Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
All statements included in this section, other than statements or characterizations of historical fact, are forward-looking statements. These “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, are based on our current expectations, estimates and projections about our industry, management's beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can often be identified by words such as "anticipates," "expects," "intends," "plans," "predicts," "believes," "seeks," "estimates," "may" "will," "should," "would," "could," "potential," "continue," "ongoing," similar expressions, and variations or negatives of these words. These statements appear in a number of places and include statements regarding the intent, belief or current expectations of Bridgeline Digital, Inc. These forward-looking statements are not guarantees of future results and are subject to risks, uncertainties and assumptions, including, but not limited to, the impact of the COVID – 19 pandemic and related public health measures on our financial results; business operations and the business of our customers, suppliers and partners; our ability to retain and upgrade current customers; increasing our recurring revenue; our ability to attract new customers; our revenue growth rate; our history of net loss and our ability to achieve or maintain profitability; our liability for any unauthorized access to our data or our users’ content, including through privacy and data security breaches; any decline in demand for our platform or products; changes in the interoperability of our platform across devices, operating systems, and third party applications that we do no control; competition in our markets; our ability to respond to rapid technological changes, extend our platform, develop new features or products, or gain market acceptance for such new features or products, particularly in light of potential disruptions to the productivity of our employees resulting from remote work; our ability to manage our growth or plan for future growth, and our acquisition of other businesses and the potential of such acquisitions to require significant management attention, disrupt our business, or dilute stockholder value; the volatility of the market price of our common stock; the ability to maintain our listing on the NASDAQ Capital Market; or our ability to maintain an effective system of internal controls as well as other risks described in our filings with the Securities and Exchange Commission. Any of such risks could cause our actual results to differ materially and adversely from those expressed in any forward-looking statement. We urge readers to review carefully the risk factors described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020 as well as in the other documents that we file with the Securities and Exchange Commission.
This section should be read in combination with the accompanying unaudited condensed 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 integrates Web Content Management, eCommerce, eMarketing, Social Media management, and Web Analytics (Insights) with the goal of assisting marketers to deliver 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, and 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”) multi-tenant business model, whose flexible architecture provides customers with state of the art deployment providing maintenance, daily technical operation and support; or via a traditional perpetual licensing business model, in which the software resides on a dedicated server in either the customer’s facility or 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.
Locations
The Company’s corporate office is located in Woburn, Massachusetts. The Company maintains regional field offices serving the following geographical locations: Boston, MA; New York, NY; and Ontario, Canada. The Company has two wholly-owned subsidiaries: Bridgeline Digital Pvt. Ltd. located in Bangalore, India, and Bridgeline Digital Canada Inc. located in Ontario, Canada.
Customer Information
For the three months ended December 31, 2020, and 2019, one customer represented approximately 12% of the Company’s total revenue.
Results of Operations for the Three Months Ended December 31, 2020 compared to the Three Months Ended December 31, 2019
Total revenue for each of the three months ended December 31, 2020 and 2019, was $2.8 million. We had a net loss of $1.2 million for the three months ended December 31, 2020 and net income of $136 thousand for the three months ended December 31, 2019. Included in the net loss for the three months ended December 31, 2020, was a loss of $1.4 million as a result of the change in fair value of certain warrant liabilities and income of $88 thousand related to government grant income related to the Paycheck Protection Program (“PPP”) loan. Included in the net loss 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. 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 and diluted net loss per share attributable to common shareholders was ($0.26) for the three months ended December 31, 2020 and ($0.81) for the three months ended December 31, 2019.
