Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This section contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of a variety of factors and risks including the impact of the weakness in the U.S. and international economies on our business, our inability to manage our future growth effectively or profitably, fluctuations in our revenue and quarterly results, our license renewal rate, the impact of competition and our ability to maintain margins or market share, the limited market for our common stock, the ability to maintain our listing on the NASDAQ Capital Market, the volatility of the market price of our common stock, the ability to raise capital, the performance of our products, our ability to respond to rapidly evolving technology and customer requirements, our ability to protect our proprietary technology, the security of our software and response to cyber security risks, our ability to meet our financial obligations and commitments, our dependence on our management team and key personnel, our ability to hire and retain future key personnel,our ability to maintain an effective system of internal controls, or our ability to respond to government regulations. These and other risks are more fully described herein and in our other filings with the Securities and Exchange Commission.
This section should be read in combination with the accompanying audited consolidated financial statements and related notes prepared in accordance with United States generally accepted accounting principles.
Overview
Bridgeline Digital, The Digital Engagement Company™, helps customers maximize the performance of their complete digital experience from websites and intranets to online stores and marketing campaigns. Bridgeline’s Unbound platform deeply integrates Web Content Management, eCommerce, eMarketing, Social Media management, and Web Analytics (now known as Insights) to ensure marketers deliver digital experiences that attract, engage, nurture, and convert their customers across all channels. Bridgeline’s Unbound platform combined with its digital services assists customers in maximizing on-line revenue, improving customer service and loyalty, enhancing employee knowledge, and reducing operational costs. The Bridgeline Unbound franchise product is a platform that empowers franchise and large dealer networks with state-of-the-art web engagement management while providing superior oversight of corporate branding. Bridgeline’s Unbound franchise product also deeply integrates content management, eCommerce, eMarketing and web analytics on one unified plaform.
The Bridgeline Unbound platform is delivered through a cloud-based SaaS (“Software as a Service”) multi-tenant business model, whose flexible architecture provides customers with state of the art deployment providing maintenance, daily technical operation and support; or via a traditional perpetual licensing business model, in which the software resides on a dedicated server in either the customer’s facility or by Bridgeline via cloud-based hosted services model.
The Bridgeline Unbound Platform is an award-winning application recognized around the globe. Our teams of Microsoft Gold© certified developers have won over 100 industry related awards. In 2017, our Marketing Automation platform was named a 2017 SIIA CODiE Award finalist in the Best Marketing Solution category. In 2016,
CIO Review
selected Bridgeline Unbound (formerly iAPPS) as one of the 20 Most Promising Digital Marketing Solution Providers. This followed accolades from the SIIA (Software and Information Industry Association) which recognized Content Manager with the 2015 SIIA CODiE Award for Best Web Content Management Platform. Also in 2015,
EContent
magazine named Bridgeline's Unbound Digital Engagement Platform to its Trendsetting Products list. The list of 75 products and platforms was compiled by EContent’s editorial staff, and selections were based on each offering’s uniqueness and importance to digital publishing, media, and marketing. We were also recognized in 2015 as a strong performer by Forrester Research, Inc in its independence report, “The Forrester Wave ™: Through-Channel Marketing Automation Platforms, Q3 2015.” In recent years, our Content Manager and Commerce products were selected as finalists for the 2014, 2013, and 2012 CODiE Awards for Best Content Management Solution and Best Electronic Commerce Solution, globally. In 2014 and 2013, Bridgeline Digital won twenty-five Horizon Interactive Awards for outstanding development of web applications and websites. Also in 2013, the Web Marketing Association sponsored Internet Advertising Competition honored Bridgeline Digital with three awards for iAPPS customer websites and B2B Magazine selected Bridgeline Digital as one of the Top Interactive Technology companies in the United States. KMWorld Magazine Editors selected Bridgeline Digital as one of the 100 Companies That Matter in Knowledge Management and also selected Bridgeline's Unbound (formerly iAPPS) as a Trend Setting Product in 2013.
Bridgeline Digital was incorporated under the laws of the State of Delaware on August 28, 2000.
Locations
The Company’s corporate office is located in Burlington, Massachusetts. 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 reduced the number of shares of the Company’s common stock outstanding as of March 31, 2017 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. Our consolidated financial statements have been retroactively adjusted to reflect the effects of the 1-for-5 reverse stock split.
Customer Information
We currently have over 3,000 active customers. For the three months ended March 31, 2018, two customers represented 19% and 14% of the Company’s total revenue, respectively, and for the six months ended March 31, 2018, two customers represented 15% and 12% of the Company’s total revenue, respectively. For the three months ended March 31, 2017, two customers represented 13% and 11% of the Company’s total revenue, respectively, and for the six months ended March 31, 2017, two customers represented 11% and 10% of the Company’s total revenue, respectively.
The Tax Cut and Jobs Act
The effects of the Tax Cuts and Jobs Act on our business have not yet been fully analyzed and could have an adverse effect on our net income.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. We are in the process of analyzing the Act and its possible effects on the Company. The Act reduces the corporate tax rate to 21 percent from 35 percent, among other things. It could also require us to write down our deferred tax assets.The reduction of the corporate tax rate will cause the Company to reduce its deferred tax assets to the lower federal base rate with resulting adjustments to the allowance against the deferred tax asset. The Company has not yet determined the impact the rate reduction will have on its gross deferred tax assets and liabilities and the offsetting valuation allowance. Historically, the Company has a full allowance against the deferred tax assets.
The changes included in the Tax Act are broad and complex. The final transition impacts of the Tax Act may differ from the above estimate, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the company has utilized to calculate the transition impact. The Securities Exchange Commission has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. We currently anticipate finalizing and recording any resulting adjustments by the end of our current fiscal year ending September 30, 2018.
Results of Operations for the Three
and Six
Months Ended
March
31, 201
8
compared to the Three
and Six
Months Ended
March
31, 201
7
Total revenue for the three months ended March 31, 2018 was $3.7 million compared with $4.0 million for the three months ended March 31, 2017. We had a net loss of ($680) thousand for the three months ended March 31, 2018 compared with net loss of ($529) thousand for the three months ended March 31, 2017. Net loss per share applicable to common shareholders was ($0.18) for the three months ended March 31, 2018 and ($0.14) for the three months ended March 31, 2017.
Total revenue for the six months ended March 31, 2018 was $7.7 million compared with $8.0 million for the six months ended March 31, 2017. We had a net loss of ($1.1) million for the six months ended March 31, 2018 compared with net loss of ($938) thousand for the six months ended March 31, 2017. Net loss per share applicable to common shareholders was ($0.30) for the six months ended March 31, 2018 and ($0.26) for the six months ended March 31, 2017.
Results of Operations
|
|
Three Months
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
$
|
|
|
%
|
|
|
March 31,
|
|
|
March 31,
|
|
|
$
|
|
|
%
|
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
|
Change
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
|
Change
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital enagement services
|
|
$
|
1,921
|
|
|
$
|
2,151
|
|
|
|
(230
|
)
|
|
|
(11
|
%)
|
|
$
|
3,981
|
|
|
$
|
4,177
|
|
|
|
(196
|
)
|
|
|
(5
|
%)
|
% of total net revenue
|
|
|
52
|
%
|
|
|
54
|
%
|
|
|
|
|
|
|
|
|
|
|
52
|
%
|
|
|
52
|
%
|
|
|
|
|
|
|
|
|
Subscription and perpetual licenses
|
|
|
1,499
|
|
|
|
1,582
|
|
|
|
(83
|
)
|
|
|
(5
|
%)
|
|
|
3,105
|
|
|
|
3,307
|
|
|
|
(202
|
)
|
|
|
(6
|
%)
|
% of total net revenue
|
|
|
40
|
%
|
|
|
40
|
%
|
|
|
|
|
|
|
|
|
|
|
40
|
%
|
|
|
41
|
%
|
|
|
|
|
|
|
|
|
Managed service hosting
|
|
|
293
|
|
|
|
261
|
|
|
|
32
|
|
|
|
12
|
%
|
|
|
596
|
|
|
|
501
|
|
|
|
95
|
|
|
|
19
|
%
|
% of total net revenue
