What changed in this filing

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Item 7. Management’s Discussion and Analysis

2020-12-23 compared with 2019-12-27 · 152 added, 146 removed, 224 unchanged (57% of the section changed)

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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 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 volatility of the market price of our common stock, the ability to maintain our listing on the NASDAQ Capital Market, 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, dependence on third parties, 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, and our ability to respond to government regulations.

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.

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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.

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.

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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.

Bridgeline Digital was incorporated under the laws of the State of Delaware on August 28, 2000.

The Company’s corporate office is located in Burlington, Massachusetts.

The Company’s corporate office is located in Woburn, Massachusetts.

The Company maintains regional field offices serving the following geographical locations:

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Bridgeline Digital Pvt.

located in Bangalore, India, Bridgeline Digital Canada, Inc.

located in Ontario, Canada, and Stantive Technologies Pty, Ltd.

located in Bangalore, India;

Bridgeline Digital Canada, Inc.

located in Ontario, Canada;

and Stantive Technologies Group Pty, Ltd.

located in Australia.

Increase in Authorized Shares and Reverse Stock Split

On April 26, 2019, the Company’s Shareholders and the Board of Directors approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to increase the total number of shares of Common Stock, par value $0.001 per share (“ Common Stock ”), authorized for issuance thereunder from 50 million shares to 2.5 billion shares (the “ Increase in Authorized ”).

On the same date the Company’s Shareholders and the Board of Directors also approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to effect a reverse stock split of both its issued and outstanding and authorized shares of Common Stock, par value $0.001 per share, at a ratio of one (1) share of Common Stock for every fifty (50) shares of Common Stock at any time prior to December 31, 2019 (the “Reverse Split”) pursuant to which all classes of the Company’s issued and outstanding shares of Common Stock at the close of business on such date were combined and reconstituted into a smaller number of shares of Common Stock in a ratio of one (1) share of Common Stock for every fifty (50) shares of Common Stock (“1-for-50 reverse stock split”).

The 1-for-50 reverse stock split was effective as of close of business on May 1, 2019 (the “Effective Date”) and the Company’s stock began trading on a split-adjusted basis on May 2, 2019.

The reverse stock split reduced the number of shares of the Company’s Common Stock authorized from 2.5 billion shares to 50 million shares.

Proportional adjustments have been made to the conversion and exercise prices of the Company’s outstanding convertible preferred stock, warrants, restricted stock awards, and stock options, and to the number of shares issued and issuable under the Company’s Stock Incentive Plans.

The Company did not issue any fractional shares in connection with the reverse stock split.

Instead, any stockholder who would otherwise be entitled to receive a fractional share of Common Stock as a result of the reverse stock split is entitled to receive a cash payment in lieu thereof based on the average of the closing sales prices of a share of the Company’s Common Stock on the Nasdaq Capital Market during regular trading hours for the five consecutive trading days immediately preceding the Effective Date.

The reverse stock split does not modify the rights or preferences of the Common Stock.

The number of authorized shares of the Company’s Common Stock is 50 million shares and the par value remain $0.001.

Sales and Marketing

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These potential acquisitions will be consistent with our growth strategy by providing Bridgeline with new geographical distribution opportunities, an expanded customer base, an expanded sales force and an expanded developer force.

In addition, integrating acquired companies into our existing operations allows us to consolidate the finance, human resources, legal, marketing, research and development of the acquired businesses with our own internal resources, hence reducing the aggregate of these expenses for the combined businesses and resulting in improved operating results.

In addition, integrating acquired companies into our existing operations allows us to consolidate the finance, human resources, legal, marketing, and research and development of the acquired businesses with our own internal resources, hence reducing the aggregate of these expenses for the combined businesses and resulting in improved operating results.

Customer Information

We currently have over 200 active customers.

For the year ended September 30, 2019, two customers each represented approximately 11% - 15% of the Company’s total revenue.

For the year ended September 30, 2018, three customers each represented approximately 10% - 14% of the Company’s total revenue.

For the year ended September 30, 2020, one customer represented approximately 12% of the Company’s total revenue.

For the year ended September 30, 2019, two customers each represented approximately 11% and 15% of the Company’s total revenue.

