NOTES TO CONSOLIDATED FINANCIAL STATEMENT
S
(Dollars in thousands, except share and per share data
)
1.
Description of Business
Overview
Bridgeline Digital, The Digital Engagement Company™, helps customers
with their digital experience from websites and intranets to online stores. Bridgeline’s iAPPS® platform integrates Web Content Management, eCommerce, eMarketing, Social Media management, and Web Analytics to deliver digital experiences to its customers. iAPPSds is a platform for large franchise and multi-unit organizations and also integrates Web Content Management, eCommerce, eMarketing, Social Media management, and Web Analytics.
The iAPPS
platform is delivered through a cloud-based SaaS (“Software as a Service”) multi-tenant business model, providing maintenance, daily technical operation and support; or via a traditional perpetual licensing business model, in which the iAPPS software resides on a dedicated server in either the customer’s facility or hosted by Bridgeline via a cloud-based hosted services model.
Bridgeline Digital was incorporated under the laws of
the State of Delaware on August 28, 2000.
Locations
The Company
’s corporate office is located in Burlington, Massachusetts. The Company maintains regional field offices serving the following geographical locations: Boston, MA; Chicago, IL; Denver, CO; and Tampa, FL. The Company has one wholly-owned subsidiary, Bridgeline Digital Pvt. Ltd. located in Bangalore, India.
Reverse Stock Split
On June 29, 2017, 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 July 24, 2017 and the Company’s stock began trading on a split-adjusted basis on July 25, 2017.
The reverse stock split reduce
d the number of shares of the Company’s common stock currently outstanding from approximately 21 million shares to approximately 4.2 million shares. Proportional adjustments have been made to the conversion and exercise prices of the Company’s outstanding convertible preferred stock, warrants, restricted stock awards, and stock options, and to the number of shares issued and issuable under the Company’s Stock Incentive Plans.
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 $.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 operations, develop new products, and build infrastructure. However, during the past two fiscal years and continuing into the current fiscal year, the Company has executed on a restructuring plan that included a reduction of workforce and office space, which significantly reduced operating expenses and improved gross margins.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
The Company has a Loan and Security Agreement wi
th Heritage Bank of Commerce (“Heritage Bank”). The Heritage Bank Loan and Security Agreement (“Heritage Agreement”) was set to expire on June 9, 2018, however, on June 10, 2017, the Company was able to extend the maturity date to June 15, 2019. The Heritage Agreement currently provides for $2.5 million of revolving credit advances and may be used for acquisitions and working capital purposes. The credit advances may not exceed the monthly borrowing base capacity, which will fluctuate based on monthly accounts receivable balances. The Company may request credit advances if the borrowing capacity is more than the current outstanding loan advance, and must pay down the outstanding loan advance if it exceeds the borrowing capacity. As of September 30, 2017, the Company had an outstanding balance under the Heritage Agreement of $2.5 million.
On O
ctober 10, 2017, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Montage Capital II, L.P. (“Montage”). The Loan Agreement has a thirty-six (36) month term which expires on October 10, 2020. The Loan Agreement provides for up to $1.5 million of borrowing in the form of a non-revolving term loan which may be used by the Company for working capital purposes (the “Loan”). $1 million of borrowing was advanced on the date of closing (the “First Tranche”). An additional $500 thousand of borrowing will be available at the Company’s option in the event that the Company achieves certain financial milestones and is otherwise in compliance with its loan covenants (the “Second Tranche”).
On May 19, 2017, the Company filed a Registration Statement on Form S-3 with the Securities and Exchange Commission
in relation to the registration of securities of the Company having an aggregate public offering price of up to $10 million. The determinate number of shares of common stock, preferred stock, warrants, and units of any combination thereof (collectively, the “Securities”) may be offered and sold from time to time, but shall not exceed $10 million in total. There have been no securities sold as of September 30, 2017.
The Company has made significant cost reductions over the past two years and the current
fiscal year revenues have increased in comparison to the previous fiscal years. While there can be no assurances that the anticipated sales will be achieved for future periods, the Company’s management believes it will have an appropriate cost structure to support the revenues that will be achieved. As such, management believes that it is probable that we will meet our working capital, capital expenditure and debt repayment needs for the next twelve months from the financial statement date of issuance. In addition, the ability to raise funds through its credit line with Heritage Bank, the funds received from Montage, and through the sales of securities may be helpful to the Company if the anticipated sales levels are not achieved or it cannot reduce operating expenses to account for any shortfalls.
2.
Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The Company
’s fiscal year end is September 30. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to
make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported periods. The most significant estimates included in these 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. Actual results could differ from these estimates under different assumptions or conditions.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
The complexity of the estimation process and factors relating to assumptions, risks and uncertainties inherent with the use of the proportional performance model affect the amount of revenue and related expenses reported in the Company’s financial statements. Internal and external factors can affect the Company’s estimates.
Cash
and Cash Equivalents
The Company considers all highly liquid instruments with original maturity of three months or less from the date of purchase to be cash equivalents.
Concentration of Credit Risk, Significant Customers, and Off-Balance Sheet Risk
F
inancial instruments, which potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents, and accounts receivable. The Company’s cash is maintained with what management believes to be a high-credit quality financial institution. At times, deposits held at this bank may exceed the federally insured limits. Management believes that the financial institutions that hold the Company’s deposits are financially sound and have minimal credit risk. Risks associated with cash and cash equivalents are mitigated by the Company’s investment policy, which limits the Company’s investing of excess cash into only money market mutual funds.
The Company extends credit to customers on an unsecured basis in the normal course of b
usiness. Management performs ongoing credit evaluations of its customers’ financial condition and limits the amount of credit when deemed necessary. Accounts receivable are carried at original invoice less an estimate for doubtful accounts based on a review of all outstanding amounts. The Company had two customers that contributed approximately 12% of revenue for fiscal 2017 and one customer that contributed approximately 10% of revenue in fiscal 2016. The Company had two customers that had an accounts receivable balance of greater than 10% of total accounts receivable at September 30, 2017 and 2016.
The Company has no significant off-balance sheets risks such as foreign exchange contracts, interest rate swaps, option contracts or other foreign hedging
agreements.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. For all customers, the Company recognizes allowances for doubtful accounts based on the length of time tha
t the receivables are past due, current business environment and its historical experience. If the financial condition of the Company’s customers were to deteriorate, resulting in impairment of their ability to make payments, additional allowances may be required.
Revenue Recognition
Overview
The Company enters into arrangements to sell
digital engagement services (professional services), software licenses or combinations thereof. Revenue is categorized into: (i) Digital Engagement Services; (ii) Subscriptions and Perpetual Licenses; and (iii) Managed Service Hosting.
The Company
recognizes 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.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
The Comp
any maintains a reseller channel to supplement our direct sales force for our iAPPS platform. Resellers are generally located in territories where the Company does not have a direct sales force. Customers generally sign a license agreement directly with the Company. Revenue from perpetual licenses sold through resellers is recognized upon delivery to the end user as long as evidence of an arrangement exists, collectability is probable, and the fee is fixed and determinable. Revenue for subscription licenses is recognized monthly as the services are delivered.
Digital
E
ngagement
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 the Company recognizes 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.
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
the Company’s 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 life of the hosting period.
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.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
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. The Company continues to evaluate the length of the amortization period of the set up fees as the Company gains more experience with customer contract renewals.
Multiple Element Arrangements
In accounting for multiple element arrangements, we follow either ASC Topic 605-985
Revenue Recognition Software
or ASC Topic 605-25
Revenue Recognition Multiple Element Arrangements
, as applicable.
In accordance with
Revenue Recognition: Multiple Deliverable Revenue Arrangement.
, 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 the Company’s 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 the Company’s allocations of arrangement consideration are analyzed at minimum on an annual basis and more frequently if our business necessitates a more timely review. The Company has determined that the Company has 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
. 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 method. 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.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
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. The Company continues to evaluate the length of the amortization period of the set up fees as we gain more experience with customer contract renewals and our newer product offerings.
Customer Payment Terms
Payment terms with customers typically require payment 30 days from invoice date. Payment terms may vary by customer but generally do not exceed 45 days from invoice date.