|
|
|
8
|
%
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
8
|
%
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
3,713
|
|
|
$
|
3,994
|
|
|
$
|
(281
|
)
|
|
|
(7
|
%)
|
|
$
|
7,682
|
|
|
$
|
7,985
|
|
|
$
|
(303
|
)
|
|
|
(4
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital engagement costs
|
|
|
1,292
|
|
|
|
1,144
|
|
|
|
148
|
|
|
|
13
|
%
|
|
|
2,689
|
|
|
|
2,272
|
|
|
|
417
|
|
|
|
18
|
%
|
% of digital engagement services revenue
|
|
|
67
|
%
|
|
|
53
|
%
|
|
|
|
|
|
|
|
|
|
|
68
|
%
|
|
|
54
|
%
|
|
|
|
|
|
|
|
|
Subscription and perpetual licenses
|
|
|
513
|
|
|
|
499
|
|
|
|
14
|
|
|
|
3
|
%
|
|
|
993
|
|
|
|
995
|
|
|
|
(2
|
)
|
|
|
(0
|
%)
|
% of subscription and perpetual revenue
|
|
|
34
|
%
|
|
|
32
|
%
|
|
|
|
|
|
|
|
|
|
|
32
|
%
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
Managed service hosting
|
|
|
86
|
|
|
|
73
|
|
|
|
13
|
|
|
|
18
|
%
|
|
|
166
|
|
|
|
144
|
|
|
|
22
|
|
|
|
15
|
%
|
% of managed service hosting revenue
|
|
|
29
|
%
|
|
|
28
|
%
|
|
|
|
|
|
|
|
|
|
|
28
|
%
|
|
|
29
|
%
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
1,891
|
|
|
|
1,716
|
|
|
|
175
|
|
|
|
10
|
%
|
|
|
3,848
|
|
|
|
3,411
|
|
|
|
437
|
|
|
|
13
|
%
|
Gross profit
|
|
$
|
1,822
|
|
|
$
|
2,278
|
|
|
$
|
(456
|
)
|
|
|
(20
|
%)
|
|
$
|
3,834
|
|
|
$
|
4,574
|
|
|
$
|
(740
|
)
|
|
|
(16
|
%)
|
Gross profit margin
|
|
|
49
|
%
|
|
|
57
|
%
|
|
|
|
|
|
|
|
|
|
|
50
|
%
|
|
|
57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
950
|
|
|
|
1,174
|
|
|
|
(224
|
)
|
|
|
(19
|
%)
|
|
|
2,054
|
|
|
|
2,468
|
|
|
|
(414
|
)
|
|
|
(17
|
%)
|
% of total revenue
|
|
|
26
|
%
|
|
|
29
|
%
|
|
|
|
|
|
|
|
|
|
|
27
|
%
|
|
|
31
|
%
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
795
|
|
|
|
803
|
|
|
|
(8
|
)
|
|
|
(1
|
%)
|
|
|
1,531
|
|
|
|
1,594
|
|
|
|
(63
|
)
|
|
|
(4
|
%)
|
% of total revenue
|
|
|
21
|
%
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
20
|
%
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
408
|
|
|
|
422
|
|
|
|
(14
|
)
|
|
|
(3
|
%)
|
|
|
815
|
|
|
|
782
|
|
|
|
33
|
|
|
|
4
|
%
|
% of total revenue
|
|
|
11
|
%
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
11
|
%
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
104
|
|
|
|
157
|
|
|
|
(53
|
)
|
|
|
(34
|
%)
|
|
|
212
|
|
|
|
342
|
|
|
|
(130
|
)
|
|
|
(38
|
%)
|
% of total revenue
|
|
|
3
|
%
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
3
|
%
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
181
|
|
|
|
169
|
|
|
|
(12
|
)
|
|
|
7
|
%
|
|
|
181
|
|
|
|
200
|
|
|
|
(19
|
)
|
|
|
(10
|
%)
|
% of total revenue
|
|
|
5
|
%
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
2
|
%
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,438
|
|
|
|
2,725
|
|
|
|
(287
|
)
|
|
|
(11
|
%)
|
|
|
4,793
|
|
|
|
5,386
|
|
|
|
(593
|
)
|
|
|
(11
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(616
|
)
|
|
|
(447
|
)
|
|
|
(169
|
)
|
|
|
38
|
%
|
|
|
(959
|
)
|
|
|
(812
|
)
|
|
|
(147
|
)
|
|
|
18
|
%
|
Interest and other income (expense) net
|
|
|
(64
|
)
|
|
|
(82
|
)
|
|
|
(18
|
)
|
|
|
(22)
|
%
|
|
|
(150
|
)
|
|
|
(113
|
)
|
|
|
(37
|
)
|
|
|
33
|
%
|
Loss before income taxes
|
|
|
(680
|
)
|
|
|
(529
|
)
|
|
|
(151
|
)
|
|
|
29
|
%
|
|
|
(1,109
|
)
|
|
|
(925
|
)
|
|
|
(184
|
)
|
|
|
20
|
%
|
Provision for income taxes
|
|
|
-
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
(100
|
%)
|
|
|
1
|
|
|
|
13
|
|
|
|
(12
|
)
|
|
|
(92
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(680
|
)
|
|
$
|
(530
|
)
|
|
$
|
(150
|
)
|
|
|
28
|
%
|
|
$
|
(1,110
|
)
|
|
$
|
(938
|
)
|
|
$
|
(172
|
)
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Measure:
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(185
|
)
|
|
$
|
22
|
|
|
$
|
(207
|
)
|
|
|
(941
|
%
)
|
|
$
|
(279
|
)
|
|
$
|
32
|
|
|
$
|
(311
|
)
|
|
|
(972
|
%
)
|
Revenue
Our revenue is derived from three sources: (i) digital engagement services (ii) subscription and perpetual licenses and (iii) managed service hosting.
Digital Engagement
Services
Digital engagement services revenue is comprised of implementation and retainer related services. In total, revenue from digital engagement services decreased $230 thousand, or 11%, for the three months ended March 31, 2018 compared to three months ended March 31, 2017 and decreased $196 thousand, or 5%, for the six months ended March 31, 2018 compared to the six months ended March 31, 2017. Digital engagement services revenue as a percentage of total revenue decreased to 52% from 54% for the three months ended March 31, 2018 and was 52% for both the six months ended March 31, 2018 and March 31, 2017. The decrease as a percentage of total revenue is attributable to the decreases in new engagements from new license sales for the three and six months ended March 31, 2018 compared to the prior period.
Subscription and Perpetual Licenses
Revenue from subscription and perpetual licenses decreased $83 thousand, or 5%, to $1.5 million for the three months ended March 31, 2018 compared to $1.6 million for the three months ended March 31, 2017 and decreased $202 thousand, or 6%, to $3.1 million for the six months ended March 31, 2018 compared to $3.3 million for the six months ended March 31, 2017. The decrease for the three months ended March 31, 2018 compared to the prior period is attributable to a decline in SaaS licenses and Perpetual licenses. Subscription and perpetual license revenue as a percentage of total revenue was 40% for both the three months ended March 31, 2018 and March 31, 2017 and decreased to 40% for the six months ended March 31, 2018 from 41% compared to the six months ended March 31, 2017. The decrease as a percentage of revenues is attributable to the decreases in new license sales.
Managed Service Hosting
Revenue from managed service hosting increased $32 thousand, or 12%, to $293 thousand for the three months ended March 31, 2018 compared to $261 thousand for the three months ended March 31, 2017 and increased $95 thousand, or 19%, to $596 thousand for the six months ended March 31, 2018 compared to $501 thousand for the six months ended March 31, 2017. The increase is due to new hosting contracts for perpetual licenses sold in the second half of fiscal 2017. Managed services revenue as a percentage of total revenue increased to 8% for the three months ended March 31, 2018 from 6% compared to the three months ended March 31, 2017 and increased to 8% for the six months ended March 31, 2018 from 7% compared to the six months ended March 31, 2017. The increase as a percentage of revenue is attributable to the increase in customer hosting contracts.
Costs of Revenue
Total cost of revenue increased $175 thousand, or 10%, to $1.9 million for the three months ended March 31, 2018 compared to $1.7 million for the three months ended March 31, 2017 and increased $437 thousand, or 13%, to $3.8 million for the six months ended March 31, 2018 compared to $3.4 million for the six months ended March 31, 2017. The gross profit margin declined to 49% for the three months ended March 31, 2018 compared to 57% for the three months ended March 31, 2017 and declined to 50% for the six months ended March 31, 2018 compared to 57% for the six months ended March 31, 2017. The decline in the gross profit margin for the three and months ended March 31, 2018 compared to the three and six months ended March 31, 2017 is attributable to a decrease in digital engagement services and lower margin services.
Cost of
Digital Engagement
Services
Cost of digital engagement services increased $148 thousand, or 13%, to $1.3 million for the three months ended March 31, 2018 compared to $1.1 million for the three months ended March 31, 2017 and increased $417 thousand, or 18%, to $2.7 million for the six months ended March 31, 2018 compared to $2.3 million for the six months ended March 31, 2017. The cost of digital engagement services as a percentage of digital engagement services revenue increased to 67% from 53% for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 and increased to 68% from 54% for the six months ended March 31, 2018 compared to the six months ended March 31, 2017. The increases are due to an increase in both internal costs and third party subcontractor that were incurred at a lower gross margin in order to complete a project for a strategic customer.
Cost of Subscription and Perpetual License
Cost of subscription and perpetual licenses increased $14 thousand, or 3%, to $513 thousand for the three months ended March 31, 2018 compared to $499 thousand for the three months ended March 31, 2017 and decreased $2 thousand to $993 thousand for the six months ended March 31, 2018 compared to $995 thousand for the six months ended March 31, 2017. The cost of subscription and perpetual licenses as a percentage of subscription and perpetual license revenue increased to 34% from 32% for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 and increased to 32% from 30% for the six months ended March 31, 2018 compared to the six months ended March 31, 2017. Costs to support SaaS licenses are primarily fixed costs.
Cost of Managed Service Hosting
Cost of managed service hosting increased $13 thousand, or 18%, to $86 thousand for the three months ended March 31, 2018 compared to $73 thousand for the three months ended March 31, 2017 and increased $22 thousand, or 15%, to $166 thousand for the six months ended March 31, 2018 compared to $144 thousand for the six months ended March 31, 2017. The cost of managed services as a percentage of managed services revenue increased to 29% from 28% for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 and decreased to 28% from 29% for the six months ended March 31, 2018 compared to the six months ended March 31, 2017. The costs to support our network operations center have primarily increased with our transition to a cloud-based model with Amazon Web Services, however this infrastructure does not require investment in capital equipment. We transitioned to Amazon Web Services during the second and third quarter of fiscal 2017.
Operating Expenses
Sales and Marketing Expenses
Sales and marketing expenses decreased $224 thousand, or 19%, to $950 thousand for the three months ended March 31, 2018 compared to $1.2 million for the three months ended March 31, 2017 and decreased $414 thousand, or 17%, to $2.1 million for the six months ended March 31, 2018 compared to $2.5 million for the six months ended March 31, 2017. Sales and marketing expenses represented 26% and 29% of total revenue for the three months ended March 31, 2018 and 2017, respectively, and 27% and 31% of total revenue for the six months ended March 31, 2018 and 2017, respectively. The decreases for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 is attributable to decreases in sales personnel and related compensation expenses. The decreases for the six months ended March 31, 2018 compared to the six months ended March 31, 2017 is attributable to decreases in sales personnel and related compensation expenses and marketing expenses.
Administrative Expenses
General and administrative expenses decreased $8 thousand, or 1%, to $795 thousand for the three months ended March 31, 2018 compared to $803 thousand for the three months ended March 31, 2017 and decreased $63 thousand, or 4%, to $1.5 million for the six months ended March 31, 2018 compared to $1.6 million for the six months ended March 31, 2017. General and administrative expenses represented 21% and 20% of total revenue for the three months ended March 31, 2018 and 2017, respectively, and 20% of total revenue for both the six months ended March 31, 2018 and 2017. The decreases for the three and six months ended March 31, 2018 compared to the three and six months ended March 31, 2017 is attributable to decreases in headcount and personnel expenses.
Research and Development
Research and development expense decreased $14 thousand, or 3%, to $408 thousand for the three months ended March 31, 2018 compared to $422 thousand for the three months ended March 31, 2017 and increased $33 thousand, or 4%, to $815 thousand for the six months ended March 31, 2018 compared to $782 thousand for the six months ended March 31, 2017. Research and development expenses represented 11% of total revenue for both the three months March 31, 2018 and 2017 and 11% and 10% of total revenue for the six months ended March 31, 2018 and 2017, respectively. The decrease in research and development expense for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 is due to a decrease in facilities costs. The increase in research and development expense for the six months ended March 31, 2018 compared to the six months ended March 31, 2017 is due to an increase in compensation expense.
