Bridgeline Digital, Inc. - Quarter Report: 2018 December (Form 10-Q)

 

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		December 31,				September 30,
		2018				2018
ASSETS
Current assets:
Cash and cash equivalents		$	2,101			$	644
Accounts receivable and unbilled receivables, net			2,267				1,721
Prepaid expenses			472				452
Other current assets			75				21
Total current assets			4,915				2,838
Property and equipment, net			57				80
Intangible assets, net			17				20
Goodwill			4,050				7,782
Other assets			232				280
Total assets		$	9,271			$	11,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	1,215			$	1,577
Accrued liabilities			480				580
Debt, current			198				1,017
Deferred revenue			935				594
Total current liabilities			2,828				3,768
Debt, net of current portion			2,323				2,574
Other long term liabilities			203				234
Total liabilities			5,354				6,576
Commitments and contingencies
Stockholders’ equity:
Preferred stock - $0.001 par value; 1,000,000 shares authorized;
Series A Convertible Preferred stock:
264,000 shares and 262,310 shares at December 31, 2018 and 264,000 shares and 262,364 shares at September 30, 2018 issued and outstanding (liquidation preference $2,624 at December 31, 2018)			-				-
Series B Convertible Preferred stock:
4,288 shares and 80 shares at December 31, 2018 and 0 shares at September 30, 2018 issued and outstanding			-				-
Common stock - $0.001 par value; 50,000,000 shares authorized; 14,081,259 shares and 4,241,225 shares at December 31, 2018 and at September 30, 2018 issued and outstanding			14				5
Additional paid-in capital			70,988				66,548
Accumulated deficit			(66,734	)			(61,778	)
Accumulated other comprehensive loss			(351	)			(351	)
Total stockholders’ equity			3,917				4,424
Total liabilities and stockholders’ equity		$	9,271			$	11,000

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		Three Months Ended
		December 31,
		2018				2017
Net revenue:
Digital engagement services		$	1,073			$	2,060
Subscription and perpetual licenses			1,045				1,606
Managed service hosting			257				303
Total net revenue			2,375				3,969
Cost of revenue:
Digital engagement services			855				1,397
Subscription and perpetual licenses			423				480
Managed service hosting			63				80
Total cost of revenue			1,341				1,957
Gross profit			1,034				2,012
Operating expenses:
Sales and marketing			814				1,030
Support			91				74
General and administrative			687				736
Research and development			418				407
Depreciation and amortization			26				108
Goodwill impairment			3,732				-
Total operating expenses			5,768				2,355
Loss from operations			(4,734	)			(343	)
Interest and other expense, net			(217	)			(86	)
Loss before income taxes			(4,951	)			(429	)
Provision for income taxes			4				1
Net loss			(4,955	)			(430	)
Dividends on convertible preferred stock			(79	)			(75	)
Net loss applicable to common shareholders		$	(5,034	)		$	(505	)
Net loss per share attributable to common shareholders:
Basic and diluted		$	(0.46	)		$	(0.12	)
Number of weighted average shares outstanding:
Basic and diluted			11,007,780				4,200,219

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		Three Months Ended
		December 31,
		2018				2017
Net Loss		$	(4,955	)		$	(430	)
Other Comprehensive Income : Net change in foreign currency translation adjustment			-				1
Comprehensive loss		$	(4,955	)		$	(429	)

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		Three Months Ended
		December 31,
		2018				2017
Cash flows from operating activities:
Net loss		$	(4,955	)		$	(430	)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss on disposal of property and equipment			9				-
Amortization of intangible assets			4				72
Depreciation			20				36
Other amortization			15				16
Goodwill impairment			3,732				-
Debt discount amortization			150				22
Change in fair value of warrant			(12	)			-
Stock-based compensation			97				125
Changes in operating assets and liabilities
Accounts receivable and unbilled receivables			(546	)			(182	)
Prepaid expenses			28				(55	)
Other current assets and other assets			(10	)			5
Accounts payable and accrued liabilities			(499	)			(37	)
Deferred revenue			344				(86	)
Other liabilities			68				(61	)
Total adjustments			3,400				(145	)
Net cash used in operating activities			(1,555	)			(575	)
Cash flows from investing activities:
Software development capitalization costs			(11	)			-
Purchase of property and equipment			(7	)			(8	)
Net cash used in investing activities			(18	)			(8	)
Cash flows from financing activities:
Proceeds from issuance of common stock and Series B convertible preferred stock, net of issuance costs			4,376				-
Proceeds from term notes from Montage Capital, net of issuance costs			-				953
Borrowing on bank line of credit			-				300
Payments on bank line of credit			(201	)			(300	)
Principal payments on term notes from Montage Capital			(125	)			-
Principal payments on promissory term notes			(941	)			-
Cash dividends paid on Series A convertible preferred stock			(79	)			-
Net cash provided by financing activities			3,030				953
Effect of exchange rate changes on cash and cash equivalents			-				(1	)
Net increase in cash and cash equivalents			1,457				369
Cash and cash equivalents at beginning of period			644				748
Cash and cash equivalents at end of period		$	2,101			$	1,117
Supplemental disclosures of cash flow information:
Cash paid for:
Interest		$	185			$	64
Income taxes		$	4			$	9
Non cash investing and financing activities:
Accrued dividends on convertible preferred stock		$	-			$	76

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1.   Description of Business

 

Overview

 

Bridgeline Digital, The Digital Engagement Company™ ( the “Company”), helps customers with their digital experience from websites and intranets to eCommerce 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 has one wholly-owned subsidiary, Bridgeline Digital Pvt. Ltd. located in Bangalore, India.

 

 

Liquidity and Management’s Plans

 

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

 

Revenue decreased in the last fiscal year compared to the previous fiscal year and is expected to decline further this fiscal year. The Company has made significant cost reductions over the past few years, but these reductions may not be enough to compensate for further declines in revenues in future periods. While there can be no assurances that the anticipated sales will be achieved for future periods to provide positive cash flows, the Company’s management believes it will have an appropriate cost structure to support the revenues that will be achieved. As such, management believes that it is probable that we will meet our working capital, capital expenditure and debt repayment needs for the next twelve months from the financial statement date of issuance.

 

 

2.   Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant inter-company balances and transactions have been eliminated in consolidation.

 

Unaudited Interim Financial Information

 

The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), and with the instructions to Form 10-Q and Regulation S-X, and in the opinion of the Company’s management these condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments and accruals, necessary for the fair presentation. The operating results for the three months ended December 31, 2018 are not necessarily indicative of the results to be expected for the year ending September 30, 2019. The accompanying September 30, 2018 Condensed Consolidated Balance Sheet has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by US GAAP for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended September 30, 2018 filed with the Securities and Exchange Commission on December 28, 2018.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

Subsequent Events

 

The Company evaluated subsequent events through the date of this filing and concluded there were no material subsequent events requiring adjustment to or disclosure in these interim condensed consolidated financial statements, except as already disclosed in these financial statements.

 

Revenue Recognition

 

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 existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. 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.

 

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 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 $50 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. Retained earnings increased by $77 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.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

The following tables summarize the impact of adopting ASC 606 on the Company’s condensed consolidated financial statements during the three months ended and as of December 31, 2018:

 

 

 

 

 

 

 

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 of perpetual licenses. Customers who license the software on a subscription basis, which can be described as “Software as a Service” or “SaaS” and 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.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

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 the 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 type 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 within the notes (Note 11) as it believes this best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

Deferred Revenue

 

Amounts that have been invoiced are recorded in accounts receivable and 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 been recognized. Deferred revenue that will be recognized during the succeeding 12-month period is recorded as current deferred revenue, and the remaining portion is recorded as noncurrent deferred revenue included in Other long term liabilities.  Deferred revenue during the three months ended December 31, 2018 increased by $341.  As of December 31, 2018, approximately $13 of revenue is expected to 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 24 months, with the balance recognized thereafter.  

 

 

 

Deferred Capitalized Commission 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 generally be the customer contract term, which is typically thirty-six (36) months, with some exceptions. Deferred capitalized commission expense that will be recorded as expense during the succeeding 12-month period is recorded as current deferred capitalized commission costs, and the remaining portion is recorded as long-term deferred capitalized commission costs. Deferred capitalized commissions increased by $29 for the quarter ended December 31, 2018 compared to $77 for the year ended September 30, 2018. Current deferred capitalized commission costs are included in Other current assets in the Condensed Consolidated Balance Sheet and noncurrent deferred capitalized commission costs are included in Other assets in the Condensed Consolidated Balance Sheet. Amortization expense for the three months ended December 31, 2018 was $15.

 

 

Accounting Pronouncements Pending Adoption

 

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 interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The guidance requires the use of a modified retrospective approach. The Company is evaluating the impact of the guidance on its consolidated financial position, results of operations and related disclosures.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

Earnings Per Share

 

In July 2017, the FASB issued ASU No. 2017-11, which simplifies the accounting for certain financial instruments with down round features. This new standard will reduce income statement volatility for many companies that issue warrants and convertible instruments containing such features. ASU 2017-11 is effective for public companies in 2019 and all other entities in 2020. Management is currently evaluating the impact of the new guidance on its consolidated financial statements.

 

Compensation – Stock Compensation

 

In June 2018, the FASB issued ASU 2018-07, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 is effective for interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted, but no earlier than the Company’s adoption date of Topic 606. The new guidance is required to be applied retrospectively with the cumulative effect recognized at the date of initial application. Management is currently evaluating the impact of the new guidance on its consolidated financial statements.

 

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. ASU 2018-15 is effective for interim periods in fiscal years beginning after December 15, 2019, with early adoption permitted.

 

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. This guidance is will be effective for all entities for fiscal years beginning after December 15, 2019, including interim periods therein. Early adoption is permitted for any eliminated or modified disclosures upon issuance of this ASU. The Company is evaluating the impact the update will have on its disclosures.

 

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

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

 

3. Accounts Receivable and Unbilled Receivables

 

Accounts receivable and unbilled receivables consists of the following:

 

 

 

 

 

For the three months ended December 31, 2018, three customers represented more than 10% of accounts receivable. For the year ended September 30, 2018, two customers represented more than 10% of accounts receivable. For the three months ended December 31, 2018, two customers represented 18% and 19% 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.

 

 

4.   Fair Value Measurement and Fair Value of Financial Instruments

 

The Company’s other financial instruments consist principally of accounts receivable, accounts payable, and debt. The Company 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 recorded values for accounts receivable and accounts payable and short term debt approximate current fair values as of December 31, 2018 and September 30, 2018 because of their short-term nature and durations. The carrying value of long term debt also approximates fair value as of December 31, 2018 and September 30, 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 utilizes 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 December 31, 2018, annual volatility decreased to 74%, the risk-free rate was 2.58% and the Company’s stock price declined to $0.23 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. The fair value of the warrant is included in Other long-term liabilities in the Condensed Consolidated Balance Sheet. Changes in fair value are included in interest expense in the Statement of Operations in the period the change occurs. In total, the Company has recorded a change in fair value of $173 since the original valuation in October 2017. The fair value of the warrant at December 31, 2018 is $168.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

Assets and liabilities of the Company measured at fair value on a recurring basis as of December 31, 2018 and September 30, 2018 are as follows:

 

 

 

 

 

 

 

 

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

 

 

Warrant Liability

 

 

 

5. Goodwill

 

The carrying value of goodwill is not amortized, but is typically 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.  

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

An interim test was performed at 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. The fair value was calculated using the Company’s market price.  In performing the interim impairment test, Management concluded that goodwill was impaired and recorded a charge of $3.7 million. This amount is reflected as a reduction in goodwill of $3.7 million in the Company’s Condensed Consolidated Balance Sheet as of December 31, 2018 with the offset as an expense in the Company’s Condensed Consolidated Statement of Operations. 

 

Changes in the carrying value of goodwill are as follows:

 

 

 

 

 

6.   Intangible Assets

 

 

The components of intangible assets, net of accumulated amortization, are as follows:

 

 

 

 

Total amortization expense related to intangible assets for the three months ended December 31, 2018 and the year ended September 30, 2018 was $4 and $242, respectively, and is reflected in operating expenses on the Condensed Consolidated Statements of Operations. The estimated amortization expense for fiscal year 2019 (remaining) and 2020 is $7 and $0, respectively.

 

 

 

7.   Restructuring

 

Commencing in fiscal 2015 and through fiscal 2017, 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 spaces are currently contractually occupied by new sub-tenants 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 targeted to be completed in early fiscal 2019. All of these estimates and assumptions will be monitored on a quarterly basis for changes in circumstances with the corresponding adjustments reflected in the consolidated statement of operations. All of these estimates and assumptions will be monitored on a quarterly basis for changes in circumstances with the corresponding adjustments reflected in the Condensed Consolidated Statement of Operations.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

The following table summarizes the restructuring activity for the three months ended December 31, 2018:

 

 

 

 

 

The components of the accrued restructuring liabilities is as follows:

 

 

 

 

As of December 31, 2018, $37 was reflected in Accrued Liabilities and $12 in Other Long-Term Liabilities in the Condensed Consolidated Balance Sheet. As of September 30, 2018, $53 is reflected in Accrued Liabilities and $25 is reflected in Other Long-Term Liabilities in the Condensed Consolidated Balance Sheet.

 

 

8.   Debt

 

The Company’s debt as of December 31, 2018, consisted of the Line of Credit from Heritage Bank of Commerce (“Heritage Bank”) and a term loan with Montage Capital II, L.P. (“Montage Capital”). 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.

 

 

Debt at December 31, 2018 and September 30, 2018 consists of the following:

 

 

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

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 February 2019 to a maturity date of February 29, 2020. 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 will be $6 on each anniversary thereafter. Borrowings are secured by all of the Company’s assets and all of the Company’s intellectual property. The Company is required to comply with certain financial and reporting covenants including an Asset Coverage Ratio and an Adjusted EBITDA metric. The Company was in compliance with all financial covenants as of December 31, 2018.

 

The Heritage Agreement provides for up to $2.5 million of revolving credit advances which may be used for acquisitions and working capital purposes. Borrowings are limited to the lesser of (i) $2.5 million and (ii) 75% of eligible receivables as defined. The Company can borrow up to $1.0 million in out of formula borrowings for specified periods of time. The borrowings or credit advances may not exceed the monthly borrowing base capacity, which will fluctuate based on monthly accounts receivable balances. The Company may request credit advances if the borrowing capacity is more than the current outstanding loan advance, and must pay down the outstanding loan advance if it exceeds the borrowing capacity.  Borrowings accrue interest at Wall Street Journal Prime Rate plus 1.75%, (7.25% and 7.0% at December 31, 2018 and September 30, 2018, respectively). As of December 31, 2018, the Company had an outstanding balance under the Heritage Agreement of $1.9 million and additional borrowing capacity of $200.

 

Amendments – Heritage Bank

 

The Company and Heritage Bank have executed numerous amendments since the origination of the Heritage Agreement. Those amendments that are relevant as of December 31, 2018 are the following:

 

The first amendment, executed on August 15, 2016, included a decrease in the revolving line of credit from $3.0 million to $2.5 million. The second amendment, executed on December 14, 2016, included a minimum cash requirement of $250 in the Company’s accounts at Heritage. On October 6, 2017, a fourth amendment was executed, which included a consent to the Company’s incurrence of additional indebtedness from Montage Capital and the grant of a second position lien to Montage Capital. In addition, Heritage Bank and Montage Capital entered into an Intercreditor Agreement dated October 10, 2017 and acknowledged by the Company. On September 21, 2018, the ninth amendment was executed and addressed the minimum unrestricted cash requirements for the Company’s accounts at Heritage Bank upon repayment of certain Promissory Term Notes issued by the Company on September 7, 2018 in the principal amount of $941. On December 27, 2018, the tenth amendment was executed, which extended the maturity date of the Loan Agreement to January 1, 2020, as well as, set new financial covenants for fiscal 2019. On February 14, 2019, the eleventh amendment was executed, which extended the maturity date of the Loan Agreement to February 29, 2020, as well as, set new financial covenants for fiscal 2019.