Invoicing for digital engagement services are either monthly or upon achievement of milestones and payment terms for such billings are within the standard terms described above. Invoicing for subscriptions and hosting are typically issued monthly and are generally due in the month of service.
The Company's
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 concerns over delivered services, the Company has endeavored to remedy the concern and all costs related to such matters have been insignificant in all periods presented. 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.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Warranty
Certain arrangements include a warranty period, which is generally 30 days from the completion of work. In hosting
arrangements, the Company provides warranties of up-time reliability. The Company continues to monitor the conditions that are subject to the warranties to identify if a warranty claim may arise. If it is determined that a warranty claim is probable, then any related cost to satisfy the warranty obligation is estimated and accrued. Warranty claims to date have been immaterial.
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.
Property and
Equipment
The components of
property and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets (three to five years). Leasehold improvements are amortized using the straight-line method over the lesser of the estimated useful life of the asset or the lease term. Repairs and maintenance costs are expensed as incurred.
Internal Use Software
Cost
s incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable that the expenditures will result in additional functionality. Capitalized costs are recorded as part of equipment and improvements. Training costs are expensed as incurred. Internal use software is amortized on a straight-line basis over its estimated useful life, generally three years.
Research and Development
and Software Development Costs
Costs for research and development of
a software product to sell, lease or otherwise market are charged to operations as incurred until technological feasibility has been established. Once technological feasibility has been established, certain software development costs incurred during the application development stage are eligible for capitalization. Based on the Company’s software product development process, technological feasibility is established upon completion of a working model.
Software development costs that are capitalized are amortized to
cost of sales over the estimated useful life of the software, typically three years. Capitalization ceases when a product is available for general release to customers. Capitalization costs are included in other assets in the consolidated financial statements. The Company capitalized $46 and $142 of costs in fiscal 2017 and fiscal 2016, respectively.
Intangible Assets
All intangible assets have finite lives and are stated at cost, net of amortization. Amortization is computed over the estimated useful
life of the related assets on a straight-line method as follows:
Description
|
|
Estimated Useful Life
(in years)
|
|
Developed and core technology
|
|
|
|
3
|
|
|
Non-compete agreements
|
|
|
3
|
-
|
6
|
|
Customer relationships
|
|
|
5
|
-
|
6
|
|
Trademarks and trade names
|
|
|
1
|
-
|
10
|
|
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets of the business acquired.
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. Goodwill is assessed at the consolidated level as one reporting unit. 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. 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, the relevant events and circumstances that may impact the fair value and the carrying amount of a reporting unit are assessed. 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 the company, 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 2017 and 2016, the Company performed the annual assessment of goodwill during the fourth quarter of each year and concluded that it was not more likely than not that
the fair values of the reporting units were less than their carrying amounts. In fiscal 2016, the Company performed a quantitative step 1 analysis since a significant impairment was recorded in the prior fiscal year 2015. In estimating fair value, the Company performed a discounted cash flow analysis on the reporting unit to determine fair value. While there are inherent limitations in any valuation, the Company believes that using a Discounted Cash Flow Method is the most indicative of the fair value, or the price, that the Company would be sold at in an orderly transaction between market participants. The Company believes the most significant change in circumstances that could affect the key assumptions in its valuation are a significant reduction in the observed revenue multiples implied by future mergers and acquisitions and/or a significant deterioration of the Company’s projected financial performance. The impairment test performed by the Company indicated that the estimated fair value of the reporting unit was more than its corresponding carrying amount. As a result of the analysis performed, the Company assessed that goodwill was not impaired.
For fiscal 2017, the Company used 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. The Company concluded that it was not more likely than not that the fair value of our reporting unit was less than the corresponding carrying amount, and therefore it was not necessary to perform the two-step impairment test. The key qualitative factors that led to the conclusion included the following: (i) access to capital (ii) market acceptance of products (iii) improvements in financial metrics and (iv) market value of the Company.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Valuation of Long-Lived Assets
The Company periodically reviews its long-lived assets, which consist primarily of property and equipment and
intangible assets with finite lives, for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may exceed their fair value. Recoverability of these assets is assessed using a number of factors including operating results, business plans, budgets, economic projections and undiscounted cash flows.
In addition, the Company
’s evaluation considers non-financial data such as market trends, product development cycles and changes in management’s market emphasis. For the definite-lived intangible asset impairment review, the carrying value of the intangible assets is compared against the estimated undiscounted cash flows to be generated over the remaining life of the intangible assets. To the extent that the undiscounted future cash flows are less than the carrying value, the fair value of the asset is determined and impairment is recognized. If such fair value is less than the current carrying value, the asset is written down to the estimated fair value. There were no impairments in fiscal 2017 or 2016.
Deferred Revenue
Deferred revenue includes
PCS and services billed in advance. PCS revenue, whether sold separately or as part of a multiple element arrangement, is deferred and recognized ratably over the term of the maintenance contract, generally 12 months. Payments made for PCS fees are generally made in advance and are nonrefundable. Revenue from consulting and training services is recognized as the related services are performed, using a proportional performance model.
Fair Value of Financial Instruments
The Company
’s financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable, and debt. Estimated fair values of amounts reported in the consolidated financial statements have been determined using available market information and valuation methodologies, as applicable. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The Company believes the recorded values for accounts receivable and accounts payable approximate current fair values as of September 30, 2017 and September 30, 2016 because of their nature and durations. The carrying value of debt instruments also approximates fair value as of September 30, 2017 and September 30, 2016 based on acceptable valuation methodologies which use market data of similar size and situated debt issues.
Fa
ir Value Measurement
s
For fair value measurements
, the Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The use of market-based information over entity specific information is also prioritized and establishes a three-level hierarchy for fair value measurements based on the nature of inputs used in the valuation of an asset or liability as of the measurement date.
The hierarchy established under
the Codification gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
Level 1
–Quoted prices in active markets for identical assets or liabilities;
Level 2
– Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3
– Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Foreign Currency
The Company determines the appropriate method of measuring assets and liabilities as to whether the method should be based on the functional currency of the entity in the environment it operates or the reporting currency of the Company, the U.S. dollar.
The Company has determined that the functional currency of its Indian subsidiary is the Rupee. Assets and liabilities are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Equity accounts are translated at historical rates, except for the change in retained earnings during the results of the income statement translation process. Revenue and expense items are translated into U.S. dollars at average exchange rates for the period. The adjustments are recorded as a separate component of stockholders’ equity and are included in accumulated other comprehensive income (loss). The Company’s foreign currency translation net gains for fiscal 2017 and 2016 were $3 for both periods. Translation gains and losses related to monetary assets and liabilities denominated in a currency different from a subsidiary’s functional currency are included in the consolidated statements of operations.
Segment Information
The Company
has sales offices in the United States that operate internally as one reportable operating segment because all of these locations have similar economic characteristics.
Stock-Based Compensation
The Company accounts for
stock-based compensation in the consolidated statements of operations based on their fair values of the awards on the date of grant on a straight-line basis over their vesting term. Compensation expense is recognized only for share-based payments expected to vest. The Company estimates forfeitures at the date of grant based on the Company’s historical experience and future expectations.
Valuation of Stock Options and Warrants Issued to Non-Employees
The Company measures expense for non-employee stock-based compensation and the estimated fair value of options exchanged in business combinations and wa
rrants issued for services using the fair value method for services received or the equity instruments issued, whichever is more readily measured. The Company estimated the fair value of stock options issued to non-employees using the Black-Scholes Merton option valuation model.
The Company estimated the fair value of common stock warrants issued to non-employees using the binomial options pricing model. The Company evaluates common stock warrants as they are issued to determine whether they should be
classified as an equity instrument or a liability. Those warrants that are classified as a liability are carried at fair value at each reporting date, with changes in their fair value recorded in other income (expense) in the consolidated statements of operation.
Advertising Costs
Advertising costs are expensed when incurred. Such costs
were $528 and $621 for fiscal 2017 and 2016, respectively.
Employee Benefits
The Company sponsors a contributory 401(k) plan
allowing all full-time employees who meet prescribed service requirements to participate. The Company is not required to make matching contributions, although the plan provides for discretionary contributions by the Company. The Company made no contributions in either fiscal 2017 or fiscal 2016.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the Company
’s financial statements and tax returns. Deferred income taxes are recognized based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the temporary differences are expected to reverse. Valuation allowances are provided if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The Company provides for reserves for potential payments of taxes to various tax authorities related to uncertain tax positions.
Reserves are based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings or positions is “more likely than not” to be realized following resolution of any uncertainty related to the tax benefit, assuming that the matter in question will be raised by the tax authorities. Interest and penalties associated with uncertain tax positions are included in the provision for income taxes.
The Company does not provide for U.S. income taxes on the undistributed earnings of it
s Indian subsidiary, which the Company considers to be permanent investments.
Net Los
s
Per Share
Basic net los
s 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 and convertible preferred stock using the as-if-converted method. The computation of diluted earnings per share does not include the effect of outstanding stock options, warrants and convertible preferred stock that are considered anti-dilutive.
For fiscal 2017 and 2016, all outstanding options to purchase shares of the Company
’s common stock totaling 450,646 and 448,586 respectively, were considered as anti-dilutive, as the options were all valued more than the current market price. Common stock warrants of 539,593 and 328,752 for fiscal 2017 and fiscal 2016 were also excluded due to their anti-dilutive nature. Also, excluded were contingent shares issuable related to an acquisition earnout in fiscal 2016.
Recent Accounting Pronouncements
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (“
ASU”) No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In July 2015, the FASB approved a one-year delay in the effective date. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Management is currently evaluating the impact of the adoption of ASU 2014-09 on its consolidated financial statements.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Income Taxes
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, (the “
Update”), which eliminates the current requirement to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, entities will be required to classify all deferred tax assets and liabilities as noncurrent. The Update is effective for financial statements issued for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Management does not expect the adoption of this Update to have a material impact on its consolidated financial position, results of operations or cash flows.
Leases
In February 2016, the FASB issued ASU No. 2016-02, which is guidance on accounting
for leases. ASU No, 2016-02 requires lessees to recognize most leases on their balance sheets for the rights and obligations created by those leases. The guidance requires enhanced disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases and will be effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The guidance requires the use of a modified retrospective approach. The Company is evaluating the impact of the guidance on its consolidated financial position, results of operations and related disclosures.
Stock Compensation
In March 2016, the FASB issued ASU No. 2016-09, which amended guidance related to employee share-based payment accounting. The new guidance simplifies
several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public companies, the amendments in this standard are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. Management does not expect the adoption of this Standard to have a material impact on our consolidated financial position, results of operations or cash flows.
Cash Flows
In August 2016, the FASB issued ASU 2016-15, which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows, spe
cifically certain cash receipts and cash payments. The standard is effective for public business entities financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective method.
Management does not expect the adoption of this Standard to have a material impact on our consolidated cash flows.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
In November 2016, the FASB issued ASU No. 2016-18 which
requires entities to include in their cash and cash-equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents. As a result, companies will no longer present transfers between cash and cash equivalents, and restricted cash and restricted cash equivalents in the statement of cash flows. The guidance is effective for annual and interim periods beginning after December 15, 2017. Early adoption of ASU 2016-18 is permitted, including adoption in an interim period. Management is currently evaluating the adoption of ASU 2016-18 on its consolidated financial statements.
Goodwill
In January 2017, the FASB issued ASU No. 2017-04 to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance will be applied prospectively and is effective for annual reporting periods ending December 31, 2020 and thereafter with early adoption permitted. Management is currently evaluating the impact of the new guidance on its consolidated financial statements.
Business Combinations
In January 2017, the FASB issued ASU No. 2017-01, which amended the existing FASB Accounting Standards Codification Topic 805 Business Combinations. The standard provides additional guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting, including acquisitions, disposals, goodwill, and consolidation. ASU 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted. Management is currently evaluating the impact of the new guidance on its consolidated financial statements.
All other Accounting Standards Updates issued but not yet effective are not expected to have a material effect on the Company
’s future financial statements.
3. Accounts Receivable and
Unbilled Receivables
Accounts receivable and unbilled receivables consists of the following:
|
|
As of September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Accounts receivable
|
|
$
|
3,174
|
|
|
$
|
2,627
|
|
Unbilled receivables
|
|
|
41
|
|
|
|
60
|
|
Subtotal
|
|
|
3,215
|
|
|
|
2,687
|
|
Allowance for doubtful accounts
|
|
|
(189
|
)
|
|
|
(138
|
)
|
Accounts receivable and unbilled receivables, net
|
|
$
|
3,026
|
|
|
$
|
2,549
|
|
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
4.
Property and
e
quipment
Property and
equipment consists of the following:
|
|
As of September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Furniture and fixtures
|
|
$
|
212
|
|
|
$
|
713
|
|
Purchased software
|
|
|
14
|
|
|
|
1,043
|
|
Computers and equipment
|
|
|
46
|
|
|
|
4,080
|
|
Leasehold improvements
|
|
|
872
|
|
|
|
1,223
|
|
Total cost
|
|
|
1,144
|
|
|
|
7,059
|
|
Less accumulated depreciation
|
|
|
(935
|
)
|
|
|
(6,547
|
)
|
Property and equipment, net
|
|
$
|
209
|
|
|
$
|
512
|
|
D
epreciation and amortization on the above assets was $256 and $707 in fiscal 2017 and 2016, respectively. During fiscal 2017, the Company disposed of property and equipment totaling $5.9 million related to the downsizing of offices, the majority of which was fully depreciated. During fiscal 2016, the Company disposed of property and equipment totaling $1.1 million in fiscal 2016, also mostly fully depreciated and of which $67 was included in Restructuring Expenses in the Statement of Operations.
5
.
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 September 30, 2017 and 2016 because of their short-term nature and durations. The carrying value of debt instruments also approximates fair value as of September 30, 2017 and 2016 based on acceptable valuation methodologies which use market data of similar size and situated debt issues. The Company no longer has any other assets or liabilities to be measured at fair value on a recurring basis as of September 30, 2017.
Assets and liabilities of the Company measured at fair value on a recurring basis as of September 30,
2016 are as follows:
|
|
As of September 30, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent acquisition consideration
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
75
|
|
|
$
|
75
|
|
Total Liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
75
|
|
|
$
|
75
|
|
The Company determines the fair value of acquisition-related contingent consideration based on assessment of the probability that the Company would be required to make such future payments. Changes to the fair value of contingent consideration are recorded in general and administrative expenses. The following table provides a
roll forward of the fair value, as determined by Level 3 inputs, of the contingent consideration.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
The following table summarizes the changes in
contingent consideration for the fiscal year ended September 30, 2017 and 2016.
|
|
Years Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Balance at beginning of period
|
|
$
|
75
|
|
|
$
|
468
|
|
Payments
|
|
|
(75
|
)
|
|
|
(393
|
)
|
Balance at end of period
|
|
$
|
-
|
|
|
$
|
75
|
|
6
. Intangible Assets
I
ntangible assets are comprised as follows:
|
|
As of September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Domain and trade names
|
|
$
|
10
|
|
|
$
|
10
|
|
Customer related
|
|
|
179
|
|
|
|
392
|
|
Non-compete agreements
|
|
|
74
|
|
|
|
146
|
|
Balance at end of period
|
|
$
|
263
|
|
|
$
|
548
|
|
Total amortization expense
of $285 and $480 related to intangible assets for the years ended September 30, 2017 and 2016, respectively, is reflected in the consolidated statements of operations in depreciation and amortization
.
The estimated amortization expense for fiscal years 2018, 2019, and 2020 is: $242, $11, and $10, respectively.
7
. Accrued Liabilities
Accrued liabilities consist of the following:
|
|
As of September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Accrued taxes
|
|
|
41
|
|
|
|
44
|
|
Compensation and benefits
|
|
|
244
|
|
|
|
194
|
|
Deferred rent (1)
|
|
|
154
|
|
|
|
141
|
|
Professional fees
|
|
|
161
|
|
|
|
133
|
|
Restructuring expenses
|
|
|
119
|
|
|
|
331
|
|
Other
|
|
|
201
|
|
|
|
103
|
|
Total
|
|
$
|
920
|
|
|
$
|
946
|
|
(1) The deferred rent liability is being amortized as a reduction of rent expense over the lives of the leases. As of September 30, 2017, $154 is reflected in Accrued Liabilities and $43 is reflected in Other Long Term Liabilities on the Consolidated Balance Sheet
as
deferred rent liabilities. As of September 30, 2016, $141 is reflected in Accrued Liabilities and $197 is reflected in Other Long Term Liabilities on the Consolidated Balance Sheet
as
deferred rent liabilities.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
8
. Debt
The Company
’s debt as of September 30, 2017 and 2016 consisted of the Line of Credit from Heritage Bank of Commerce. All other debt instruments and bank lines of credit were satisfied in full.
