Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This section contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of a variety of factors and risks including the impact of the weakness in the U.S. and international economies on our business, our inability to manage our future growth effectively or profitably, fluctuations in our revenue and quarterly results, our license renewal rate, the impact of competition and our ability to maintain margins or market share, the limited market for our common stock, the ability to maintain our listing on the NASDAQ Capital Market, the volatility of the market price of our common stock, the ability to raise capital, the performance of our products, our ability to respond to rapidly evolving technology and customer requirements, our ability to protect our proprietary technology, the security of our software and response to cyber security risks, our ability to meet our financial obligations and commitments, our dependence on our management team and key personnel, our ability to hire and retain future key personnel,
our ability to maintain an effective system of internal controls, or our ability to respond to government regulations. These and other risks are more fully described herein and in our other filings with the Securities and Exchange Commission.
This section should be read in combination with the accompanying audited consolidated financial statements and related notes prepared in accordance with United States generally accepted accounting principles.
Overview
Bridgeline Digital, The Digital Engagement Company™, helps customers maximize the performance of their full digital experience from websites and intranets to eCommerce experiences. Bridgeline’s Unbound platform is a Digital Experience Platform that deeply integrates Web Content Management, eCommerce, Marketing Automation, Site Search, Authenticated Portals, Social Media Management, and Web Analytics with the goal of assisting marketers to deliver exceptional digital experiences that attract, engage, nurture and convert their customers across all channels. Bridgeline offers a core accelerator framework for rapidly implementing digital experiences on the Bridgeline Unbound Platform which provides customers with cost-effective solutions in addition to velocity to market.
Bridgeline’s Unbound platform combined with its professional services assists customers in digital business transformation, driving lead generation, increasing revenue, improving customer service and loyalty, enhancing employee knowledge, and reducing operational costs. The Bridgeline Unbound platform bridges the gaps between web content management, eCommerce, eMarketing, social and web analytics by providing all of these components in one unified and deeply integrated platform.
Our Unbound Franchise product empowers large franchises, healthcare networks, associations/chapters and other multi-unit organizations to manage a large hierarchy of digital properties at scale. The platform provides an easy-to-use administrative console that enables corporate marketing to provide consistency in branding and messaging while providing flexible publishing capabilities at the local-market level. The platform empowers brand networks to unify, manage, scale and optimize a hierarchy of web properties and marketing campaigns on a global, national and local level.
The Unbound platform is delivered through a cloud-based software as a service (“
SaaS
”) model, whose flexible architecture provides customers with state-of-the-art deployment providing maintenance, daily technical operation and support; or via a traditional perpetual licensing business model, in which the software resides on a dedicated infrastructure in either the customer’s facility or manage-hosted by Bridgeline via a cloud-based hosted services model.
Bridgeline Digital was incorporated under the laws of the State of Delaware on August 28, 2000.
Locations
The Company’s corporate office is located in Burlington, Massachusetts. The Company has three wholly-owned subsidiaries: Bridgeline Digital Pvt. Ltd. located in Bangalore, India, Bridgeline Digital Canada, Inc. located in Ontario, Canada, and Stantive Technologies Pty. Ltd. located in Australia.
Acquisitions
On February 13, 2019, the Company entered into an Asset Purchase Agreement with Seevolution Inc, a Delaware corporation, Celebros, Inc., a Delaware corporation, and Elisha Gilboa, an individual and shareholder of Seevolution, (the “Seevolution Asset Purchase Agreement”). The Seevolution Asset Purchase Agreement sets forth the terms and conditions pursuant to which the Company acquired certain assets in exchange for consideration paid consisting of (i) $400 thousand in cash at the time of the purchase, (ii) the payment of $100 thousand of additional cash to be paid out $10 thousand per month for ten months starting April 30, 2019 and (iii) 40,000 shares of Bridgeline Digital common stock. Costs to complete the transaction were approximately $18 thousand.
On March 13, 2019, the Company entered into an Asset Purchase Agreement with Stantive Technologies Group Inc., (“Stantive”) a corporation organized under the laws of Ontario, Canada to purchase substantially all of the assets of Stantive and assume certain liabilities. The Company also acquired all of the outstanding stock of Stantive Technologies Group, Pty, a company incorporated in Australia, which was a subsidiary of Stantive. The total purchase price for Stantive and its Australian subsidiary was $5.2 million in cash.
Customer Information
For the three months ended March 31, 2019, one customer represented 19% of the Company’s total revenue. For the six months ended March 31, 2019, two customers represented 15% and 19% of the Company’s total revenue. For the three months ended March 31, 2018, two customers represented 19% and 14% of the Company’s total revenue. For the six months ended March 31, 2018, two customers represented 15% and 12% of the Company’s total revenue.
