is recognized when control of these services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. If the consideration promised in a contract includes a variable amount, for example, overage fees, contingent fees or service level penalties, the Company includes an estimate of the amount it expects to receive for the total transaction price if it is probable that a significant reversal of cumulative revenue recognized will not occur. The Company’s subscription service arrangements are non-cancelable and do not contain refund-type provisions. Revenue is reported net of applicable sales and use tax.

 

The Company recognizes revenue from contracts with customers using a five-step model, which is described below:

 

 

Identify the customer contract;

 

Identify performance obligations that are distinct;

 

Determine the transaction price;

 

Allocate the transaction price to the distinct performance obligations; and

 

Recognize revenue as the performance obligations are satisfied.

 

Identify the customer contract

 

A customer contract is generally identified when there is approval and commitment from both the Company and its customer, the rights have been identified, payment terms are identified, the contract has commercial substance and collectability and consideration is probable.

 

41

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Identify performance obligations that are distinct

 

A performance obligation is a promise to provide a distinct good or service or a series of distinct goods or services. A good or service that is promised to a customer is distinct if the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and a company’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.

 

Determine the transaction price

 

The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer, excluding sales taxes that are collected on behalf of government agencies.

 

Allocate the transaction price to distinct performance obligations

 

The transaction price is allocated to each performance obligation based on the relative standalone selling prices (“SSP”) of the goods or services being provided to the customer. The Company determines the SSP of its goods and services based upon the historical average sales prices for each types of software license and professional services sold.

 

Recognize revenue as the performance obligations are satisfied

 

Revenues are recognized when or as control of the promised goods or services is transferred to customers. Revenue from SaaS licenses is recognized ratably over the subscription period beginning on the date the license is made available to customers. Most subscription contracts are three-year terms. 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”). PCS revenue is recognized ratably on a straight-line basis over the period of performance and the perpetual license is recognized upon delivery. The Company also offers hosting services for those customers who purchase a perpetual license and do not want to run the software in their environment. Revenue from hosting is recognized ratably over the service period, ranging from one to three-year terms. The Company recognizes revenue from professional services as the services are provided.

 

Disaggregation of Revenue

 

The Company provides disaggregation of revenue based on geography and product groupings (Note 14) as it believes this best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

 

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.

 

Warranty

 

Certain arrangements include a warranty period, which is generally 30 days from the completion of work. In hosting arrangements, the Company provides warranties of up-time reliability. The Company continues to monitor the conditions that are subject to the warranties to identify if a warranty claim may arise. If it is determined 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.

 

42

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Deferred Revenue

 

Amounts that have been invoiced are recognized in accounts receivable, deferred revenue or revenue, depending on whether the revenue recognition criteria have been met. Deferred revenue represents amounts billed for which revenue has not yet be recognized. Deferred revenue that will be recognized during the succeeding 12-month period is recognized as current deferred revenue and the remaining portion is recognized as noncurrent deferred included in Other long-term liabilities. As of September 30, 2019, approximately $8 of revenue is expected be recognized from remaining performance obligations for contracts with original performance obligations that exceed one year. The Company expects to recognize revenue on approximately 99% of these remaining performance obligations over the next 12 months, with the balance recognized thereafter.

 

The following table summarizes the classification and net increase (decrease) in deferred revenue as of and for the years ended September 30, 2019 and 2018:

 

   

Deferred Revenue

 
   

Current

   

Long Term

 

Balance as of October 1, 2017

  $ 1,466     $ 28  

Increase (decrease)

    (872 )     (8 )

Balance as of September 30, 2018

    594       20  

Increase (decrease)

    668       (12 )

Balance as of September 30, 2019

  $ 1,262     $ 8  

 

Deferred Capitalized Commissions Costs

 

The incremental direct costs of obtaining a contract, which primarily consist of sales commissions paid for new subscription contracts are deferred and amortized on a straight-line basis over a period of approximately three years. The Company evaluated both qualitative and quantitative factors, including the estimated life cycles of its offerings, renewal rates, and its customer attrition to determine the amortization periods for the capitalized costs. The initial amortization period will general be the customer contract term, which is typically thirty-six (36) months, with some exceptions. Deferred capitalized commission expense that will be recognized as expense during the succeeding 12-month period is recognized as current deferred capitalized commission costs, and the remaining portion is recognized as long-term deferred capitalized commission costs. Total deferred capitalized commissions were $70 and $77 as of September 30, 2019 and 2018, respectively. Current deferred capitalized commission costs are included in Other current assets in the Consolidated Balance Sheets and noncurrent deferred capitalized commission costs are included in Other assets in the Consolidated Balance Sheets. Amortization expense was $39 for the year ended September 30, 2019.

