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EX-10.6 - EXHIBIT 10.6 - Bridgeline Digital, Inc.ex10-6.htm
EX-10.3 - EXHIBIT 10.3 - Bridgeline Digital, Inc.ex10-3.htm
EX-31.2 - EXHIBIT 31.2 - Bridgeline Digital, Inc.ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Bridgeline Digital, Inc.ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - Bridgeline Digital, Inc.ex32-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 (Mark One)

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

 

 

For the quarterly period ended December 31, 2015

 

OR

 

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

For the transition period from ______________ to ______________

 

Commission File Number 333-139298

 

Bridgeline Digital, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

52-2263942

State or other jurisdiction of incorporation or organization

IRS Employer Identification No.

 

80 Blanchard Road

 

Burlington, Massachusetts

01803

(Address of Principal Executive Offices)

(Zip Code)

 

 

(781) 376-5555

(Registrant’s telephone number, including area code) 

 
(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ☒     No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)   ☒  Yes    ☐  No

 

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

 

Large accelerated filer  ☐

Accelerated filer  ☐

Non-accelerated filer  ☐

Smaller reporting company ☒

    (Do not check if a smaller reporting company)  

 

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

 

The number of shares of Common Stock par value $0.001 per share, outstanding as of February 11, 2016 was 5,326,615.

 

 
1

 

 

Bridgeline Digital, Inc.

 

Quarterly Report on Form 10-Q

 

For the Quarterly Period ended December 31, 2015

 

Index

 

 

 

Page

Part I

Financial Information

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets (unaudited) as of December 31, 2015 and September 30, 2015

4

 

 

 

 

Condensed Consolidated Statements of Operations (unaudited) for the three months ended December 31, 2015 and 2014

5

     
 

Condensed Consolidated Statements of Comprehensive Loss (unaudited) for the three months ended December 31, 2015 and 2014

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended December 31, 2015 and 2014

7

     

 

Notes to Unaudited Interim Condensed Consolidated Financial Statements

8

 

 

 

Item 2.

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

20

 

 

 

Item 3.

Qualitative and Quantitative Disclosures About Market Risk

32

 

 

 

Item 4.

Controls and Procedures

32

 

 

 

Part II

Other Information

 

 

 

 

Item 1.

Legal Proceedings

33

     

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds 

33

     
Item 5. Other Information 33

 

 

 

Item 6.

Exhibits

34

     
Signatures   35

 

 
2

 

 

Bridgeline Digital, Inc.

 

Quarterly Report on Form 10-Q

 

For the Quarterly Period ended December 31, 2015

 

 

Statements contained in this Report on Form 10-Q that are not based on historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements may be identified by the use of forward-looking terminology such as “should,” “could,” “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intends,” “continue,” or similar terms or variations of those terms or the negative of those terms.  These statements appear in a number of places in this Form 10-Q and include statements regarding the intent, belief or current expectations of Bridgeline Digital, Inc. Forward-looking statements are merely our current predictions of future events. Investors are cautioned that any such forward-looking statements are inherently uncertain, are not guaranties of future performance and involve risks and uncertainties. Actual results may differ materially from our predictions. Important factors that could cause actual results to differ from our predictions include the impact of the weakness in the U.S. and international economies on our business, our inability to manage our future growth effectively or profitably, fluctuations in our revenue and quarterly results, our license renewal rate, the impact of competition and our ability to maintain margins or market share, the limited market for our common stock, the volatility of the market price of our common stock, the ability to maintain our listing on the NASDAQ Capital market, the ability to raise capital, the performance of our products, our ability to respond to rapidly evolving technology and customer requirements, our ability to protect our proprietary technology, the security of our software, our dependence on our management team and key personnel, our ability to hire and retain future key personnel, or our ability to maintain an effective system of internal controls.  Although we have sought to identify the most significant risks to our business, we cannot predict whether, or to what extent, any of such risks may be realized, nor is there any assurance that we have identified all possible issues which we might face. We assume no obligation to update our forward-looking statements to reflect new information or developments. We urge readers to review carefully the risk factors described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015 as well as in the other documents that we file with the Securities and Exchange Commission. You can read these documents at www.sec.gov.

 

 

Where we say “we,” “us,” “our,” “Company” or “Bridgeline Digital” we mean Bridgeline Digital, Inc.

 

 
3

 

 

PART I—FINANCIAL INFORMATION

 Item 1.

Condensed Consolidated Financial Statements.

 

BRIDGELINE DIGITAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(Unaudited)

 

ASSETS

 

December 31,

   

September 30,

 
   

2015

   

2015

 

Current assets:

               

Cash and cash equivalents

  $ 580     $ 337  

Accounts receivable and unbilled receivables, net

    2,507       2,463  

Prepaid expenses and other current assets

    624       680  

Total current assets

    3,711       3,480  

Equipment and improvements, net

    1,084       1,315  

Intangible assets, net

    921       1,028  

Goodwill

    12,641       12,641  

Other assets

    635       723  

Total assets

  $ 18,992     $ 19,187  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               
                 

Current liabilities:

               

Accounts payable

  $ 1,282     $ 1,626  

Accrued liabilities

    1,396       1,046  

Accrued contingent consideration

    301       468  

Debt, current

    500       92  

Capital lease obligations, current

    216       320  

Deferred revenue

    1,592       1,542  

Total current liabilities

    5,287       5,094  
                 

Debt, net of current portion

    7,879       7,695  

Other long term liabilities

    784       726  

Total liabilities

    13,950       13,515  
                 

Commitments and contingencies

               
                 

Stockholders’ equity:

               

Preferred stock - $0.001 par value; 1,000,000 shares authorized; 211,393 at December 31, 2015 and 208,222 at Septermber 30, 2015, issued and outstanding (liquidation preference $2,146)

    -       -  

Common stock - $0.001 par value; 50,000,000 shares authorized; 5,326,615 at December 31, 2015 and 4,637,684 at September 30, 2015, issued and outstanding

    5       5  

Additional paid-in capital

    51,183       50,434  

Accumulated deficit

    (45,791 )     (44,411 )

Accumulated other comprehensive loss

    (355 )     (356 )

Total stockholders’ equity

    5,042       5,672  

Total liabilities and stockholders’ equity

  $ 18,992     $ 19,187  

 

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

 

 
4

 

  

BRIDGELINE DIGITAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

(Unaudited)

 

   

Three Months Ended

 
   

December 31,

 
   

2015

   

2014

 

Net revenue:

               

Digital engagement services

  $ 2,373     $ 3,231  

Subscription and perpetual licenses

    1,523       1,380  

Managed service hosting

    347       401  

Total net revenue

    4,243       5,012  

Cost of revenue:

               

Digital engagement services

    1,454       2,564  

Subscription and perpetual licenses

    558       430  

Managed service hosting

    77       74  

Total cost of revenue

    2,089       3,068  

Gross profit

    2,154       1,944  

Operating expenses:

               

Sales and marketing

    1,068       1,810  

General and administrative

    862       993  

Research and development

    341       602  

Depreciation and amortization

    356       452  

Restructuring charges

    586       -  

Total operating expenses

    3,213       3,857  

Loss from operations

    (1,059 )     (1,913 )

Interest and other expense, net

    (283 )     (162 )

Loss before income taxes

    (1,342 )     (2,075 )

Provision for income taxes

    6       35  

Net loss

    (1,348 )     (2,110 )

Dividends on convertible preferred stock

    (32 )     (21 )

Net loss applicable to common shareholders

  $ (1,380 )   $ (2,131 )

Net loss per share attributable to common shareholders:

               

Basic and diluted

  $ (0.25 )   $ (0.49 )

Number of weighted average shares outstanding:

               

Basic and diluted

    5,164,809       4,343,023  

 

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

 

 
5

 

 

BRIDGELINE DIGITAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 (Dollars in thousands)

(Unaudited)

 

 

   

Three Months Ended

 
   

December 31,

 
   

2015

   

2014

 

Net Loss

  $ (1,348 )   $ (2,110 )
                 

Net change in foreign currency translation adjustment

    1       (5 )

Comprehensive loss

  $ (1,347 )   $ (2,115 )

 

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

 

 
6

 

 

BRIDGELINE DIGITAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 (Dollars in thousands, except share data)

(Unaudited)

 

   

Three Months Ended

 
   

December 31,

 
   

2015

   

2014

 

Cash flows from operating activities:

               

Net loss

  $ (1,348 )   $ (2,110 )

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

               

Amortization of intangible assets

    107       152  

Depreciation

    231       279  

Other amortization

    198       146  

Stock-based compensation

    72       89  

Change in deferred taxes

    -       15  

Changes in operating assets and liabilities

               

Accounts receivable and unbilled receivables

    (44 )     165  

Prepaid expenses and other assets

    60       255  

Accounts payable and accrued liabilities

    (18 )     (245 )

Deferred revenue

    50       34  

Other liabilities

    5       (27 )

Total adjustments

    661       863  

Net cash used in operating activities

    (687 )     (1,247 )

Cash flows used in investing activities:

               

Purchase of equipment and improvements

    -       (54 )

Software development capitalization costs

    (44 )     (21 )

Net cash used in investing activities

    (44 )     (75 )

Cash flows provided by financing activities:

               