Results of Operations for the Three
and Six
Months Ended
March 31, 2019
compared to the Three
and Six
Months Ended
March 31, 201
8
Total revenue for the three months ended March 31, 2019 was $2.2 million and $3.7 million for the three months ended March 31, 2018. We had a net loss of ($12.5) million for the three months ended March 31, 2019 and ($680) thousand for the three months ended March 31, 2018. Included in the net loss for the three months ended March 31, 2019 were one-time acquisition costs of $304 thousand and a warrant expense charge of $10.3 million, net related to the fair value allocation of Series C Preferred stock warrants. Net loss per share applicable to common shareholders was ($41.52) for the three months ended March 31, 2019 and ($8.95) for the three months ended March 31, 2018.
Total revenue for the six months ended March 31, 2019 was $4.6 million and $7.7 million for the six months ended March 31, 2018. We had a net loss of ($17.5) million for the six months ended March 31, 2019 and ($1.1) million for the six months ended March 31, 2018. Included in the net loss for the six months ended March 31, 2019 was a goodwill impairment of $3.7 million, one-time acquisition costs of $304 thousand, and a warrant expense charge of $10.3 million, net related to the fair value allocation of Series C Preferred stock warrants. Net loss per share applicable to common shareholders was ($67.36) for the six months ended March 31, 2019 and ($14.98) for the six months ended March 31, 2018. Total revenue from acquisitions was $295 thousand for the three and six months ended March 31, 2019.
|
|
Three Months
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
(in thousands)
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
$
|
|
|
%
|
|
|
March 31,
|
|
|
March 31,
|
|
|
$
|
|
|
%
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
Change
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
Change
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital engagement services
|
|
$
|
911
|
|
|
$
|
1,921
|
|
|
|
(1,010
|
)
|
|
|
(53
|
%)
|
|
$
|
1,984
|
|
|
$
|
3,981
|
|
|
|
(1,997
|
)
|
|
|
(50
|
%)
|
% of total net revenue
|
|
|
41
|
%
|
|
|
52
|
%
|
|
|
|
|
|
|
|
|
|
|
43
|
%
|
|
|
52
|
%
|
|
|
|
|
|
|
|
|
Subscription and perpetual licenses
|
|
|
1,044
|
|
|
|
1,499
|
|
|
|
(455
|
)
|
|
|
(30
|
%)
|
|
|
2,089
|
|
|
|
3,105
|
|
|
|
(1,016
|
)
|
|
|
(33
|
%)
|
% of total net revenue
|
|
|
48
|
%
|
|
|
40
|
%
|
|
|
|
|
|
|
|
|
|
|
46
|
%
|
|
|
40
|
%
|
|
|
|
|
|
|
|
|
Managed service hosting
|
|
|
241
|
|
|
|
293
|
|
|
|
(52
|
)
|
|
|
(18
|
%)
|
|
|
498
|
|
|
|
596
|
|
|
|
(98
|
)
|
|
|
(16
|
%)
|
% of total net revenue
|
|
|
11
|
%
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
11
|
%
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
2,196
|
|
|
$
|
3,713
|
|
|
$
|
(1,517
|
)
|
|
|
(41
|
%
)
|
|
$
|
4,571
|
|
|
$
|
7,682
|
|
|
$
|
(3,111
|
)
|
|
|
(41
|
%
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital engagement services
|
|
|
579
|
|
|
|
1,292
|
|
|
|
(713
|
)
|
|
|
(55
|
%)
|
|
|
1,434
|
|
|
|
2,689
|
|
|
|
(1,255
|
)
|
|
|
(47
|
%)
|
% of digital engagement services revenue
|
|
|
64
|
%
|
|
|
67
|
%
|
|
|
|
|
|
|
|
|
|
|
72
|
%
|
|
|
68
|
%
|
|
|
|
|
|
|
|
|
Subscription and perpetual licenses
|
|
|
753
|
|
|
|
513
|
|
|
|
240
|
|
|
|
47
|
%
|
|
|
1,176
|
|
|
|
993
|
|
|
|
183
|
|
|
|
18
|
%
|
% of subscription and perpetual revenue
|
|
|
72
|
%
|
|
|
34
|
%
|
|
|
|
|
|
|
|
|
|
|
56
|
%
|
|
|
32
|
%
|
|
|
|
|
|
|
|
|
Managed service hosting
|
|
|
75
|
|
|
|
86
|
|
|
|
(11
|
)
|
|
|
(13
|
%)
|
|
|
138
|
|
|
|
166
|
|
|
|
(28
|
)
|
|
|
(17
|
%)
|
% of managed service hosting revenue
|
|
|
31
|
%
|
|
|
29
|
%
|
|
|
|
|
|
|
|
|
|
|
28
|
%
|
|
|
28
|
%
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
1,407
|
|
|
|
1,891
|
|
|
|
(484
|
)
|
|
|
(26
|
%
)
|
|
|
2,748
|
|
|
|
3,848
|
|
|
|
(1,100
|
)
|
|
|
(29
|
%
)
|
Gross profit
|
|
$
|
789
|
|
|
$
|
1,822
|
|
|
$
|
(1,033
|
)
|
|
|
(57
|
%
)
|
|
$
|
1,823
|
|
|
$
|
3,834
|
|
|
$
|
(2,011
|
)
|
|
|
(52
|
%
)
|
Gross profit margin
|
|
|
36
|
%
|
|
|
49
|
%
|
|
|
|
|
|
|
|
|
|
|
40
|
%
|
|
|
50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
1,001
|
|
|
|
878
|
|
|
|
123
|
|
|
|
14
|
%
|
|
|
1,815
|
|
|
|
1,908
|
|
|
|
(93
|
)
|
|
|
(5
|
%)
|
% of total revenue
|
|
|
46
|
%
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
|
40
|
%
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
Support
|
|
|
144
|
|
|
|
72
|
|
|
|
72
|
|
|
|
100
|
%
|
|
|
235
|
|
|
|
146
|
|
|
|
89
|
|
|
|
61
|
%
|
% of total revenue
|
|
|
7
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
5
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
744
|
|
|
|
795
|
|
|
|
(51
|
)
|
|
|
(6
|
%)
|
|
|
1,431
|
|
|
|
1,531
|
|
|
|
(100
|
)
|
|
|
(7
|
%)
|
% of total revenue
|
|
|
34
|
%
|
|
|
21
|
%
|
|
|
|
|
|
|
|
|
|
|
31
|
%
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
489
|
|
|
|
408
|
|
|
|
81
|
|
|
|
20
|
%
|
|
|
907
|
|
|
|
815
|
|
|
|
92
|
|
|
|
11
|
%
|
% of total revenue
|
|
|
22
|
%
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
20
|
%
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
78
|
|
|
|
104
|
|
|
|
(26
|
)
|
|
|
(25
|
%)
|
|
|
104
|
|
|
|
212
|
|
|
|
(108
|
)
|
|
|
(51
|
%)
|
% of total revenue
|
|
|
4
|
%
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
2
|
%
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
Goodwill impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0
|
%
|
|
|
3,732
|
|
|
|
-
|
|
|
|
3,732
|
|
|
|
100
|
%
|
% of total revenue
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
82
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
Restructuring and acquisition related expenses
|
|
|
304
|
|
|
|
181
|
|
|
|
123
|
|
|
|
68
|
%
|
|
|
304
|
|
|
|
181
|
|
|
|
123
|
|
|
|
68
|
%
|
% of total revenue
|
|
|
14
|
%
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
7
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,760
|
|
|
|
2,438
|
|
|
|
322
|
|
|
|
13
|
%
|
|
|
8,528
|
|
|
|
4,793
|
|
|
|
3,735
|
|
|
|
78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,971
|
)
|
|
|
(616
|
)
|
|
|
(1,355
|
)
|
|
|
220
|
%
|
|
|
(6,705
|
)
|
|
|
(959
|
)
|
|
|
(5,746
|
)
|
|
|
599
|
%
|
Interest and other income (expense) net
|
|
|
(10,330
|
)
|
|
|
(64
|
)
|
|
|
(10,266
|
)
|
|
|
(16,041
|
%)
|
|
|
(10,547
|
)
|
|
|
(150
|
)
|
|
|
(10,397
|
)
|
|
|
6,931
|
%
|
Unamortized debt discount/loss on extinguishment of debt
|
|
|
(221
|
)
|
|
|
-
|
|
|
|
(221
|
)
|
|
|
(100
|
%)
|
|
|
(221
|
)
|
|
|
-
|
|
|
|
(221
|
)
|
|
|
(100
|
%)
|
Loss before income taxes
|
|
|
(12,522
|
)
|
|
|
(680
|
)
|
|
|
(11,842
|
)
|
|
|
1,741
|
%
|
|
|
(17,473
|
)
|
|
|
(1,109
|
)
|
|
|
(16,364
|
)
|
|
|
1,476
|
%
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0
|
%
|
|
|
4
|
|
|
|
1
|
|
|
|
3
|
|
|
|
300
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(12,522
|
)
|
|
$
|
(680
|
)
|
|
$
|
(11,842
|
)
|
|
|
1,741
|
%
|
|
$
|
(17,477
|
)
|
|
$
|
(1,110
|
)
|
|
$
|
(16,367
|
)
|
|
|
1,475
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Measure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(1,546
|
)
|
|
$
|
(185
|
)
|
|
$
|
(1,361
|
)
|
|
|
736
|
%
|
|
$
|
(2,412
|
)
|
|
$
|
(279
|
)
|
|
$
|
(2,133
|
)
|
|
|
765
|
%
|
Revenue
Our revenue is derived from three sources: (i) digital engagement services (ii) subscription and perpetual licenses and (iii) managed service hosting.
Digital Engagement
Services
Digital engagement services revenue is comprised of Bridgeline Unbound implementation and retainer related services. In total, revenue from digital engagement services decreased $1.0 million, or 53%, to $911 thousand for the three months ended March 31, 2019 compared to $1.9 million for the three months ended March 31, 2018 and decreased $2.0 million, or 50%, to $2.0 million for the six months ended March 31, 2019 compared to $4.0 million for the six months ended March 31, 2018. The decrease for the three and six months ended March 31, 2019 compared to the prior period is primarily due to a decrease in new service engagements. Digital engagement services revenue as a percentage of total revenue decreased to 41% from 52% for the three ended March 31, 2019 compared to the three months ended March 31, 2018 and decreased to 43% from 52% for the six months ended March 31, 2019 compared to the six months ended March 31, 2018. The decrease as a percentage of total revenue is attributable to overall decreases in revenues generated from service engagements. Digital engagement services revenue from acquisitions was $127 thousand for the three months ended March 31, 2019.
Subscription and Perpetual Licenses
Revenue from subscription and perpetual licenses decreased $455 thousand, or 30%, to $1.0 million for the three months ended March 31, 2019 compared to $1.5 million for the three ended March 31, 2018 and decreased $1.0 million, or 33%, to $2.1 million for the six months ended March 31, 2019 compared to $3.1 million for the six months ended March 31, 2018. The decrease for the three and six months ended March 31, 2019 compared to the prior period is primarily due to a decline in SaaS license revenue due to the loss of a large customer that we previously disclosed. Subscription and perpetual license revenue as a percentage of total revenue increased to 48% from 40% for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 and increased to 46% from 40% for the six months ended March 31, 2019 compared to the six months ended March 31, 2018. The increase as a percentage of total revenue is attributable to the overall decreases in digital engagement services revenue. Subscription and perpetual license revenue from acquisitions was $168 thousand for the three months ended March 31, 2019.
Managed Service Hosting
Revenue from managed service hosting decreased $52 thousand, or 18%, to $241 thousand for the three months ended March 31, 2019 compared to $293 thousand for the three months ended March 31, 2018 and decreased $98 thousand, or 16%, to $498 thousand for the six months ended March 31, 2019 compared to $596 thousand for the six months ended March 31, 2018. The decrease is due to customer attrition offset by new hosting contracts entered into the current fiscal year. Managed services revenue as a percentage of total revenue increased to 11% for the three and six months ended March 31, 2019 from 8% for the three and six months ended March 31, 2018. The increase as a percentage of revenue is attributable to the overall decreases in other revenue streams.
Costs of Revenue
Total cost of revenue decreased $484 thousand, or 26%, to $1.4 million for the three months ended March 31, 2019 compared to $1.9 million for the three months ended March 31, 2018 and decreased $1.1 million, or 29%, to $2.7 million for the six months ended March 31, 2019 compared to $3.8 million for the six months ended March 31, 2018. The gross profit margin declined to 36% for the three months ended March 31, 2019 compared to 49% for the three months ended March 31, 2018 and declined to 40% for the six months ended March 31, 2019 compared to 50% for the six months ended March 31, 2018. The decline in the gross profit margin for the three and six months ended March 31, 2019 compared to the three and six months ended March 31, 2018 is attributable to the decrease in digital engagement services revenue.
Cost of
Digital Engagement
Services
Cost of digital engagement services decreased $713 thousand, or 55%, to $579 thousand for the three months ended March 31, 2019 compared to $1.3 million for the three months ended March 31, 2018 and decreased $1.3 million, or 47%, to $1.4 million for the six months ended March 31, 2019 compared to $2.7 million for the six months ended March 31, 2018. The decrease is primarily due to a decrease in headcount. The cost of digital engagement services as a percentage of digital engagement services revenue decreased to 64% for the three months ended March 31, 2019 compared to 67% for the three months ended March 31, 2018 and increased to 72% for the six months ended March 31, 2019 compared to 68% for the six months ended March 31, 2018. The decrease as a percentage of revenue for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 is primarily due to the decrease in headcount. The decrease as a percentage of revenue for the six months ended March 31, 2019 as compared to the six months ended March 31, 2018 is primarily due to under-utilization of billable consultants due to the decrease in engagements.
Cost of Subscription and Perpetual License
Cost of subscription and perpetual licenses increased $240 thousand, or 47%, to $753 thousand for the three months ended March 31, 2019 compared to $513 thousand for the three months ended March 31, 2018 and increased $183 thousand, or 18%, to $1.2 million for the six months ended March 31, 2019 compared to $1.0 million for the six months ended March 31, 2018. The cost of subscription and perpetual licenses as a percentage of subscription and perpetual license revenue increased to 72% for the three months ended March 31, 2019 compared to 34% for the three months ended March 31, 2018 and increased to 56% for the six months ended March 31, 2019 compared to 32% for the six months ended March 31, 2018. The increases are attributable to fixed costs to operate our cloud-based hosting model with Amazon Web Services and variable internal support costs.
Cost of Managed Service Hosting
Cost of managed service hosting decreased $11 thousand, or 13%, to $75 thousand for the three months ended March 31, 2019 compared to $86 thousand for the three months ended March 31, 2018 and decreased $28 thousand, or 17%, to $138 thousand for the six months ended March 31, 2019 compared to $166 thousand for the six months ended March 31, 2018. The cost of managed services as a percentage of managed services revenue increased to 31% for the three months ended March 31, 2019 compared to 29% for the three months ended March 31, 2018 and remained constant at 28% for the six months ended March 31, 2019 and the six months ended March 31, 2018. While certain costs to operate our cloud-based model with Amazon Web Services are fixed, we were able to eliminate unnecessary variable costs.
Operating Expenses
Sales and Marketing Expenses
Sales and marketing expenses increased $123 thousand, or 14%, to $1.0 million for the three months ended March 31, 2019 compared to $878 million for the three months ended March 31, 2018 and decreased $93 thousand, or 5%, to $1.8 million for the six months ended March 31, 2019 compared to $1.9 million for the six months ended March 31, 2018. Sales and marketing expenses represented 46% and 24% of total revenue for the three months ended March 31, 2019 and 2018, respectively, and 40% and 25% of total revenue for the six months ended March 31, 2019 and March 31, 2018, respectively. The increase for the three and six months ended March 31, 2019 compared to the three and six months ended March 31, 2018 is attributable to the overall decrease in revenue and an increase in headcount from acquisitions.
Support
Support expenses increased $72 thousand, or 100%, to $144 thousand for the three months ended March 31, 2019 compared to $72 thousand for the three months ended March 31, 2018 and increased $89 thousand, or 61%, to $235 thousand for the six months ended March 31, 2019 compared to $146 thousand for the six months ended March 31, 2018. Support expenses represented 7% and 2% of total revenue for the three months ended March 31, 2019 and 2018, respectively, and 5% and 2% of total revenue for the six months ended March 31, 2019 and 2018, respectively. The increase in expenses for the three and six months ended March 31, 2019 as compared to the three and six months ended March 31, 2018 was due to increases in support headcount from acquisitions. The increases as a percentage of revenues for the three and six months ended March 31, 2019 as compared to the three and six months ended March 31, 2018 are attributable to the decreases in revenues.
General and
Administrative Expenses
General and administrative expenses decreased $51 thousand, or 6%, to $744 thousand for the three months ended March 31, 2019 compared to $795 thousand for the three months ended March 31, 2018 and decreased $100 thousand, or 7%, to $1.4 million for the six months ended March 31, 2019 compared to $1.5 million for the six months ended March 31, 2018. General and administrative expenses represented 34% and 21% of total revenue for the three months ended March 31, 2019 and 2018, respectively, and 31% and 20% of total revenue for the six months ended March 31, 2019 and 2018, respectively. The decrease in expense was due to decreases in headcount and personnel expenses.
Research and Development
Research and development expense increased $81 thousand, or 20%, to $489 thousand for the three months ended March 31, 2019 compared to $408 thousand for the three months ended March 31, 2018 and increased $92 thousand, or 11%, to $907 thousand for the six months ended March 31, 2019 compared to $815 thousand for the six months ended March 31, 2018. Research and development expenses represented 22% and 11% of total revenue for the three months ended March 31, 2019 and 2018, respectively, and 20% and 11% of total revenue for the six months ended March 31, 2019 and 2018, respectively. The increase in expenses for the three and six months ended March 31, 2019 compared to the three and six months ended March 31, 2018 is due to an increase in headcount from acquisitions. The increases as a percentage of revenues for the three and six months ended March 31, 2019 as compared to the three and six months ended March 31, 2018 are attributable to the decreases in revenues.
Depreciation and Amortization
Depreciation and amortization expense decreased $26 thousand, or 25%, to $78 thousand for the three months ended March 31, 2019 compared to $104 thousand for the three months ended March 31, 2018 and decreased $108 thousand, or 51%, to $104 thousand for the six months ended March 31, 2019 compared to $212 thousand for the six months ended March 31, 2018. Depreciation has decreased due to asset retirements related to the termination and closing of offices, as well as reductions in capital expenditures. Amortization has increased due to amortization of intangible assets resulting from the acquisitions. Amortization expense was $66 thousand for the three months ended March 31, 2019. Depreciation and amortization represented 4% and 3% of total revenue for the three months ended March 31, 2019 and 2018, respectively, and 2% and 3% of total revenue for the six months ended March 31, 2019 and 2018, respectively.
Goodwill Impairment
The Company performed an interim impairment test for the three months ended December 31, 2018, which resulted in an impairment charge of $3.7 million. An impairment charge is recognized for the amount by which the carrying amount exceeds the Company’s fair value. There was no impairment at March 31, 2019.
Restructuring and
Acquisition Related
Expenses
Restructuring and acquisition related expenses were $304 thousand for the three and six months ended March 31, 2019 compared to $181 thousand for the three and six months ended March 31, 2018. The increase is due to acquisition related expenses of $304 thousand related to the asset purchase of Stantive. Restructuring and acquisition related expenses represented 14% and 5% of total revenue for the three months ended March 31, 2019 and 2018, respectively, and 7% and 2% of total revenue for the six months ended March 31, 2019 and March 31 2018, respectively.
Net Loss
Loss from operations
The loss from operations was ($2.0) million for three months ended March 31, 2019 compared to a loss of ($616) thousand for the three months ended March 31, 2018 and ($6.7) million for the six months ended March 31, 2019 compared to a loss of ($959) thousand for the six months ended March 31, 2018. Operating expenses increased $322 thousand, or 13%, to $2.8 million for the three months ended March 31, 2019 compared to $2.4 million for the three months ended March 31, 2018. The increase is primarily due to acquisition related expenses of $304 thousand. Operating expenses increased $3.7 million, or 78%, to $8.5 million for the six months ended March 31, 2019 compared to $4.8 million for the six months ended March 31, 2018. The increase is due to acquisition related expenses of $304 thousand and a goodwill impairment charge of $3.7 million. Excluding the acquisition related expenses of $304 thousand and the goodwill impairment charge of $3.7 million, operating expenses decreased $301 thousand for the six months ended March 31, 2019. We do not expect to incur any significant additional acquisition related costs for the remainder of the fiscal year.
Income Taxes
The provision for income tax expense was $4 thousand and $1 thousand for the six months ended March 31, 2019 and 2018, respectively. There was no provision for income tax expense for the three months ended March 31, 2019 and 2018. Income tax expense represents the estimated liability for federal and state income taxes owed, including the alternative minimum tax. We have net operating loss carryforwards and other deferred tax benefits that are available to offset any potential taxable income.
Interest and other expense, net
We recorded a non-cash charge of $10.3 million for warrant expense, net related to the fair value allocation of the Series C Preferred stock warrants.
Adjusted EBITDA
We also measure our performance based on a non-GAAP (“Generally Accepted Accounting Principles”) measurement of earnings before interest, taxes, depreciation, and amortization and before stock-based compensation expense and impairment of goodwill and intangible assets (“Adjusted EBITDA”).
We believe this non-GAAP financial measure of Adjusted EBITDA is useful to management and investors in evaluating our operating performance for the periods presented and provide a tool for evaluating our ongoing operations.
Adjusted EBITDA, however, is not a measure of operating performance under GAAP and should not be considered as an alternative or substitute for GAAP profitability measures such as (i) income from operations and net income, or (ii) cash flows from operating, investing and financing activities, both as determined in accordance with GAAP. Adjusted EBITDA as an operating performance measure has material limitations since it excludes the financial statement impact of income taxes, net interest expense and loss on early extinguishment of debt, amortization of intangibles, depreciation, restructuring and acquisition related expenses, goodwill impairment, other amortization and stock-based compensation, and therefore does not represent an accurate measure of profitability. As a result, Adjusted EBITDA should be evaluated in conjunction with net income for a complete analysis of our profitability, as net income includes the financial statement impact of these items and is the most directly comparable GAAP operating performance measure to Adjusted EBITDA. Our definition of Adjusted EBITDA may also differ from and therefore may not be comparable with similarly titled measures used by other companies, thereby limiting its usefulness as a comparative measure. Because of the limitations that Adjusted EBITDA has as an analytical tool, investors should not consider it in isolation, or as a substitute for analysis of our operating results as reported under GAAP.
The following table reconciles net loss (which is the most directly comparable GAAP operating performance measure) to Adjusted EBITDA (in thousands):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Net loss
|
|
$
|
(12,522
|
)
|
|
$
|
(680
|
)
|
|
$
|
(17,477
|
)
|
|
$
|
(1,110
|
)
|
Provision for income tax
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
1
|
|
Interest and other expense, net
|
|
|
10,330
|
|
|
|
75
|
|
|
|
10,547
|
|
|
|
161
|
|
Loss on early extinguishment of debt
|
|
|
221
|
|
|
|
-
|
|
|
|
221
|
|
|
|
-
|
|
Amortization of intangible assets
|
|
|
62
|
|
|
|
71
|
|
|
|
66
|
|
|
|
143
|
|
Depreciation
|
|
|
14
|
|
|
|
29
|
|
|
|
34
|
|
|
|
65
|
|
Goodwill impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
3,732
|
|
|
|
-
|
|
Restructuring and acquisition related charges
|
|
|
304
|
|
|
|
181
|
|
|
|
304
|
|
|
|
181
|
|
Other amortization
|
|
|
7
|
|
|
|
17
|
|
|
|
22
|
|
|
|
33
|
|
Stock based compensation
|
|
|
38
|
|
|
|
122
|
|
|
|
135
|
|
|
|
247
|
|
Adjusted EBITDA
|
|
$
|
(1,546
|
)
|
|
$
|
(185
|
)
|
|
$
|
(2,412
|
)
|
|
$
|
(279
|
)
|
Adjusted EBITDA decreased year over year and is primarily attributable to a decrease in revenues.
Liquidity and Capital Resources
Cash Flows
Operating Activities
Cash used in operating activities was $2.5 million for the six months ended March 31, 2019 compared to cash used in operating activities of $429 thousand for the six months ended March 31, 2018. The increase in the use of cash compared to the prior period was primarily due to an increase in accounts receivable and deferred revenue.
Investing Activities
Cash used in investing activities was $5.6 million for the six months ended March 31, 2019 compared to $13 thousand for the six months ended March 31, 2018. We primarily used cash to acquire the assets of Stantive and Seevolution. Expenditures for property and equipment during the current fiscal year will not be material.
Financing Activities
Cash provided by financing activities was $9.2 million for the six months ended March 31, 2019 compared to $451 thousand for the six months ended March 31, 2018. Cash provided by financing activities for the six months ended March 31, 2019 is attributable to the public offering in October 2018, whereby we sold an aggregate of (i) 28,480 Class A Units (the “
Class A Units
”) at a price of $25.00 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 $25.00 and (ii) Preferred stock of 4,288 Class B Units, with each Class B Unit, convertible into 40 shares of the Company’s common stock at a conversion price of $25.00. The net proceeds to the Company after deducting the underwriter’s fees and expenses was approximately $4.4 million. The proceeds of the October public offering were used to paydown the Promissory Term Notes of $941 thousand. In a private offering in March 2019, the Company sold Preferred stock of 10,227.50 Class C Units, with each Class C Unit convertible into 1,136,390 shares of the Company’s common stock at a conversion price of $9.00, for net proceeds of $8.9 million. The proceeds of the March private offering were used to pay down the Heritage Bank of Commerce line of credit by $2.2 million leaving a zero balance at March 31, 2019, as well as, the loan due to Montage Capital in the amount of $922 thousand. The proceeds also funded the asset purchase of Stantive.
Capital Resources and Liquidity Outlook
In the second quarter of this current fiscal year, we concluded a private offering that raised a net $8.9 million in cash. We used these proceeds to pay down our Heritage Bank of Commerce line of credit to zero and pay our outstanding loan to Montage Capital II, L.P in full, so we have zero debt at March 31, 2019. Also, in this quarter we used cash to purchase the assets of Seevolution, Inc and Stantive Technologies Group Inc., which assets included technology and customers. We believe the future revenues and cash flows from these newly acquired customers combined with our existing accounts and cash balance of $1.6 million as of March 31, 2019 will be sufficient to meet the Company’s obligations for a minimum of twelve months from the financial statement issuance date. Our borrowing facility with Heritage Bank of Commerce is subject to financial covenants that must be met. It is not certain that all or part of this line will be available to us in the future; and other sources of financing may not be available to us in a timely basis if at all, or on terms acceptable to us. If we fail to obtain acceptable funding when needed, we may not have sufficient resources to fund our normal operations, and this would have a material adverse effect on our business.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, financings or other relationships with unconsolidated entities or other persons, other than our operating leases and contingent acquisition payments.
We currently do not have any variable interest entities. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Therefore, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Commitments and Contingencies
As of March 31, 2019, we have no material commitments or contingencies.
Critical Accounting Policies
These critical accounting policies and estimates by our management were prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and should be read in conjunction with Note 2
Summary of
Significant Accounting Policies
to the Consolidated Financial Statements of our Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 28, 2018.
The preparation of financial statements in accordance US GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period. We regularly make estimates and assumptions that affect the reported amounts of assets and liabilities. The most significant estimates included in our financial statements are the valuation of accounts receivable and long-term assets, including intangibles, goodwill and deferred tax assets, stock-based compensation, amounts of revenue to be recognized on service contracts in progress, unbilled receivables, and deferred revenue. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected.
We consider the following accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment:
|
●
|
Revenue recognition;
|
|
|
|
|
●
|
Allowance for doubtful accounts;
|
|
|
●
|
Accounting for cost of computer software to be sold, leased or otherwise marketed;
|
|
|
●
|
Accounting for goodwill and other intangible assets; and
|
|
|
●
|
Accounting for stock-based compensation.
|
Revenue Recognition
The Company derives its revenue from three sources: (i) Software Licenses, which are comprised of subscription fees ("SaaS"), perpetual software licenses, and maintenance for post-customer support (“PCS”) on perpetual licenses, (ii) Digital Engagement Services, which are professional services to implement our products such as web development, digital strategy, information architecture and usability engineering, search and (iii) hosting of perpetual licenses. Customers who license the software on a subscription basis, which can be described as “Software as a Service” or “SaaS” do not take possession of the software.