Summary of Results of Operations

Total revenue for the fiscal year ended September 30, 2019 (“fiscal 2019”) decreased to $10.0 million from $13.6 million for the fiscal year ended September 30, 2018 (“fiscal 2018”).

Loss from operations for fiscal 2019 was ($11.1) million, which included a goodwill impairment charge of $3.7 million, compared with loss from operations of ($7.0) million, which included a goodwill impairment charge of $4.9 million, for fiscal 2018.

We had a net loss for fiscal 2019 of ($9.5) million, including a goodwill impairment charge of $3.7 million, compared with a net loss of ($7.2) million, including a goodwill impairment charge of $4.9 million, for fiscal 2018.

Basic net loss per share calculation attributable to common shareholders for fiscal 2019 was ($8.16) compared with the equivalent basic net loss per share attributable to common shareholders of ($89.05) for fiscal 2018.

Total revenue for the fiscal year ended September 30, 2020 (“fiscal 2020”) increased to $10.9 million from $10.0 million for the fiscal year ended September 30, 2019 (“fiscal 2019”).

Loss from operations for fiscal 2020 was $1.6 million, compared with loss from operations of $11.1 million, which included a goodwill impairment charge of $3.7 million, for fiscal 2019.

We had net income for fiscal 2020 of $326 thousand including government grant income related to the Paycheck Protection Program (“PPP”) loan of $960 thousand, compared with a net loss of ($9.5) million, including a goodwill impairment charge of $3.7 million and a net gain of $2.1 million due to warrant related charges, for fiscal 2019.

Basic net loss per share attributable to common shareholders for fiscal 2020 was $(0.59) compared with the equivalent basic net loss per share attributable to common shareholders of $(8.16) for fiscal 2019.

(in thousands)

Years Ended September 30,

September 30,

Digital engagement services

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% of total net revenue

Managed service hosting

% of total net revenue

Total net revenue

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% of subscription and perpetual revenue

Managed service hosting

% of managed service hosting revenue

Total cost of revenue

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Loss from operations

Interest expense, net

Interest expense and other, net

Government grant income

Amortization of debt discount

Other income, net

Loss before income taxes

Provision for (benefit from) income taxes

Warranty liability expense

Change in fair value of warrant liabilities

Income (loss) before income taxes

Provision for income taxes

Net income/(loss)

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Adjusted EBITDA

Total revenue for the fiscal year ended September 30, 2019 decreased $3.6 million, or 27%, to $10.0 million from $13.6 million in fiscal 2018.

Our revenue is derived from three sources:

(i) digital engagement services;

(ii) subscription and perpetual licenses;

and (iii) managed service hosting.

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 Bridgeline Unbound implementation and retainer-related services.

Total revenue from digital engagement services decreased $2.8 million, or 40%, to $4.1 million in fiscal 2019 from $6.9 million in fiscal 2018.

Total revenue from digital engagement services decreased $708 thousand, or 17%, to $3.4 million in fiscal 2020 from $4.1 million in fiscal 2019.

Digital engagement services revenue as a percentage of total revenue decreased to 31% in fiscal 2020 from 41% in fiscal 2019.

The decreases compared to the prior period is primarily due to a decrease in new service engagements.

Digital engagement services revenues from acquisitions was $747 thousand for fiscal 2019.

The decrease compared to the prior period is primarily due to a decrease in new service engagements.

Subscription and Perpetual Licenses

Revenue from subscription (SaaS) and perpetual licenses decreased $0.8 million, or 14%, to $4.8 million in fiscal 2019 from $5.6 million in fiscal 2018.

The decrease 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.

Revenue from subscription (SaaS) and perpetual licenses increased $1.7 million, or 29%, to $7.5 million in fiscal 2020 from $5.8 million in fiscal 2019.

The increase compared to the prior period is primarily due to license revenues of $3.7 million 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 69% in fiscal 2020 from 59% in fiscal 2019.

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 $657 thousand for fiscal 2019.

Managed Service Hosting

Revenue from managed service hosting remained constant at $1.0 million for both fiscal 2019 and fiscal 2018.

We were able to maintain renewals for hosting service contracts sold in previous periods.

Managed services revenue as a percentage of total revenue increased to 10% in fiscal 2019 from 8% in fiscal 2018.