Proceeds from employee stock purchase plan

    -       2  

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

    -       1,776  

Proceeds from issuance of 680,000 shares of common stock, net of issuance costs

    669       -  

Proceeeds from bank term loan

    500       610  

Proceeds from term notes from stockholder

    500       500  

Borrowing on bank line of credit

    108       -  

Payments on bank term loan

    (250 )     (1,000 )

Payments on bank line of credit

    (336 )     (461 )

Payments on subordinated promissory notes

    -       (7 )

Contingent acquisition payments

    (113 )     (180 )

Principal payments on capital leases

    (105 )     (125 )

Net cash provided by financing activities

    973       1,115  

Effect of exchange rate changes on cash and cash equivalents

    1       (5 )

Net increase(decrease) in cash and cash equivalents

    243       (212 )

Cash and cash equivalents at beginning of period

    337       1,256  

Cash and cash equivalents at end of period

  $ 580     $ 1,044  

Supplemental disclosures of cash flow information:

               

Cash paid for:

               

Interest

  $ 67     $ 55  

Income taxes

  $ 3     $ 2  

Non cash investing and financing activities:

               

Equipment purchased under capital leases

  $ -     $ 172  

Other assets included in accounts payable

  $ -     $ 19  

Accrued dividends on convertible preferred stock

  $ 32     $ 21  

 

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

 

 
7

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

1.   Description of Business

 

Overview

 

Bridgeline Digital, The Digital Engagement Company™, helps customers maximize the performance of their full digital experience - from websites and intranets to online stores and campaigns. Bridgeline’s iAPPS® platform deeply integrates Web Content Management, eCommerce, eMarketing, Social Media management, and Web Analytics to help marketers deliver digital experiences that attract, engage and convert their customers across all channels. Bridgeline’s iAPPS platform combined with its digital services assists customers in maximizing on-line revenue, improving customer service and loyalty, enhancing employee knowledge, and reducing operational costs. The iAPPSds (“distributed subscription”) product is a platform that empowers franchise and large dealer networks with state-of-the-art web engagement management while providing superior oversight of corporate branding. iAPPSds deeply integrates content management, eCommerce, eMarketing and web analytics and is a self-service web platform that is offered to each authorized franchise or dealer for a monthly subscription fee. Our iAPPSdsr platform, released in 2015, targets the growing multi-unit organizations with 10-500 locations providing them with powerful web engagement tools while maintaining corporate brand control and consistency.

 

The iAPPS platform is delivered through a cloud-based SaaS (“Software as a Service”) multi-tenant business model, whose flexible architecture provides customers with state of the art deployment providing maintenance, daily technical operation and support; or via a traditional perpetual licensing business model, in which the iAPPS software resides on a dedicated server in either the customer’s facility or Bridgeline’s co-managed hosting facility.

 

The iAPPS Platform is an award-winning application. Our teams of Microsoft Gold© certified developers have won over 100 industry related awards. In 2015, the SIIA (Software and Information Industry Association) awarded iAPPS Content Manager, the 2015 SIIA CODiE Award for Best Web Content Management Platform. Also in 2015, EContent magazine named iAPPS Digital Engagement Platform to its Trendsetting Products list. The list of 75 products and platforms was compiled by EContent’s editorial staff, and selections were based on each offering’s uniqueness and importance to digital publishing, media, and marketing. Bridgeline was also recognized in 2015 as a strong performer by Forrester Research, Inc in its independence report, “The Forrester Wave ™: Through-Channel Marketing Automation Platforms, Q3 2015.” In recent years, iAPPS Content Manager and iAPPS Commerce products were selected as finalists for the 2014, 2013, and 2012 CODiE Awards for Best Content Management Solution and Best Electronic Commerce Solution, globally. In 2015, the SIIA (Software and Information Industry Association) awarded iAPPS Content Manager the 2015 SIIA CODiE Award for Best Web Content Management Platform. In 2014 and 2013, Bridgeline Digital won twenty-five Horizon Interactive Awards for outstanding development of web applications and websites. Also in 2013, the Web Marketing Association sponsored Internet Advertising Competition honored Bridgeline Digital with three awards for iAPPS customer websites and B2B Magazine selected Bridgeline Digital as one of the Top Interactive Technology companies in the United States. KMWorld Magazine Editors selected Bridgeline Digital as one of the 100 Companies That Matter in Knowledge Management and also selected iAPPS as a Trend Setting Product in 2013.

 

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

 

Locations

 

The Company’s corporate office is located north of Boston, Massachusetts.  The Company maintains regional field offices serving the following geographical locations: Atlanta, GA; Boston, MA; Chicago, IL; Denver, CO; New York, NY; Dallas, TX; San Luis Obispo, CA; and Tampa, FL.  The Company has a wholly-owned subsidiary, Bridgeline Digital Pvt. Ltd. located in Bangalore, India.

 

Reverse Stock Split

 

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

 

 
8

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

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

 

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

 

Liquidity

 

The Company has incurred operating losses and used cash in its operating activities for the past several years. Cash was used to fund acquisitions to broaden our geographic footprint, develop new products, and build infrastructure. In fiscal 2015, the Company initiated a restructuring plan that included a reduction of workforce and office space, which significantly reduced operating expenses. In the first quarter of fiscal 2016, the Company recorded additional restructuring charges of $586 related to more office lease and workforce reductions. The Company’s management believes it will have an appropriate cost structure for its anticipated sales in the first half of fiscal 2016. Management believes that operating expenses will be reduced to the point where the Company can drive positive Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, stock-based compensation charges and other onetime charges). As such, management believes that the Company will provide sufficient cash flows to fund its operations in the ordinary course of business through at least the next twelve months. However, there can be no assurance that the anticipated sales level will be achieved.

 

The Company maintains a bank financing agreement with BridgeBank, a division of Western Alliance Bank, which provides for up to $5 million of revolving credit advances. Borrowing is limited to the lesser of the $5 million or 80% of eligible receivables. Additionally, the Company can borrow up to $1 million in out of formula borrowings and a director/shareholder of the Company guarantees up to $2 million of the outstanding line of credit. As of December 31, 2015, the Company had an outstanding balance under the BridgeBank Loan Agreement of $2.5 million. During fiscal 2015, Bridgebank extended the term to a maturity date of September 30, 2016 and extended it again in December 2015 to a maturity date of December 31, 2016. Also, in December 2015, the four Term Notes from Shareholder in the amount of $2 million were amended to reflect a change in the maturity dates from September 30, 2016 and November 30, 2016 to March 1, 2017. In consideration for the extension in the maturity date, the Company increased the interest by 1.5% and included a prepayment penalty of 2%. The Term Notes of $500 issued in November 2015 were also amended with the same terms and conditions as the first four notes. In addition, the Company amended the maturity dates of its 10% Secured Convertible Notes in the amount of $3 million to March 1, 2017 in exchange for an increase in the interest to 11.5% as of January 1, 2016 and a prepayment penalty of 2%.

 

 

2.   Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

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

 

 
9

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Unaudited Interim Financial Information

 

The accompanying interim Condensed Consolidated Balance Sheets as of December 31, 2015 and September 30, 2015, and the interim Condensed Consolidated Statements of Operations, Comprehensive Loss, and Cash Flows for the three months ended December 31, 2015 and 2014 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), and with the same instructions to Form 10-Q and Regulation S-X, and in the opinion of the Company’s management have been prepared on the same basis as the audited consolidated financial statements as of and for the year ended September 30, 2015. These interim condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments and accruals, necessary for the fair presentation of the Company’s financial position at December 31, 2015 and September 30, 2015 and its results of operations and cash flows for the three months ended December 31, 2015 and 2014. The results for the three months ended December 31, 2015 are not necessarily indicative of the results to be expected for the year ending September 30, 2016. The accompanying September 30, 2015 Condensed Consolidated Balance Sheet has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by US GAAP for complete financial statements.

 

Subsequent Events

 

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

 

Recent Accounting Pronouncements

 

In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2015-17, Balance Sheet Classification of Deferred Taxes, (the “Update”), which eliminates the current requirement to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, entities will be required to classify all deferred tax assets and liabilities as noncurrent. The Update is effective for financial statements issued for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Management does not expect the adoption of this Update to have a material impact on our consolidated financial position, results of operations or cash flows.

 

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

 

 

3. Accounts Receivable and Unbilled Receivables

 

Accounts receivable and unbilled receivables consists of the following:

 

   

As of

   

As of

 
   

December 31, 2015

   

September 30, 2015

 

Accounts receivable

  $ 2,377     $ 2,228  

Unbilled receivables

    201       306  

Subtotal

    2,578       2,534  

Allowance for doubtful accounts

    (71 )     (71 )

Accounts receivable and unbilled receivables, net

  $ 2,507     $ 2,463  

 

 

4.   Fair Value Measurement and Fair Value of Financial Instruments

 

The Company’s other financial instruments consist principally of accounts receivable, accounts payable, and debt. The Company believes the recorded values for accounts receivable and accounts payable approximate current fair values as of December 31, 2015 and September 30, 2015 because of their nature and durations. The carrying value of debt instruments also approximates fair value as of December 31, 2015 and September 30, 2015 based on acceptable valuation methodologies which use market data of similar size and situated debt issues.