Revenue is recognized when control of these services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. If the consideration promised in a contract includes a variable amount, for example, overage fees, contingent fees or service level penalties, the Company includes an estimate of the amount it expects to receive for the total transaction price if it is probable that a significant reversal of cumulative revenue recognized will not occur. The Company’s subscription service arrangements are non-cancelable and do not contain refund-type provisions. Revenue is reported net of applicable sales and use tax.
The Company recognizes revenue from contracts with customers using a five-step model, which is described below:
|
•
|
Identify the customer contract;
|
|
•
|
Identify performance obligations that are distinct;
|
|
•
|
Determine the transaction price;
|
|
•
|
Allocate the transaction price to the distinct performance obligations; and
|
|
•
|
Recognize revenue as the performance obligations are satisfied.
|
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts which represents estimated losses resulting from the inability, failure or refusal of our clients to make required payments.
We analyze historical percentages of uncollectible accounts and changes in payment history when evaluating the adequacy of the allowance for doubtful accounts. We use an internal collection effort, which may include our sales and services groups as we deem appropriate. Although we believe that our allowances are adequate, if the financial condition of our clients deteriorates, resulting in an impairment of their ability to make payments, or if we underestimate the allowances required, additional allowances may be necessary, resulting in increased expense in the period in which such determination is made.
Accounting for Cost of Computer Software to be Sold, Leased or Otherwise Marketed
We charge research and development expenditures for technology development to operations as incurred. However, in accordance with Codification 985-20
Costs of Software to be Sold Leased or Otherwise Marketed
, we capitalize certain software development costs subsequent to the establishment of technological feasibility. Based on our product development process, technological feasibility is established upon completion of a working model. Certain costs incurred between completion of a working model and the point at which the product is ready for general release is capitalized if significant. Once the product is available for general release, the capitalized costs are amortized in cost of sales.
Accounting for Goodwill and Intangible Assets
Goodwill is tested for impairment annually during the fourth quarter of every year and more frequently if events and circumstances indicate that the asset might be impaired. 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.
Factors that could lead to a future impairment include material uncertainties such as operational, economic and competitive factors specific to the key assumptions underlying the fair value estimate we use in our impairment testing that have reasonable possibility of changing. This could include a significant reduction in projected revenues, a deterioration of projected financial performance, future acquisitions and/or mergers, and a decline in our market value as a result of a significant decline in our stock price.
Accounting for Stock-Based Compensation
At March 31, 2019, we maintained two stock-based compensation plans, one of which has expired but still contains vested and unvested stock options and are more fully described in Note 12 to the Consolidated Financial Statements of our Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 28, 2018.
The Company accounts for stock-based compensation awards in accordance with ASC 718
Compensation-Stock
Topic of the Codification. Share-based payments (to the extent they are compensatory) are recognized in our Consolidated Statements of Operations based on their fair values.
We recognize stock-based compensation expense for share-based payments issued or assumed after October 1, 2006 that are expected to vest on a straight-line basis over the service period of the award, which is generally three years. We recognize the fair value of the unvested portion of share-based payments granted prior to October 1, 2006 over the remaining service period, net of estimated forfeitures. In determining whether an award is expected to vest, we use an estimated, forward-looking forfeiture rate based upon our historical forfeiture rate and reduce the expense over the recognition period. Estimated forfeiture rates are updated for actual forfeitures quarterly. We also consider, each quarter, whether there have been any significant changes in facts and circumstances that would affect our forfeiture rate. Although we estimate forfeitures based on historical experience, actual forfeitures in the future may differ. In addition, to the extent our actual forfeitures are different than our estimates, we record a true-up for the difference in the period that the awards vest, and such true-ups could materially affect our operating results.
We estimate the fair value of employee stock options using the Black-Scholes-Merton option valuation model. The fair value of an award is affected by our stock price on the date of grant as well as other assumptions including the estimated volatility of our stock price over the term of the awards and the estimated period of time that we expect employees to hold their stock options. The risk-free interest rate assumption we use is based upon United States treasury interest rates appropriate for the expected life of the awards. We use the historical volatility of our publicly traded options in order to estimate future stock price trends. In order to determine the estimated period of time that we expect employees to hold their stock options, we use historical trends of employee turnovers. Our expected dividend rate is zero since we do not currently pay cash dividends on our common stock and do not anticipate doing so in the foreseeable future. The aforementioned inputs entered into the option valuation model we use to fair value our stock awards are subjective estimates and changes to these estimates will cause the fair value of our stock awards and related stock-based compensation expense we record to vary.
We record deferred tax assets for stock-based awards that result in deductions on our income tax returns, based on the amount of stock-based compensation recognized and the statutory tax rate in the jurisdiction in which we will receive a tax deduction.