Heritage Line of Credit
In June 2016, the Company replaced its Loan and Security Agreement with BridgeBank (the “Bridgebank Agreement”) with a new Loan and Security Agreement
(“Heritage Agreement” or “Loan Agreement”) with Heritage Bank of Commerce (“Heritage”). The Heritage Agreement had and original a term of 24 months but was amended in 2017 to a maturity date of June 9, 2019. The Company paid an annual commitment fee of 0.4% of the commitment amount in the first year and 0.2% in the second year. The facility fee will be $6 on each anniversary thereafter. Borrowings are secured by all of the Company’s assets and all of the Company’s intellectual property. The Company is required to comply with certain financial and reporting covenants including an Asset Coverage Ratio and an Adjusted EBITDA metric. The Company was in compliance with all financial covenants as of September 30, 2017.
The Heritage Agreement provides for up to $
2.5 million of revolving credit advances which may be used for acquisitions and working capital purposes. Borrowings are limited to the lesser of (i) $2.5 million and (ii) 75% of eligible receivables as defined. The Company can borrow up to $1.0 million in out of formula borrowings for specified periods of time. The borrowings or credit advances may not exceed the monthly borrowing base capacity, which will fluctuate based on monthly accounts receivable balances. The Company may request credit advances if the borrowing capacity is more than the current outstanding loan advance, and must pay down the outstanding loan advance if it exceeds the borrowing capacity. Borrowings accrue interest at Wall Street Journal Prime Rate plus 1.75%, (currently 6%). As of September 30, 2017 and 2016, the Company had an outstanding balance under the Loan Agreement of $2.5 million and $2.1 million, respectively.
A
Director and Shareholder of the Company, Michael Taglich, signed an unconditional guaranty (the “Guaranty”) and promise to pay Heritage Bank all indebtedness in an amount not to exceed $1.5 million in connection with the out of formula borrowings. Under the terms of the Guaranty, the Guarantor authorizes Lender, without notice or demand and without affecting its liability hereunder, from time to time to: (a) renew, compromise, extend, accelerate, or otherwise change the time for payment, or otherwise change the terms, of the Indebtedness or any part thereof, including increase or decrease of the rate of interest thereon, or otherwise change the terms of the Indebtedness; (b) receive and hold security for the payment of this Guaranty or any Indebtedness and exchange, enforce, waive, release, fail to perfect, sell, or otherwise dispose of any such security; (c) apply such security and direct the order or manner of sale thereof as Lender in its discretion may determine; and (d) release or substitute any Guarantor or any one or more of any endorsers or other guarantors of any of the Indebtedness.
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 Le
nder, 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.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Amendments
– Heritage Bank
An amendment to the Heritage Agreement (“First Amendment”) was executed on August 15, 2016 and include
d a waiver for the Adjusted EBITDA metric for the quarter ended June 30, 2016. The First Amendment also included a decrease in the revolving line of credit from $3.0 million to $2.5 million, the Adjusted EBITDA metric for the quarter ended September 30, 2016, and also included a minimum cash requirement of $500 in the Company’s accounts at Heritage, which was waived for the period ended September 30, 2016.
On December 1
4, 2016, a second amendment to the Heritage Agreement (“Second Amendment”) was executed. The Second Amendment included a minimum cash requirement of $250 in its accounts at Heritage and the Adjusted EBITDA metrics for the first half of fiscal 2017.
On
August 10, 2017, the third Amendment was executed (“Third Amendment”). The Third Amendment extended the maturity date of the loan to June 9, 2019.
On October 6, 2017,
a fourth amendment to the Heritage Agreement (“Fourth Amendment”) was executed. The Fourth Amendment included a consent to the Company’s incurrence of additional indebtedness from Montage Capital (“Montage”) and the grant of a second position lien to Montage (See Subsequent Events). In addition, Heritage and Montage entered into an Intercreditor Agreement dated October 10, 2017, and acknowledged by the Company.
On November
27, 2017, a fifth amendment to the Heritage Agreement (“Fifth Amendment”) was executed. The Fifth Amendment included the Adjusted EBITDA metrics for the second half of fiscal 2017 and the first six months of fiscal 2018. Thereafter, the Company and Heritage shall mutually agree upon minimum quarterly Adjusted EBITDA amounts for each fiscal year within thirty days following the beginning of each fiscal year.
Western Alliance (formerly Bridgebank, N.A)
Prior to entering into the Heritage Agreement in June 2016, the Company had a loan agreement with
Bridgebank, N.A (“Bridgebank Agreement”). The Bridgebank Agreement provided for up to $5 million of revolving credit advances which could be used for acquisitions and working capital purposes. Borrowings were limited to the lesser of (i) $5 million and (ii) 80% of eligible receivables as defined. The Company could 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% plus 5.00% (8.25%). The Company paid an annual commitment fee of 0.25%. Borrowings were secured by all of the Company’s assets and all of the Company’s intellectual property. The Company was also required to comply with certain financial and reporting covenants including an Asset Coverage Ratio. The Bridgebank Agreement also included an unconditional guarantee from one of the Company’s Directors, Michael Taglich (the “Guaranty”) and promise to pay the BridgeBank all indebtedness in an amount not to exceed $2 million in connection with the out of formula borrowings.
Term Notes from Shareholder
s
The Company issued term notes
to certain officers and directors of the Company. Term notes totaling $2.45 million were issued to Michael Taglich from the period of January 7, 2015 through February 2016. Term notes totaling $450 were issued to Robert Taglich on December 3, 2015 and February 2016. Michael Taglich is both a shareholders and director of the Company. Robert Taglich is a shareholder and was a director of the Company from May 2016 to June 29, 2017. In February 2016, Bridgeline issued a term note to Roger Kahn in the amount of $100. Roger Kahn is the Company’s President and Chief Executive Officer.
In
April 2016, the shareholders of the Company approved the proposal for
the issuance of up to 940,000 shares of the Company’s common stock upon conversion of the above outstanding term notes totaling $3 million. In May 2016, each of the holders of the outstanding term notes converted all outstanding principal and accrued but unpaid interest due under such outstanding term notes into shares of common stock of the Company at a conversion price of $3.75 per share. In connection with the conversion, a total of 867,765 shares of common stock was issued. Michael Taglich received 715,209 shares of common stock, Robert Taglich received 125,320 shares of common stock and Roger Kahn received 27,236 shares of common stock. The Taglich Brothers, Inc acted as the Placement Agent for the conversion of these notes and were granted warrants to purchase 86,778 shares of common stock at a price of $3.75 per share.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Su
bordinated Convertible Debt
I
n April 2016, the shareholders of the Company approved a proposal for
issuance of up to 800,000 shares of the Company’s Common Stock upon conversion of the outstanding $3.0 million of secured subordinated convertible notes (the "Convertible Notes"). The conversion price to $3.75 per share was provided as an incentive to the holders of such Convertible Notes to convert the outstanding principal into shares of Common Stock. As of September 30, 2016, all of the shares converted and a total of 800,000 shares of common stock was issued. Due to the reduction in the conversion price from $32.50 per share to $3.75 per share, the Company recorded an inducement charge of $3.4 million in fiscal 2016. The charge was recorded as a non-operating expense in the Consolidated Income Statement with a corresponding credit to additional paid in capital.
Minimum Debt Obligations
As
of September 30, 2017, the Company had minimum debt obligations of $2.5 million related to the Heritage Bank line of credit, which has a maturity date of June 9, 2019.
9
.