The increases as a percentage of revenue is attributable to the overall decreases in other revenue streams, primarily digital engagement services.

The increase as a percentage of total revenue is attributable to the two acquisitions completed in fiscal 2019 second quarter, which resulted in the Company acquiring a larger proportion of subscription and perpetual licenses over digital engagement service contracts.

Cost of Revenue

Total cost of revenue for fiscal 2019 decreased $1.4 million, or 21%, to $5.4 million from $6.7 million in fiscal 2018.

The gross profit margin decreased to 46% for the fiscal 2019 compared to 50% for fiscal 2018.

The decline in the gross profit margin for fiscal 2019 compared to fiscal 2018 is attributable to the decrease in digital engagement services revenue.

Total cost of revenue for fiscal 2020 decreased $853 thousand, or 16%, to $4.5 million from $5.4 million in fiscal 2019.

The gross profit margin increased to 59% for fiscal 2020 compared to 46% for fiscal 2019.

The increase in the gross profit margin for fiscal 2020 compared to fiscal 2019 is primarily attributable to decreases in headcount, and the use of third-party consultants and an increase in the proportion of license revenue, which is generally associated with higher margins, to digital engagement service revenue.

Cost of Digital Engagement Services

Cost of digital engagement services decreased $1.9 million, or 42%, to $2.6 million in fiscal 2019 from $4.5 million in fiscal 2018.

The cost of total digital engagement services as a percentage of total digital engagement services revenue decreased to 63% in fiscal 2019 from 65% in fiscal 2018.

The decrease in cost of digital engagement services in fiscal 2019 compared to fiscal 2018 is primarily due to a decrease in headcount.

Cost of digital engagement services decreased $239 thousand, or 12%, to $1.8 million in fiscal 2020 from $2.1 million in fiscal 2019.

The decrease in cost of digital engagement services in fiscal 2020 compared to fiscal 2019 is primarily due to the allocation of support team and third-party subcontractor costs.

The cost of total digital engagement services as a percentage of total digital engagement services revenue increased to 54% in fiscal 2020 from 50% in fiscal 2019.

The increase as a percentage of revenues in fiscal 2020 compared to fiscal 2019 is primarily due to the overall decrease in digital engagement services revenue.

Cost of Subscription and Perpetual License

Cost of subscription and perpetual licenses increased $475 thousand, or 24%, to $2.5 million in fiscal 2019 compared to $2.0 million in fiscal 2018.

Costs to support SaaS licenses are primarily fixed costs.

The cost of subscription and perpetual licenses as a percentage of subscription and perpetual license revenue increased to 51% in fiscal 2019 from 36% in fiscal 2018.

The increase is due to fixed costs to operate our cloud-based hosting model with Amazon Web Services without a commensurate increase in license revenue.

Cost of Managed Service Hosting

Cost of managed service hosting increased $19 thousand, or 7%, in fiscal 2019 to $283 thousand compared to $264 thousand in fiscal 2018.

The cost of managed services as a percentage of managed services revenue increased to 28% in fiscal 2019 from 25% in fiscal 2018.

These increases are attributable to fixed costs to operate our cloud-based hosting model with Amazon Web Services and variable internal support costs.

Gross profit decreased $2.2 million, or 33%, in fiscal 2019 to $4.6 million compared to $6.8 million in fiscal 2018.

The decrease in fiscal 2019 is primarily attributable to the decrease in revenues, as, overall costs decreased by 21%.

Cost of subscription and perpetual licenses decreased $614 thousand, or 19%, to $2.7 million in fiscal 2020 compared to $3.3 million in fiscal 2019.

The cost of subscription and perpetual licenses as a percentage of subscription and perpetual license revenue decreased to 36% in fiscal 2020 from 56% in fiscal 2019.

This is primarily due to a reduction of the workforce and less allocated time by the delivery team and third-party subcontractors on platform support projects.

Gross profit increased $1.8 million, or 39%, in fiscal 2020 to $6.4 million compared to $4.6 million in fiscal 2019.

The increase in fiscal 2020 compared to fiscal 2019 is primarily attributable to the increase in revenue and overall cost decrease, both as more fully described above.