Depreciation and Amortization
Depreciation and amortization expense decreased $53 thousand, or 34%, to $104 thousand for the three months ended March 31, 2018 compared to $157 thousand for the three months ended March 31, 2017 and decreased $130 thousand, or 38%, to $212 thousand for the six months ended March 31, 2018 compared to $342 thousand for the six months ended March 31, 2017. Depreciation and amortization has decreased due to asset retirements related to the termination of leases and closing offices, as well as reductions in capital expenditures. Depreciation and amortization represented 3% and 4% of revenue for the three months ended March 31, 2018 and 2017 and 3% and 4% of revenue for the six months ended March 31, 2018 and 2017.
Restructuring Expenses
Commencing in fiscal 2015, the Company’s management approved, committed to and initiated plans to restructure and further improve efficiencies by implementing cost reductions. As part of these restructuring initiatives, we recorded $181 thousand and $169 thousand for the three months ended March 31, 2018 and 2017, respectively, and $181 and $200 thousand for the six months ended March 31, 2018 and 2017, respectively. Included in the three and six months ended March 31, 2018, were costs to terminate and restructure our Burlington, Massachusetts corporate headquarters and costs to dispose of property and equipment at this location.
Net Loss
Loss from operations
The loss from operations was ($616) thousand for three months ended March 31, 2018 compared to a loss of ($447) thousand in the prior period. Operating expenses decreased $287 thousand to $2.4 million from $2.7 million, or 11%, for the three months ended March 31, 2018 compared to March 31, 2017 and decreased $593 thousand to $4.8 million from $5.4 million, or 11%, for the six months ended March 31, 2018 compared to March 31, 2017. We have made concerted efforts to decrease operating expenses in line with the decline in revenues.
Income Taxes
There was no provision for income tax recorded for the three months ended March 31, 2018. The provision for income tax expense was $1 thousand and $13 thousand for the six months ended March 31, 2018 and 2017, respectively. Income tax expense represents the estimated liability for state income taxes owed. We have net operating loss carryforwards and other deferred tax benefits that are available to offset future taxable income. However, due to the Tax Cuts and Jobs Act (the “Tax Act”), the deferred tax benefits may be diminished. For taxable years after December 31, 2017, the Tax Act reduces the federal corporate tax rate to 21 percent and as such will impact the Company’s fiscal 2018 tax calculations. The reduction of the corporate tax rate may cause the Company to reduce its deferred tax assets to the lower federal base rate with resulting adjustments to the allowance against the deferred tax asset. Historically, the Company has a full allowance against its deferred tax assets. The Securities Exchange Commission has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. We currently anticipate finalizing and recording any resulting adjustments by the end of our current fiscal year ending September 30, 2018.
Adjusted EBITDA
We also measure our performance based on a non-GAAP (“Generally Accepted Accounting Principles”) measurement of earnings before interest, taxes, depreciation, and amortization and before stock-based compensation expense and impairment of goodwill and intangible assets (“Adjusted EBITDA”).
We believe this non-GAAP financial measure of Adjusted EBITDA is useful to management and investors in evaluating our operating performance for the periods presented and provide a tool for evaluating our ongoing operations.
Adjusted EBITDA, however, is not a measure of operating performance under GAAP and should not be considered as an alternative or substitute for GAAP profitability measures such as (i) income from operations and net income, or (ii) cash flows from operating, investing and financing activities, both as determined in accordance with GAAP. Adjusted EBITDA as an operating performance measure has material limitations since it excludes the financial statement impact of income taxes, net interest expense, amortization of intangibles, depreciation, restructuring charges, other amortization and stock-based compensation, and therefore does not represent an accurate measure of profitability. As a result, Adjusted EBITDA should be evaluated in conjunction with net income for a complete analysis of our profitability, as net income includes the financial statement impact of these items and is the most directly comparable GAAP operating performance measure to Adjusted EBITDA. Our definition of Adjusted EBITDA may also differ from and therefore may not be comparable with similarly titled measures used by other companies, thereby limiting its usefulness as a comparative measure. Because of the limitations that Adjusted EBITDA has as an analytical tool, investors should not consider it in isolation, or as a substitute for analysis of our operating results as reported under GAAP.