Restructuring
Charges
Commencing in
fiscal 2015 and through fiscal 2017, the Company’s management approved, committed to and initiated plans to restructure and further improve efficiencies by implementing cost reductions in line with expected decreases in revenue. The Company renegotiated several office leases and relocated to smaller space, while also negotiating sub-leases for the original space. In addition, the Company executed a general work-force reduction and recognized costs for severance and termination benefits. These restructuring charges and accruals require estimates and assumptions, including contractual rental commitments or lease buy-outs for vacated office space and related costs, and estimated sub-lease income. The Company’s sub-lease assumptions include the rates to be charged to a sub-tenant and the timing of the sub-lease arrangement. All of the vacated lease space is currently contractually occupied by a new sub-tenant for the remaining life of the lease. In the second quarter of fiscal 2017, the Company initiated a plan to shut down its operations in India. All of these estimates and assumptions will be monitored on a quarterly basis for changes in circumstances with the corresponding adjustments reflected in the consolidated statement of operations.
In total, a
charge of $286 and $879 was recorded to restructuring expenses for fiscal 2017 and fiscal 2016 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.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
The following table summarizes the restructuring charges reserve activity:
|
|
Employee
Severence and
Benefits
|
|
|
Facility Related
and Other Costs
|
|
|
Total
|
|
Balance at end of period, September 30, 2015
|
|
$
|
-
|
|
|
$
|
307
|
|
|
$
|
307
|
|
Charges to operations
|
|
|
505
|
|
|
|
158
|
|
|
|
663
|
|
Cash disbursements
|
|
|
(311
|
)
|
|
|
(223
|
)
|
|
|
(534
|
)
|
Changes in estimates
|
|
|
(1
|
)
|
|
|
5
|
|
|
|
4
|
|
Balance at end of period, September 30, 2016
|
|
$
|
193
|
|
|
$
|
247
|
|
|
$
|
440
|
|
Charges to operations
|
|
|
-
|
|
|
|
241
|
|
|
|
241
|
|
Cash disbursements
|
|
|
(203
|
)
|
|
|
(347
|
)
|
|
|
(550
|
)
|
Changes in estimates
|
|
|
-
|
|
|
|
33
|
|
|
|
33
|
|
Accretion Expense
|
|
|
10
|
|
|
|
2
|
|
|
|
12
|
|
Balance at end of period, September 30, 2017
|
|
$
|
-
|
|
|
$
|
176
|
|
|
$
|
176
|
|
As of September 30, 2
017, $119 is reflected in Accrued Liabilities and $57 is reflected in Other long term liabilities. As of September 30, 2016, $331 is reflected in Accrued Liabilities and $109 is reflected in Other long term liabilities.
A
ccrued restructuring liabilities is comprised of the following:
|
|
As of September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Facilities and related
|
|
$
|
133
|
|
|
$
|
195
|
|
Employee related
|
|
|
-
|
|
|
|
193
|
|
Other
|
|
|
43
|
|
|
|
52
|
|
Total
|
|
$
|
176
|
|
|
$
|
440
|
|
10
. Commitments and Contingencies
Operating Lease Commitments
The Company
leases facilities in the United States and India.
Future minimum rental commitments under non-cancelable operating leases with initial or remaining terms in excess of one year at September 30, 2017 were as follows:
Years Ending September 30,
|
|
Gross Amount
|
|
|
Sublease Income
Amount
|
|
|
Net
|
|
2018
|
|
$
|
611
|
|
|
$
|
(159
|
)
|
|
$
|
452
|
|
2019
|
|
|
242
|
|
|
|
(126
|
)
|
|
|
116
|
|
2020
|
|
|
97
|
|
|
|
(73
|
)
|
|
|
24
|
|
Total
|
|
$
|
950
|
|
|
$
|
(358
|
)
|
|
$
|
592
|
|
The Company has no lease commitments that extend past fiscal 2020.
Rent expense for fiscal 2017 and 2016 was $686 and $976, respectively, inclusive of sublease income $45 for fiscal 2017.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Capital Lease
Obligation
s
|
|
As of September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Capital Lease Obligations
|
|
$
|
-
|
|
|
$
|
45
|
|
Less: Current portion
|
|
|
-
|
|
|
|
(45
|
)
|
Capital Lease obligations
|
|
$
|
-
|
|
|
$
|
-
|
|
As of September 30, 201
7, the Company has no further lease payments due under capitalized leases.
Other Commitments, Guarantees, and Indemnification Obligations
The Company frequently warrants that the technology
solutions it develops for its clients will operate in accordance with the project specifications without defects for a specified warranty period, subject to certain limitations that the Company believes are standard in the industry. In the event that defects are discovered during the warranty period, and none of the limitations apply, the Company is obligated to remedy the defects until the solution that the Company provided operates within the project specifications. The Company is not typically obligated by contract to provide its clients with any refunds of the fees they have paid, although a small number of its contracts provide for the payment of liquidated damages upon default. The Company has purchased insurance policies covering professional errors and omissions, property damage and general liability that reduce its monetary exposure for warranty-related claims and enable it to recover a portion of any future amounts paid.
The Company
’s contracts typically provide for testing and client acceptance procedures that are designed to mitigate the likelihood of warranty-related claims, although there can be no assurance that such procedures will be effective for each project. The Company has not paid any material amounts related to warranties for its solutions. The Company sometimes commits unanticipated levels of effort to projects to remedy defects covered by its warranties. The Company’s estimate of its exposure to warranties on contracts is immaterial as of September 30, 2017.
The Company
’s agreements with customers generally require the Company to indemnify the customer against claims in which the Company’s products infringe third-party patents, copyrights, or trademarks and indemnify against product liability matters. As of September 30, 2017 and 2016, respectively, the Company has not experienced any losses related to the indemnification obligations and no significant claims with respect thereto were outstanding. The Company does not expect significant claims related to the indemnification obligations and, consequently, concluded that the fair value of these obligations is negligible, and no related reserves were established.
Litigation
The Company is subject to ordinary routine litigation and clai
ms incidental to its business. As of September 30, 2017, Bridgeline was not engaged in any material legal proceedings.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
1
1
. Stock
holders
’
Equity
Preferred Stock
In October 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. The shares of Preferred Stock may be converted, at the option of the holder at any time, into such number of shares of common stock (“Conversion Shares”) equal (i) to the number of shares of Preferred Stock to be converted, multiplied by the stated value of $10.00 (the “Stated Value”) and (ii) divided by the conversion price in effect at the time of conversion. The current conversion price is $16.25, and is subject to adjustment in the event of stock splits or stock dividends. Any accrued but unpaid dividends on the shares of Preferred Stock to be converted shall also be converted in common stock at the conversion price. A mandatory provision also may provide that the Company will have the right to require the holders to convert shares of Preferred Stock into Conversion Shares if (i) the Company’s common stock has closed at or above $32.50 per share for ten consecutive trading days and (ii) the Conversion Shares are (A) registered for resale on an effective registration statement or (B) may be resold pursuant to Rule 144.
As of September 30, 2017, a total of 1,636 preferred shares have been converted to 1,007 shares of common stock.
In the event of any liquidation, dissolution, or windin
g up of the Company, the holders of shares of Preferred Stock will be entitled to receive in preference to the holders of common stock, the amount equal to the stated value per share of Series A Preferred Stock plus declared and unpaid dividends, if any. After such payment has been made, the remaining assets of the Company will be distributed ratably to the holders of common stock.
The Company may pay dividends in cash or Preferred Stock. Effective January 1, 2017, c
umulative dividends are payable at a rate of 12% per year, as after
two years, any Preferred Stock dividends increase from 6% to 12% 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”) up to 64,000 shares cumulatively.
If the Company shall make the PIK Election with respect to the dividend payable, it shall deliver a number of shares of Preferred Stock equal to (A) the aggregate dividend payable to such holder as of the end of the quarter
divided by
(B) the lesser of (x) the then effective Conversion Price or (y) the average VWAP for the five (5) consecutive Trading Days prior to such dividend payment date. The Company shall have the right to force conversion of the Preferred Stock into shares of Common Stock at any time after the Common Stock trades in excess of $32.50 per share. The Preferred Shares shall vote with the Common on an as converted basis.