Operating Expenses

Sales and Marketing Expenses

Sales and marketing expenses increased $873 thousand, or 22%, to $4.7 million in fiscal 2019 from $4.0 million in fiscal 2018.

The decrease is primarily attributable to decreases in headcount and facility costs and travel related expenditures, partially offset by increases in marketing expenses.

Sales and marketing expense as a percentage of total revenue increased to 48% in fiscal 2019 compared to 29% in fiscal 2018.

The increases compared to the prior period are primarily attributable to the overall decrease in revenue and an increase in headcount from acquisitions.

Sales and marketing expenses decreased $2.2 million, or 46%, to $2.6 million in fiscal 2020 from $4.8 million in fiscal 2019.

Sales and marketing expense as a percentage of total revenue decreased to 24% in fiscal 2020 compared to 48% in fiscal 2019.

These decreases compared to the prior period are primarily attributable to the decrease in headcount and personnel from acquisitions as well as decreased commission expenses incurred.

General and Administrative Expenses

General and administrative expenses increased $170 thousand, or 6%, to $3.0 million in fiscal 2019 from $2.9 million in fiscal 2018.

The decrease is attributable to decreases in headcount and overall administration expenses.

General and administrative expense as a percentage of revenue increased to 30% in fiscal 2019 compared to 21% in fiscal 2018.

The increases compared to the prior period are primarily attributable to an increase in headcount from recent acquisitions.

General and administrative expenses decreased $791 thousand, or 24%, to $2.5 million in fiscal 2020 from $3.2 million in fiscal 2019.

General and administrative expense as a percentage of revenue decreased to 23% in fiscal 2020 compared to 33% in fiscal 2019.

These decreases compared to the prior period are primarily attributable to a decrease in overall support headcount and personnel expenses.

Research and Development

Research and development expense increased $581 thousand, or 36%, to $2.2 million in fiscal 2019 from $1.6 million in fiscal 2018.

The increases compared to the prior period are primarily attributable to an increase in headcount from acquisitions.

Research and development expense as a percentage of total revenue increased to 22% in fiscal 2019 compared to 12% for fiscal 2018.

The increase as a percentage of total revenues in fiscal 2019 is a function of the decrease in total revenues in fiscal 2019.

Research and development expense decreased $544 thousand, or 25%, to $1.6 million in fiscal 2020 from $2.2 million in fiscal 2019.

Research and development expense as a percentage of total revenue decreased to 15% in fiscal 2020 compared to 22% for fiscal 2019.

These decreases compared to the prior period are primarily attributable to decreases in headcount.

Depreciation and Amortization

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Depreciation and amortization as a percentage of total revenue increased to 9% in fiscal 2020 from 6% in fiscal 2019.

The increase is primarily due to amortization of intangible assets resulting from acquisitions.

These increases compared to the prior period are primarily due to a full year of amortization of intangible assets resulting from acquisitions completed during the prior comparable period.

Goodwill Impairment

The carrying value of goodwill is not amortized, but it typically tested for impairment annually as of September 30, as well as, on an interim basis whenever events or changes in circumstances indicate that the carrying amount of a reporting unit may not be recoverable.

The carrying value of goodwill is not amortized, but it is typically tested for impairment annually as of September 30th, as well as on an interim basis whenever events or changes in circumstances indicate that the carrying amount of a reporting unit may not be recoverable.

An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value.

Goodwill is assessed at the consolidated level as one reporting unit.

During fiscal 2019 and 2018, the Company performed impairment tests and recognized an aggregated impairment charge, for all test dates during the respective periods, of $3.7 million and $4.9 million, respectively.

During fiscal 2020 and 2019, the Company performed impairment tests which resulted in no impairment charge assessed for fiscal 2020 and an aggregated impairment charge of $3.7 million recognized during fiscal 2019.

Restructuring and Acquisition Related Expenses

During fiscal 2020, the Company recognized $366 thousand related to a reduction in the workforce in its U.S.

and Canada operations aimed at improving efficiencies by combining functions, certain responsibilities and eliminating redundancies, which resulted in a reduction of 15 positions.

Commencing in fiscal 2015 and through fiscal 2019, the Company’s management approved, committed to and initiated plans to restructure and further improve efficiencies by implementing cost reductions in line with expected decreases in revenue.