 

Property and Equipment

 

The components of property and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets (three to five years). Leasehold improvements are amortized using the straight-line method over the lesser of the estimated useful life of the asset or the lease term.  Repairs and maintenance costs are expensed as incurred.

 

43

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Internal Use Software

 

Costs incurred in the preliminary stages of development are expensed as incurred.  Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing.  The Company also capitalizes costs related to specific upgrades and enhancements when it is probable that the expenditures will result in additional functionality.  Capitalized costs are recorded as part of equipment and improvements. Training costs are expensed as incurred.  Internal use software is amortized on a straight-line basis over its estimated useful life, generally three years.

 

Research and Development and Software Development Costs

 

Costs for research and development of a software product to sell, lease or otherwise market are charged to operations as incurred until technological feasibility has been established.  Once technological feasibility has been established, certain software development costs incurred during the application development stage are eligible for capitalization. Based on the Company’s software product development process, technological feasibility is established upon completion of a working model.

 

Software development costs that are capitalized and are amortized to cost of sales over the estimated useful life of the software, typically three years. Capitalization ceases when a product is available for general release to customers. Capitalization costs are included in other assets in the consolidated financial statements.  The Company capitalized $11 and $15 of costs in fiscal 2019 and fiscal 2018, respectively.

 

Intangible Assets

 

All intangible assets have finite lives and are stated at cost, net of amortization. Amortization is computed over the estimated useful life of the related assets on a straight-line method as follows:

 

Description

 

Estimated Useful Life (in years)

 

Developed and core technology

      3    

Non-compete agreements

    3 - 6  

Customer relationships

    5 - 6  

Trademarks and trade names

    1 - 10  

 

Goodwill

 

The carrying value of goodwill is not amortized, but it tested for impairment annually as of September 30, as well as on an interim basis whenever events or changes in circumstances indicate that the carrying amount of a reporting unity may not be recoverable. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the impairment loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Goodwill is assessed at the consolidated level as one reporting unit.

 

Valuation of Long-Lived Assets

 

The Company periodically reviews its long-lived assets, which consist primarily of property and equipment and intangible assets with finite lives, for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may exceed their fair value. Recoverability of these assets is assessed using a number of factors including operating results, business plans, budgets, economic projections and undiscounted cash flows.

 

In addition, the Company’s evaluation considers non-financial data such as market trends, product development cycles and changes in management’s market emphasis. For the definite-lived intangible asset impairment review, the carrying value of the intangible assets is compared against the estimated undiscounted cash flows to be generated over the remaining life of the intangible assets. To the extent that the undiscounted future cash flows are less than the carrying value, the fair value of the asset is determined. If such fair value is less than the current carrying value, the asset is written down to the estimated fair value. There were no impairments of long-lived assets in fiscal 2019 or 2018.

 

44

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Foreign Currency

 

The Company determines the appropriate method of measuring assets and liabilities as to whether the method should be based on the functional currency of the entity in the environment it operates or the reporting currency of the Company, the U.S. dollar.  The Company has determined that the functional currency of its foreign subsidiaries are the local currencies of their respective jurisdictions.  Assets and liabilities are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Equity accounts are translated at historical rates, except for the change in retained earnings as a result of the income statement translation process. Revenue and expense items are translated into U.S. dollars at average exchange rates for the period. The adjustments are recorded as a separate component of stockholders’ equity and are included in accumulated other comprehensive income (loss). The Company’s foreign currency translation net gains and losses for fiscal 2019 and 2018 were $13 and ($1), respectively.  Transaction gains and losses related to monetary assets and liabilities denominated in a currency different from a subsidiary’s functional currency are included in the Consolidated Statements of Operations.

 

Segment Information

 

The Company has one reportable segment.

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation in the Consolidated Statements of Operations based on their fair values of the awards on the date of grant on a straight-line basis over their vesting term. Compensation expense is recognized only for share-based payments expected to vest. The Company estimates forfeitures at the date of grant based on the Company’s historical experience and future expectations.