As of
September 30, 2017, the Company has issued 45,172 preferred convertible shares (PIK shares) to the preferred shareholders of which 24,080 shares were issued in fiscal 2017. The Company elected to declare a PIK dividend for the next quarterly payment due October 1, 2017. The total PIK dividend declared for October 1, 2017 is 7,391 preferred stock shares at a dividend rate of 12%.
Common
S
tock
In October 2015, the Company sold
136,000 shares of common stock at $5.00 per share for gross proceeds of $680 in a private placement. Net proceeds to the Company after offering expenses were approximately $669.
I
n February 2016, the Company issued 21,539 shares of restricted common stock at $4.55 to four members of its Board of Directors in lieu of cash payments for their services as board members. The shares vested in equal installments on a monthly basis through the end of the service period of September 30, 2016. The aggregate fair value of the shares of $98 was expensed over the service period. In May 2016, additional restricted common shares were issued to a new board member totaling 2,192 shares with a fair market value of $8, and fully expensed in fiscal 2016.
In
May 2016, the Company issued 361,336 shares of common stock for net proceeds of $1.2 million for the first closing in connection with the conversion of term notes issued to accredited investors, as approved by the shareholders on April 29, 2016. In June 2016, the Company issued an additional 172,001 shares of common stock for net proceeds of $400 for the second closing in connection with the conversion of these term notes.
In
May 2016, each of Michael Taglich, Robert Taglich, and Roger Kahn, holders of outstanding term notes, converted all outstanding principal and accrued but unpaid interest due under such outstanding term notes into shares of Common Stock of the Company at a conversion price of $3.75 per share. In connection with the conversion, a total of 867,765 shares of common stock were issued. (See Term Notes from Shareholders.)
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
On April 29, 2016, the shareholders of the Company approved a proposal for
issuance of up to 800,000 shares of the Company’s Common Stock upon conversion of outstanding Convertible Notes. From June 2016 through August 2016, all of the notes were converted to shares of common stock.
In July 2016, the Company sold 440,000
shares of common stock at $3.75 per share for gross proceeds of $1.7 million in a private placement. Net proceeds to the Company after offering expenses were approximately $1.5 million.
In October 2016, the
Company issued 2,000 shares of common stock to one if its vendors for payment for services. The fair market value of the shares was $8.
I
n November 2016, the Company entered into Securities Purchase Agreements (“November 2016 Private Placement”) with certain institutional and accredited investors (the “Purchasers”) to sell an aggregate total of 427,073 shares of common stock for $2.40 per share (the “Purchaser Shares”) for gross proceeds of $1.0 million. The Company’s President and CEO (Roger Kahn) and two of the Company’s directors (Michael Taglich and Robert Taglich) purchased shares of common stock in this private offering. Roger Kahn purchased 17,200 common shares and Michael and Robert Taglich each purchased 30,770 common shares. Also, as additional consideration, the Company issued to the Purchasers, warrants to purchase an aggregate total of 213,538
shares common stock (the “Purchaser Warrant Shares”).
I
n February 2017, the Company issued 36,826 shares of restricted common stock at $3.15 to five members of its Board of Directors in lieu of cash payments for their annual services as board members. The shares vested in equal installments on a monthly basis through the end of the service period of September 30, 2017. The aggregate fair value of the shares is $113 and was being expensed over the service period.
I
n June 2017, the Company’s CEO and President (Roger Kahn) elected to receive common stock in lieu of a $20,000 cash payment for a bonus earned for the first half of the fiscal year. He received 7,273 fully vested restricted shares with a fair value price per share of $2.75.
Contingent
C
onsideration
In connection with the acquisition of ElementsLocal on August 1
, 2013, the Company issued 21,058 common shares to the sellers of ElementsLocal. In addition, contingent consideration not to exceed 13,539 shares of Bridgeline Digital common stock was contingently issuable to the sellers of ElementsLocal. The contingent consideration was payable quarterly over the 12 consecutive calendar quarters following the acquisition, contingent upon the acquired business achieving certain revenue targets.
As of September 30, 2016, the stockholders of ElementsLocal earned the full earnout of 13,539 shares of common stock, of which the final earnout shares totaling 1,129 were issued in November 2016.
Registration Rights and Piggyback Registration
The Company and the Purchasers also entered into a Registration Rights Agreement, wherein the Company agreed to file a registration statement (“Registration” or “Form S-3”) to register the Purchaser Shares and Purchaser Warrant Shares under the Securities Act of 1933, as amended. The Registration was filed with the Securities and Exchange Commission on November 14, 2016 and further amended on December 23, 2016. A total of 348,334 Purchaser Shares and 174,167 Purchaser Warrant Shares were registered with the Form S-3 filing. Roger Kahn, Michael Taglich, and Robert Taglich did not participate in the Registration.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Also included in the Registration were other securities that had been purchased prior to the November 2016 Private Placement, namely private placements of our common stock and warrants to purchase common stock. As a part of these private placement transactions, the Company had offered certain investors piggyback registration rights such that, in the event the Company filed a registration statement to register its securities under the Securities Act, the shares of common stock issued or issuable to those investors would be eligible to also be included in the registration statement to be registered under the Securities Act. Accordingly, in addition to the Purchaser Shares and Purchaser Warrants from the November 2016 Private Placement, 616,533
common shares and warrants were included in the registration statement pursuant to these previously granted piggyback registration rights. In total, the Registration included 1,139,033 shares of common stock and warrants to purchase common stock for net proceeds of $852.
Amended and Restated Stock Incentive Plan
The Company has granted common stock, common stock warrants, and common stock option awards (the “
Equity Awards”) to employees, consultants, advisors and debt holders of the Company and to former owners and employees of acquired companies that have become employees of the Company. The Company’s Amended and Restated Stock Incentive Plan (the “Plan”) provided for the issuance of up 250,000 shares of common stock. This Plan expired in August 2016. A total of 227,280 shares of common stock are outstanding under the Plan as of September 2017. On April 29, 2016, the stockholders approved a new plan, The 2016 Stock Incentive Plan (the “2016 Plan”). The 2016 Plan authorizes the award of incentive stock options, non-statutory stock options, restricted stock, unrestricted stock, performance shares, stock appreciation rights and any combination thereof to employees, officers, directors, consultants, independent contractors and advisors of the Company. Initially, a total of 500,000 shares of the Company’s Common Stock are reserved for issuance under this new plan. There were 223,366 options outstanding under this plan as of September 30, 2017. As of September 30, 2017, there are 276,634 shares available for future issuance.