The Company renegotiated several office leases and relocated to smaller space, while also negotiating sub-leases for the original space.

In addition, the Company executed a general work-force reduction and recognized costs for severance and termination benefits.

In addition, the Company executed a general workforce reduction and recognized costs for severance and termination benefits.

These restructuring charges and accruals require estimates and assumptions, including contractual rental commitments or lease buy-outs for vacated office space and related costs, and estimated sub-lease income.

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All of the vacated lease space is currently contractually occupied by a new sub-tenant for the remaining life of the lease.

In the second quarter of fiscal 2017, the Company initiated a plan to shut down its operations in India, which is expected to be completed in early fiscal 2020.

In total, restructuring expenses were $625 thousand and $187 thousand in fiscal 2019 and fiscal 2018, respectively.

These charges consist of the total lease expenses less sub-lease rental income, other miscellaneous lease termination costs, loss on disposal of fixed assets.

In total, restructuring expenses related to this activity commencing in prior periods was $625 thousand in fiscal 2019.

These charges consist of the total lease expenses less sub-lease rental income, other miscellaneous lease termination costs, and loss on disposal of fixed assets.

Acquisition related expenses related to the acquisition of Stantive Technologies Group Inc.

consummated in March 2019 were $428 thousand.

There were no acquisition related expenses incurred during fiscal 2020.

Loss from Operations

The loss from operations was ($11.1) million for fiscal 2019 compared to a loss from operations of ($7.0) million for fiscal 2018, a decrease of ($4.0) million or 58% for fiscal 2019.

The loss from operations included a goodwill impairment charge of $3.7 million and $4.9 million in fiscal 2019 and 2018, respectively.

The loss from operations was $1.6 million for fiscal 2020 compared to a loss from operations of $11.1 million for fiscal 2019, a decrease of $9.4 million or 85%.

The loss from operations for fiscal 2019 included a goodwill impairment charge of $3.7 million.

Other income (expense), net

During the year ended September 30, 2019, we recognized an expense of $11.3 million related to the allocation of proceeds from the sale of Preferred Series C stock and Series C Preferred warrants.

The expense was entirely offset by the aggregate other income recognized related to the change in fair value of the associated warrant liabilities of $13.4 million during fiscal 2019.

During fiscal 2018, there were no similar expense charges recognized upon issuance of warrants and the aggregate other income recognized related to the change in fair value of warrant liabilities was $160 thousand.

The Company recognized a gain related to the change in fair value of warrant liabilities of $1.0 million and $13.4 million for the years ended September 30, 2020 and 2019, respectively.

During the year ended September 30, 2019, we also recognized a warrant liability expense of $11.3 million related to the excess of fair value allocated to warrants over the proceeds received from the issuance of Series C Preferred Convertible Stock and associated warrants.

During the year ended September 30, 2020, the Company recognized government grant income of $960 thousand associated with proceeds received under the Paycheck Protection Program deemed probable to be forgiven based on the actual expenditures from the date proceeds were received by the Company through September 30, 2020.

The remaining unexpended proceeds are expected to be expended in the first quarter of fiscal 2021.

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.

During the years ended September 30, 2020 and 2019, interest expense, net, inclusive of amortization of debt discounts, was $7 thousand and $534 thousand, respectively.

Provision for Income Taxes

We recorded an income tax expense of $4 thousand for fiscal 2019 compared to an income tax benefit of ($3) thousand for fiscal 2018.

The Company has net operating loss carryforwards and other deferred tax benefits, subject to the limitations discussed below, that are available to offset future taxable income.

We recorded an income tax expense of $11 thousand and $4 thousand for fiscal 2020 and 2019, respectively.

The Company has net operating loss (“NOL”) carryforwards and other deferred tax benefits, subject to the limitations discussed below, that are available to offset future taxable income.

A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized.

The Company established a valuation allowance against its net deferred tax assets, excluding the portion attributable to the alternative minimum tax of $22 thousand at September 30, 2019 and 2018.

The Federal net operating loss (NOL) carryforward of approximately $34 million as of September 30, 2019 expires on various dates through 2039.

The Company established a valuation allowance against its net deferred tax assets.

The Federal NOL carryforward of approximately $37 million as of September 30, 2020 expires on various dates through 2039.