(in thousands)
|
|
Three Months Ended
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
|
2020
|
|
|
2019
|
|
|
Change
|
|
|
Change
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital engagement services
|
|
$
|
837
|
|
|
$
|
1,096
|
|
|
$
|
(259
|
)
|
|
|
(24
|
%)
|
% of total net revenue
|
|
|
30
|
%
|
|
|
39
|
%
|
|
|
|
|
|
|
|
|
Subscription and perpetual licenses
|
|
|
1,999
|
|
|
|
1,736
|
|
|
|
263
|
|
|
|
15
|
%
|
% of total net revenue
|
|
|
70
|
%
|
|
|
61
|
%
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
2,836
|
|
|
|
2,832
|
|
|
|
4
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital engagement services
|
|
|
374
|
|
|
|
568
|
|
|
|
(194
|
)
|
|
|
(34
|
%)
|
% of digital engagement services revenue
|
|
|
45
|
%
|
|
|
52
|
%
|
|
|
|
|
|
|
|
|
Subscription and perpetual licenses
|
|
|
583
|
|
|
|
790
|
|
|
|
(207
|
)
|
|
|
(26
|
%)
|
% of subscription and perpetual revenue
|
|
|
29
|
%
|
|
|
46
|
%
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
957
|
|
|
|
1,358
|
|
|
|
(401
|
)
|
|
|
(30
|
%)
|
Gross profit
|
|
|
1,879
|
|
|
|
1,474
|
|
|
|
405
|
|
|
|
27
|
%
|
Gross profit margin
|
|
|
66
|
%
|
|
|
52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
444
|
|
|
|
1,032
|
|
|
|
(588
|
)
|
|
|
(57
|
%)
|
% of total revenue
|
|
|
16
|
%
|
|
|
36
|
%
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
465
|
|
|
|
751
|
|
|
|
(286
|
)
|
|
|
(38
|
%)
|
% of total revenue
|
|
|
16
|
%
|
|
|
27
|
%
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
349
|
|
|
|
390
|
|
|
|
(41
|
)
|
|
|
(11
|
%)
|
% of total revenue
|
|
|
12
|
%
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
232
|
|
|
|
258
|
|
|
|
(26
|
)
|
|
|
(10
|
%)
|
% of total revenue
|
|
|
8
|
%
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
Restructuring and acquisition-related expenses
|
|
|
210
|
|
|
|
5
|
|
|
|
205
|
|
|
|
4,100
|
%
|
% of total revenue
|
|
|
7
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,700
|
|
|
|
2,436
|
|
|
|
(736
|
)
|
|
|
(30
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from operations
|
|
|
179
|
|
|
|
(962
|
)
|
|
|
1,141
|
|
|
|
(119
|
%)
|
Interest expense, net
|
|
|
6
|
|
|
|
-
|
|
|
|
6
|
|
|
|
100
|
%
|
Government grant income
|
|
|
88
|
|
|
|
-
|
|
|
|
88
|
|
|
|
100
|
%
|
Change in fair value of warrant liabilities
|
|
|
(1,441
|
)
|
|
|
1,101
|
|
|
|
(2,542
|
)
|
|
|
(231
|
%)
|
Income (loss) before income taxes
|
|
|
(1,168
|
)
|
|
|
139
|
|
|
|
(1,307
|
)
|
|
|
(940
|
%)
|
Provision for (benefit from) income taxes
|
|
|
(6
|
)
|
|
|
3
|
|
|
|
(9
|
)
|
|
|
(300
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
(1,162
|
)
|
|
$
|
136
|
|
|
$
|
(1,298
|
)
|
|
|
(954
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Measure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
672
|
|
|
$
|
(669
|
)
|
|
$
|
1,341
|
|
|
|
(200
|
%)
|
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 decreased $259 thousand, or 24%, to $837 thousand for the three months ended December 31, 2020 compared to $1.1 million for the three months ended December 31, 2019. The decrease 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 30% from 39% for the three months ended December 31, 2020 compared to the three months ended December 31, 2019. 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, 2020.
Subscription and Perpetual Licenses
Revenue from subscription (SaaS) and perpetual licenses increased $263 thousand, or 15%, to $2.0 million for the three months ended December 31, 2020 compared to $1.7 million for the three months ended December 31, 2019. The increase compared to the prior period is primarily due to license revenues realized from our two acquisitions completed in the fiscal 2019 second quarter, partially offset by cancelled SaaS subscriptions for legacy customers. Subscription and perpetual license revenue as a percentage of total revenue increased to 70% from 61% for the three months ended December 31, 2020 compared to the three months ended December 31, 2019. The increase as a percentage of total revenue is attributable to the overall decreases in digital engagement services revenue.
Cost of Revenue
Total cost of revenue decreased $401 thousand, or 30%, to $957 thousand for the three months ended December 31, 2020 compared to $1.4 million for the three months ended December 31, 2019. The gross profit margin increased to 66% for the three months ended December 31, 2020 compared to 52% for the three months ended December 31, 2019. The increase in the gross profit margin for the three months ended December 31, 2020 compared to the prior period is primarily attributable to decreases in the use of third-party consultants and increases in the proportion of license revenue, which are generally associated with higher margins, to digital engagement service revenue.