Stock
Option and Warrant Activity and Outstanding Shares
A summary of combined option and warrant activity follows:
|
|
Stock Options
|
|
|
Stock Warrants
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2015
|
|
|
175,200
|
|
|
$
|
18.40
|
|
|
|
140,656
|
|
|
$
|
21.89
|
|
Granted
|
|
|
337,758
|
|
|
$
|
4.22
|
|
|
|
190,110
|
|
|
$
|
4.46
|
|
Forfeited or expired
|
|
|
(64,372
|
)
|
|
$
|
19.77
|
|
|
|
(2,014
|
)
|
|
$
|
37.10
|
|
Outstanding, September 30, 2016
|
|
|
448,586
|
|
|
$
|
7.53
|
|
|
|
328,752
|
|
|
$
|
11.71
|
|
Granted
|
|
|
28,400
|
|
|
$
|
3.16
|
|
|
|
219,538
|
|
|
$
|
3.95
|
|
Forfeited or expired
|
|
|
(26,340
|
)
|
|
$
|
11.52
|
|
|
|
(8,697
|
)
|
|
$
|
35.00
|
|
Outstanding, September 30, 2017
|
|
|
450,646
|
|
|
$
|
7.02
|
|
|
|
539,593
|
|
|
$
|
8.18
|
|
There
were no options exercised during fiscal 2017 and 2016. There were 194,977 and 69,041 options vested and exercisable as of September 30, 2017 and September 30, 2016, respectively. The shares outstanding at September 30, 2017 and 2016 had an intrinsic value of $4 and $1, respectively.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
A summary of the status of
unvested shares is as follows:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Unvested at September 30, 2016
|
|
|
379,545
|
|
|
$
|
4.94
|
|
Granted
|
|
|
28,400
|
|
|
|
3.16
|
|
Vested
|
|
|
(134,622
|
)
|
|
|
5.77
|
|
Forfeited
|
|
|
(17,654
|
)
|
|
|
5.16
|
|
Unvested at September 30, 2017
|
|
|
255,669
|
|
|
$
|
4.29
|
|
Price ranges of outstanding and exercisable options as of September 30,
2017 are summarized below:
Outstanding Options
|
|
|
Exercisable Options
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
Number
|
|
|
Weighted
|
|
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
of
|
|
|
Average
|
|
Exercise
|
|
of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Options
|
|
|
Exercise
|
|
Price
|
|
Options
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
$2.22
|
to
|
$3.80
|
|
|
29,400
|
|
|
|
9.53
|
|
|
$
|
3.17
|
|
|
|
334
|
|
|
$
|
3.65
|
|
$3.81
|
to
|
$6.05
|
|
|
360,158
|
|
|
|
8.73
|
|
|
|
4.40
|
|
|
|
137,407
|
|
|
|
4.58
|
|
$6.06
|
to
|
$18.75
|
|
|
22,280
|
|
|
|
5.83
|
|
|
|
14.53
|
|
|
|
18,428
|
|
|
|
14.82
|
|
$18.76
|
to
|
$41.00
|
|
|
38,808
|
|
|
|
4.45
|
|
|
|
29.93
|
|
|
|
38,808
|
|
|
|
29.93
|
|
|
|
|
|
|
450,646
|
|
|
|
8.27
|
|
|
$
|
7.02
|
|
|
|
194,977
|
|
|
$
|
10.59
|
|
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Compensation Expense
The Company estimates the fair value of stock options using the Black-Scholes-Merton option valuation
model (the “Model”). The assumptions used to calculate compensation expense is as follows:
|
|
Years Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Expected option life in years
|
|
|
|
6.0
|
|
|
|
|
|
6.0
|
|
|
Expected volatility
|
|
|
|
85.03%
|
|
|
|
|
|
84.12%
|
|
|
Expected dividend rate
|
|
|
|
0.00%
|
|
|
|
|
|
0.00%
|
|
|
Risk free interest rate
|
|
|
|
1.95%
|
|
|
|
|
|
1.33%
|
|
|
Option exercise prices
|
|
|
$2.22
|
to
|
$41.00
|
|
|
|
$3.65
|
to
|
$6.05
|
|
Weighted average fair value of options granted during the year
|
|
|
|
$2.27
|
|
|
|
|
|
$2.99
|
|
|
Compensation expense is generally recognized on a graded
accelerated basis over the vesting period of grants. During the years ended September 30, 2017 and 2016, the Company recognized $418 and $214, respectively, as compensation expense related to share based payments. Compensation expense is recorded in the Consolidated Statement of Operations with a portion charged to Cost of Goods Sold and a portion to Operating Expenses depending on the employee’s department. In fiscal 2017, $18 was charged to Cost of Goods Sold and $400 was charged to Operating Expenses. In fiscal 2016, $1 was charged to Cost of Goods Sold and $213 was charged to Operating Expenses. As of September 30, 2017, the Company had approximately $555 of unrecognized compensation costs related to unvested options which the Company expects to recognize through fiscal 2020.
Common Stock Warrants
The Company typically issues warrants to individual investors and placement agents to purchase shares of the Company
’s common stock in connection with private placement fund raising activities. Warrants may also be issued to individuals or companies in exchange for services provided for the company. The warrants are typically exercisable six months after the issue date, expire in five years, and contain a cashless exercise provision and piggyback registration rights.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Stock warrants outstanding at Sep
tember 30, 2017 are as follows:
|
|
Issue
|
|
|
|
|
|
|
Type
|
|
Date
|
|
Shares
|
|
Price
|
|
Expiration
|
|
|
|
|
|
|
|
|
|
Investors
|
|
6/19/2013
|
|
18,400
|
|
$ 31.25
|
|
6/19/2018
|
Placement Agent
|
|
6/19/2013
|
|
9,200
|
|
$ 31.25
|
|
6/19/2018
|
Placement Agent
|
|
9/30/2013
|
|
6,157
|
|
$ 32.50
|
|
9/30/2018
|
Placement Agent
|
|
11/6/2013
|
|
3,078
|
|
$ 32.50
|
|
11/6/2018
|
Placement Agent
|
|
3/28/2014
|
|
12,800
|
|
$ 26.25
|
|
3/28/2019
|
Placement Agent
|
|
10/28/2014
|
|
12,308
|
|
$ 16.25
|
|
10/28/2019
|
Director/Shareholder
|
|
12/31/2014
|
|
12,000
|
|
$ 20.00
|
|
12/31/2019
|
Director/Shareholder
|
|
2/12/2015
|
|
12,000
|
|
$ 20.00
|
|
2/12/2020
|
Director/Shareholder
|
|
5/12/2015
|
|
12,000
|
|
$ 20.00
|
|
5/12/2020
|
Director/Shareholder
|
|
7/21/2015
|
|
32,000
|
|
$ 8.75
|
|
7/21/2018
|
Director/Shareholder
|
|
12/31/2015
|
|
6,000
|
|
$ 20.00
|
|
12/31/2020
|
Placement Agent
|
|
5/17/2016
|
|
86,778
|
|
$ 3.65
|
|
5/17/2021
|
Placement Agent
|
|
5/11/2016
|
|
53,334
|
|
$ 3.75
|
|
5/11/2021
|
Placement Agent
|
|
7/15/2016
|
|
44,000
|
|
$ 4.60
|
|
7/15/2021
|
Investors
|
|
11/9/2016
|
|
213,538
|
|
$ 3.50
|
|
5/22/2022
|
Director/Shareholder
|
|
12/31/2016
|
|
6,000
|
|
$ 20.00
|
|
12/31/2021
|
Total
|
|
|
|
539,593
|
|
|
|
|
In fiscal 2017 and 2016, the Company issued 219,538 and 190,112 warrants to a director/shareholder, investors and placements agents, respectively. In fiscal 2017, the 219,538 warrants were issued as follows: 213,538 warrants were issued to investors in co
nnection with private placements and 6,000 warrants were issued to a director/shareholder for a bank guarantee. In fiscal 2016, the 190,112 warrants were issued as follows: 184,112 warrants to the placement agent in connection with the private placement of common stock and 6,000 to a director/shareholder in connection with a bank guarantee. All of the warrants were priced above the closing stock price at September 30, 2017 and therefore have an immaterial fair value.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
1
2
. Income Taxes
The
components of the Company’s tax provision as of September 30, 2017 and 2016 is as follows:
|
|
Years Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
16
|
|
|
|
(47
|
)
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
Total current
|
|
|
16
|
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Total deferred
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
16
|
|
|
$
|
(47
|
)
|
The Company
’s income tax provision was computed using the federal statutory rate and average state statutory rates, net of related federal benefit. The provision differs from the amount computed by applying the statutory federal income tax rate to pretax income, as follows:
|
|
Years Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Income tax benefit at the
federal statutory rate of 34%
|
|
$
|
(556
|
)
|
|
$
|
(2,606
|
)
|
Permanent differences
|
|
|
365
|
|
|
|
494
|
|
State income tax benefit, net of federal tax
|
|
|
(86
|
)
|
|
|
(475
|
)
|
Change in valuation allowance
|
|
|
193
|
|
|
|
1,964
|
|
Foreign Taxes
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
100
|
|
|
|
576
|
|
Total
|
|
$
|
16
|
|
|
$
|
(47
|
)
|
As of
September 30, 2017, the Company has a federal net operating loss (NOL) carryforward of approximately $27 million that expires on various dates through 2037. Internal Revenue Code Section 382 places a limitation on the amount of taxable income which can be offset by NOL carryforwards after a change in control of a loss corporation. Due to these “change of ownership” provisions, utilization of NOL carryforwards may be subject to an annual limitation in future periods. The Company has not performed a Section 382 analysis. However, if performed, Section 382 may be found to limit potential future utilization of the Company’s NOL carryforwards. The Company also has approximately $23 million in state NOLs which expire on various dates through 2037.