Net operating losses incurred after December 31, 2017 carry forward indefinitely.

Internal Revenue Code Section 382 places certain limitations on the amount of taxable income that can be offset by NOL carryforwards after a change in control of a loss corporation.

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Adjusted EBITDA

We also measure our performance based on a non-U.S.

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-U.S.

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.

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 accounting principles generally accepted in the United States of America (“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.

Adjusted EBITDA as an operating performance measure has material limitations because 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 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 U.S.

Adjusted EBITDA as an operating performance measure has material limitations because 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 income (loss) includes the financial statement impact of these items and is the most directly comparable U.S.

GAAP operating performance measure to Adjusted EBITDA.

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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.

The following table reconciles net loss (which is the most directly comparable U.S.

The following table reconciles net income (loss) (which is the most directly comparable U.S.

GAAP operating performance measure) to Adjusted EBITDA:

Years Ended September 30,

September 30,

Net income (loss)

Provision for income tax

Interest expense, net

Change in fair value of warrants/warrant expense

Interest expense and other, net

Government grant income

Amortization of debt discount

Warrant liability expense

Change in fair value of warrants

Amortization of intangible assets

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Adjusted EBITDA

Adjusted EBITDA was ($5.2) million for fiscal 2019 compared with ($1.1) million for fiscal 2018.

This was primarily due to the decline in revenues.

Adjusted EBITDA increased year over year, which is primarily attributable to increases in revenues and cost control measures.

Liquidity and Capital Resources

Operating Activities

Cash used in operating activities was $4.2 million for fiscal 2019 compared to cash used in operating activities of $1.1 million for fiscal 2018.

This increase in use of cash was driven by decreases with our accounts receivables collections, fair market value of our warrant liabilities, goodwill impairment charge and increases with our accounts payable and accrued liabilities.

Cash used in operating activities was $498 thousand during fiscal 2020 compared to cash used in operating activities of $4.2 million during fiscal 2019.

The change in cash used in operating activities compared to the prior period was primarily due to a decrease in loss from operations partially offset by decreases in non-cash items of $3.6 million and accounts payables.

Investing Activities

Cash used in investing activities was $5.7 million for fiscal 2019 compared with $50 thousand for fiscal 2018.

We primarily used cash to acquire the assets of Stantive and Seevolution.

We did not have any cash flows from investing activities during fiscal 2020 compared to cash used in investing activities of $5.7 million during fiscal 2019.

Cash used in investing activities during the prior fiscal year was primarily related to the acquisition of the assets of Stantive and Seevolution.

Financing Activities

Cash provided by financing activities was $9.5 million for fiscal 2019 compared with $1.1 million for fiscal 2018.

In fiscal 2019, cash provided by financing activities was attributable to the public offering in October 2018 and private offering in March 2019.

In October 2018, we sold an aggregate of 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 the Company’s 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 $5.0 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 $9.1 million.

The proceeds of the March 2019 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 Technologies Group Inc.

for $5.2 million.

In fiscal 2018, we raised funds from a term note with Montage Capital II, L.P.

and the promissory term notes, issued in September 2018.

We made net payments on our bank line of credit of $419 thousand.

Capital Resources, Liquidity Outlook and Going Concern

In the second quarter of fiscal 2019, the Company concluded a private offering that raised net cash proceeds of $9.2 million.

Proceeds were used to pay-off in full the outstanding amounts on our Heritage Bank of Commerce line of credit and Montage Capital II, L.P.

At September 30, 2019, the Company had no debt.

Further, in the second quarter of fiscal 2019, the Company used cash to purchase the assets of Seevolution, Inc.

and Stantive Technologies Group Inc., which assets included technology and customers.

While the Company believes the future revenues and cash flows from these newly acquired customers will supplement its working capital and the Company believes 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 annual report and there can be no assurances that 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 that 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 annual report.

Cash provided by financing activities was $1.0 million during fiscal 2020 compared with $9.5 million during fiscal 2019.

Cash provided by financing activities was attributable to the proceeds received under the Payroll Protection Program during fiscal 2020 and to the public offering in October 2018 and a private offering in March 2019, partially offset by repayments of term and promissory notes during fiscal 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 June 16, 2020) 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 September 20, 2020, the remaining unexpended PPP loan proceeds are $88 thousand, which are currently expected to be expended in the first quarter of fiscal 2021.