 

Valuation of Stock Options and Warrants Issued to Non-Employees

 

The Company measures expense for non-employee stock-based compensation and the estimated fair value of options exchanged in business combinations and warrants issued for services using the fair value method for services received or the equity instruments issued, whichever is more readily measured.  The Company estimates the fair value of stock options issued to non-employees using the Black-Scholes Merton option valuation model.

 

The Company estimated the fair value of common stock warrants issued to non-employees using the binomial options pricing model. The Company evaluates common stock warrants as they are issued to determine whether they should be classified as an equity instrument or a liability. Those warrants that are classified as a liability are carried at fair value at each reporting date, with changes in their fair value recorded in other income (expense) in the Consolidated Statements of Operations. 

 

Advertising Costs

 

Advertising costs are expensed when incurred. Such costs were $425 and $465 for fiscal 2019 and 2018, respectively.

 

Employee Benefits

 

The Company sponsors a contributory 401(k) plan allowing all full-time employees who meet prescribed service requirements to participate. The Company is not required to make matching contributions, although the plan provides for discretionary contributions by the Company. The Company made no contributions in either fiscal 2019 or fiscal 2018.

 

45

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Income Taxes

 

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act made broad and complex changes to the U.S. tax code that affected the Company’s fiscal year ended September 30, 2018, including, but not limited to, reducing the U.S. federal corporate tax rate. For taxable years beginning after December 31, 2017, the Tax Act reduces the federal corporate tax rate to 21 percent and as such impacted the Company’s fiscal 2018 tax calculations. For the year ended September 30, 2018, the U.S. federal statutory rate is a blended rate based upon the number of days in fiscal 2018 that the Company was taxed at the former rate of 34 percent and the number of days that it was taxed at the new rate of 21 percent. The reduction of the corporate tax rate caused the Company to revalue its deferred tax assets to the lower federal rate and correspondingly adjust the valuation allowance against the deferred tax assets by the same amount. For the year ended September 30, 2018, the deferred tax asset and related valuation allowance were lowered by $3,839 to account for the lowered rate. The Tax Act repealed the Corporate Alternative Minimum Tax. The Company has available an AMT credit carryforward in the amount of $22 at September 30, 2019 and 2018. This has been recognized as a deferred tax asset not subject to a valuation allowance.

 

The Act required the Company to pay a one-time transition tax on earnings of the Company’s foreign subsidiaries that were previously tax deferred for U.S. income taxes and created new taxes on the Company’s foreign sourced earnings. The Company determined that the repatriation tax was zero as the foreign subsidiaries had no positive retained earnings and no current income.

 

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the Company’s financial statements and tax returns. Deferred income taxes are recognized based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the temporary differences are expected to reverse. Valuation allowances are provided if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

 

The Company provides for reserves for potential payments of taxes to various tax authorities related to uncertain tax positions.  Reserves are based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings or positions is “more likely than not” to be realized following resolution of any uncertainty related to the tax benefit, assuming that the matter in question will be raised by the tax authorities.  Interest and penalties associated with uncertain tax positions are included in the provision for income taxes.

 

The Company does not provide for U.S. income taxes on the undistributed earnings of its foreign subsidiaries, which the Company considers to be permanent investments.

 

Net Loss Per Share

 

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 applicable to common shareholders 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 and convertible preferred stock using the as-if-converted method.  The computation of diluted earnings per share does not include the effect of outstanding stock options, warrants and convertible preferred stock that are considered anti-dilutive.

 

For the years ended September 30, 2019 and 2018, diluted net loss per share was the same as basic net loss per share as the effects of all the Company’s potential common stock equivalents are anti-dilutive as the Company reported a net loss applicable to common shareholders for the periods and the impact of in-the-money warrants were also anti-dilutive. Potential common stock equivalents excluded include the Series A Convertible Preferred Stock, Series C Convertible Preferred Stock, stock options and warrants (See Note 13).

 

46

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Recently Issued Accounting Pronouncements Not Yet Effective

 

Leases

 

In February 2016, the FASB issued ASU No. 2016-02, which is guidance on accounting for leases. ASU No. 2016-02 requires lessees to recognize most leases on their balance sheets for the rights and obligations created by those leases. The guidance requires enhanced disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases and will be effective for annual periods beginning after December 15, 2018, including interim reporting periods within those annual reporting periods. Early adoption is permitted.

 

The new guidance will take effect at the beginning of the Company’s first quarter (October 1) of our fiscal year ending September 30, 2020. The guidance requires either a modified retrospective transition approach with application in all comparative periods presented, or an alternative transition method, which permits the Company to use its effective date as the date of initial application without restating the comparative period financial statements and recognizing any cumulative effect adjustment to the opening balance sheet of accumulated deficit at October 1, 2019. The Company is finalizing the review of information for completeness of its lease portfolio, analyzing the financial statement impact of adopting the standards, and evaluating the impact of adoption on our existing accounting policies and disclosures. Upon adoption, we expect to recognize lease liabilities and right-to-use assets of the related lease arrangements, however, our contractual lease arrangements and commitments at September 30, 2019 are not material to the consolidated financial statements, as a whole.

 

47

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Intangibles – Goodwill and Other – Internal-Use Software

 

In August 2018, the FASB issued ASU 2018-15, which addresses a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. Under the new guidance, customers will apply the same criteria for capitalizing implementation costs as they would for an arrangement that has a software license. ASC 2018-15 is effective for annual reporting periods beginning after December 15, 2019, including interim reporting periods within those annual reporting periods. Early adoption is permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements and related disclosures.

 

Fair Value

 

In August 2018, the FASB issued ASU 2018-13, which is guidance that changes the fair value measurement disclosure requirements of ASC 820. ASU 2018-13 is effective for annual reporting periods beginning after December 15, 2019, including interim reporting periods within those annual reporting periods. Early adoption is permitted for any eliminated or modified disclosures upon issuance of this ASU. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements and related disclosures.

 

Financial Instruments – Credit Losses

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. ASC 2016-16 is effective for annual reporting periods beginning after December 15, 2019, including interim reporting periods within those annual reporting periods. Early adoption is permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements and related disclosures.

 

All other Accounting Standards Updates issued but not yet effective are not expected to have a material effect on the Company’s future consolidated financial statements.

 

 

 

3. Accounts Receivable and Unbilled Receivables

 

Accounts receivable and unbilled receivables consists of the following:

 

   

As of September 30,

 
   

2019

   

2018

 

Accounts receivable

  $ 1,067     $ 1,902  

Allowance for doubtful accounts

    (88 )     (181 )

Accounts receivable, net

  $ 979     $ 1,721  

 

As of and for the year ended September 30, 2019, three customers represented approximately 16%, 14% and 12% of accounts receivable and two customers represented approximately 11% and 15% of total revenues. As of and for the year ended September 30, 2018, two customers represented approximately 19% and 12% of accounts receivable and three customers represented approximately 11%, 12% and 14% of total revenues. Unbilled receivables represent amounts recognized as revenue for which invoices have not yet been sent.

 

 

 

4.   Acquisitions

 

On February 13, 2019, the Company entered into an Asset Purchase Agreement with Seevolution Inc., a Delaware corporation, Celebros, Inc., a Delaware corporation, and Elisha Gilboa, an individual and shareholder of Seevolution (the “Seevolution Asset Purchase Agreement”). The Seevolution Asset Purchase Agreement sets forth the terms and conditions pursuant to which the Company acquired certain assets in exchange for consideration paid consisting of (i) $418 in cash at the time of purchase, (ii) the payment of $100 of additional cash to be paid out $10 per month for ten months starting April 30, 2019 and (iii) 40,000 shares of Bridgeline Digital common stock. Costs to complete the transaction were approximately $18. The Company accounted for the Seevolution transaction as an asset acquisition as there were no substantive processes acquired. Goodwill is not recognized in an asset acquisition.

 

48

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

On March 13, 2019, the Company entered into an Asset Purchase Agreement with Stantive Technologies Group Inc. (“Stantive”), a corporation organized under the laws of Ontario, Canada to purchase substantially all of the assets of Stantive and assume certain liabilities. The Company also acquired all of the outstanding stock of Stantive Technologies Group, Pty, a company incorporated in Australia, which was a subsidiary of Stantive. The total purchase price, including cure costs, for Stantive and its Australian subsidiary was approximately $5.2 million in cash.

 

The Company accounted for the Stantive transaction as a business combination in accordance with ASC Topic 805, Business Combinations.

 

The Company assessed the fair market value of the acquired assets and liabilities as of the respective purchase dates, as follows:

 

Net assets acquired:

 

Seevolution

   

Stantive

   

Total

 

Cash

  $ -     $ 8     $ 8  

Accounts receivable, net

    47       844       891  

Other assets

    -       40       40  

Fixed assets, net

    -       272       272  

Intangible assets

    1,024       3,007       4,031  

Goodwill

    -       1,507       1,507  

Total assets

    1,071       5,678       6,749  
                         

Current liabilities

    76       488       564  

Net assets acquired:

  $ 995     $ 5,190     $ 6,185  
                         

Purchase Price:

                       

Cash Paid (including acquisition costs)

  $ 418     $ 5,190     $ 5,608  

Future deferred payments (present value)

    97       -       97  

Common stock ( fair value)

    480       -       480  

Total consideration paid

  $ 995     $ 5,190     $ 6,185  

 

 

As part of the Seevolution acquisition, of the $1,024 allocated to intangible assets, $602 was allocated to customer relationships, $401 was allocated to technology with an average useful life of five years, and $21 was allocated to trademarks with an average useful life of one year. Amortization expense of intangible assets was approximately $138 for the year ended September 30, 2019.

 

As part of the Stantive acquisition, of the $3,007 allocated to intangible assets, $1.7 million was allocated to customer relationships, $1.2 million was allocated to technology with an average useful life of five years, and $75 was allocated to trademarks with an average useful life of one year. Amortization expense of intangible assets was approximately $397 for the year ended September 30, 2019.

 

Total revenue from the Seevolution and Stantive acquisitions totaled approximately $2,145. Total earnings from the two acquisitions is impracticable to disclose as the acquisitions were asset purchases and the operations were merged with existing operations and not accounted for separately.

 

49

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Pro Forma Information (Unaudited)

 

The following is the unaudited pro forma information assuming the Stantive acquisition occurred on October 1, 2017:

 

   

Years Ended September 30,

 

(In thousands, except per share data)

 

2019

   

2018

 
                 

Revenue

  $ 15,622     $ 18,439  
                 

Net loss applicable to common shareholders

    (9,127 )     (7,783 )
                 
                 

Net loss per share attributable to common shareholders:

               

Basic

  $ (7.61 )   $ (92.06 )

Diluted

  $ (7.61 )   $ (92.06 )
                 

Weighted average common shares outstanding - basic

    1,199,322       84,549  

Weighted average common shares outstanding - diluted

    1,199,322       84,549  

 

 

 

5. Property and equipment

 

Property and equipment consist of the following:

 

   

As of September 30,

 
   

2019

   

2018

 

Furniture and fixtures

  $ 73     $ 233  

Purchased software

    18       18  

Property and equipment

    93       56  

Leasehold improvements

    195       412  

Total cost

    379       719  

Less accumulated depreciation

    (80 )     (639 )

Property and equipment, net

  $ 299     $ 80  

 

 

Depreciation and amortization on the above assets were $66 and $105 in fiscal 2019 and 2018, respectively.

 

50

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

 

6.   Fair Value Measurement and Fair Value of Financial Instruments

 

The Company measures its financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. Additionally, companies are required to provide disclosure and categorize assets and liabilities measured at fair value into one of three different levels depending on the assumptions (i.e., inputs) used in the valuation. Level 1 provides the most reliable measure of fair value while Level 3 generally requires significant management judgment. Financial assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. The fair value hierarchy is defined as follows:

 

Level 1—Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.

 

Level 2—Valuations are based on quoted prices for similar assets or liabilities in active markets, or quoted prices in markets that are not active for which significant inputs are observable, either directly or indirectly.

 

Level 3—Valuations are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Inputs reflect management’s best estimate of what market participants would use in valuing the asset or liability at the measurement date.

 

The Company believes the carrying values for accounts receivable and accounts payable and short-term debt approximate current fair values as of September 30, 2019 and 2018 because of their short-term nature and durations. The carrying value of long-term debt also approximates fair value as of September 30, 2019 and 2018 based upon the Company’s ability to acquire similar debt at similar maturities and renew current debt instruments under similar terms as the original debt.

 

In October 2017, the Company recorded a liability associated with a warrant to purchase common stock issued to Montage Capital II, L.P (“Montage Capital”). The fair value of the warrant liability will utilize a Level 3 input. To determine the value of the warrant liability, the Company used a Monte Carlo option-pricing model, which takes into consideration the market values of comparable public companies, considering among other factors, the use of multiples of earnings, and adjusted to reflect the restrictions on the ability of our shares to trade in an active market. The Monte Carlo option-valuation model also uses certain assumptions to determine the fair value, including expected life and annual volatility. The initial valuation assumptions included an expected life of eight (8) years, annual volatility of 80%, and a risk-free interest rate of 2.24%. At September 30, 2019, annual volatility decreased to 71%, the risk-free rate was 1.59% and the Company’s stock price declined to $1.91 per share.

 

The fair value of the warrant liability was valued at the loan execution date in the amount of $341 and is revalued at the end of each reporting period to fair value. Changes in fair value are included in Other income (expense), net in the Consolidated Statement of Operations in the period the change occurs. The Company recognized net gains as a result of the change in fair value of $166 and $161 during the years ended September 30, 2019 and 2018, respectively, and $327 since the original valuation in October 2017. The fair value of the warrant was $14 and $180 at September 30, 2019 and 2018, respectively.

 

In connection with the private offering of Series C Convertible Preferred Stock issued on March 12, 2019, the Company issued Series A, Series B and Series C warrants (collectively, the “Series C Preferred Warrants”) to accredited investors and the placement agents. These Series C Preferred Warrants have been classified as liabilities with the fair value determined using the Monte Carlo option-pricing model. The initial valuation assumptions included an average expected life of five and one-half (5.5) years, volatility of 76.8% and a risk-free interest rate of 2.4%. At September 30, 2019, annual volatility increased to 80.9%, the risk-free rate was 1.59% and the Company’s stock price declined to $1.91 per share. Changes in fair value are included in Other income (expense), net in the Consolidated Statement of Operations in the period the change occurs. The Company recognized net gains as a result of the change in fair value of $13,404 during the year ended September 30, 2019. The resulting gain was primarily due to changes in inputs to the valuation model, including a decline in the stock price. The fair value of the warrants was $3,500 at September 30, 2019. During the year ended September 30, 2019, there were Series C Preferred Warrant exercises which contributed to the decrease in the associated liability by approximately $4.8 million.

 

51

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Assets and liabilities of the Company measured at fair value on a recurring basis as of September 30, 2019 and 2018 are as follows:

 

           

As of September 30, 2019

         
   

Level 1

   

Level 2

   

Level 3

   

Total

 
                                 

Liabilities:

                               

Warrant liability - Montage

  $ -     $ -     $ 14     $ 14  

Warrant liability - Series A, B and C

    -       -       3,500       3,500  

Total Liabilities

  $ -     $ -       3,514       3,514  

 

           

As of September 30, 2018

         
   

Level 1

   

Level 2

   

Level 3

   

Total

 
                                 

Liabilities:

                               

Warrant liability - Montage

  $ -     $ -     $ 180     $ 180  

Total Liabilities

  $ -     $ -     $ 180     $ 180  

 

 

The following table provides a rollforward of the fair value, as determined by Level 3 inputs, of the warrant liabilities:

 

Balance at beginning of period, October 1, 2017

  $ -  

Additions

    341  

Adjustment to fair value

    (161 )

Balance at end of period, September 30, 2018

    180  

Additions

    21,500  

Exercises

    (4,762 )

Adjustment to fair value

    (13,404 )

Balance at end of period, September 30, 2019

  $ 3,514  

 

 

 

7. Goodwill

 

The carrying value of goodwill is not amortized, but is tested for impairment annually as of September 30, as well as whenever events or changes in circumstances indicate that the carrying amount of a reporting unit may not be recoverable. The purpose of an impairment test is to identify any potential impairment by comparing the carrying value of a reporting unit including goodwill to its fair value. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.  