Cost of Digital Engagement Services
Cost of digital engagement services decreased $194 thousand, or 34%, to $374 thousand for the three months ended December 31, 2020 compared to $568 thousand for the three months ended December 31, 2019. 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 45% for the three months ended December 31, 2020 compared to 52% for the three months ended December 31, 2019. The decrease as a percentage of revenues compared to the prior period is primarily due to the decline in digital engagement services revenue, as more fully described above.
Cost of Subscription and Perpetual License
Cost of subscription and perpetual licenses decreased $207 thousand, or 26%, to $583 thousand for the three months ended December 31, 2020 compared to $790 thousand for the three months ended December 31, 2019. The cost of subscription and perpetual licenses as a percentage of subscription and perpetual license revenue decreased to 29% for the three months ended December 31, 2020 compared to 46% for the three months ended December 31, 2019. These decreases are attributable to a reduction within our 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 decreased $588 thousand, or 57%, to $444 thousand for the three months ended December 31, 2020 compared to $1.0 million for the three months ended December 31, 2019. Sales and marketing expenses represented 16% and 36% of total revenue for the three months ended December 31, 2020 and 2019, respectively. The decrease in expense was due to decrease in headcount and travel related expenses.
General and Administrative Expenses
General and administrative expenses decreased $286 thousand, or 38%, to $465 thousand for the three months ended December 31, 2020 compared to $751 thousand for the three months ended December 31, 2019. General and administrative expenses represented 16% and 27% of total revenue for the three months ended December 31, 2020 and 2019, respectively. The decrease in expense was due to decrease in headcount and personnel expenses.
Research and Development
Research and development expense decreased $41 thousand, or 11%, to $349 thousand for the three months ended December 31, 2020 compared to $390 thousand for the three months ended December 31, 2019. Research and development expenses represented 12% and 14% of total revenue for the three months ended December 31, 2020 and 2019, respectively. The decrease as a percentage of revenues compared to the prior period is primarily due to the decline in digital engagement services revenue, as more fully described above.
Depreciation and Amortization
Depreciation and amortization expense decreased $26 thousand, or 10%, to $232 thousand for the three months ended December 31, 2020 compared to $258 thousand for the three months ended December 31, 2019. The decrease is primarily due to amortization of intangible assets resulting from acquisitions. Amortization expense was $220 thousand and $237 thousand for the three months ended December 31, 2020 and 2019, respectively. Depreciation and amortization represented 8% and 9% of total revenue for the three months ended December 31, 2020 and 2019, respectively.
Restructuring and Acquisition-Related Expenses
During the three months ended December 31, 2020, the Company incurred acquisition-related expenses related to the acquisition of Woorank, which occurred in February 2021 of $210 thousand and represented 7% of total revenue for the three months ended December 31, 2020. No acquisition-related expenses were incurred during the three months ended December 31, 2019.
Net Income/(Loss)
Income/(Loss) from Operations
The income from operations was $179 thousand for the three months ended December 31, 2020 compared to a loss of ($1.0) million for the three months ended December 31, 2019. Operating expenses decreased $783 thousand, or 32%, to $1.7 million for the three months ended December 31, 2020 compared to $2.5 million for the three months ended December 31, 2019. The decreases for the three months ended December 31, 2020 are primarily due to a decrease in headcount and a reduction within our fixed costs to operate our cloud-based hosting model with Amazon Web Services and variable internal support costs.
Other Income (Expense), net
In the three months ended December 31, 2020, we recorded a loss related to the change in fair value of certain warrant liabilities of $1.4 million compared to a gain of $1.1 million thousand for the three months ended December 31, 2019.
During the three months ended December 31, 2020, the Company recognized government grant income of $88 thousand associated with proceeds received under the Paycheck Protection Program deemed probable to be forgiven based on the actual expenditures for qualified expenses during the period. As of December 31, 2020, the Company expended all loan proceeds on qualified expense incurred during the period. The Company plans to submit the PPP loan forgiveness application in the near term. Although the Company believes it is probable that the PPP loan will be forgiven, the Company cannot provide any objective assurance that it will obtain forgiveness in whole or in part.