The Company plans to submit the PPP loan forgiveness application in the near term.

On August 17, 2020, the Company entered into an arrangement with an investment banking firm (the “Manager”) to sell up to $4,796,090 of shares of the Company’s common stock, $0.001 par value (the “ATM Offering”).

Pursuant to the ATM Offering, shares may be sold on a daily basis, commencing no earlier than August 17, 2020, at a gross sales price equal to the market price for shares of the Company’s common stock on the NASDAQ Capital Market at the time of sale of such shares.

The Manager has no obligation to purchase shares of the Company’s common stock and is only obligated to use its commercially reasonable efforts consistent with its normal trading and sales practices to sell shares of the Company’s common stock.

Accordingly, there can be no assurances that the Manager will be successful in selling any portion of the shares available for sale under the ATM Offering.

The Company shall pay to the Manager a placement fee of 2.5% of the gross sales price of shares sold.

The ATM Offering shall remain in effect until the earlier of August 17, 2021, or upon written notice of termination by either the Company or the Manager.

As of September 30, 2020, there have been no shares of common stock sold under the ATM offering.

The Company currently intends to use the net proceeds from the sale of shares pursuant to the ATM Offering for working capital and general corporate purposes.

The Company believes that future revenues and cash flows 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 may need additional sources of financing in place in order to ensure its operations are adequately funded.

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 12 under the caption, At the Market Offering , for a detailed description of this capital raise 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.

No definitive agreements for additional financing are in place as of the date of this Form 10-K 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, these factors raise doubt about the Company’s ability to continue as a going concern for at least twelve months following the issuance of this Form 10-K.

No adjustments have been made to the accompanying consolidated financial statements as a result of this uncertainty.

Inflationary increases can cause pressure on wages and the cost of benefits offered to employees.

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Contractual Obligations

We lease our facilities in the United States.

We lease our facilities in the United States and Canada.

We currently have no future commitments that extend past fiscal 2025.

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(in thousands)

As of September 30, 2019

Payment obligations by year

Operating Leases (a)

(a) Net of sublease income

Operating leases

Critical Accounting Policies

These critical accounting policies and estimates by our management should be read in conjunction with Note 2 Summary of Significant Accounting Policies to the Consolidated Financial Statements that were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.

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.

The preparation of consolidated financial statements in accordance U.S.

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.

The most significant estimates included in our consolidated 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.

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Accounting for goodwill and other intangible assets;

Accounting for Payroll Protection Program;

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 and (iii) hosting perpetual licenses.

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.

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The transaction price is allocated to each performance obligation based on the relative standalone selling prices (“SSP”) of the goods or services being provided to the customer.

The Company determines the SSP of its goods and services based upon the historical average sales prices for each types of software license and professional services sold.

The Company determines the SSP of its goods and services based upon the historical average sales prices for each type of software license and professional services sold.

Recognize revenue as the performance obligations are satisfied

Revenues are recognized when or as control of the promised goods or services is transferred to customers.

Revenue is recognized when or as control of the promised goods or services is transferred to customers.

Revenue from SaaS licenses is recognized ratably over the subscription period beginning on the date the license is made available to customers.

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Invoicing for digital engagement services are either monthly or upon achievement of milestones and payment terms for such billings are within the standard terms described above.

Invoicing for subscriptions and hosting are typically issued monthly and are generally due in the month of service.

Invoices for subscriptions and hosting are typically issued monthly and are generally due in the month of service.

The Company’s subscription and hosting agreements provide for refunds when service is interrupted for an extended period of time and are reserved for in the month in which they occur, if necessary.

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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.

However, in accordance with Accounting Standards Codification (“ASC”) 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.

Once the product is available for general release, the capitalized costs are amortized in cost of sales over the estimated useful life of the asset.

Accounting for Goodwill and Intangible Assets

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The purpose of an impairment test is to identify any potential impairment by comparing the carrying value of a reporting unit including goodwill to its fair value.

An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

An 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.

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We record current tax expense for incentive 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 Payroll Protection Program

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 Financial Accounting Standards Board (“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.

Quantitative and Qualitative Disclosures About Market Risk.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis