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.
OrchestraCMS, delivered through a cloud-based SaaS, is the only content and digital experience platform built 100% native on Salesforce and helps customers create compelling digital experiences for their customers, partners, and employees; uniquely combining content with business data, processes and applications across any channel or device including Salesforce Communities, social media, portals, intranets, websites, applications and services.
Celebros Search, delivered through a cloud-based SaaS, is a commerce oriented, site search product that provides for Natural Language Processing with artificial intelligence to present very relevant search results based on long-tail keyword searches in seven languages.
Bridgeline Digital was incorporated under the laws of the State of Delaware on August 28, 2000.
Locations
The Company’s corporate office is located in Burlington, Massachusetts. The Company maintains regional field offices serving the following geographical locations: Boston, MA; Chicago, IL; New York, NY; and Ontario, Canada. 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.
Customer Information
For the three months ended December 31, 2019, one customer represented approximately 12% of the Company’s total revenue. For the three months ended December 31, 2018, two customers represented approximately 18% and 19% of the Company’s total revenue.
Results of Operations for the Three Months Ended December 31, 2019 compared to the Three Months Ended December 31, 2018
Total revenue for the three months ended December 31, 2019 was $2.8 million and $2.4 million for the three months ended December 31, 2018. We had net income of $136 thousand for the three months ended December 31, 2019 and a net loss of ($5.0) million for the three months ended December 31, 2018. Included in net income for the three months ended December 31, 2019 was a gain of $1.1 million as a result of the change in fair value of certain warrant liabilities. Included in the net loss for the three months ended December 31, 2018 was a goodwill impairment charge of $3.7 million. On December 31, 2019 the Company amended its Series A Convertible Preferred Stock resulting in a deemed dividend of $2.3 million charged against net income to arrive at net loss applicable to common shareholders for purposes of calculating earnings per share. Basic net loss per share attributable to common shareholders was ($0.81) for the three months ended December 31, 2019 and ($22.87) for the three months ended December 31, 2018.
(in thousands)
|
|
Three Months Ended
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
Change
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital engagement services
|
|
$
|
1,096
|
|
|
$
|
1,073
|
|
|
$
|
23
|
|
|
|
2
|
%
|
% of total net revenue
|
|
|
39
|
%
|
|
|
45
|
%
|
|
|
|
|
|
|
|
|
Subscription and perpetual licenses
|
|
|
1,736
|
|
|
|
1,302
|
|
|
|
434
|
|
|
|
33
|
%
|
% of total net revenue
|
|
|
61
|
%
|
|
|
55
|
%
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
2,832
|
|
|
|
2,375
|
|
|
|
457
|
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital engagement services
|
|
|
583
|
|
|
|
855
|
|
|
|
(272
|
)
|
|
|
(32
|
%)
|
% of digital engagement services revenue
|
|
|
53
|
%
|
|
|
80
|
%
|
|
|
|
|
|
|
|
|
Subscription and perpetual licenses
|
|
|
728
|
|
|
|
486
|
|
|
|
242
|
|
|
|
50
|
%
|
% of subscription and perpetual revenue
|
|
|
42
|
%
|
|
|
37
|
%
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
1,311
|
|
|
|
1,341
|
|
|
|
(30
|
)
|
|
|
(2
|
%)
|
Gross profit
|
|
|
1,521
|
|
|
|
1,034
|
|
|
|
487
|
|
|
|
47
|
%
|
Gross profit margin
|
|
|
54
|
%
|
|
|
44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
1,076
|
|
|
|
814
|
|
|
|
262
|
|
|
|
32
|
%
|
% of total revenue
|
|
|
38
|
%
|
|
|
34
|
%
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
754
|
|
|
|
778
|
|
|
|
(24
|
)
|
|
|
(3
|
%)
|
% of total revenue
|
|
|
27
|
%
|
|
|
33
|
%
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
390
|
|
|
|
418
|
|
|
|
(28
|
)
|
|
|
(7
|
%)
|
% of total revenue
|
|
|
14
|
%
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
258
|
|
|
|
26
|
|
|
|
232
|
|
|
|
892
|
%
|
% of total revenue
|
|
|
9
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
Goodwill impairment
|
|
|
-
|
|
|
|
3,732
|
|
|
|
(3,732
|
)
|
|
|
(100
|
%)
|
% of total revenue
|
|
|
0
|
%
|
|
|
157
|
%
|
|
|
|
|
|
|
|
|
Restructuring and acquisition related expenses
|
|
|
5
|
|
|
|
-
|
|
|
|
5
|
|
|
|
100
|
%
|
% of total revenue
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,483
|
|
|
|
5,768
|
|
|
|
(3,285
|
)
|
|
|
(57
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(962
|
)
|
|
|
(4,734
|
)
|
|
|
3,772
|
|
|
|
(80
|
%)
|
Interest expense, net
|
|
|
-
|
|
|
|
(79
|
)
|
|
|
79
|
|
|
|
(100
|
%)
|
Amortization of debt discount
|
|
|
-
|
|
|
|
(150
|
)
|
|
|
150
|
|
|
|
(100
|
%)
|
Other income, net
|
|
|
1,101
|
|
|
|
12
|
|
|
|
1,089
|
|
|
|
9,075
|
%
|
Income (loss) before income taxes
|
|
|
139
|
|
|
|
(4,951
|
)
|
|
|
5,090
|
|
|
|
(103
|
%)
|
Provision for income taxes
|
|
|
3
|
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
(25
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
136
|
|
|
$
|
(4,955
|
)
|
|
$
|
5,091
|
|
|
|
(103
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Measure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(669
|
)
|
|
$
|
(1,016
|
)
|
|
$
|
347
|
|
|
|
(34
|
%)
|
Revenue
Our revenue is derived from two sources: (i) digital engagement services and (ii) subscription and perpetual licenses.
Digital Engagement Services
Digital engagement services revenue is comprised of implementation and retainer related services. In total, revenue from digital engagement services increased $23 thousand, or 2%, to $1.1 million for the three months ended December 31, 2019 compared to $1.1 million for the three months ended December 31, 2018. The increase compared to the prior period is primarily due to revenues of $688 thousand generated from our two acquisitions completed in the fiscal 2019 second quarter, partially offset by decreases in new service engagements. Digital engagement services revenue as a percentage of total revenue decreased to 39% from 45% for the three months ended December 31, 2019 compared to the three months ended December 31, 2018. The decrease as a percentage of total revenue is attributable to increases in revenues generated from subscription and perpetual licenses during the three months ended December 31, 2019.
Subscription and Perpetual Licenses
Revenue from subscription (SaaS) and perpetual licenses increased $434 thousand, or 33%, to $1.7 million for the three months ended December 31, 2019 compared to $1.3 million for the three months ended December 31, 2018. The increase compared to the prior period is primarily due to license revenues of $310 realized from our two acquisitions completed in the fiscal 2019 second quarter. Subscription and perpetual license revenue as a percentage of total revenue increased to 61% from 55% for the three months ended December 31, 2019 compared to the three months ended December 31, 2018. The increase as a percentage of total revenue is attributable to the overall decreases in digital engagement services revenue.
Costs of Revenue
Total cost of revenue decreased $30 thousand, or 2%, to $1.3 million for the three months ended December 31, 2019 compared to $1.3 million for the three months ended December 31, 2018. The gross profit margin increased to 54% for the three months ended December 31, 2019, compared to 44% for the three months ended December 31, 2018. The increase in the gross profit margin compared to the prior period is attributable to decreases in headcount.
Cost of Digital Engagement Services
Cost of digital engagement services decreased $272 thousand, or 32%, to $583 thousand for the three months ended December 31, 2019 compared to $855 thousand for the three months ended December 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 53% for the three months ended December 31, 2019 compared to 80% for the three months ended December 31, 2018. The decrease as a percentage of revenues compared to the prior period is primarily due to decrease in headcount and third-party subcontractor costs.
Cost of Subscription and Perpetual License
Cost of subscription and perpetual licenses increased $242 thousand, or 50%, to $728 thousand for the three months ended December 31, 2019 compared to $486 thousand for the three months ended December 31, 2018. The cost of subscription and perpetual licenses as a percentage of subscription and perpetual license revenue decreased to 42% for the three months ended December 31, 2019 compared to 37% for the three months ended December 31, 2018. These increases are attributable to fixed costs to operate our cloud-based hosting model with Amazon Web Services and variable internal support costs.
Operating Expenses
Sales and Marketing Expenses
Sales and marketing expenses increased $262 thousand, or 32%, to $1.1 million for the three months ended December 31, 2019 compared to $814 thousand for the three months ended December 31, 2018. Sales and marketing expenses represented 38% and 34% of total revenue for the three months ended December 31, 2019 and 2018, respectively. The increases compared to the prior period are attributable to an increase in headcount from acquisitions.
General and Administrative Expenses
General and administrative expenses decreased $24 thousand, or 3%, to $754 thousand for the three months ended December 31, 2019 compared to $778 thousand for the three months ended December 31, 2018. General and administrative expenses represented 27% and 33% of total revenue for the three months ended December 31, 2019 and 2018, respectively. The decrease in expense was due to decrease in headcount and personnel expenses.
Research and Development
Research and development expense decreased $28 thousand, or 7%, to $390 thousand for the three months ended December 31, 2019 compared to $418 thousand for the three months ended December 31, 2018. Research and development expenses represented 14% and 18% of total revenue for the three months ended December 31, 2019 and 2018, respectively. The decrease as a percentage of revenues compared to the prior period is attributable to the increases in revenues.
Depreciation and Amortization
Depreciation and amortization expense increased $232 thousand, or 892%, to $258 thousand for the three months ended December 31, 2019 compared to $26 thousand for the three months ended December 31, 2018. The increase is primarily due to amortization of intangible assets resulting from acquisitions. Amortization expense was $237 thousand and $4 thousand for the three months ended December 31, 2019 and 2018, respectively. Depreciation and amortization represented 9% and 1% of total revenue for the three months ended December 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 charges for the three months ended December 31, 2019.
Net Loss
Loss from Operations
The loss from operations was ($1.0) million for three months ended December 31, 2019 compared to a loss of ($4.7) million for the three months ended December 31, 2018. Operating expenses decreased $3.3 million, or 57%, to $2.5 million for the three months ended December 31, 2019 compared to $5.8 million for the three months ended December 31, 2018. The decreases for the three months ended December 31, 2019 are primarily attributable to a goodwill impairment charge of $3.7 million which occurred in the prior period and similar charges did not recur.
Other Income (Expense), net
In the three months ended December 31, 2019, we recorded a gain related to the change in fair value of derivative liabilities of $1.1 million compared to $12 thousand for the three months ended December 31, 2018. During the three months ended December 31, 2018, interest expense, inclusive of amortization of debt discounts, was $229. During the three months ended December 31, 2019, we did not have any interest expense as we did not have any debt outstanding.
Income Taxes
The provision for income tax expense was $3 thousand and $4 thousand for the three months ended December 31, 2019 and 2018, respectively. Income tax expense represents the estimated liability for federal and state income taxes owed. We have net operating loss carryforwards and other deferred tax benefits that are available to offset any potential taxable income.
Adjusted EBITDA
We also measure our performance based on a non-GAAP (“Generally Accepted Accounting Principles”) measurement of earnings before interest, taxes, depreciation, amortization, stock-based compensation expense, impairment of goodwill and intangible assets, non-cash warrant related expenses, change in fair value of derivative instruments and restructuring and acquisition related charges (“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 U.S. GAAP and should not be considered as an alternative or substitute for U.S. GAAP profitability measures such as (i) loss from operations and net loss, or (ii) cash flows from operating, investing and financing activities, both as determined in accordance with U.S. GAAP. Adjusted EBITDA as an operating performance measure has material limitations since it excludes the financial statement impact of income taxes, net interest expense, amortization of intangibles, depreciation, goodwill impairment, restructuring charges, loss on disposal of assets, other amortization, changes in fair value of warrant liabilities 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 (loss) for a complete analysis of our profitability, as net loss includes the financial statement impact of these items and is the most directly comparable U.S. 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 U.S. GAAP.
The following table reconciles net income (loss) (which is the most directly comparable U.S. GAAP operating performance measure) to Adjusted EBITDA (in thousands):
|
|
Three Months Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Net income (loss)
|
|
$
|
136
|
|
|
$
|
(4,955
|
)
|
Provision for income tax
|
|
|
3
|
|
|
|
4
|
|
Interest expense, net
|
|
|
-
|
|
|
|
79
|
|
Change in fair value of warrants
|
|
|
(1,101
|
)
|
|
|
(12
|
)
|
Amortization of intangible assets
|
|
|
237
|
|
|
|
4
|
|
Depreciation
|
|
|
16
|
|
|
|
20
|
|
Goodwill impairment
|
|
|
-
|
|
|
|
3,732
|
|
Restructuring and acquisition related charges
|
|
|
5
|
|
|
|
-
|
|
Other amortization
|
|
|
5
|
|
|
|
15
|
|
Stock based compensation
|
|
|
30
|
|
|
|
97
|
|
Adjusted EBITDA
|
|
$
|
(669
|
)
|
|
$
|
(1,016
|
)
|
Adjusted EBITDA increased year over year, which is primarily attributable to increases in revenues and cost control measures.
Liquidity and Capital Resources
Cash Flows
Operating Activities
Cash provided by in operating activities was $110 thousand for the three months ended December 31, 2019 compared to cash used in operating activities of $1.6 million for the three months ended December 31, 2018. The change in cash provided by operating activities compared to the prior period was primarily due to a decrease in loss from operations and increases in deferred revenue and accounts payable.
Investing Activities
We did not have any cash flows from investing activities for the three months ended December 31, 2019 compared to cash used in investing activities of $18 thousand for the three months ended December 31, 2018. The Company does not expect material expenditures for property and equipment during the 2020 fiscal year.
Financing Activities
We did not have any cash flows from investing activities for the three months ended December 31, 2019 compared to cash provided by financing activities of $3.0 million for the three months ended December 31, 2018. Cash provided by financing activities for the three months ended December 31, 2018 was attributable to the public offering in October 2018, partially offset by repayments of term and promissory notes.
Capital Resources and Liquidity Outlook
At December 31, 2019, the Company had no debt. While the Company believes that future revenues and cash flows, as we continue to integrate and realize a full year of operations from acquisitions completed in the fiscal 2019 second quarter, will supplement its working capital and it has an appropriate cost structure to support future revenue growth, based upon its current working capital and projected cash flows in the next twelve months, the Company will need additional sources of financing in place in order to ensure its operations are adequately funded. No definitive agreements for additional financing are in place as of the date of this Form 10-Q and there can be no assurances that additional sources of financing could be obtained on terms that are favorable or acceptable to us and that revenue growth and improvement in cash flows can be achieved. Accordingly, management believes there is substantial doubt about the Company’s ability to continue as a going concern for at least twelve months following the issuance of this Form 10-Q.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, financings or other relationships with unconsolidated entities or other persons, other than our operating leases and contingent acquisition payments.
We currently do not have any variable interest entities. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Therefore, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Commitments and Contingencies
As of December 31, 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 27, 2019.
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.
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Revenue Recognition
The Company derives its revenue from two sources: (i) Software Licenses, which are comprised of subscription fees ("SaaS"), perpetual software licenses, and maintenance for post-customer support (“PCS”) on perpetual licenses and (ii) Digital Engagement Services, which are professional services to implement our products such as web development, digital strategy, information architecture and usability engineering, search. 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:
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Identify the customer contract;
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Identify performance obligations that are distinct;
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Determine the transaction price;
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Allocate the transaction price to the distinct performance obligations; and
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Recognize revenue as the performance obligations are satisfied.
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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 December 31, 2019, we maintained two stock-based compensation plans, one of which has expired but still contains vested and unvested stock options. The two plans are more fully described in Note 13 to the Consolidated Financial Statements of our Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 27, 2019.
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.