Income Taxes
The provision for (benefit from) income tax expense was ($6) thousand and $3 thousand for the three months ended December 31, 2020 and 2019, 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 provides 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) income from operations and net income, 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, acquisition related expenses, 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,
|
|
|
|
2020
|
|
|
2019
|
|
Net income (loss)
|
|
$
|
(1,162
|
)
|
|
$
|
136
|
|
Provision for (benefit from) income tax
|
|
|
(6
|
)
|
|
|
3
|
|
Interest expense and other, net
|
|
|
(6
|
)
|
|
|
-
|
|
Government grant income
|
|
|
(88
|
)
|
|
|
|
|
Change in fair value of warrants
|
|
|
1,441
|
|
|
|
(1,101
|
)
|
Amortization of intangible assets
|
|
|
218
|
|
|
|
237
|
|
Depreciation
|
|
|
12
|
|
|
|
16
|
|
Restructuring and acquisition related charges
|
|
|
210
|
|
|
|
5
|
|
Other amortization
|
|
|
2
|
|
|
|
5
|
|
Stock-based compensation
|
|
|
51
|
|
|
|
30
|
|
Adjusted EBITDA
|
|
$
|
672
|
|
|
$
|
(669
|
)
|
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 operating activities was $451 thousand for the three months ended December 31, 2020 compared to cash provided by operating activities of $110 thousand for the three months ended December 31, 2019. 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
Cash used in investing activities was $41 thousand for the three months ended December 31, 2020 and we did not have any cash flows from investing activities during the three months ended December 31, 2019.
Financing Activities
We did not have any cash flows from financing activities for the three months ended December 31, 2020 and 2019.
Capital Resources and Liquidity Outlook
In March 2020, the World Health Organization declared the outbreak of novel coronavirus disease (“COVID-19”) as a pandemic, and we expect our operations in all locations to be affected as the virus continues to proliferate. We have adjusted certain aspects of our operations to protect employees and customers while still meeting customers’ needs for vital technology. We will continue to monitor the situation closely and it is possible that we will implement further measures. In light of the uncertainty as to the severity and duration of the pandemic, the impact on our revenues, profitability and financial position is uncertain at this time.
On April 17, 2020, the Company entered into a loan with an aggregate principal amount of $1,047,500, pursuant to the PPP. The Company has performed initial calculations for PPP loan forgiveness according to the terms and conditions of the U.S. Small Business Administration’s (the “SBA”) Loan Forgiveness Application (Revised January 8, 2021) and, based on such calculations, expects that the PPP loan will be forgiven in full based on usage of related proceeds over a period less than 24 weeks. In addition, the Company determined it is probable the Company will meet all the conditions of the PPP loan forgiveness. However, there can be no assurances that the Company will ultimately meet the conditions for forgiveness of the loan or that the Company will not take actions that could cause the Company to be ineligible for forgiveness of the loan, in whole or in part. As of December 31, 2020, the Company expended all loan proceeds on qualified expenses incurred during the period. The Company plans to submit the PPP loan forgiveness application in the near term.
On February 3, 2021, the Company entered into a Share Purchase Agreement (the “Purchase Agreement”) with Woorank SRL (“Woorank”), an entity located in Belgium, to acquire all of the issued and outstanding shares of Woorank for an unconditional purchase price of approximately €3.3 million (the “Purchase Price”), which consists of (1) approximately €1.4 million paid to the sellers at closing, (2) approximately €1.9 million in assumed debt obligations, and (3) $80,000 payable to one selling shareholder as consideration for assistance with certain matters related to the acquisition for a period of one-year from the closing date of the acquisition. Approximately €1.2 million of the debt to be assumed by the Company will be current debt with payment due within one year and has a weighted average interest rate of approximately 2.25%. The Purchase Agreement also provides for adjustments to the Purchase Price in the event of the achievement of certain revenue targets, as well as an additional earn-out provision for the achievement of certain operational goals. The consummation of the acquisition is conditioned upon certain customary closing conditions, as well as certain lenders of Woorank consenting to the acquisition.
Under certain conditions, up to approximately €0.6 million of the Purchase Price is payable, at the Company’s discretion, in shares of the Company’s common stock, par value $0.001 per share, at a price per share equal to the greater of (i) the closing price of the Company’s common stock on the date of issuance or (ii) $3.38, the Minimum Price (as defined in the Nasdaq Listing Rule 5635(d)) of the Company’s common stock on February 1, 2021.
