The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
1. Description of Business
Overview
Bridgeline Digital, The Digital Engagement Company™, helps customers with their digital experience from websites and intranets to eCommerce experiences. The Bridgeline Unbound platform is delivered through a cloud-based SaaS (“Software as a Service”) multi-tenant business model, providing maintenance, daily technical operation and support; or via a traditional perpetual licensing business model, in which the software resides on a dedicated server in either the customer’s facility or hosted by Bridgeline via a cloud-based hosted services model.
The Company was incorporated under the laws of the State of Delaware on August 28, 2000.
Locations
The Company’s corporate office is located in Burlington, Massachusetts. The Company has one wholly-owned subsidiary, Bridgeline Digital Pvt. Ltd. located in Bangalore, India.
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 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. During the past two fiscal years and continuing into the current fiscal year, the Company has executed a restructuring plan that included a reduction of workforce and office space, which significantly reduced operating expenses.
The Company has a Loan and Security Agreement with Heritage Bank of Commerce (“Heritage Bank” or “Heritage”). The Heritage Bank Loan and Security Agreement (“Heritage Agreement”) has a current maturity date of January 1, 2020. 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, 2018, the Company had an outstanding balance under the Heritage Agreement of $2.1 million and there was no additional borrowing capacity at September 30, 2018.
In October 2018, the Company raised gross proceeds of $5.0 million in a public offering. The net proceeds to the Company from the public offering, after deducting the Underwriter’s fees and expenses, the Company’s offering expenses and the repayment of promissory term notes were approximately $3.4 million.
Revenues have decreased in fiscal 2018 compared to fiscal 2017. The Company has made significant cost reductions over the past few years, but these reductions may not be enough to compensate for further declines in revenue in future periods. While there can be no assurances that the anticipated sales will be achieved for future periods to provide positive cash flows, the Company’s management believes it will have an appropriate cost structure to support the revenues that will be achieved. As such, management believes that it is probable that we will meet our working capital, capital expenditure and debt repayment needs for the next twelve months from the financial statement date of issuance.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
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 U.S. GAAP (“Generally Accepted Accounting Principles”) 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.
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.
The Company’s cash is maintained with what management believes to be a high-credit quality financial institution. At times, deposits held at this bank may exceed the federally insured limits. Management believes that the financial institutions that hold the Company’s deposits are financially sound and have minimal credit risk. Risks associated with cash and cash equivalents are mitigated by the Company’s investment policy, which limits the Company’s investing of excess cash into only money market mutual funds.
Concentration of Credit Risk, Significant Customers, and Off-Balance Sheet Risk
Financial instruments, which potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents, and accounts receivable.
The Company extends credit to customers on an unsecured basis in the normal course of business. Management performs ongoing credit evaluations of its customers’ financial condition and limits the amount of credit when deemed necessary. Accounts receivable are carried at original invoice less an estimate for doubtful accounts based on a review of all outstanding amounts.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
The Company has no off-balance sheets risks such as foreign exchange contracts, interest rate swaps, option contracts or other foreign hedging agreements.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. For all customers, the Company recognizes allowances for doubtful accounts based on the length of time that the receivables are past due, current business environment and its historical experience. If the financial condition of the Company’s customers were to deteriorate, resulting in impairment of their ability to make payments, additional allowances may be required.
Revenue Recognition
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.
Through fiscal 2018, the Company recorded revenues for software related deliverables in accordance with the guidance provided by ASC 985-605,
Software-Revenue Recognition
and revenues for non-software deliverables in accordance with
ASC 605-25
, Revenue Recognition, Multiple-Element Arrangements.
Under those standards, 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.
The Company maintains a reseller channel to supplement our direct sales force for our Bridgeline Unbound 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.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
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 provided 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 provided. 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.
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 provided. 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”).
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
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.
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.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
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.
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
Costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable that the expenditures will result in additional functionality. Capitalized costs are recorded as part of equipment and improvements. Training costs are expensed as incurred. Internal use software is amortized on a straight-line basis over its estimated useful life, generally three years.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Research and Development and Software Development Costs
Costs for research and development of a software product to sell, lease or otherwise market are charged to operations as incurred until technological feasibility has been established. Once technological feasibility has been established, certain software development costs incurred during the application development stage are eligible for capitalization. Based on the Company’s software product development process, technological feasibility is established upon completion of a working model.
Software development costs that are capitalized and are amortized to cost of sales over the estimated useful life of the software, typically three years. Capitalization ceases when a product is available for general release to customers. Capitalization costs are included in other assets in the consolidated financial statements. The Company capitalized $15 and $46 of costs in fiscal 2018 and fiscal 2017, respectively.
Intangible Assets
All intangible assets have finite lives and are stated at cost, net of amortization. Amortization is computed over the estimated useful life of the related assets on a straight-line method as follows:
Description
|
|
Estimated Useful Life (in years)
|
|
Developed and core technology
|
|
|
3
|
|
|
Non-compete agreements
|
|
3
|
-
|
6
|
|
Customer relationships
|
|
5
|
-
|
6
|
|
Trademarks and trade names
|
|
1
|
-
|
10
|
|
Goodwill
The Company elected to early adopt Accounting Standards Update ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”) during fiscal 2018. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the impairment loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Goodwill is assessed at the consolidated level as one reporting unit.
Valuation of Long-Lived Assets
The Company periodically reviews its long-lived assets, which consist primarily of property and equipment and intangible assets with finite lives, for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may exceed their fair value. Recoverability of these assets is assessed using a number of factors including operating results, business plans, budgets, economic projections and undiscounted cash flows.
In addition, the Company’s evaluation considers non-financial data such as market trends, product development cycles and changes in management’s market emphasis. For the definite-lived intangible asset impairment review, the carrying value of the intangible assets is compared against the estimated undiscounted cash flows to be generated over the remaining life of the intangible assets. To the extent that the undiscounted future cash flows are less than the carrying value, the fair value of the asset is determined 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 2018 or 2017.
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.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Fair Value of Financial Instruments
The carrying amount of the Company’s financial instruments, which consist principally of cash and cash equivalents, accounts receivable, accounts payable, and debt approximated their fair values at September 30, 2018 and 2017. The Company believes the recorded values for accounts receivable and accounts payable approximate current fair values as of September 30, 2018 and September 30, 2017 because of their short-term nature and durations. The carrying value of debt instruments also approximates fair value as of September 30, 2018 and 2017 based on available market information and the Company’s ability to borrow comparable debt instruments, as well as renew current debt instruments under similar terms.
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 (losses) and gains for fiscal 2018 and 2017 were $(1) and $3, respectively. Transaction gains and losses related to monetary assets and liabilities denominated in a currency different from a subsidiary’s functional currency are included in the consolidated statements of operations.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Segment Information
The Company has one reportable segment.
Stock-Based Compensation
The Company accounts for stock-based compensation in the consolidated statements of operations based on their fair values of the awards on the date of grant on a straight-line basis over their vesting term. Compensation expense is recognized only for share-based payments expected to vest. The Company estimates forfeitures at the date of grant based on the Company’s historical experience and future expectations.
Valuation of Stock Options and Warrants Issued to Non-Employees
The Company measures expense for non-employee stock-based compensation and the estimated fair value of options exchanged in business combinations and warrants issued for services using the fair value method for services received or the equity instruments issued, whichever is more readily measured. The Company 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 $465 and $528 for fiscal 2018 and 2017, 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 2018 or fiscal 2017.
Income Taxes
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act made broad and complex changes to the U.S. tax code that affected the Company’s fiscal year ended September 30, 2018, including, but not limited to, reducing the U.S. federal corporate tax rate. For taxable years beginning after December 31, 2017, the Tax Act reduces the federal corporate tax rate to 21 percent and as such impacted the Company’s fiscal 2018 tax calculations. For the twelve months ended September 30, 2018, the U.S. federal statutory rate is a blended rate based upon the number of days in fiscal 2018 that the Company was taxed at the former rate of 34 percent and the number of days that it was taxed at the new rate of 21 percent. The reduction of the corporate tax rate caused the Company to revalue its deferred tax assets to the lower federal rate and correspondingly adjust the valuation allowance against the deferred tax assets by the same amount.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the Company’s financial statements and tax returns. Deferred income taxes are recognized based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the temporary differences are expected to reverse. Valuation allowances are provided if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The Company provides for reserves for potential payments of taxes to various tax authorities related to uncertain tax positions. Reserves are based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings or positions is “more likely than not” to be realized following resolution of any uncertainty related to the tax benefit, assuming that the matter in question will be raised by the tax authorities. Interest and penalties associated with uncertain tax positions are included in the provision for income taxes.
The Company does not provide for U.S. income taxes on the undistributed earnings of its Indian subsidiary, which the Company considers to be permanent investments.
Net Los
s
Per Share
Basic net loss per share is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding. Diluted net income per share 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 2018 and 2017, all outstanding options to purchase shares of the Company’s common stock totaling 457,846 and 450,646 respectively, were considered as anti-dilutive. Warrants to purchase shares of the Company’s common stock totaling 546,151 and 539,593 for fiscal 2018 and fiscal 2017, respectively, were also excluded due to their anti-dilutive nature. Also excluded are the Series A Convertible Preferred Stock shares.
Accounting Pronouncements Pending Adoption
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09 or ASC 606), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. 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. ASU 2014-09 is effective for the Company in the first quarter of the year ended September 30, 2019 (“fiscal 2019”), including interim periods within that year. Companies may adopt ASU 2014-09 using either the retrospective method, under which each prior reporting period is presented under ASU 2014-09, with the option to elect certain permitted practical expedients, or the modified retrospective method, under which a company adopts ASU 2014-09 from the beginning of the year of initial application with no restatement of comparative periods, with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of initial application as an adjustment to retained earnings, with certain additional required disclosures. The Company is adopting the standard using the modified retrospective method and the balance sheet impact based on the modified retrospective method at the date of adoption will be immaterial.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
The Company has completed its assessment of all potential impacts of the new standard, and has determined that the impact will not be material due to the fact that a majority of the Company’s license business is primarily Software-as-a-Service (SaaS) term-based software licenses bundled with maintenance and support. Under current U.S. GAAP revenue guidance, the revenue attributable to SaaS software licenses is recognized ratably over the term of the arrangement because VSOE does not exist for the undelivered maintenance and support element as it is not sold separately. To apply the new revenue standard, a company must first determine whether a contract includes a promise of a license of intellectual property. A separate promise of a license exists when (1) the customer has the contractual right to take possession of the software at any time without significant penalty and (2) the customer can run the software on its own hardware or contract with another party unrelated to the vendor to host of the software. Neither of these criteria are met with our current SaaS licensing arrangements, therefore, revenue recognition will continue to be recognized over the expected life of the customer contract or period of service. Revenue recognition related to our professional services is expected to remain substantially unchanged, as the majority of professional services contracts are time and materials on an as-delivered basis.
Capitalized costs to acquire a contract and costs to fulfill a contract
Under ASC 606, direct and incremental costs to acquire a contract are capitalized and amortized using a systematic basis over the pattern of transfer of the goods and services to which the asset relates. Capitalized costs such as sales commissions related to new non-cancelable SaaS subscription licenses, annual support contracts, and annual and multi-year hosting contracts will be amortized on a straight-line basis over the expected life of the customer contract or period of service. Currently, the Company expenses sales commissions in the period incurred and does not amortize the expense.