 

 
10

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED 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 December 31, 2015 and September 30, 2015 are as follows:

 

    December 31, 2015  
   

Level 1

   

Level 2

   

Level 3

   

Total

 
                                 

Liabilities:

                               

Contingent acquisition consideration

     -        -     $ 301     $ 301  

Total Liabilities

  $ -     $ -     $ 301     $ 301  

 

    September 30, 2015  
   

Level 1

   

Level 2

   

Level 3

   

Total

 
                                 

Liabilities:

                               

Contingent acquisition consideration

     -        -     $ 468     $ 468  

Total Liabilities

  $ -     $ -     $ 468     $ 468  

 

 

The Company determines the fair value of acquisition-related contingent consideration based on assessment of the probability that the Company would be required to make such future payments. Changes to the fair value of contingent consideration are recorded in general and administrative expenses. The following table provides a rollforward of the fair value, as determined by Level 3 inputs, of the contingent consideration.

 

Changes in the fair value of the contingent consideration liability were as follows:

 

   

Contingent Consideration

 

Balance, October 1, 2015

  $ 468  

Payment of contingent consideration

    (167 )

Balance, December 31, 2015

  $ 301  

 

 
11

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

5.   Intangible Assets

 

The components of intangible assets are as follows:

 

   

As of

   

As of

 
   

December 31, 2015

   

September 30, 2015

 

Domain and trade names

  $ 10     $ 10  

Customer related

    712       802  

Non-compete agreements

    199       216  

Balance at end of period

  $ 921     $ 1,028  

 

 

 

Total amortization expense related to intangible assets for the three months ended December 31, 2015 and 2014 was $107 and $152, respectively, and is reflected in operating expenses on the Condensed Consolidated Statements of Operations. The estimated amortization expense for fiscal years 2016 (remaining), 2017, 2018, and 2019 is $323, $335, $242, and $22, respectively.

 

 

6.  Goodwill

 

During fiscal 2015, the Company recorded a $10.5 million goodwill impairment charge. The Company determined that the most appropriate approach to use to determine the fair value of the reporting unit was the discounted cash flow method. The fair value of our reporting unit pursuant to the discounted cash flow approach was impacted by lower than forecasted revenues, volatility of the Company’s common stock, longer sales cycles, and higher operating losses. A comparison to the implied fair value of goodwill to its carrying value resulted in the impairment charge. The Company did not have an impairment charge in the three months ended December 31, 2015.

 

 

7.   Restructuring

 

During the second half of fiscal 2015, the Company’s management approved, committed to and initiated plans to restructure and further improve efficiencies by implementing cost reductions in line with the decreases in revenue. The Company renegotiated three 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. During the fourth quarter of fiscal 2015, the Company recorded a restructuring liability of $307 for the future contractual rental commitments for vacated office space and related costs, offset by estimated sub-lease income. In total, for the three months ended September 30, 2015, a charge of $496 was recorded to restructuring expenses in the consolidated statement of operations for the total lease expenses less sub-lease rental income, other miscellaneous lease termination costs, loss on disposal of fixed assets, and costs for severance and termination benefits. In the three months ended December 31, 2015, the Company recorded an additional liability of $506 related to severance and termination benefits, and a total of $586 was charged to restructuring expenses in the first quarter of fiscal 2016.

 

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. 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.

 

 
12

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

The following table summarizes the restructuring activity for the three months ended December 31, 2015:

 

   

Employee Severence and Benefits

   

Facility Closures and Other Costs

   

Total

 

Balance at beginning of period, September 30, 2015

  $ -     $ 307     $ 307  

Charges to operations

    586        -       586  

Cash disbursements

     -       (149 )     (149 )

Changes in estimates

    -       -       -  

Balance at end of period, December 31, 2015

  $ 586     $ 158     $ 744  

 

 

The components of the accrued restructuring liabilities is as follows:

 

   

As of

   

As of

 
   

December 31, 2015

   

September 30, 2015

 

Facilities and related

  $ 194     $ 259  

Employee related

    506       -  

Other

    44       48  

Total

  $ 744     $ 307  

 

 

As of December 31, 2015, $498 was reflected in Accrued Liabilities and $246 in Other Long Term Liabilities in the Condensed Consolidated Balance Sheet. As of September 30, 2015, $114 was reflected in Accrued Liabilities and $193 in Other Long Term Liabilities in the Condensed Consolidated Balance Sheet.

 

8.   Debt

 

 

Debt consists of the following:

 

   

As of

   

As of

 
   

December 31, 2015

   

September 30, 2015

 

Line of credit borrowings

  $ 2,467     $ 2,695  

Bank term loan

    500       250  

Subordinated convertible debt

    3,000       3,000  

Term note from shareholder

    2,500       2,000  

Subtotal debt

  $ 8,467     $ 7,945  

Other (debt warrants)

  $ (88 )   $ (158 )

Total debt

  $ 8,379     $ 7,787  

Less current portion

  $ 500     $ 92  

Long term debt, net of current portion

  $ 7,879     $ 7,695  

  

 

Line of Credit and Bank Term Loan

 

In December 2013, the Company entered into a Loan and Security Agreement with BridgeBank (the “Loan Agreement”). The Loan Agreement had an original term of 27 months set to expire on March 31, 2016. In December 2015, BridgeBank agreed to extend the term to a maturity date of December 31, 2016. The Loan Agreement provides for up to $5 million of revolving credit advances which may be used for acquisitions and working capital purposes. Borrowings are limited to the lesser of (i) $5 million and (ii) 80% of eligible receivables as defined. The Company can borrow up to $1.0 million in out of formula borrowings for specified periods of time.   Borrowings accrued interest at BridgeBank’s prime plus 1.00% (4.25%) through June 1, 2015 and then increased to prime plus 5.00% (8.25%) in accordance with an amendment to the Loan and Security Agreement (see below). The prime rate adjusted to 3.5% on December 17, 2015. The Company pays an annual commitment fee of 0.25%. Borrowings are secured by all of the Company’s assets and all of the Company’s intellectual property. The Company is also required to comply with certain financial and reporting covenants including an Asset Coverage Ratio. As of December 31, 2015, the Company had an outstanding balance under the Loan Agreement of $2.5 million. The Company was in compliance with all financial reporting covenants for the period ended December 31, 2015.

 

 
13

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

In December 2014, the Company signed an Amendment to its Loan and Security Agreement with BridgeBank (the “Amendment”). As part of the Amendment Mr. Michael Taglich, a member of the Board of Directors, signed an unconditional guaranty (the “Guaranty”) and promise to pay the Company’s lender, BridgeBank, N.A all indebtedness in an amount not to exceed $1 million in connection with the out of formula borrowings. The Amendment also modified certain monthly financial reporting requirements and financial covenants on a prospective basis commencing as of the effective date of the Amendment. In July 2015, the Company further amended its Loan and Security Agreement with BridgeBank which further extended the Guaranty from Mr. Taglich to an amount not to exceed $2 million in connection with the out of formula borrowings.

 

Under the terms of the Guaranty, the Guarantor authorizes Lender, without notice or demand and without affecting its liability hereunder, from time to time to: (a) renew, compromise, extend, accelerate, or otherwise change the time for payment, or otherwise change the terms, of the Indebtedness or any part thereof, including increase or decrease of the rate of interest thereon, or otherwise change the terms of the Indebtedness; (b) receive and hold security for the payment of this Guaranty or any Indebtedness and exchange, enforce, waive, release, fail to perfect, sell, or otherwise dispose of any such security; (c) apply such security and direct the order or manner of sale thereof as Lender in its discretion may determine; and (d) release or substitute any Guarantor or any one or more of any endorsers or other guarantors of any of the Indebtedness.

 

To secure all of Guarantor's obligations hereunder, Guarantor assigns and grants to Lender a security interest in all moneys, securities, and other property of Guarantor now or hereafter in the possession of Lender, all deposit accounts of Guarantor maintained with Lender, and all proceeds thereof. Upon default or breach of any of Guarantor's obligations to Lender, Lender may apply any deposit account to reduce the Indebtedness, and may foreclose any collateral as provided in the Uniform Commercial Code and in any security agreements between Lender and Guarantor.

 

At December 31, 2015, the Company had an outstanding short term bank loan with BridgeBank of $500 which was repaid in January 2016. At September 30, 2015, the Company had an outstanding short term bank term loan with BridgeBank of $250 which was repaid in October 2015.

 

Term Notes from Shareholders

 

The Company has issued term notes to Mr. Michael Taglich and Mr. Robert Taglich, both of whom are shareholders of the Company. Mr. Michael Taglich is also a Director of the Company. Five term notes totaling $2.25 million have been issued to Michael Taglich from the period of January 7, 2015 through December 3, 2015. Total interest due to Mr. Michael Taglich on his notes is $108 as of December 31, 2015. Term notes totaling $250 were issued to Robert Taglich on December 3, 2015. Total interest due to Mr. Robert Taglich on his note is $2 as of December 31, 2015. On December 23 2015, all of the Term Notes due to Mr. Michael and Mr. Robert Taglich were amended. The amendments consisted of an increase of 1.5% interest per annum effective January 1, 2016, an extension of the maturity date to March 1, 2017, and a prepayment penalty of 2%. Interest is due and payable for each of the above mentioned notes on the maturity date.

 

In consideration of the loans by Michael Taglich and a personal guaranty delivered by Michael Taglich to BridgeBank, N.A. for the benefit of Bridgeline on December 19, 2014 (the “Guaranty”), on January 7, 2015 the Company issued Michael Taglich a warrant to purchase 60,000 shares of Common Stock of the Company at a price equal to $4.00 per share. On January 7, 2015, Bridgeline also entered into a side letter with Michael Taglich pursuant to which Bridgeline agreed in the event the Guaranty remains outstanding for a period of more than 12 months, on each anniversary of the date of issuance of the Guaranty while the Guaranty remains outstanding Bridgeline will issue Michael Taglich a warrant to purchase 30,000 shares of common stock, which warrant shall contain the same terms as the warrant issued to Michael Taglich on January 7, 2015.

 

 
14

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Mr. Taglich was also issued warrants in connection with the first four term notes. He was issued 120,000 at an exercise price of $4.00 in conjunction with the second and third Notes and 160,000 at an exercise price of $1.75 in connection with the fourth Note. The warrants have a term of five years and are exercisable six months after the date of issuance. Bridgeline agreed to provide piggyback registration rights with respect to the shares of common stock underlying the warrants. The fair value of the warrants issued to Mr. Taglich in connection with all of the Term Notes is $270 which was reflected as a debt discount in current liabilities with the offsetting amount recorded to additional paid in capital in the Consolidated Balance Sheet. The fair market value of the warrants is being amortized on a straight-line basis over their expected life, which was adjusted to coincide with the amendment to the maturity dates. Amortization of the debt discount is $100 through December 31, 2015.

 

 

9.   Other Long Term Liabilities

 

Deferred Rent

 

In connection with the leases in Massachusetts, New York, and in San Luis Obispo, the Company made investments in leasehold improvements at these locations of approximately $1.6 million, of which the respective landlords funded approximately $857. The capitalized leasehold improvements are being amortized over the initial lives of each lease. The improvements funded by the landlords are treated as lease incentives. Accordingly, the funding received from the landlords was recorded as fixed asset additions and a deferred rent liability on the Condensed Consolidated Balance Sheets. As of December 31, 2015, $398 was reflected in Accrued Liabilities and $164 is reflected in Other Long Term Liabilities. The deferred rent liability is being amortized as a reduction of rent expense over the lives of the leases.

 

 

10.   Shareholders Equity

 

Preferred Stock

 

On October 27, 2014, the Company sold 200,000 shares of Series A convertible preferred stock (the “Preferred Stock”) at a purchase price of $10.00 per share for gross proceeds of $2.0 million in a private placement. Net proceeds to the Company after offering expenses were approximately $1.8 million. The shares of Preferred Stock may be converted, at the option of the holder at any time, into such number of shares of common stock (“Conversion Shares”) equal (i) to the number of shares of Preferred Stock to be converted, multiplies by the stated value of $10.00 (the “Stated Value”) and (ii) divided by the conversion price in effect at the time of conversion. The initial conversion price is $0.65, and is subject to adjustment in the event of stock splits or stock dividends. Any accrued but unpaid dividends on the shares of Preferred Stock to be converted shall also be converted in common stock at the conversion price. A mandatory provision also may provide that the Company will have the right to require the holders to convert shares of Preferred Stock into Conversion Shares if (i) the Company’s common stock has closed at or above $1.30 per share for ten consecutive trading days and (ii) the Conversion Shares are (A) registered for resale on an effective registration statement or (B) may be resold pursuant to Rule 144.

 

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

 

Cumulative dividends are payable at a rate of 6% per year. If the Company does not pay the dividends in cash, then the Company may pay dividends in any quarter by delivery of additional shares of Preferred Stock (“PIK Election”). If the Company shall make the PIK Election with respect to the dividend payable, it shall deliver a number of shares of Preferred Stock equal to (A) the aggregate dividend payable to such holder as of the end of the quarter divided by (B) the lesser of (x) the then effective Conversion Price or (y) the average VWAP for the five (5) consecutive Trading Days prior to such dividend payment date. If, after two years, any Preferred Stock are outstanding the cash dividend rate will increase to 12.0% per year. The Company shall have the right to force conversion of the Preferred Stock into shares of Common Stock at any time after the Common Stock trades in excess of $1.30 per share. The Preferred Shares shall vote with the Common on an as converted basis.

 

As of December 2015, the Company has issued 11,393 preferred convertible shares (PIK shares) to the preferred shareholders of which 3,171 were issued in October 2015. The Company elected to declare a PIK dividend for the next quarterly payment due January 1, 2016. The total PIK dividend declared for January 1, 2016 is 3,221 preferred stock shares.

 

 
15

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

Common Stock

 

In October 2015, the Company sold 680,000 shares of common stock at $1.00 per share for gross proceeds of $680 in a private placement. Net proceeds to the Company after offering expenses were approximately $669. There are no plans to register the common stock issued in this offering, however in the event the Company does register other common stock, the Company agreed to provide piggyback registration rights with respect to the shares of common stock sold in the offering and underlying the warrants.

 

Contingent Consideration

 

In connection with the acquisition of ElementsLocal on August 1, 2013, the Company issued 105,288 common shares to the sellers of ElementsLocal. In addition, contingent consideration not to exceed 67,693 shares of Bridgeline Digital common stock is contingently issuable to the sellers of ElementsLocal. The contingent consideration is payable quarterly over the 12 consecutive calendar quarters following the acquisition, contingent upon the acquired business achieving certain revenue targets. Through December 31, 2015, the stockholders of ElementsLocal earned 50,769 shares of common stock.

 

Amended and Restated Stock Incentive Plan

 

Effective August 2015, the Company’s Amended and Restated Stock Incentive Plan (the “Plan”) provides for the issuance of up 1,250,000 shares of common stock. The Plan authorizes the award of incentive stock options, non-statutory stock options, restricted stock, unrestricted stock, performance shares, stock appreciation rights and any combination thereof to employees, officers, directors, consultants, independent contractors and advisors of the Company.   Options granted under the Plan may be granted with contractual lives of up to ten years. There were 831,197 options outstanding reserved under the Plan as of December 31, 2015 and 418,803 shares available for future issuance.

  

 
16

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

  

Common Stock Warrants

 

As of December 31, 2015: (i) placement agent warrants to purchase 43,479, 138,000, 46,155, 64,000, and 61,539 shares at an exercise price of $7.00, $6.25, $6.50, $5.25 and $3.25, respectively are outstanding; and (ii) investor shareholder warrants to purchase 180,000 and 160,000 shares at an exercise price of $4.00 and $1.75 are outstanding.

 

 

Summary of Option and Warrant Activity and Outstanding Shares

 

   

Stock Options

   

Stock Warrants

 
           

Weighted

           

Weighted

 
           

Average

           

Average

 
           

Exercise

           

Exercise

 
   

Options

   

Price

   

Warrants

   

Price

 
                                 

Outstanding, September 30, 2015

    875,977     $ 0.98       703,281     $ 4.38  

Granted

    105,000     $ 1.19       -       -  

Exercised

    -     $ -       -       -  

Forfeited or expired

    (149,780 )   $ 3.91       (10,000 )     7.50  

Outstanding, December 31, 2015

    831,197     $ 3.32       693,281     $ 4.33  

 

 

 

11.  Accumulated Other Comprehensive Loss

 

Changes in accumulated other comprehensive loss were as follows:

 

   

Accumulated Other

Comprehensive Loss

 

Balance, October 1, 2015

  $ (356 )

Foreign currency translation adjustment

    1  

Balance, December 31, 2015

  $ (355 )

 

 
17

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

12.   Net Loss Per Share

 

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

 

   

Three Months Ended

 

(in thousands, except per share data)

 

December 31,

 
   

2015

   

2014

 

Net loss

  $ (1,348 )   $ (2,110 )

Accrued dividends on convertible preferred stock

    (32 )     (21 )

Net loss applicable to common shareholders

  $ (1,380 )   $ (2,131 )
                 

Weighted average common shares outstanding - basic

    5,165       4,343  

Effect of dilutive securities

    -       -  

Weighted average common shares outstanding - diluted

    5,165       4,343  
                 

Net loss per share attributable to common shareholders:

               

Basic and diluted

  $ (0.25 )   $ (0.49 )

 

 

Basic net loss per share is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding.  Diluted net income per share is computed using the weighted average number of common shares outstanding during the period plus the dilutive effect of outstanding stock options and warrants using the “treasury stock” method.  The computation of diluted earnings per share does not include the effect of outstanding stock options and warrants that are anti-dilutive.

 

For the three months ended December 31, 2015, there were no options to purchase shares of the Company’s common stock considered as dilutive, as the options were all valued at less than the current market price. Warrants to purchase 693,281 shares of common stock and contingent shares to be issued in connection with prior acquisitions of ElementsLocal have also been excluded as they are anti-dilutive to the Company’s net loss. Also, excluded in the computation of diluted loss per share are the Series A convertible preferred stock shares as they are anti-dilutive to the Company’s net loss.