On August 17, 2020, the Company entered into an arrangement with an investment banking firm to sell up to $4,796,090 of shares of the Company’s common stock, $0.001 par value. Refer to Note 8 under the caption, At the Market Offering, for a detailed description of this capital raising activity. There are no obligations for the sale or purchase of the Company’s common stock pursuant to this offering. Accordingly, there can be no assurances that the Company or investment banking firm will be successful in selling any portion of the shares available for sale pursuant to this offering. On December 18, 2020, the Company delivered written notice to Roth Capital Partners that it was suspending all offers and sales under the At the Market Offering Agreement (the “Suspension Period”), during which time the Company will not make any sales of Placement Shares. No other definitive agreements for additional financing are in place as of the issuance 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 the Company and that revenue growth and improvement in cash flows can be achieved. No adjustments have been made to the accompanying consolidated financial statements as a result of this uncertainty.
On February 4, 2021, the Company offered and sold a total of 880,000 shares of its common stock, par value $0.001 per share, to certain institutional and accredited investors at a public offering price of $3.10 per share in a registered direct offering. The aggregate proceeds from this transactions, net of certain fees due to placement agents and transaction expenses, was approximately $2.4 million. The Company currently intends to use the net proceeds from the sale of shares pursuant to the Offering for general corporate purposes, including general working capital.
In prior years, the Company incurred operating losses and used cash to fund operations, develop new products, and build infrastructure. During its 2020 fiscal year, the Company executed an operating plan that reduced operating expenses and has resulted in three consecutive quarters of operating income. The Company is continuing to maintain tight control over discretionary spending for the 2021 fiscal year. While the Company believes that it has sufficient revenue and working capital to support future growth no assurances can be made that the Company will not need additional financing to ensure its operations are adequately funded.
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
The Company leases its facilities in the United States and Canada. We currently have no future commitments that extend past fiscal 2025. The following summarizes our cash contractual obligations and commitments by maturity as of December 31, 2020:
(in thousands)
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Payment obligations by year
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FY21
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FY22
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FY23
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FY24
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FY25
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Total
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Operating leases
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$
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142
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$
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169
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$
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173
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$
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115
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$
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84
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$
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683
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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 (“U.S. 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 23, 2020.
The preparation of financial statements in accordance U.S. 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:
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Revenue recognition;
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Allowance for doubtful accounts;
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Accounting for implementation costs incurred in a cloud computing arrangement;
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Accounting for goodwill and other intangible assets;
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Accounting for Paycheck Protection Program; and
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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 Implementation Costs Incurred in a Cloud Computing Arrangement
In accordance with Accounting Standards Codification (“ASC”) 350-40, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, we capitalize implementation costs incurred in a cloud computing arrangement that is a service contract and amortize those costs over the term of the arrangement.
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, 2020, 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 12 to the Consolidated Financial Statements of our Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 23, 2020.
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.
Accounting for Paycheck Protection Program
U.S. GAAP does not contain authoritative accounting standards for forgivable loans provided by governmental entities to a for-profit entity. Absent authoritative accounting standards, interpretative guidance issued and commonly applied by financial statement preparers allows for the selection of accounting policies amongst acceptable alternatives. Based on the facts and circumstances, the Company determined it most appropriate to account for the PPP Loan proceeds as an in-substance government grant by analogy to International Accounting Standards 20 (“IAS 20”), Accounting for Government Grants and Disclosure of Government Assistance. Under the provisions of IAS 20, “a forgivable loan from government is treated as a government grant when there is reasonable assurance that the entity will meet the terms for forgiveness of the loan.” IAS 20 does not define “reasonable assurance”; however, based on certain interpretations, it is analogous to “probable” as defined in FASB ASC 450-20-20 under U.S. GAAP, which is the definition the Company has applied to its expectations of PPP Loan forgiveness. Under IAS 20, government grants are recognized in earnings on a systematic basis over the periods in which the Company recognizes costs for which the grant is intended to compensate (i.e. qualified expenses). Further, IAS 20 permits for the recognition in earnings either separately under a general heading such as other income, or as a reduction of the related expenses. The Company has elected to recognize government grant income separately within other income to present a clearer distinction in its consolidated financial statements between its operating income and the amount of net income resulting from the PPP Loan and subsequent expected forgiveness. The Company believes this presentation method promotes greater comparability amongst all periods presented.