Costs associated with fulfilling a contract, such as the internal labor hours to set up a perpetual license that we host or a SaaS license in our cloud environment will also be capitalized under ASC 606. Capitalized costs related to perpetual licenses that we host and the SaaS licenses that we set up in our cloud environment will be amortized on a straight-line basis over the expected life of the customer contract or period of service.
The Company evaluated both qualitative and quantitative factors, including the estimated life cycles of its offerings, renewal rates, and its customer attrition to determine the amortization periods for the capitalized costs. The initial amortization period will generally be the customer contract term, which is typically thirty-six (36) months, with some exceptions. The Company expects that the balance sheet impact based on the modified retrospective method at the date of adoption will be immaterial.
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.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
In July 2017, the FASB issued ASU No. 2017-11, which simplifies the accounting for certain financial instruments with down round features. This new standard will reduce income statement volatility for many companies that issue warrants and convertible instruments containing such features. ASU 2017-11 is effective for public companies in 2019 and all other entities in 2020. Management is currently evaluating the impact of the new guidance on its consolidated financial statements.
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, specifically 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 its consolidated cash flows.
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 cash flows.
Recently Issued Accounting Pronouncements
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.
Fair Value
In August 2018, the FASB issued ASU 2018-13, which is guidance that changes the fair value measurement disclosure requirements of ASC 820. This guidance is will be effective for all entities for fiscal years beginning after December 15, 2019, including interim periods therein. Early adoption is permitted for any eliminated or modified disclosures upon issuance of this ASU. The Company is evaluating the impact the update will have on its disclosures.
All other Accounting Standards Updates issued but not yet effective are not expected to have a material effect on the Company’s future financial statements.
3. Accounts Receivable and Unbilled Receivables
Accounts receivable and unbilled receivables consists of the following:
|
|
As of September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Accounts receivable
|
|
$
|
1,866
|
|
|
$
|
3,174
|
|
Unbilled receivables
|
|
|
36
|
|
|
|
41
|
|
Subtotal
|
|
|
1,902
|
|
|
|
3,215
|
|
Allowance for doubtful accounts
|
|
|
(181
|
)
|
|
|
(189
|
)
|
Accounts receivable and unbilled receivables, net
|
|
$
|
1,721
|
|
|
$
|
3,026
|
|
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
As of September 30, 2018, two customers represented approximately 19% and 12% of accounts receivable. As of September 30, 2017, two customers represented approximately 23% and 14% of accounts receivable. Unbilled receivables represent amounts recognized as revenue for which invoices have not yet been sent.
4.
Property and
e
quipment
Property and equipment consists of the following:
|
|
As of September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Furniture and fixtures
|
|
$
|
233
|
|
|
$
|
212
|
|
Purchased software
|
|
|
18
|
|
|
|
14
|
|
Property and equipment
|
|
|
56
|
|
|
|
46
|
|
Leasehold improvements
|
|
|
412
|
|
|
|
872
|
|
Total cost
|
|
|
719
|
|
|
|
1,144
|
|
Less accumulated depreciation
|
|
|
(639
|
)
|
|
|
(935
|
)
|
Property and equipment, net
|
|
$
|
80
|
|
|
$
|
209
|
|
Depreciation and amortization on the above assets was $105 and $256 in fiscal 2018 and 2017, 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.
5
.
Fair Value Measurement and Fair Value of Financial Instruments
The Company measures its financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. Additionally, companies are required to provide disclosure and categorize assets and liabilities measured at fair value into one of three different levels depending on the assumptions (i.e., inputs) used in the valuation. Level 1 provides the most reliable measure of fair value while Level 3 generally requires significant management judgment. Financial assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. The fair value hierarchy is defined as follows:
Level 1—Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2—Valuations are based on quoted prices for similar assets or liabilities in active markets, or quoted prices in markets that are not active for which significant inputs are observable, either directly or indirectly.
Level 3—Valuations are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Inputs reflect management’s best estimate of what market participants would use in valuing the asset or liability at the measurement date.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
The Company believes the carrying values for accounts receivable and accounts payable and short-term debt approximate current fair values as of September 30, 2018 and 2017 because of their short-term nature and durations. The carrying value of long term debt also approximates fair value as of September 30, 2018 and 2017 based upon the Company’s ability to acquire similar debt at similar maturities and renew current debt instruments under similar terms as the original debt.
In October 2017, the Company recorded a liability associated with a warrant to purchase common stock issued to Montage Capital II, L.P. ("Montage Capital"). The fair value of the warrant liability will utilize a Level 3 input. To determine the value of the warrant liability, the Company used a Monte Carlo option-pricing model, which takes into consideration the market values of comparable public companies, considering among other factors, the use of multiples of earnings, and adjusted to reflect the restrictions on the ability of our shares to trade in an active market. The Monte Carlo option-valuation model also uses certain assumptions to determine the fair value, including expected life and annual volatility. The initial valuation assumptions included an expected life of eight (8) years, annual volatility of 80%, and a risk-free interest rate of 2.24%. At September 30, 2018, annual volatility decreased to 75%, the risk-free rate was 3.01% and the Company’s stock price declined to $0.98 per share.
The fair value of the warrant liability was valued at the loan execution date in the amount of $341 and is revalued at the end of each reporting period to fair value. The fair value of the warrant is included in Other long-term liabilities in the Consolidated Balance Sheet. Changes in fair value are included in interest expense in the Statement of Operations in the period the change occurs. In total, the Company has recorded a change in fair value of ($161) since the original valuation in October 2017. The fair value of the warrant at September 30, 2018 is $180.
The Company did not have any assets and liabilities to be measured at fair value on a recurring basis as of September 30, 2017. The assets and liabilities to be measured at fair value on a recurring basis as of September 30, 2018 consisted only of warrant liabilities, as follows:
|
|
As of September 30, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
180
|
|
|
$
|
180
|
|
Total Liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
180
|
|
|
$
|
180
|
|
6. Goodwill
The carrying value of goodwill is not amortized, but is typically tested for impairment annually as of September 30, as well as, whenever events or changes in circumstances indicate that the carrying amount of a reporting unit may not be recoverable. The purpose of an impairment test is to identify any potential impairment by comparing the carrying value of a reporting unit including goodwill to its fair value. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.
An interim test was performed at June 30, 2018 and an annual test was performed at September 30, 2018, as a decline in the stock price and other negative qualitative factors led management to conclude that there was a potential impairment. The fair value was calculated at June 30, 2018 and September 30, 2018 using the Company’s market price which is classified as Level 3 within the fair value hierarchy under U.S. GAAP. In performing the interim impairment test at June 30, 2018, Management concluded that goodwill was impaired and recorded a charge of $4.6 million. The annual impairment test at September 30, 2018 resulted in further impairment of $243. This amount is reflected as a reduction in goodwill of $4.9 million in the Company’s Consolidated Balance Sheet as of September 30, 2018 with the offset as an expense in the Company’s Consolidated Statement of Operations.
Changes in the carrying value of goodwill are as follows:
|
|
As of September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Balance at beginning of period
|
|
$
|
12,641
|
|
|
$
|
12,641
|
|
Impairment
|
|
|
(4,859
|
)
|
|
|
-
|
|
Balance at end of period
|
|
$
|
7,782
|
|
|
$
|
12,641
|
|
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
7
. Intangible Assets
Intangible assets are comprised as follows:
|
|
As of September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Domain and trade names
|
|
$
|
10
|
|
|
$
|
10
|
|
Customer related
|
|
|
-
|
|
|
|
179
|
|
Non-compete agreements
|
|
|
10
|
|
|
|
74
|
|
Balance at end of period
|
|
$
|
20
|
|
|
$
|
263
|
|
Total amortization expense of $242 and $285 related to intangible assets for the years ended September 30, 2018 and 2017, respectively, is reflected in the Consolidated Statements of Operations in depreciation and amortization
.
The estimated amortization expense for fiscal years 2019 and 2020 is: $10 for both periods.
8
. Accrued Liabilities
Accrued liabilities consist of the following:
|
|
As of September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Accrued taxes
|
|
|
39
|
|
|
|
41
|
|
Compensation and benefits
|
|
|
151
|
|
|
|
244
|
|
Deferred rent (1)
|
|
|
-
|
|
|
|
154
|
|
Professional fees
|
|
|
151
|
|
|
|
161
|
|
Restructuring expenses
|
|
|
53
|
|
|
|
119
|
|
Other
|
|
|
186
|
|
|
|
201
|
|
Total
|
|
$
|
580
|
|
|
$
|
920
|
|
(1) The deferred rent liability was amortized as a reduction of rent expense over the lives of the leases. As of September 30, 2018, there is no deferred rent liability due to the restructuring and termination of certain 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.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
9
. Debt
The Company’s debt as of September 30, 2018, consisted of the Line of Credit from Heritage Bank of Commerce, a term loan with Montage Capital, and Promissory Term Notes. As of September 30, 2017, the Company’s debt consisted of only the Line of Credit from Heritage Bank of Commerce.
|
|
As of September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Line of credit borrowings
|
|
$
|
2,081
|
|
|
$
|
2,500
|
|
Term loan - Montage Capital
|
|
|
922
|
|
|
$
|
-
|
|
Promissory Term Notes
|
|
|
941
|
|
|
|
-
|
|
Subtotal debt
|
|
$
|
3,944
|
|
|
$
|
2,500
|
|
Other (debt discount warrants)
|
|
$
|
(353
|
)
|
|
$
|
-
|
|
Total debt
|
|
$
|
3,591
|
|
|
$
|
2,500
|
|
Less current portion
|
|
$
|
1,017
|
|
|
$
|
-
|
|
Long term debt, net of current portion
|
|
$
|
2,574
|
|
|
$
|
2,500
|
|
Heritage Line of Credit
In June 2016, the Company entered into a new Loan and Security Agreement with Heritage Bank. The Heritage Agreement had an original a term of 24 months but was further amended in December 2018 to a maturity date of January 1, 2020. The Company paid an annual commitment fee of 0.4% of the commitment amount in the first year and 0.2% in the following years. The facility fee will be $6 on each anniversary thereafter. Borrowings are secured by all of the Company’s assets and all of the Company’s intellectual property. The Company is required to comply with certain financial and reporting covenants including an Asset Coverage Ratio and an Adjusted EBITDA metric. The Company was in compliance with all financial covenants as of September 30, 2018.
The Heritage Agreement provides for up to $2.5 million of revolving credit advances which may be used for acquisitions and working capital purposes. Borrowings are limited to the lesser of (i) $2.5 million and (ii) 75% of eligible receivables as defined. The Company can borrow up to $1.0 million in out of formula borrowings for specified periods of time. The borrowings or credit advances may not exceed the monthly borrowing base capacity, which will fluctuate based on monthly accounts receivable balances. The Company may request credit advances if the borrowing capacity is more than the current outstanding loan advance, and must pay down the outstanding loan advance if it exceeds the borrowing capacity. Borrowings accrue interest at Wall Street Journal Prime Rate plus 1.75%, (7% and 6% at September 30, 2018 and 2017, respectively). As of September 30, 2018 and 2017, the Company had an outstanding balance under the Heritage Agreement of $2.1 million and $2.5 million, respectively.
Michael Taglich, a director and Shareholder of the Company, 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.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Amendments
– Heritage Bank
The Company and Heritage have executed numerous amendments since the origination of the Heritage Agreement. Those amendments that are relevant as of September 30, 2018 are the following:
The first amendment, executed on August 15, 2016, included a decrease in the revolving line of credit from $3.0 million to $2.5 million. The second amendment, executed on December 14, 2016, included a minimum cash requirement of $250 in the Company’s accounts at Heritage. On October 6, 2017, a fourth amendment was executed, which included a consent to the Company’s incurrence of additional indebtedness from Montage Capital and the grant of a second position lien to Montage Capital. In addition, Heritage and Montage Capital entered into an Intercreditor Agreement dated October 10, 2017, and acknowledged by the Company.
On September 21, 2018, the ninth amendment was executed and addressed the minimum unrestricted cash requirements for the Company’s accounts at the Bank upon repayment of Subordinated Debt incurred by the Company pursuant to certain Promissory Term Notes issued by the Company on September 7, 2018 in the principal amount of $941.
On December 27, 2018, the tenth amendment was executed, which extended the maturity date of the Loan Agreement to January 1, 2020, as well as, set new financial covenants for fiscal 2019.
Montage Capital II, L.P. Loan Agreement
On October 10, 2017, the Company entered into a Loan and Security Agreement (the “Montage Agreement" or the "Loan”) with Montage Capital. The Montage Agreement has a thirty-six (36) month term which matures on October 10, 2020. The Montage Agreement provided for up to $1.5 million of borrowing in the form of a non-revolving term loan which may be used by the Company for working capital purposes. $1 million of borrowing was advanced on the date of closing. Borrowings bear interest at the rate of 12.75% per annum. The Company paid a fee of $47 to Montage Capital at closing. Interest only payments are due and payable during the first nine months of the Loan. On July 1, 2018, the Company commenced payment of principal payments of $26 per month plus accrued interest. All remaining principal and interest shall be due and payable at maturity. Borrowings are secured by a second position lien on all of the Company’s assets including intellectual property and general intangibles and is subordinate to the Company’s senior debt facility with Heritage Bank. Pursuant to the Montage Agreement, the Company is also required to comply with certain financial covenants.
On May 10, 2018, the first amendment to the Montage Agreement (“First Amendment”) was executed. The First Amendment included the Adjusted EBITDA metrics for the third quarter of fiscal 2018 and a waiver for not achieving the Adjusted EBITDA metrics for the quarter ended March 31, 2018. A Second Amendment to the Montage Agreement (the “Second Amendment”) was executed on October 22, 2018. The Second Amendment included modifications to financial covenants and addressed the minimum unrestricted cash requirements for the Company’s accounts at the Bank upon repayment of Subordinated Debt incurred by the Company pursuant to the Promissory Term Notes issued by the Company on September 7, 2018 in the principal amount of $941. The Company was in compliance with all financial covenants as of September 30, 2018.
As additional consideration for the Loan, the Company issued to Montage Capital an eight-year warrant (the “
Montage Warrant
”) to purchase 66,315 shares of the Company’s common stock at a price equal to $2.65 per share. The Montage Warrant contains an equity buy-out provision upon the earlier of (1) dissolution or liquidation of the Company, (2) any sale or distribution of all or substantially all of the assets of the Company or (3) a “Change in Control” as defined within the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934. Montage Capital shall have the right to receive an equity buy-out of $250. If the equity buy-out is exercised, the Montage Warrant will be surrendered to the Company for cancellation.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Promissory
Term Notes
On September 7, 2018, the Company sold and issued subordinate promissory notes (the “
Promissory Term Notes
”) to certain accredited investors (each, a “Purchaser”), pursuant to which it issued to the Purchasers (i) Promissory Term Notes, in the aggregate principal amount of approximately $941. The Promissory Term Notes have an original issue discount of fifteen percent (15%), bear interest at a rate of twelve percent (12%) per annum, and have a maturity date of the earlier to occur of (a) six months from the date of execution of the Purchase Agreement, or (b) the consummation of a debt or equity financing resulting in the gross proceeds to the Company of at least $3.0 million. After recording $141 of original issue discount and debt issuance costs of $40, the Company received net cash proceeds in the aggregate amount of $760 for the Promissory Term Notes. The original issue discount and debt issuance costs are recorded as a contra liability and will be amortized over the life of the Promissory Term Notes. On October 19, 2018, the Company completed an equity financing resulting in gross proceeds of $5.0 million and repaid the Promissory Term Notes, including accrued interest of $13, for a total of $954 on October 23, 2018.
The Company’s lenders, Heritage Bank and Montage Capital, approved the issuance of the Promissory Term Notes and the repayment terms and each Purchaser also entered into a Subordination Agreement with the lenders, pursuant to which the Purchasers agreed to subordinate (i) all of the Company’s indebtedness and obligations to the Purchasers, whether presently existing or arising in the future, to all of the Company’s indebtedness the Lenders and (ii) all of the Purchasers’ security interests, if any, to all of the Lenders’ security interests in property of the Company.
10
.
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 spaces are currently contractually occupied by new sub-tenants for the remaining life of the lease. In the second quarter of fiscal 2017, the Company initiated a plan to shut down its operations in India, which is targeted to be completed in early fiscal 2019. All of these estimates and assumptions will be monitored on a quarterly basis for changes in circumstances with the corresponding adjustments reflected in the consolidated statement of operations.
In total, a charge of $187 and $286 was recorded to restructuring expenses for fiscal 2018 and fiscal 2017, respectively.
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 beginning of period, October 1, 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
|
|
Charges to operations
|
|
|
-
|
|
|
|
142
|
|
|
|
142
|
|
Cash disbursements
|
|
|
-
|
|
|
|
(226
|
)
|
|
|
(226
|
)
|
Changes in estimates
|
|
|
-
|
|
|
|
(19
|
)
|
|
|
(19
|
)
|
Accretion Expense
|
|
|
-
|
|
|
|
5
|
|
|
|
5
|
|
Balance at end of period, September 30, 2018
|
|
$
|
-
|
|
|
$
|
78
|
|
|
$
|
78
|
|
As of September 30, 2018, $25 is reflected in Accrued Liabilities and $53 is reflected in Other long term liabilities.
As of September 30, 2017, $119 is reflected in Accrued Liabilities and $57 is reflected in Other long term liabilities.
Accrued restructuring liabilities is comprised of the following:
|
|
As of September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Facilities and related
|
|
$
|
77
|
|
|
$
|
133
|
|
Other
|
|
|
1
|
|
|
|
43
|
|
Total
|
|
$
|
78
|
|
|
$
|
176
|
|
1
1
. Commitments and Contingencies
Operating Lease Commitments
The Company leases facilities in the United States. Future minimum rental commitments under non-cancelable operating leases with initial or remaining terms in excess of one year at September 30, 2018 were as follows:
Years Ending September 30,
|
|
Gross Amount
|
|
|
Sublease Income
Amount
|
|
|
Net
|
|
2019
|
|
$
|
267
|
|
|
$
|
(108
|
)
|
|
$
|
159
|
|
2020
|
|
|
129
|
|
|
|
(73
|
)
|
|
|
56
|
|
Total
|
|
$
|
396
|
|
|
$
|
(181
|
)
|
|
$
|
215
|
|
The Company has no lease commitments that extend past fiscal 2020. Rent expense for fiscal 2018 and 2017 was $368 and $686, respectively, inclusive of sublease income $119 and $45 for fiscal 2018 and 2017, respectively.
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.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
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, 2018.
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, 2018 and 2017, 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 claims incidental to its business. As of September 30, 2018, The Company was not engaged in any material legal proceedings.
1
2
. Stock
holders
’
Equity
Preferred Stock
In October 2014, the Company designated 264,000 shares of its Preferred stock (the “Preferred Stock”) as Series A convertible preferred stock and sold 200,000 shares of Series A convertible preferred stock at a purchase price of $10.00 per share for gross proceeds of $2.0 million in a private placement. The shares of Preferred Stock may be converted, at the option of the holder at any time, into such number of shares of common stock (“Conversion Shares”) equal (i) to the number of shares of Preferred Stock to be converted, multiplied by the stated value of $10.00 (the “Stated Value”) and (ii) divided by the conversion price in effect at the time of conversion. The current conversion price is $16.25, and is subject to adjustment in the event of stock splits or stock dividends. As of September 30, 2018, a total of 1,636 preferred shares have been converted to 1,007 shares of common stock.
Any accrued but unpaid dividends on the shares of Preferred Stock to be converted shall also be converted in common stock at the conversion price. A mandatory provision also may provide that the Company will have the right to require the holders to convert shares of Preferred Stock into Conversion Shares if (i) the Company’s common stock has closed at or above $32.50 per share for ten consecutive trading days and (ii) the Conversion Shares are (A) registered for resale on an effective registration statement or (B) may be resold pursuant to Rule 144.
In the event of any liquidation, dissolution, or winding up of the Company, the holders of shares of Preferred Stock will be entitled to receive in preference to the holders of common stock, the amount equal to the stated value per share of Series A Preferred Stock plus declared and unpaid dividends, if any. After such payment has been made, the remaining assets of the Company will be distributed ratably to the holders of common stock. The Preferred Shares shall vote with the Common Stock on an as converted basis.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Effective January 1, 2017, cumulative dividends are payable at a rate of 12% per year. The Company has issued 64,000 shares of Preferred Stock as PIK dividends to the preferred shareholders, which is the maximum amount of cumulative PIK dividends authorized. Therefore, all future dividend payments will be cash dividends. Preferred shares representing the remaining available PIK dividend shares of 18,828 were issued in fiscal 2018. Total cash dividend payments in fiscal 2018 was $195. The cash dividend declared in September 2018 and payable on October 1, 2018 was $79.
Common
S
tock
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.
In November 2016, the Company entered into Securities Purchase Agreements (“November 2016 Private Placement”) with certain institutional and accredited investors to sell an aggregate total of 427,073 shares of common stock for $2.40 per share for gross proceeds of $1.0 million. The Company’s President and CEO (Roger Kahn) and one of the Company’s directors (Michael Taglich) purchased shares of common stock in this private offering. Roger Kahn purchased 17,200 common shares and Michael Taglich purchased 30,770 common shares. Also, as additional consideration, the Company issued warrants to purchase an aggregate total of 213,538 shares common stock.
In 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 expensed over the service period.
In 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.
In February 2018, the Company issued 41,006 shares of restricted common stock at $2.39 to four 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, 2018. The aggregate fair value of the shares is $98 and was expensed over the service period.
Registration Rights and Piggyback Registration
The Company entered into a Registration Rights Agreement, wherein the Company agreed to file a registration statement (“Registration” or “Form S-3”) to register the common shares and 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 common shares and 174,167 warrant shares were registered with the Form S-3 filing.