 

For the three months ended December 31, 2014, options to purchase shares of the Company’s common stock of 2,433 were excluded from the computation of diluted net loss per share as the effect was anti-dilutive to the Company’s net loss.  Warrants to purchase 363,278 shares of common stock and contingent shares to be issued in connection with prior acquisitions of Marketnet, Magnetic and ElementsLocal have also been excluded as they are anti-dilutive to the Company’s net loss. Also, excluded in the computation of diluted loss per share are the Series A convertible preferred stock shares as they are anti-dilutive to the Company’s net loss.

 

 

13.  Income Taxes

 

Income tax expense was $6 and $35 for the three months ended December 31, 2015 and 2014. Income tax expense consists of the estimated liability for federal and state income taxes owed by the Company, including the alternative minimum tax.  Net operating loss carry forwards are estimated to be sufficient to offset additional taxable income for all periods presented.

 

The Company does not provide for U.S. income taxes on the undistributed earnings of its Indian subsidiary, which the Company considers to be a permanent investment.

 

 

14.  Related Party Transactions

 

In October 2013, Mr. Michael Taglich joined the Board of Directors. Mr. Taglich is the Chairman and President of Taglich Brothers, Inc. a New York based securities firm. Mr. Taglich beneficially owns more than 10% of Bridgeline stock. Other employees, affiliates and clients of Taglich Brothers, Inc. own approximately 600,000 shares of Bridgeline common stock and 40,427 shares of convertible preferred stock. The Company has issued $2.25 million in interest bearing term notes to Mr. Taglich with a maturity date of March 1, 2017. Mr. Taglich has also guaranteed $2 million in connection with the Company’s out of formula borrowings on its credit facility with BridgeBank.

 

 
18

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

In November 2015, the Company entered into a consulting agreement with Mr. Robert Taglich, also of Taglich Brothers, Inc. Mr. Taglich is a shareholder of the Company and beneficially owns approximately 9.5% of Bridgeline stock. The consulting services may include assistance with strategic planning and other matters as requested by management or the Board of Directors of the Company. The term of the Consulting Agreement is twelve months. As compensation for his services, Mr. Taglich was granted 15,000 options to purchase the Company’s common stock at a price of $1.21. The fair value of the options at the time of grant was $0.83 per share.

 

The Company also has an annual service contract for $18 with Taglich Brothers, Inc to perform market research.

 

 

15.  Legal Proceedings

 

The Company is subject to ordinary routine litigation and claims incidental to its business. As of December 31, 2015 the Company was not engaged with any material legal proceedings.

 

 

16.  Subsequent Events

 

 

Amendment to Bank Loan Agreement

 

On February 11, 2016, the Company entered into an amendment to its Loan Agreement with Bridgebank, a division of Western Alliance Bank, to extend the term of the loan from an expiration date of December 31, 2016 to March 31, 2017.  

 

 

Term Notes

 

On February 10, 2016, Bridgeline issued Term Notes to both Mr. Michael Taglich and Mr. Robert Taglich to document a loan from each of them for $250. Also, on February 10, 2016, Bridgeline issued a Term Note to Mr. Roger Kahn to document a loan for $100. The terms of the each of these three Notes provide that Bridgeline will pay interest at a rate of 8% per annum due and payable on the maturity date of March 1, 2017. 

 

 
19

 

 

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

This section contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of a variety of factors and risks including risks described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015 as well as in the other documents that we file with the Securities and Exchange Commission. You can read these documents at www.sec.gov.

 

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

 

Overview

 

Bridgeline Digital, The Digital Engagement Company™, helps customers maximize the performance of their full digital experience - from websites and intranets to online stores and campaigns. Bridgeline’s iAPPS® platform deeply integrates Web Content Management, eCommerce, eMarketing, Social Media management, and Web Analytics to help marketers deliver digital experiences that attract, engage and convert their customers across all channels. Bridgeline’s iAPPS platform combined with its digital services assists customers in maximizing on-line revenue, improving customer service and loyalty, enhancing employee knowledge, and reducing operational costs. The iAPPSds (“distributed subscription”) product is a platform that empowers franchise and large dealer networks with state-of-the-art web engagement management while providing superior oversight of corporate branding. iAPPSds deeply integrates content management, eCommerce, eMarketing and web analytics and is a self-service web platform that is offered to each authorized franchise or dealer for a monthly subscription fee. Our iAPPSdsr platform, released in 2015, targets the growing multi-unit organizations with 10-500 locations providing them with powerful web engagement tools while maintaining corporate brand control and consistency.

 

The iAPPS platform is delivered through a cloud-based SaaS (“Software as a Service”) multi-tenant business model, whose flexible architecture provides customers with state of the art deployment providing maintenance, daily technical operation and support; or via a traditional perpetual licensing business model, in which the iAPPS software resides on a dedicated server in either the customer’s facility or Bridgeline’s co-managed hosting facility.

 

The iAPPS Platform is an award-winning application. Our teams of Microsoft Gold© certified developers have won over 100 industry related awards. In 2015, the SIIA (Software and Information Industry Association) awarded iAPPS Content Manager, the 2015 SIIA CODiE Award for Best Web Content Management Platform. Also in 2015, EContent magazine named iAPPS Digital Engagement Platform to its Trendsetting Products list. The list of 75 products and platforms was compiled by EContent’s editorial staff, and selections were based on each offering’s uniqueness and importance to digital publishing, media, and marketing. Bridgeline was also recognized in 2015 as a strong performer by Forrester Research, Inc in its independence report, “The Forrester Wave ™: Through-Channel Marketing Automation Platforms, Q3 2015.” In recent years, iAPPS Content Manager and iAPPS Commerce products were selected as finalists for the 2014, 2013, and 2012 CODiE Awards for Best Content Management Solution and Best Electronic Commerce Solution, globally. In 2015, the SIIA (Software and Information Industry Association) awarded iAPPS Content Manager the 2015 SIIA CODiE Award for Best Web Content Management Platform. In 2014 and 2013, Bridgeline Digital won twenty-five Horizon Interactive Awards for outstanding development of web applications and websites. Also in 2013, the Web Marketing Association sponsored Internet Advertising Competition honored Bridgeline Digital with three awards for iAPPS customer websites and B2B Magazine selected Bridgeline Digital as one of the Top Interactive Technology companies in the United States. KMWorld Magazine Editors selected Bridgeline Digital as one of the 100 Companies That Matter in Knowledge Management and also selected iAPPS as a Trend Setting Product in 2013.

 

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

 

Locations

 

The Company’s corporate office is located north of Boston, Massachusetts.  The Company maintains regional field offices serving the following geographical locations: Atlanta, GA; Boston, MA; Chicago, IL; Denver, CO; New York, NY; Dallas, TX; San Luis Obispo, CA; and Tampa, FL.  The Company has a wholly-owned subsidiary, Bridgeline Digital Pvt. Ltd. located in Bangalore, India.

 

 
20

 

 

Customer Information

 

We currently have over 3,000 customers, the majority of which are iAPPSds customers who pay a monthly subscription fee. For the three months ended December 31, 2015 and 2014 no customer represented 10% or more of total revenue.

 

 

Results of Operations for the Three Months Ended December 31, 2015 compared to the Three Months Ended December 31, 2014

 

Total revenue for the three months ended December 31, 2015 was $4.2 million compared with $5.0 million for the three months ended December 31, 2014.  We had a net loss of ($1.3) million for the three months ended December 31, 2015 compared with net loss of ($2.1) million for the three months ended December 31, 2014.  Net loss per share applicable to common shareholders was ($0.25) for the three months ended December 31, 2015 and ($0.49) for the three months ended December 31, 2014.

 

Revenue

 

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

 

   

Three Months

   

Three Months

                 
   

Ended

   

Ended

                 
   

December 31,

   

December 31,

    $    

%

 

Net revenue:

 

2015

   

2014

   

Change

   

Change

 

Digital engagement services

                               

iAPPS digital enagement services

  $ 2,211     $ 2,856       (645 )     (23 %)

% of total net revenue

    52 %     57 %                

Other digital engagement services

    162       375       (213 )     (57 %)

% of total net revenue

    4 %     7 %                

Subtotal digital engagement services

    2,373       3,231       (858 )     (27 %)

% of total net revenue

    56 %     64 %                
                                 

Subscription and perpetual licenses

    1,523       1,380       143       10 %

% of total net revenue

    36 %     28 %                

Managed service hosting

    347       401       (54 )     (13 %)

% of total net revenue

    8 %     8 %                

Total net revenue

  $ 4,243     $ 5,012     $ (769 )     (15 %)

 

 

 

Digital Engagement Services

 

Digital engagement services revenue is comprised of iAPPS digital engagement related services and other digital engagement related services generated from non-iAPPS related engagements. In total, revenue from digital engagement services decreased $858 thousand, or 27%, to $2.4 million for the three months ended December 31, 2015 compared to $3.2 million for the three months ended December 31, 2014. The decrease in iAPPS digital engagements services is a result of a decrease in new iAPPS implementations. Also contributing to the decline, was the expected decreases in non-iAPPS engagement services, as we continue to concentrate on selling higher-margin iAPPS digital engagements to both new and existing customers. Digital engagement services revenue as a percentage of total revenue decreased to 56% from 64% for the three months ended December 31, 2015 compared to the prior period.  The decrease is attributable to the decreases in both iAPPS and non iAPPS digital engagement services revenue.