 

Montage Capital II, L.P. Loan Agreement

 

On October 10, 2017, the Company entered into a Loan and Security Agreement (the “Montage Agreement or Montage Loan”) with Montage Capital. The Montage Agreement has a thirty-six (36) month term which matures on October 10, 2020. The Montage Agreement provided for up to $1.5 million of borrowing in the form of a non-revolving term loan which may be used by the Company for working capital purposes. $1 million of borrowing was advanced on the date of closing and the option to borrow the remainder has lapsed. Borrowings bear interest at the rate of 12.75% per annum. The Company paid a fee of $47 to Montage Capital at closing. Interest only payments are due and payable during the first nine months of the Montage Loan. On July 1, 2018, the Company commenced payment of principal payments of $26 per month plus accrued interest. All remaining principal and interest shall be due and payable at maturity. Borrowings are secured by a second position lien on all of the Company’s assets including intellectual property and general intangibles and is subordinate to the Company’s senior debt facility with Heritage Bank. Pursuant to the Montage Agreement, the Company is also required to comply with certain financial covenants.

 

On May 10, 2018, the first amendment to the Montage Agreement (the “First Amendment”) was executed. The First Amendment included the Adjusted EBITDA metrics for the third quarter of fiscal 2018 and a waiver for not achieving the Adjusted EBITDA metrics for the quarter ended March 31, 2018. A second amendment to the Montage Agreement (the “Second Amendment”) was executed on October 22, 2018. The Second Amendment included modifications to financial covenants and addressed the minimum unrestricted cash requirements for the Company’s accounts at Heritage Bank upon repayment of debt incurred by the Company pursuant to certain Promissory Term Notes (see below) issued by the Company on September 7, 2018 in the principal amount of $941. A third amendment to the Montage Agreement (the “Third Amendment”) was executed on December 7, 2018 and included the new financial covenants for fiscal 2019. The Company was in compliance with all financial covenants as of December 31, 2018.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

As additional consideration for the Montage Loan, the Company issued to Montage Capital an eight-year warrant (the “Montage Warrant”) to purchase 66,315 shares of the Company’s common stock at a price equal to $2.65 per share. The Montage Warrant contains an equity buy-out provision upon the earlier of (1) dissolution or liquidation of the Company, (2) any sale or distribution of all or substantially all of the assets of the Company or (3) a “Change in Control” as defined within the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934. Montage Capital shall have the right to receive an equity buy-out of $250. If the equity buy-out is exercised, the Montage Warrant will be surrendered to the Company for cancellation.

 

Promissory Term Notes

 

On September 7, 2018, the Company sold and issued subordinate promissory notes (the “Promissory Term Notes”) to certain accredited investors (“Purchasers”), pursuant to which it issued to the Purchasers (i) Promissory Term Notes, in the aggregate principal amount of approximately $941. The Promissory Term Notes have an original issue discount of fifteen percent (15%), bear interest at a rate of twelve percent (12%) per annum, and have a maturity date of the earlier to occur of (a) six months from the date of execution of the Purchase Agreement, or (b) the consummation of a debt or equity financing resulting in the gross proceeds to the Company of at least $3.0 million. After recording $141 of original issue discount and debt issuance costs of $40, the Company received net cash proceeds in the aggregate amount of $760 for the Promissory Term Notes. The original issue discount and debt issuance costs are recorded as a contra liability and will be amortized over the life of the Promissory Term Notes. On October 19, 2018, the Company completed an equity financing resulting in gross proceeds of $5.0 million and repaid the Promissory Term Notes including accrued interest of $13 for a total of $954 on October 23, 2018. Such repayments were approved by both Heritage Bank and Montage Capital.

 

Further, Heritage Bank and Montage Capital, both approved the issuance of the Promissory Term Notes and the repayment terms and each Purchaser also entered into a Subordination Agreement with the two parties, pursuant to which the Purchasers agreed to subordinate (i) all of the Company’s indebtedness and obligations to the Purchasers, whether presently existing or arising in the future, to all of the Company’s indebtedness the both Heritage Bank and Montage Capital and (ii) all of the Purchasers’ security interests, if any, to all of Heritage Bank’s and Montage Capital’s security interests in property of the Company.

 

 

 

9.   Shareholders’ Equity

 

Preferred Stock Series A Convertible

 

In October 2014, the Company designated 264,000 shares of its Preferred stock (the “Preferred Stock”) as Series A convertible preferred stock and sold 200,000 shares of Series A convertible preferred stock at a purchase price of $10.00 per share for gross proceeds of $2.0 million in a private placement. The shares of Preferred Stock may be converted, at the option of the holder at any time, into such number of shares of common stock (“Conversion Shares”) equal (i) to the number of shares of Preferred Stock to be converted, multiplied by the stated value of $10.00 (the “Stated Value”) and (ii) divided by the conversion price in effect at the time of conversion. The current conversion price is $16.25 and is subject to adjustment in the event of stock splits or stock dividends. As of December 31, 2018, a total of 1,636 preferred shares have been converted to 1,007 shares of common stock.

 

Any accrued but unpaid dividends on the shares of Preferred Stock to be converted shall also be converted in common stock at the conversion price. A mandatory provision also may provide that the Company will have the right to require the holders to convert shares of Preferred Stock into Conversion Shares if (i) the Company’s common stock has closed at or above $32.50 per share for ten consecutive trading days and (ii) the Conversion Shares are (A) registered for resale on an effective registration statement or (B) may be resold pursuant to Rule 144.

 

In the event of any liquidation, dissolution, or winding up of the Company, the holders of shares of Preferred Stock will be entitled to receive in preference to the holders of common stock, the amount equal to the stated value per share of Series A Preferred Stock plus declared and unpaid dividends, if any. After such payment has been made, the remaining assets of the Company will be distributed ratably to the holders of common stock. The Preferred Shares shall vote with the Common Stock on an as converted basis.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

Effective January 1, 2017, cumulative dividends are payable at a rate of 12% per year. The Company has issued 64,000 shares of Preferred Stock as PIK dividends to the preferred shareholders, which is the maximum amount of cumulative PIK dividends authorized. Therefore, all future dividend payments will be cash dividends. Total cash dividend payments for the three months ended December 31, 2018 were $79.

 

Preferred Stock Series B Convertible

 

On October 16, 2018, in connection with a public offering, the Company issued 4,288 Series B Convertible Preferred Stock, par value $0.001 per share, with each share of Series B Convertible Preferred Stock convertible into 2,000 shares of the Company’s common stock at a conversion price of $0.50 per share. As of December 31, 2018, 4,208 shares of Series B Convertible Preferred Stock have been converted into 8,416,000 shares of common stock.

 

Common Stock

 

Public Offering

 

On October 16, 2018, the Company issued and sold in a public offering (the “Offering”) an aggregate of (i) 1,424,000 Class A Units (the “Class A Units”) at a price of $0.50 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 Company common stock at an exercise price of $0.50 per share and (ii) 4,288 Class B Units,  consisting of one share of Series B Convertible Preferred Stock and a Warrant to purchase one share of common stock. Each share of Series B Convertible Preferred Stock is convertible into 2,000 shares of the Company’s common stock at a conversion price of $0.50 per share. The net proceeds to the Company from the Offering, after deducting the underwriter’s fees and expenses, the Company’s Offering expenses and the repayment of the Promissory Term Notes were approximately $3.4 million.

 

In addition, the Company granted the underwriter of the Offering a 45-day option (the “Over-allotment Option”) to purchase up to an additional 1.5 million shares of common stock and additional warrants to purchase an additional 1.5 million shares of common stock. At the time of the Offering, the underwriter partially exercised the Over-allotment Option by electing to purchase from the Company additional warrants to purchase 400,000 shares of common stock.