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 220,380 shares of common stock are outstanding under the Plan as of September 2018. 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 237,466 options outstanding under this plan as of September 30, 2018. As of September 30, 2018, there are 262,534 shares available for future issuance under the 2016 Plan.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
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, October 1, 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
|
|
Granted
|
|
|
19,900
|
|
|
$
|
2.47
|
|
|
|
72,315
|
|
|
$
|
4.09
|
|
Forfeited or expired
|
|
|
(12,700
|
)
|
|
$
|
6.74
|
|
|
|
(65,757
|
)
|
|
$
|
31.25
|
|
Outstanding, September 30, 2018
|
|
|
457,846
|
|
|
$
|
6.83
|
|
|
|
546,151
|
|
|
$
|
6.16
|
|
There were no options exercised during fiscal 2018 and 2017. There were 319,267 and 194,977 options vested and exercisable as of September 30, 2018 and September 30, 2017, respectively. The shares outstanding at September 30, 2018 and 2017 had an intrinsic value of $0 and $4, respectively.
A summary of the status of unvested shares is as follows:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Unvested at October 1, 2017
|
|
|
255,669
|
|
|
$
|
3.04
|
|
Granted
|
|
|
19,900
|
|
|
|
1.73
|
|
Vested
|
|
|
(129,409
|
)
|
|
|
3.21
|
|
Forfeited
|
|
|
(7,581
|
)
|
|
|
2.60
|
|
Unvested at September 30, 2018
|
|
|
138,579
|
|
|
$
|
2.72
|
|
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
Price ranges of outstanding and exercisable options as of September 30, 2018 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
|
|
$2.30
|
to
|
$3.65
|
|
|
44,300
|
|
|
|
7.59
|
|
|
$
|
2.91
|
|
|
|
8,733
|
|
|
$
|
3.27
|
|
$3.66
|
to
|
$6.05
|
|
|
355,078
|
|
|
|
7.73
|
|
|
|
4.40
|
|
|
|
252,066
|
|
|
|
4.49
|
|
$6.06
|
to
|
$15.00
|
|
|
14,453
|
|
|
|
5.58
|
|
|
|
13.62
|
|
|
|
14,453
|
|
|
|
13.62
|
|
$15.01
|
to
|
$41.00
|
|
|
44,015
|
|
|
|
3.38
|
|
|
|
28.11
|
|
|
|
44,015
|
|
|
|
28.11
|
|
|
|
|
|
|
457,846
|
|
|
|
7.23
|
|
|
$
|
6.83
|
|
|
|
319,267
|
|
|
$
|
8.12
|
|
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,
|
|
|
|
2018
|
|
|
2017
|
|
Expected option life in years
|
|
|
|
6.0
|
|
|
|
|
6.0
|
|
Expected volatility
|
|
|
|
80.52
|
%
|
|
|
|
85.03
|
%
|
Expected dividend rate
|
|
|
|
0.00
|
%
|
|
|
|
0.00
|
%
|
Risk free interest rate
|
|
|
|
2.50
|
%
|
|
|
|
1.95
|
%
|
Option exercise prices
|
|
$2.30
|
to
|
$41.00
|
|
|
$2.22
|
to
|
$41.00
|
|
Weighted average fair value of options granted during the year
|
|
|
|
$2.47
|
|
|
|
|
$2.27
|
|
Compensation expense is generally recognized on a graded accelerated basis over the vesting period of grants. During the years ended September 30, 2018 and 2017, the Company recognized $394 and $418, respectively, as compensation expense related to share based payments related to stock options. 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 2018, $16 was charged to Cost of Goods Sold and $378 was charged to Operating Expenses. In fiscal 2017, $18 was charged to Cost of Goods Sold and $400 was charged to Operating Expenses. As of September 30, 2018, the Company had approximately $266 of unrecognized compensation costs related to unvested options which the Company expects to recognize through fiscal 2021.
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 September 30, 2018 are as follows:
|
|
Issue
|
|
|
|
|
|
|
|
|
|
Type
|
|
Date
|
|
Shares
|
|
|
Price
|
|
Expiration
|
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
|
|
12/31/2015
|
|
|
6,000
|
|
|
$
|
20.00
|
|
12/31/2020
|
Placement Agent
|
|
5/17/2016
|
|
|
86,778
|
|
|
$
|
3.75
|
|
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
|
Financing
|
|
10/10/2017
|
|
|
66,315
|
|
|
$
|
2.65
|
|
10/10/2025
|
Director/Shareholder
|
|
12/31/2017
|
|
|
6,000
|
|
|
$
|
20.00
|
|
12/31/2021
|
Total
|
|
|
546,151
|
|
|
|
|
|
|
Warrant Issuances
Issuances
|
|
Shares
|
|
|
Exercise Price
|
|
Investors
|
|
|
213,538
|
|
|
$
|
3.50
|
|
Director/Shareholder
|
|
|
6,000
|
|
|
$
|
20.00
|
|
Total issued in fiscal 2017
|
|
|
219,538
|
|
|
|
|
|
Financing
|
|
|
66,315
|
|
|
$
|
2.65
|
|
Director/Shareholder
|
|
|
6,000
|
|
|
$
|
20.00
|
|
Total issued in fiscal 2018
|
|
|
72,315
|
|
|
|
|
|
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
1
3
. Income Taxes
The components of the Company’s tax provision as of September 30, 2018 and 2017 is as follows:
|
|
Years Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
19
|
|
|
|
16
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
Total current
|
|
|
19
|
|
|
|
16
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(22
|
)
|
|
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Total deferred
|
|
|
(22
|
)
|
|
|
-
|
|
Total
|
|
$
|
(3
|
)
|
|
$
|
16
|
|
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,
|
|
|
|
2018
|
|
|
2017
|
|
Income tax benefit at the federal statutory rate of 21% and 34%, respectively
|
|
$
|
(1,497
|
)
|
|
$
|
(556
|
)
|
Permanent differences, net
|
|
|
1,534
|
|
|
|
365
|
|
State income tax (benefit)
|
|
|
(437
|
)
|
|
|
(86
|
)
|
Change in statutory rate
|
|
|
3,839
|
|
|
|
|
|
Change in valuation allowance attributable to operations
|
|
|
(3,495
|
)
|
|
|
193
|
|
Foreign Taxes
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
53
|
|
|
|
100
|
|
Total
|
|
$
|
(3
|
)
|
|
$
|
16
|
|
As of September 30, 2018, the Company has a federal net operating loss (NOL) carryforward of approximately $30 million that expires on various dates through 2038. 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 $26 million in state NOLs which expire on various dates through 2038.
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, with the exception of the alternative minimum tax (AMT) carryover recorded for the year ended September 30, 2018. Therefore, the portion of the deferred tax asset attributable to AMT carryover of $22 has not been subject to a valuation allowance. The Company has established a full valuation allowance against its deferred tax assets at September 30, 2017. For the year ended September 30, 2018, the valuation allowance for deferred tax assets decreased $3.5 million, which was mainly due to offsetting increases in the net operating losses and the effect of the change in the federal tax rate to 21%. For the year ended September 30, 2017, the valuation allowance for deferred tax assets increased $185, which was mainly due to 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.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
The Company is subject to U.S. federal income tax as well as income tax in certain state jurisdictions. The Company has not been audited by the Internal Revenue Service (IRS) or any states in connection with income taxes. The tax periods from 2015 to 2018 generally remain open to examination by the IRS and state authorities.
Significant components of the Company’s deferred tax assets and liabilities are as follows:
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|
As of September 30,
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|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Accrued vacation
|
|
$
|
26
|
|
|
$
|
83
|
|
Bad debt reserve
|
|
|
49
|
|
|
|
74
|
|
Deferred revenue
|
|
|
90
|
|
|
|
595
|
|
Long-term:
|
|
|
|
|
|
|
|
|
AMT carryforward
|
|
|
22
|
|
|
|
9
|
|
Contribution carryforward
|
|
|
15
|
|
|
|
29
|
|
Depreciation
|
|
|
36
|
|
|
|
118
|
|
Intangibles
|
|
|
437
|
|
|
|
774
|
|
Net operating loss carryforwards
|
|
|
7,515
|
|
|
|
9,981
|
|
Total deferred tax assets
|
|
|
8,190
|
|
|
|
11,663
|
|
Valuation allowance
|
|
|
(8,168
|
)
|
|
|
(11,663
|
)
|
Net deferred tax assets
|
|
$
|
22
|
|
|
$
|
-
|
|
Undistributed losses of the Company’s foreign subsidiary amounted to approximately ($59) and ($381) at September 30, 2018 and 2017, respectively. Upon repatriation of cash, 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, 2018, there are no withholding taxes as there have been no earnings.
When accounting 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, 2018 and 2017. The Company does not expect any change to this determination in the next twelve months.
1
4
.
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, the Series A Preferred stock sale in 2015, and Promissory Term Notes in 2018. As of September 30, 2018, 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 made by Michael Taglich to the Company and the personal guaranty for Heritage Bank, Mr. Taglich has been issued warrants to purchase common stock totaling 54,000 shares at an exercise price of $20.00 per share.
BRIDGELINE DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
In connection with the November 2016 Private Placement, the Company issued to the warrants to purchase an aggregate total of 213,538 shares common stock. Included were warrant shares issued to Roger Kahn (8,600 shares) and Michael Taglich (15,385 shares). Each 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.
In connection with previous private offerings and debt issuances, Taglich Brothers, Inc were granted Placement Agent warrants to purchase 212,298 shares of common stock at a weighted average price of $6.42 per share.
Michael Taglich participated in the Promissory Term Notes in September 2018. Michael Taglich purchased Promissory Term Notes in the amount of approximately $122. Taglich Brothers, Inc. served as placement agent for the above transaction, for which services the Company paid to Taglich Brothers, Inc. $40 in cash compensation, or five percent (5%) of the net proceeds received by the Company.
1
5
. Subsequent Event
s
P
ublic Offering
On October 16, 2018, the Company issued and sold in a public offering (the “
Offering
”) an aggregate of (i) 1,424,000 Class A Units (the “
Class A Units
”), at a price of $0.50 per Class A Unit, consisting of (i) one share of the Company’s common stock and one five-year warrant to purchase one share of Company common stock at an exercise price of $0.50 and (ii) 4,288 Class B Units, with each Class B Unit, convertible into shares of the Company's common stock at a conversion price of $0.50, and consisting of one share of the Company’s newly designated Series B Convertible Preferred Stock and an equivalent number of warrants to purchase shares of Company common stock as would have been issued to the purchaser if it had purchased Class A Units based on the per share offering price of the Class A Units, rather than the Class B Units. The net proceeds to the Company from the Offering, after deducting the underwriter’s fees and expenses, the Company’s Offering expenses and the repayment of the Promissory Term Notes were approximately $3.4 million.
In addition, the Company granted the underwriter of the Offering a 45-day option (the “
Over-allotment Option”)
to purchase up to an additional 1.5 million shares of common stock and/or additional warrants to purchase an additional 1.5 million shares of common stock. At the time of the Offering, the underwriter partially exercised the Over-allotment Option by electing to purchase from the Company additional warrants to purchase 400,000 shares of common stock.