 

 
21

 

 

Subscription and Perpetual Licenses

 

Revenue from subscription and perpetual licenses increased $143 thousand, or 10%, to $1.5 million for the three months ended December 31, 2015 compared to $1.4 million for the three months ended December 31, 2014.  The increase is primarily due to an increase in iAPPS SaaS subscription revenue as we recently launched two iAPPS customer websites, and an increase in perpetual licenses recognized in the current quarter.

 

Subscription and perpetual license revenue as a percentage of total revenue increased to 36% for the three months ended December 31, 2015 from 28% compared to the three months ended December 31, 2014. The increase as a percentage of revenues is attributable to the decreases in iAPPS digital engagement services revenues.

 

Managed Service Hosting

 

Revenue from managed service hosting decreased $54 thousand, or 13%, to $347 thousand for the three months ended December 31, 2015 compared to $401 thousand for the three months ended December 31, 2014.   The decrease is due to a decrease in revenue from non-iAPPS related customers from previous acquisitions. Managed services revenue as a percentage of total revenue remained flat at 8% for both periods.

 

 

Costs of Revenue

 

Total cost of revenue decreased $979 thousand to $2.1 million for the three months ended December 31, 2015 compared to $3.1 million for the three months ended December 31, 2014. The gross profit margin improved to 51% for the three months ended December 31, 2015 compared to 39% for the three months ended December 31, 2014. The decrease in costs and improvement in the gross profit margin for the three months ended December 31, 2015 compared to the three months ended December 31, 2014 is attributable to aligning labor costs with expected revenues.

 

   

Three Months

   

Three Months

                 
   

Ended

   

Ended

                 
   

December 31,

   

December 31,

    $    

%

 

Cost of revenue:

 

2015

   

2014

   

Change

   

Change

 

Digital engagement services

                               

iAPPS digital engagement costs

    1,404       2,339       (935 )     (40% )

% of iAPPS digital engagement services revenue

    64 %     82 %                

Other digital engagement costs

    50       225       (175 )     (78% )

% of other digital engagement services revenue

    31 %     60 %                

Subtotal digital engagement costs

    1,454       2,564       (1,110 )     (43% )

% of digital engagement services revenue

    61 %     79 %                
                                 

Subscription and perpetual licenses

    558       430       128       30 %

% of subscription and perpetual revenue

    37 %     31 %                

Managed service hosting

    77       74       3       4 %

% of managed service hosting revenue

    22 %     18 %                

Total cost of revenue

    2,089       3,068       (979 )     (32% )

Gross profit

  $ 2,154     $ 1,944     $ 210       11 %

Gross profit margin

    51 %     39 %                

 

 

Cost of Digital Engagement Services

 

Cost of digital engagement services decreased $1.1 million, or 43%, to $1.5 million for the three months ended December 31, 2015 compared to $2.6 million for the three months ended December 31, 2014. The decrease in iAPPS and non-iAPPS digital related costs is attributable to decreases in labor in line with the decreases in revenues.

 

 
22

 

 

The cost of digital engagement services as a percentage of digital engagement services revenue decreased to 61% from 79% compared to the three months ended December 31, 2014.  This is due to a decrease in labor in line with the decreases in revenues, as well as efforts to reduce facility costs. 

 

Cost of Subscription and Perpetual License

 

Cost of subscription and perpetual licenses increased $128 thousand, or 30%, to $558 thousand for the three months ended December 31, 2015 compared to $430 thousand for the three months ended December 31, 2014. The increase is due to fixed costs to support our network operations center.

 

The cost of subscription and perpetual licenses as a percentage of subscription and perpetual license revenue increased to 37% from 31% compared to the three months ended December 31, 2014.  The increase is due to fixed costs to support our network operations center.

 

Cost of Managed Service Hosting

 

Cost of managed service hosting remained relatively flat for the three months ended December 31, 2015 compared to the three months ended December 31, 2014. The cost of managed services as a percentage of managed services revenue increased to 22% from 18% compared to the three months ended December 31, 2014. The percentage decreases are attributable to fixed costs to support the network operations center.

 

 

Operating Expenses

 

 

 

Three Months

   

Three Months

                 
   

Ended

   

Ended

                 
   

December 31,

   

December 31,

   

$

   

%

 

Operating expenses:

 

2015

   

2014

   

Change

   

Change

 

Sales and marketing

    1,068       1,810       (742 )     (41 %)

% of total revenue

    25 %     36 %                

General and administrative

    862       993       (131 )     (13 %)

% of total revenue

    20 %     20 %                

Research and development

    341       602       (261 )     (43 %)

% of total revenue

    8 %     12 %                

Depreciation and amortization

    356       452       (96 )     (21 %)

% of total revenue

    8 %     9 %                

Restructuring charges

    586       -       586          

% of total revenue

    14 %     -                  

Total operating expenses

    3,213       3,857       (644 )     (17 %)

 

 

 

Sales and Marketing Expenses

 

Sales and marketing expenses decreased $742 thousand to $1.1 million, or 41%, for the three months ended December 31, 2015 compared to $1.8 for the three months ended December 31, 2014.  Sales and marketing expenses represented 25% and 36% of total revenue for the three months ended December 31, 2015 and 2014, respectively.

 

The decreases for the three months ended December 31, 2015 compared to the prior period is primarily attributable to decreases in sales commissions and marketing expenses.

 

General and Administrative Expenses

 

General and administrative expenses decreased $131 thousand, or 13%, to $862 thousand for the three months ended December 31, 2015 compared to $1.0 million for the three months ended December 31, 2014.   General and administrative expenses represented 20% of total revenue for both periods presented. The decrease in expense was due to decreases in headcount and the decrease in general legal expenses.

 

 
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Research and Development

 

Research and development expense decreased $261 thousand, or 43%, to $341 thousand for the three months ended December 31, 2015 compared to $602 thousand for the three months ended December 31, 2014.  The decrease in research and development expense is due to a decrease in headcount and personnel expenses.

 

Depreciation and Amortization

 

Depreciation and amortization expense decreased $96 thousand, or 21% to $356 for the three months ended December 31, 2015 compared to $452 thousand for the three months ended December 31, 2014.  Equipment related depreciation and amortization related to leasehold improvements declined due to asset retirements and termination of office leases. Depreciation and amortization represented 8% and 9% of revenue for the three months ended December 31, 2015 and 2014.   

 

Restructuring Expenses

 

During the second half of fiscal 2015, the Company’s management approved, committed to and initiated plans to restructure and further improve efficiencies by implementing cost reductions in line with current revenue expectations. The Company renegotiated three offices leases and relocated to smaller space, while also negotiating sub-leases for the original space. In the three months ended December 31, 2015, $586 thousand was recorded for additional restructuring expenses of which $505 thousand is recorded as a liability related to severance and will be paid out through 2017.  

 

Net Loss

 

   

Three Months

   

Three Months

                 
   

Ended

   

Ended

                 
   

December 31,

   

December 31,

   

$

   

%

 
   

2015

   

2014

   

Change

   

Change

 
                                 

Loss from operations

    (1,059 )     (1,913 )     854       (45% )

Interest and other expense, net

    (283 )     (162 )     (121 )     75 %

Loss before income taxes

    (1,342 )     (2,075 )     733       (35% )

Provision for income taxes

    6       35       (29 )     (83% )
                                 

Net loss

  $ (1,348 )   $ (2,110 )   $ 762       (36% )
                                 

Non-GAAP Measure:

                               

Adjusted EBITDA

  $ 65     $ (1,247 )   $ 1,312       (105% )

 

Loss from operations

 

The loss from operations was ($1.1) million for three months ended December 31, 2015, compared to a loss of ($1.9) million in the prior period. The gross profit margin increased to 51% for the three months ended December 31, 2015 compared to the 39% for the three months ended December 31, 2014, as we have made concerted efforts to bring our expenses in line with projected revenues. Operating expenses also decreased by 17% for the three months ended December 31, 2015 compared to the previous quarter.

 

Income Taxes

 

The provision for income tax expense was $6 thousand and $35 thousand for the three months ended December 31, 2015 and 2014, respectively.  Income tax expense represents the estimated liability for federal and state income taxes owed, including the alternative minimum tax.  We have net operating loss carryforwards and other deferred tax benefits that are available to offset future taxable income.

 

 

Adjusted EBITDA

 

We also measure our performance based on a non-GAAP (“Generally Accepted Accounting Principles”) measurement of earnings before interest, taxes, depreciation and amortization, and before stock-based compensation expense (“Adjusted EBITDA”).

 

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

 

Adjusted EBITDA, however, is not a measure of operating performance under GAAP and should not be considered as an alternative or substitute for GAAP profitability measures such as (i) income from operations and net income, or (ii) cash flows from operating, investing and financing activities, both as determined in accordance with GAAP. Adjusted EBITDA as an operating performance measure has material limitations since it excludes the financial statement impact of income taxes, net interest expense, amortization of intangibles, depreciation, restructuring charges, other amortization and stock-based compensation, and therefore does not represent an accurate measure of profitability.  As a result, Adjusted EBITDA should be evaluated in conjunction with net income for a complete analysis of our profitability, as net income includes the financial statement impact of these items and is the most directly comparable GAAP operating performance measure to Adjusted EBITDA. Our definition of Adjusted EBITDA may also differ from and therefore may not be comparable with similarly titled measures used by other companies, thereby limiting its usefulness as a comparative measure. Because of the limitations that Adjusted EBITDA has as an analytical tool, investors should not consider it in isolation, or as a substitute for analysis of our operating results as reported under GAAP.

 

The following table reconciles net (loss) income (which is the most directly comparable GAAP operating performance measure) to EBITDA, and EBITDA to Adjusted EBITDA (in thousands):

 

   

Three Months Ended

 
   

December 31,

 
   

2015

   

2014

 

Net loss

  $ (1,348 )   $ (2,110 )

Provision for income tax

    6       35  

Interest expense, net

    283       162  

Amortization of intangible assets

    107       152  

Depreciation

    231       279  

Restructuring charges

    586       -  

Other amortization

    128       146  

Stock based compensation

    72       89  

Adjusted EBITDA

  $ 65     $ (1,247 )

 

 

The increase in Adjusted EBITDA is primarily due to the improvement in gross profit margin and the decrease in operating expenses, as we have aligned our expenses with our expected revenues.

 

 

Liquidity and Capital Resources

 

Cash Flows

 

Operating Activities

 

Cash used in operating activities was $687 thousand for the three months ended December 31, 2015 compared to cash used in operating activities of $1.3 million for the three months ended December 31, 2014. This decrease in the use of cash compared to the prior period was primarily to the adjustments for non-cash items such as amortization and depreciation for the period and the higher net income for the period. We have reduced operating expenses which is reflected in the reduction of liabilities.

  

Investing Activities

 

Cash used in investing activities was $44 thousand for the three months ended December 31, 2015 compared to $75 thousand for the three months ended December 31, 2014.   In the three months ended December 31, 2015, we capitalized costs related to iAPPS software development.

 

 
25

 

 

Financing Activities

 

Cash provided by financing activities was $973 thousand for the three months ended December 31, 2015 compared to $1.1 million for the three months ended December 31, 2014.  Cash provided by financing activities for the three months ended December 31, 2015 is primarily attributable to a sale of 680,000 shares of common stock in October 2015, which raised a net $669 thousand in funds, as well as $500 thousand received from Mr. Michael Taglich and Mr. Robert Taglich for term notes with maturity dates of March 2017, and a short term loan from BridgeBank of $500 thousand. Offsetting these proceeds, were net borrowings/payments of $228 thousand on the BridgeBank line of credit, $250 thousand on a short term loan from BridgeBank, and contingent acquisition payments of $113 thousand.

 

Capital Resources and Liquidity Outlook

 

In the first quarter of fiscal 2016, we issued $500 thousand of term notes to Michael and Robert Taglich and raised $669 thousand from a sale of Bridgeline common stock. We believe that cash generated from operations, proceeds from the bank line of credit, the sale of common stock, and term loans from shareholders will be sufficient to fund the Company’s working capital and capital expenditure needs in the foreseeable future. However, we currently have a borrowing facility with Bridge Bank from which we can borrow, and this line is subject to financial covenants that must be met. It is not certain that all or part of this line will be available to us in the future; and other sources of financing may not be available to us in a timely basis if at all, or on terms acceptable to us. If we fail to obtain acceptable funding when needed, we may not have sufficient resources to fund our normal operations, and this would have a material adverse effect on our business.

 

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements, financings or other relationships with unconsolidated entities or other persons, other than our operating leases and contingent acquisition payments.

  

We currently do not have any variable interest entities. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Therefore, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

 

Commitments and Contingencies

 

As of December 31, 2015, we had an accrued contingent earnout liability of $301 thousand from acquisitions completed in prior fiscal years, which are scheduled to be paid out through fiscal 2016. Contingent earnout payments related to acquisitions are paid when and if certain revenue and earnings targets are achieved.

 

 
26

 

 

 

Critical Accounting Policies

 

Critical Accounting Policies

 

These critical accounting policies and estimates by our management should be read in conjunction with Note 2 Summary of Significant Accounting Policies to the Consolidated Financial Statements that were prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).

 

The preparation of financial statements in accordance US GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period. We regularly make estimates and assumptions that affect the reported amounts of assets and liabilities. The most significant estimates included in our financial statements are the valuation of accounts receivable and long-term assets, including intangibles, goodwill and deferred tax assets, stock-based compensation, amounts of revenue to be recognized on service contracts in progress, unbilled receivables, and deferred revenue. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected.

 

We consider the following accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment:

 

 

Revenue recognition;

 

 

Allowance for doubtful accounts;

 

 

Accounting for cost of computer software to be sold, leased or otherwise marketed;

 

 

Accounting for goodwill and other intangible assets; and

 

 

Accounting for stock-based compensation.

 

 

Revenue Recognition

 

Overview

 

We enter into arrangements to sell digital engagement services (professional services), software licenses or combinations thereof.  Revenue is categorized into (i) digital engagement services; (ii) managed service hosting; and (iii) subscriptions and perpetual licenses.

 

We recognize revenue as required by the Revenue Recognition Topic of the Codification.  Revenue is generally recognized when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) delivery has occurred or the services have been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of the fees is reasonably assured. Billings made or payments received in advance of providing services are deferred until the period these services are provided.

 

We maintain a reseller channel to supplement our direct sales force for our iAPPS platform.  Resellers are generally located in territories where we do not have a direct sales force.  Customers generally sign a license agreement directly with us. Revenue from perpetual licenses sold through resellers is recognized upon delivery to the end user as long as evidence of an arrangement exists, collectability is probable, and the fee is fixed and determinable. Revenue for subscription licenses is recognized monthly as the services are delivered.

 

 
27

 

 

Digital Engagement Services

 

Digital engagement services include professional services primarily related to the Company’s web development solutions that address specific customer needs such as digital strategy, information architecture and usability engineering, .Net development, rich media development, back end integration, search engine optimization, quality assurance and project management.

 

Digital engagement services are contracted for on either a fixed price or time and materials basis.  For its fixed price engagements, after assigning the relative selling price to the elements of the arrangement, the Company applies the proportional performance model (if not subject to contract accounting) to recognize revenue based on cost incurred in relation to total estimated cost at completion. The Company has determined that labor costs are the most appropriate measure to allocate revenue among reporting periods, as they are the primary input when providing application development services. Customers are invoiced monthly or upon the completion of milestones. For milestone based projects, since milestone pricing is based on expected hourly costs and the duration of such engagements is relatively short, this input approach principally mirrors an output approach under the proportional performance model for revenue recognition on such fixed priced engagements.  For time and materials contracts, revenues are recognized as the services are provided.  

 

Digital engagement services also include retained professional services contracted for on an “on call” basis or for a certain amount of hours each month. Such arrangements generally provide for a guaranteed availability of a number of professional services hours each month on a “use it or lose it” basis.   For retained professional services sold on a stand-alone basis we recognize revenue as the services are delivered or over the term of the contractual retainer period. These arrangements do not require formal customer acceptance and do not grant any future right to labor hours contracted for but not used.

 

Subscriptions and Perpetual Licenses

 

The Company licenses its software on either a perpetual or subscription basis. Customers who license the software on a perpetual basis receive rights to use the software for an indefinite time period and an option to purchase Post-Customer Support (“PCS”).  For arrangements that consist of a perpetual license and PCS, as long as Vendor Specific Objective Evidence (“VSOE”) exists for the PCS, then PCS revenue is recognized ratably on a straight-line basis over the period of performance and the perpetual license is recognized on a residual basis.  Under the residual method, the fair value of the undelivered elements are deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and recognized as revenue, assuming all other revenue recognition criteria have been met.  

 

Customers may also license the software on a subscription basis, which can be described as “Software as a Service” or “SaaS”.  SaaS is a model of software deployment where an application is hosted as a service provided to customers across the Internet.  Subscription agreements include access to the Company’s software application via an internet connection, the related hosting of the application, and PCS.  Customers receive automatic updates and upgrades, and new releases of the products as soon as they become available. Customers cannot take possession of the software.  Subscription agreements are either annual or month-to-month arrangements that provide for termination for convenience by either party upon 90 days’ notice.  Revenue is recognized monthly as the services are delivered.  Set up fees paid by customers in connection with subscription services are deferred and recognized ratably over the longer of the life of subscription period or the expected lives of customer relationships. We continue to evaluate the length of the amortization period of the set up fees as we gain more experience with customer contract renewals.  

 

Managed Service Hosting

 

Managed service hosting includes hosting arrangements that provide for the use of certain hardware and infrastructure for those customers who do not wish to host our applications independently.  Hosting agreements are either annual or month-to-month arrangements that provide for termination for convenience by either party generally upon 30-days’ notice.  Revenue is recognized monthly as the hosting services are delivered.   Set up fees paid by customers in connection with managed hosting services are deferred and recognized ratably over the longer of the life of the hosting period or the expected lives of customer relationships. We continue to evaluate the length of the amortization period of the set up fees as we gain more experience with customer contract renewals.

 

Multiple Element Arrangements 

 

In accounting for multiple element arrangements, we follow either ASC Topic 605-985 Revenue Recognition Software or ASC Topic 605-25 Revenue Recognition Multiple Element Arrangements, as applicable.