 

Interim tests were performed at June 30, 2018 and December 31, 2018, as a decline in the stock price and other negative qualitative factors led management to conclude that there was a potential impairment, and annual tests were performed at September 30, 2019 and 2018. The fair value was calculated using the Company’s market price.  In performing the interim impairment tests, Management concluded that goodwill was impaired and recorded a charge of $3.7 million and $4.6 million during the three-month periods ended December 31, 2018 and June 30, 2018, respectively. The annual impairment test at September 30, 2019 did not result in any further impairment. The annual impairment test at September 30, 2018 resulted in additional impairment of $243. In total, goodwill impairment charges of $3.7 million and $4.9 million were recognized during the years ended September 30, 2019 and 2018, respectively. These amounts are reflected as a reduction in goodwill in the Company’s Consolidated Balance Sheets and an expense in the Company’s Consolidated Statements of Operations. 

 

52

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Changes in the carrying value of goodwill are as follows:

 

   

As of September 30,

 
   

2019

   

2018

 

Balance at beginning of period

  $ 7,782     $ 12,641  

Acquisitions

    1,507       -  

Impairment

    (3,732 )     (4,859 )

Balance at end of period

  $ 5,557     $ 7,782  

 

 

 

8.   Intangible Assets

 

Intangible assets are comprised as follows:

 

   

As of September 30,

 
   

2019

   

2018

 

Domain and trade names

  $ 52     $ 10  

Customer related

    2,032       -  

Technology

    1,425       -  

Non-compete agreements

    -       10  

Balance at end of period

  $ 3,509     $ 20  

 

Total amortization expense of $544 and $242 related to intangible assets for the years ended September 30, 2019 and 2018, respectively, is reflected in the Consolidated Statements of Operations in depreciation and amortization. The estimated amortization expense for fiscal years 2020, 2021, 2022, 2023, 2024 and thereafter is $900, $858, $763, $682, $296 and $10, respectively. 

 

 

 

9.   Accrued Liabilities

 

Accrued liabilities consist of the following:

 

   

As of September 30,

 
   

2019

   

2018

 

Compensation and benefits

  $ 430     $ 151  

Professional fees

    154       151  

Restructuring expenses

    75       53  

Other

    176       225  

Total

  $ 835     $ 580  

 

 

10.   Debt

 

The Company had a Line of Credit with Heritage Bank of Commerce (“Heritage Bank”). During the year ended September 30, 2019, the Company paid off all its debt and has no outstanding debt as of September 30, 2019. The Company’s debt as of September 30, 2018, consisted of the Line of Credit from Heritage Bank, a term loan with Montage Capital, and Promissory Term Notes.

 

53

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

Debt at September 30, 2018 consists of the following:

 

   

As of

 
   

September 30, 2018

 

Line of credit borrowings

  $ 2,081  

Term loan - Montage Capital

    922  

Other promissory notes

    941  

Other (debt discount)

    (353 )

Total debt

    3,591  

Less current portion

    1,017  

Long term debt, net of current portion

  $ 2,574  

 

Heritage Line of Credit

 

In June 2016, the Company entered into a new Loan and Security Agreement (“Heritage Agreement”), with Heritage Bank. The Heritage Agreement had an original a term of 24 months but was further amended in December 2018 and February 2019 to extend the maturity date to January 1, 2020 and February 29, 2020, respectively. As of September 30, 2019, the Company no longer maintains nor are any future borrowings available under the line. The Company paid an annual commitment fee of 0.4% of the commitment amount in the first year and 0.2% in the following years. The facility fee was be $6 on each anniversary thereafter. Borrowings were secured by all of the Company’s assets and all of the Company’s intellectual property. The Company was required to comply with certain financial and reporting covenants including an Asset Coverage Ratio and an Adjusted EBITDA metric, as defined.

 

The Heritage Agreement provided for up to $2.5 million of revolving credit advances which could have been used for acquisitions and working capital purposes. Borrowings were limited to the lesser of (i) $2.5 million and (ii) 75% of eligible receivables as defined. The Company was able to borrow up to $1.0 million in out of formula borrowings for specified periods of time. The borrowings or credit advances could not exceed the monthly borrowing base capacity, which would fluctuate based on monthly accounts receivable balances. The Company was able to request credit advances if the borrowing capacity was more than the current outstanding loan advance and had to pay down the outstanding loan advance if it exceeded the borrowing capacity. Borrowings accrued interest at Wall Street Journal Prime Rate plus 1.75%, (6.75% and 7% at September 30, 2019 and 2018, respectively).

 

Michael Taglich, a director and Shareholder of the Company, signed an unconditional guaranty (the “Guaranty”) and promised to pay Heritage Bank all indebtedness in an amount not to exceed $1.5 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.