The following table reconciles net loss (which is the most directly comparable GAAP operating performance measure) to EBITDA, and EBITDA to Adjusted EBITDA (in thousands):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net loss
|
|
$
|
(680
|
)
|
|
$
|
(530
|
)
|
|
$
|
(1,110
|
)
|
|
$
|
(938
|
)
|
Provision for income tax
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
|
|
13
|
|
Interest expense, net
|
|
|
75
|
|
|
|
34
|
|
|
|
161
|
|
|
|
65
|
|
Amortization of intangible assets
|
|
|
71
|
|
|
|
72
|
|
|
|
143
|
|
|
|
143
|
|
Depreciation
|
|
|
29
|
|
|
|
74
|
|
|
|
65
|
|
|
|
163
|
|
Restructuring charges
|
|
|
181
|
|
|
|
217
|
|
|
|
181
|
|
|
|
248
|
|
Other amortization
|
|
|
17
|
|
|
|
27
|
|
|
|
33
|
|
|
|
66
|
|
Stock based compensation
|
|
|
122
|
|
|
|
127
|
|
|
|
247
|
|
|
|
272
|
|
Adjusted EBITDA
|
|
$
|
(185
|
)
|
|
$
|
22
|
|
|
$
|
(279
|
)
|
|
$
|
32
|
|
Adjusted EBITDA for the three and six months ended March 31, 2018 decreased compared to the three and six months ended March 31, 2017. The decreases were due primarily to decreases in revenues.
Liquidity and Capital Resources
Cash Flows
Operating Activities
Cash used in operating activities was $429 thousand for the six months ended March 31, 2018 compared to cash used in operating activities of $155 thousand for the six months ended March 31, 2017. This increase in the use of cash compared to the prior period was primarily to the decrease in accounts receivable and increase in net loss.
Investing Activities
Cash used in investing activities was $13 thousand for the six months ended March 31, 2018 compared to $49 thousand for the six months ended March 31, 2017. We do not expect to expend significant dollars for computer equipment or to capitalize any software in the next twelve months.
Financing Activities
Cash provided by financing activities was $451 thousand for the six months ended March 31, 2018 compared to $871 thousand for the six months ended March 31, 2017. Cash provided by financing activities for the six months ended March 31, 2018 is primarily attributable to a new term loan for gross proceeds of $1.0 million with Montage Capital II, L.P, offset by net payments on the Heritage Line of Credit of $502.
Capital Resources and Liquidity Outlook
We have a borrowing facility (line of credit) with Heritage Bank of up to $2.5 million from which we can borrow, and this line is subject to financial covenants that must be met. We were not in compliance with the Adjusted EBITDA metric as of March 31, 2018, but we received a waiver. Based on the borrowing capacity of our outstanding accounts receivable balance as of March 31, 2018, we were able to borrow $500 thousand in April 2018 to fund current operations. We expect our accounts receivable balances to be adequate to cover the majority of the outstanding balance. We should not be required to pay down any significant portion of the outstanding line of credit unless we choose to do or we have unforeseen collection issues. Also, in the first quarter of fiscal 2018, we entered into a Loan and Security Agreement with Montage Capital II, L.P. (“Montage Loan”). The Montage Loan has a thirty-six (36) month term which expires on October 10, 2020. The Montage Loan 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. $1 million of borrowing was advanced on the date of closing. An additional $500 thousand of borrowing may be available at the Company’s option through May 31, 2018 subject to compliance and certain loan covenants. The Company has not yet determined if it will request the additional $500 thousand. The Montage Loan is subordinate to the Company’s senior debt facility with Heritage Bank of Commerce (“Heritage Bank”).
We believe that the cash balance as of March 31, 2018 of $756 thousand, as well as, collections from accounts receivable will be sufficient to meet the Company’s obligations for a minimum of twelve months from the financial statement issuance date. Our borrowing facility with Heritage Bank is subject to financial covenants that must be met. It is not certain that all or part of this line will be available to us in the future; and other sources of financing may not be available to us in a timely basis if at all, or on terms acceptable to us. If we fail to obtain acceptable funding when needed, we may not have sufficient resources to fund our normal operations, and this would have a material adverse effect on our business.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, financings or other relationships with unconsolidated entities or other persons, other than our operating leases and contingent acquisition payments.
We currently do not have any variable interest entities. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Therefore, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Commitments and Contingencies
As of March 31, 2018, we have no material commitments or contingencies.
Critical Accounting Policies
There have been no changes to our critical accounting policies and estimates described in the Annual Report on Form 10-K for the year ended September 30, 2017, filed with the Securities and Exchange Commission ("SEC") on December 21, 2017, that have had a material impact on our condensed consolidated financial statements and related notes.
See Note 2 to the Unaudited Condensed Consolidated Financial Statements pertaining to the new accounting standard for income tax reporting.