 

 
28

 

 

In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Revenue Recognition: Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”). ASU 2009-13 provides amendments to certain paragraphs of previously issued ASC Subtopic 605-25 – Revenue Recognition: Multiple-Deliverable Revenue Arrangements. In accordance with ASU 2009-13, each deliverable within a multiple-deliverable revenue arrangement is accounted for as a separate unit of accounting if both of the following criteria are met (1) the delivered item has value to the customer on a standalone basis and (2) for an arrangement that includes a right of return relative to the delivered item, delivery or performance of the delivered item is considered probable and within our control. If the deliverables do not meet the criteria for being a separate unit of accounting then they are combined with a deliverable that does meet that criterion. The accounting guidance also requires that arrangement consideration be allocated at the inception of an arrangement to all deliverables using the relative selling price method. The accounting guidance also establishes a selling price hierarchy for determining the selling price of a deliverable. We determine selling price using VSOE, if it exists; otherwise, we use Third-party Evidence (“TPE”). If neither VSOE nor TPE of selling price exists for a unit of accounting, we use Estimated Selling Price (“ESP”).

 

 

VSOE is generally limited to the price at which we sell the element in a separate stand-alone transaction. TPE is determined based on the prices charged by our competitors for a similar deliverable when sold separately. It is difficult for us to obtain sufficient information on competitor pricing, so we may not be able to substantiate TPE. If we cannot establish selling price based on VSOE or TPE then we will use ESP. ESP is derived by considering the selling price for similar services and our ongoing pricing strategies. The selling prices used in our allocations of arrangement consideration are analyzed at minimum on an annual basis and more frequently if our business necessitates a more timely review. We have determined that we have VSOE on our SaaS offerings, certain application development services, managed hosting services, and PCS because we have evidence of these elements sold on a stand-alone basis.

 

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

 

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

  

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

 

 
29

 

 

Customer Payment Terms

 

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

 

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

 

Warranty

 

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

 

Reimbursable Expenses

 

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

 

Allowance for Doubtful Accounts

 

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

 

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

 

 

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

 

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

 

 
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Accounting for Goodwill and Intangible Assets

 

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

 

For fiscal 2015, we performed the annual assessment of our goodwill during the fourth quarter of 2015, using the qualitative approach described above. Based on our qualitative assessment, we concluded that it was more likely than not that the fair values of our reporting units were less than their carrying amounts, and therefore we believed it was necessary to perform the quantitative two-step impairment test. There were numerous positive qualitative factors discovered during our analysis, but the instability of the market price of our common stock and the decline in our revenues were a material adverse factor that led us to believe that we should progress to the second step of the impairment testing. In estimating fair value, we performed a discounted cash flow analysis on the reporting unit to determine fair value. The inputs to the discounted cash flow model are considered level 3 in the fair value hierarchy. The impairment test indicated that the estimated fair value of the reporting unit was less than its corresponding carrying amount. As a result of the analyses performed, we recorded goodwill impairment charges of $10.5 million in 2015.

 

Accounting for Stock-Based Compensation

 

At December 31, 2015, we maintained one stock-based compensation plan and one employee stock purchase plan which are more fully described in Note 12 to the Consolidated Financial Statements of our Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 24, 2015. There are no employees enrolled in the employee stock purchase plan as of December 31, 2015.

 

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

 

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

 

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

 

 
31

 

 

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

 

 

Item 3.

Qualitative and Quantitative Disclosures About Market Risk.

 

Not required.

 

Item 4.

Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

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

 

As of December 31, 2015 we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in enabling us to record, process, summarize and report information required to be included in our periodic filings with the Securities and Exchange Commission within the required time period.

 

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal controls over financial reporting that occurred during the quarter ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 
32

 

 

PART II – OTHER INFORMATION

 

Item 1.

 Legal Proceedings.

 

From time to time we are subject to ordinary routine litigation and claims incidental to our business. We are not currently involved in any legal proceedings that we believe are material beyond those previously disclosed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 24, 2015.

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

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

 

Common Stock

 

In October 2015, the Company sold 680,000 shares of common stock at $1.00 per share for gross proceeds of $680 in a private placement. Net proceeds to the Company after offering expenses were approximately $669. There are no plans to register the common stock issued in this offering, however in the event the Company does register other common stock, the Company agreed to provide piggyback registration rights with respect to the shares of common stock sold in the offering and underlying the warrants.

 

Stock Options

 

During the fiscal quarter ended December 31, 2015, the Company granted 105,000 stock options under its Amended and Restated Stock Incentive Plan at a weighted average exercise price of $1.19 per share.

 

The securities were issued exclusively to our directors, executive officers and employees, with the exception of 15,000 shares issued to a consultant. The issuance of options and the shares of common stock issuable upon the exercise of such options as described above were issued pursuant to written compensatory plans or arrangements with our employees, directors and consultants, in reliance on the exemptions from the registration provisions of the Securities Act set forth in Section 4(2) thereof relative to sales by an issuer not involving any public offering, to the extent an exemption from such registration was required. 

 

Item 5.

Other Information

 

Amendment to Bank Loan Agreement

 

On February 11, 2016, the Company entered into an amendment to its Loan Agreement with Bridgebank, a division of Western Alliance Bank, to extend the term of the loan from an expiration date of December 31, 2016 to March 31, 2017.  

 

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

 

On December 3, 2015, the Company issued Term Notes (the “Notes”) to Mr. Michael Taglich and Mr. Robert Taglich to document loans by each to the Company of $250,000 each. The terms of the Notes provide that the Company will pay interest at a rate of 8% per annum and the note will mature on September 1, 2016. The loans were further amended on December 23, 2015 to increase the interest rate to 9.5% effective January 1, 2017 and extended the maturity date to March 1, 2017.

 

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

 

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

 

 
33

 

 

Item 6.                                   

Exhibits.

 

Exhibit No.

 

Description of Document

     

3.1(i)

 

Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1(ii) to our Registration Statement on Form S-B2, File No. 333-139298)

     

3.1(ii)

 

Certificate of Amendment to Amended and Restated Certificate of Incorporation, dated March 19,2010 (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on March 24, 2010)

     

3.1(iii)

 

Certificate of Amendment to Amended and Restated Certificate of Incorporation, dated May 4, 2015 (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on May 5, 2015)

     

3.1(iv)

 

Certificate of Designations of the Series A Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on November 4, 2014)

     

3.1(v)

 

Amended and Restated By-laws (incorporated by reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q filed on February 17, 2015)

     

10.1

  Term Note in principal amount of $250,000 issued to Michael Taglich, dated December 3, 2015 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on December 4, 2015). 
     

10.2

  Term Note in principal amount of $250,000 issued to Robert Taglich, dated December 3, 2015 (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on December 4, 2015). 
     

10.3

 

Securities Purchase Agreement between Bridgeline Digital, Inc and the investors therein, dated October 13, 2015

     

10.4

 

Term Note in principal amount of $200,000 issued to Robert Taglich, dated February 10, 2016

     

10.5

 

Term Note in principal amount of $200,000 issued to Michael Taglich, dated February 10, 2016

     

10.6

 

Term Note in principal amount of $100,000 issued to Roger Kahn, dated February 10, 2016

     

10.7

 

Amendment to Loan and Security Agreement with Western Alliance (formerly BridgeBank)

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

31.2

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

 

 

 

32.1

 

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

 

 

 

32.2

 

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

 

 

 

101.INS*

  XBRL Instance
     

101.SCH*

  XBRL Taxonomy Extension Schema
     

101.CAL*

  XBRL Taxonomy Extension Calculation
     

101.DEF*

  XBRL Taxonomy Extension Definition
     

101.LAB*

  XBRL Taxonomy Extension Labels
     

101.PRE*

  XBRL Taxonomy Extension Presentation

 

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

 

 
34

 

 

  

 

SIGNATURES

 

 

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

 

 

 

 

Bridgeline Digital, Inc.

 

 

(Registrant)

 

 

 

February 12, 2016

 

/s/    Roger Kahn

Date

 

Roger Kahn

Co-Chief Executive Officer and President

(Co-Principal Executive Officer)

     

 

 

 

February 12, 2016

 

/s/    Michael Prinn

Date

 

Michael Prinn

Co-Chief Executive Officer and President,

Executive Vice President and Chief Financial Officer

(Co-Principal Executive Officer and Principal Financial and Accounting Officer)

 

 

 
35

 

 

INDEX OF EXHIBITS

 

 

Exhibit No.

 

Description of Document

     

10.3

 

Securities Purchase Agreement between Bridgeline Digital, Inc and the investors therein, dated October 13, 2015

     
10.4

 

Term Note in principal amount of $200,000 issued to Robert Taglich, dated February 10, 2016

     

10.5

 

Term Note in principal amount of $200,000 issued to Michael Taglich, dated February 10, 2016

     
10.6   Term Note in principal amount of $100,000 Issued to Roger Kahn, dated February 10, 2016
     
10.7   Amendment to Loan and Security Agreement with Western Alliance (formerly Bridge Bank)
     

31.1

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

31.2

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

 

 

32.1

 

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

 

 

 

32.2

 

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

 

 

 

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

   

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

 

 36