The Company has
deferred tax assets that are available to offset future taxable income. A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax assets will not be realized. Management believes that it is more likely than not that all deferred tax assets will not be realized. Accordingly, the Company has established a valuation allowance against its deferred tax assets at September 30, 2017 and 2016. For the years ended September 30, 2017 and 2016, the valuation allowance for deferred tax assets increased $185 and $1,964, respectively, which was mainly due to the increases in the net operating losses.
The Company recognizes interest accrued related to unrecognized tax benefits in interest expense. Penalties, if
incurred, are recognized as a component of tax expense.
The Company is subject to U.S. federal income tax as well as income tax of certain state jurisdictions. The Company has not been audited by the Internal Revenue Service (IRS) or any states in connecti
on with income taxes. The tax periods from 2014 to 2017 generally remain open to examination by the IRS and state authorities.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Significant components of the Company
’s deferred tax assets and liabilities are as follows:
|
|
As of September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Bad debt reserve
|
|
$
|
74
|
|
|
$
|
54
|
|
Deferred revenue
|
|
|
595
|
|
|
|
489
|
|
Accrued vacation
|
|
|
83
|
|
|
|
3
|
|
Long-term
|
|
|
|
|
|
|
|
|
AMT carryforward
|
|
|
9
|
|
|
|
9
|
|
Net operating loss carryforwards
|
|
|
9,981
|
|
|
|
9,770
|
|
Depreciation
|
|
|
118
|
|
|
|
152
|
|
Intangibles
|
|
|
774
|
|
|
|
967
|
|
Contribution carryforward
|
|
|
29
|
|
|
|
28
|
|
Total deferred tax assets
|
|
|
11,663
|
|
|
|
11,472
|
|
Valuation allowance
|
|
|
(11,663
|
)
|
|
|
(11,472
|
)
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
U
ndistributed losses of the Company’s foreign subsidiary amounted to approximately $(381) and $(415) at September 30, 2017 and 2016, respectively. These losses are considered to be indefinitely reinvested; accordingly, no provision for US federal and state income taxes has been provided thereon. Upon repatriation of those losses, in the form of dividends or otherwise, the Company would be subject to both US income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the applicable foreign tax authority. Determination of the amount of unrecognized deferred US income tax liability is not material and the detailed calculations have not been performed. As of September 30, 2017, there would be minimal withholding taxes upon remittance of all previously unremitted earnings.
When a
ccounting for uncertain income tax positions, the impact of uncertain tax positions are recognized in the financial statements if they are more likely than not of being sustained upon examination, based on the technical merits of the position. The Company’s management has determined that the Company has no uncertain tax positions requiring recognition as of September 30, 2017 and 2016. The Company does not expect any change to this determination in the next twelve months.
1
3
.
Related Party Transactions
In October 2013, Mr. Michael Taglich joined the Board of Directors. Michael Taglich is the Chairman and President of Taglich Brothers, Inc. a New York based securities firm.
Taglich Brothers, Inc were the Placement Agents for many of the Company’s private offerings in 2012, 2013, 2014, and 2016. They were also the Placement Agent for the Company’s $3 million subordinated debt offering in 2013 and the Series A Preferred stock sale in 2015. Michael Taglich beneficially owns approximately 22% of Bridgeline stock. Michael Taglich has also guaranteed $1.5 million in connection with the Company’s out of formula borrowings on its credit facility with Heritage Bank.
In consideration of previous 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
12,000 shares of Common Stock of the Company at a price equal to $20.00 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 6,000 shares of common stock, which warrant shall contain the same terms as the warrant issued to Michael Taglich on January 7, 2015. Since the Guaranty did remain outstanding for a period of more than 12 months, a warrant to purchase 6,000 shares of common stock was issued to Michael Taglich in February 2016 at a price of $20.00 and a warrant to purchase 6,000 shares of common stock was issued in January 2017 at a price of $20.00.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Mr. Taglich was also issued warrants
in fiscal 2015 in connection with shareholder term notes issued to him. The notes were subsequently converted to shares of common stock in May 2016. He was issued three warrants totaling 36,000 shares at an exercise price of $20.00 and one warrant for 32,000 shares at an exercise price of $8.75 in connection with these notes. The warrants have a term of five years and are exercisable six months after the date of issuance. A fair market value of $270 was assigned to the warrants and recorded 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 was amortized on a straight-line basis over their expected life. H
owever, when the Company converted these term notes in May 2016, the remaining unamortized value was recorded as amortization expense. Total amortization expense of $158 was recorded in fiscal 2016 related to the warrants.
Robert Taglich
was appointed to the Company’s Board of Directors in May 2016. Robert Taglich beneficially owns approximately 8% of Bridgeline stock. Mr. Taglich was a consultant to the Company prior to his appointment to the Board of Directors. As compensation for his consulting services, Robert Taglich was granted 3,000 options to purchase the Company’s common stock at a price of $6.05. As a director, Mr. Taglich was granted 2,200 options to purchase common stock, and 6,954 shares of restricted common stock. Mr. Taglich did not seek re-election to the Board of Directors and his tenure expired on June 29, 2017.
In connection with the equity c
onversion of the $3 million in term notes from shareholders that was completed in May 2016, the Taglich Brothers, Inc were granted Placement Agent warrants to purchase 86,778 shares of common stock at a price of $3.65 per share. Included in the distribution were 35,120 warrants to Michael Taglich and 28,552 warrants to Robert Taglich. The warrants expire in five years.
In connection with the
private offering in July 2016, the Taglich Brothers, Inc were granted Placement Agent warrants to purchase 44,000 shares of common stock at a price of $4.60 per share. Included in the distribution were 8,864 warrants to Michael Taglich and 7,236 warrants to Robert Taglich. The warrants expire in five years.
In connection with the
November 2016 Private Placement, the Company issued to the Purchasers warrants to purchase an aggregate total of 213,538
shares common stock. Each Purchaser Warrant Share expires five and one-half years from the date of issuance and is exercisable for $3.50 per share beginning six-months from the date of issuance, or May 9, 2017. The warrants expire May 9, 2022. Purchaser Warrant Shares were also issued to Roger Kahn 8,600 shares and Michael and Robert Taglich 15,385 shares each.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
1
4
. Subsequent Event
s
Montage
Capital II, L.P. Loan Agreement
On October 10, 2017, the Company entered into a Loan and Security Agreement (the “
Loan Agreement”) with Montage Capital II, L.P. (“Montage”). The Loan Agreement has a thirty-six (36) month term which expires on October 10, 2020. The Loan Agreement provides for up to $1.5 million of borrowing in the form of a non-revolving term loan which may be used by the Company for working capital purposes (the “Loan”). $1 million of borrowing was advanced on the date of closing (the “First Tranche”). An additional $500 thousand of borrowing will be available at the Company’s option in the event that the Company achieves certain financial milestones and is otherwise in compliance with its loan covenants (the “Second Tranche”). Borrowings bear interest at the rate of 12.75% per annum. The Company paid a fee of $33 to Montage at closing. Interest only payments are due and payable during the first nine months of the Loan. Commencing on July 1, 2018, the Company shall be obligated to make principal payments of $26 per month if only the First Tranche has been received and $39 if the Company has received both the First Tranche and the Second Tranche. All remaining principal and interest shall be due and payable at maturity. Borrowings are secured by a second position lien on all of the Company’s assets including intellectual property and general intangibles. Pursuant to the Loan Agreement, the Company is also required to comply with certain financial covenants. The Loan is subordinate to the Company’s senior debt facility with Heritage Bank of Commerce (“Heritage”). As additional consideration for the Loan, the Company issued to Montage an eight-year warrant to purchase 66,213 shares of the Company’s common stock at a price equal to $2.65 per share which may increase to an aggregate of 100,082 shares of the Company’s common stock in the event that Montage advances the Second Tranche (the “Warrant”). Further, in the event of a change in control prior to the exercise of the Warrant, Montage shall have the right to receive an equity buy-out of either $250 if only the First Tranche has been advanced or $375 if both the First Tranche and the Second Tranche have been advanced. If the equity buy-out is exercised, the Warrant will be surrendered to the Company for cancellation.
Heritage consented to the Company
’s incurrence of additional indebtedness from Montage and the grant of a second position lien to Montage. In addition, Heritage and Montage entered into an Intercreditor Agreement dated October 10, 2017, and acknowledged by the Company.