 

Amended and Restated Stock Incentive Plan

 

The Company has granted common stock, common stock warrants, and common stock option awards (the “Equity Awards”) to employees, consultants, advisors and debt holders of the Company and to former owners and employees of acquired companies that have become employees of the Company. On April 29, 2016, the stockholders approved a new stock incentive plan, The 2016 Stock Incentive Plan (the “2016 Plan”). The 2016 Plan replaced an older plan that had expired in August 2016. The 2016 Plan authorizes the award of incentive stock options, non-statutory stock options, restricted stock, unrestricted stock, performance shares, stock appreciation rights and any combination thereof to employees, officers, directors, consultants, independent contractors and advisors of the Company. Initially, a total of 500,000 shares of the Company’s Common Stock is reserved for issuance under the 2016 Plan. As of December 31, 2018, there were 232,066 options outstanding under this plan and 267,934 shares available for future issuance.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

Common Stock Warrants

 

The Company typically issues warrants to individual investors and placement agents to purchase shares of the Company’s common stock in connection with public and private placement fund raising activities. Warrants may also be issued to individuals or companies in exchange for services provided for the Company. The warrants are typically exercisable six months after the issue date, expire in five years, and contain a cashless exercise provision and piggyback registration rights.

 

Total warrants outstanding as December 31, 2018 were as follows:

 

 

 

 

Summary of Option and Warrant Activity and Outstanding Shares

 

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

 

 

 

 

10.   Net Loss Per Share

 

 

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

 

 

 

Basic net loss per share is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding.  Diluted net income per share is computed using the weighted average number of common shares outstanding during the period plus the dilutive effect of outstanding stock options and warrants and convertible preferred stock using the “treasury stock” method. For both the three months ended December 31, 2018 and 2017, the computation of diluted loss per share does not include all of stock options, warrants and convertible preferred stock as they are anti-dilutive.

 

 

11.  Disaggregated Revenue and Segment Reporting

 

The Company operates as one operating segment, therefore, all required financial segment information can be found in the condensed consolidated financial statements.

 

The Company disaggregates revenue from contracts with customers by geography and product grouping, as it believes this best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

The Company’s revenue by geography (based on customer address) is as follows:

 

 

 

 

The Company’s revenue by type is as follows:

 

 

 

 

12.  Income Taxes

 

Income tax expense was $4 and $1 for the three months ended December 31, 2018 and 2017. Income tax expense consists of the estimated liability for federal and state income taxes owed by the Company, including the alternative minimum tax.  Net operating loss carry forwards are estimated to be sufficient to offset any potential taxable income for all periods presented.

 

 

13.  Related Party Transactions

 

In November 2018, the Company engaged Taglich Brothers Inc,,on a non-exclusive basis, to perform advisory and investment banking services with possible acquisition target possibilities. Michael Taglich, a director and shareholder of the Company, is the President and Chairman of Taglich Brothers Inc.   Fees for the services are $8 per month for three months and $5 thereafter, cancellable at any time. Taglich Brothers Inc. may also earn a success fee ranging from $200 for a revenue target acquisition of under $5 million up to $1 million for an acquisition target over $200 million.

 

 

14.  Legal Proceedings

 

The Company is subject to ordinary routine litigation and claims incidental to its business. As of December 31, 2018, the Company was not engaged with any material legal proceedings.

 

 

15.  Subsequent Events

 

On February 13, 2019, the Company entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Seevolution Inc, a Delaware corporation, Celebros, Inc., a Delaware corporation, and Elisha Gilboa,an individual and shareholder of Seevolution, collectively (the “Sellers”). The Asset Purchase Agreement sets forth the terms and conditions pursuant to which the Company acquired certain assets of the Sellers in exchange for consideration paid to the Sellers consisting of (i) $400,000 in cash, (ii) the payment of $100,000 of additional cash to be paid out $10,000 per month for ten months starting April 30, 2019 and (iii) 2,000,000 shares of Bridgeline Digital common stock. 

 

On February 14, 2019, the Company paid a deposit of $498 to secure a bid and commence confirmatory due diligence related to the potential acquisition of a Canadian company that filed a Notice of Intention to File a Proposal under the Bankruptcy and Insolvency Act.  Due to the terms of the sale and investment solicitation process (bid process), the name of the acquisition target cannot be revealed until the confirmatory due diligence is completed and the Canadian court approves the sale, which will be at the end of February 2019.

 

 

 

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