Bridgeline Digital, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. This section contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of a variety of factors and risks including the impact of the weakness in the U.S. and international economies on our business, our inability to manage our future growth effectively or profitably, fluctuations in our revenue and quarterly results, our license renewal rate, the impact of competition and our ability to maintain margins or market share, the limited market for our common stock, the ability to maintain our listing on the NASDAQ Capital Market, the volatility of the market price of our common stock, the ability to raise capital, the performance of our products, our ability to respond to rapidly evolving technology and customer requirements, our ability to protect our proprietary technology, the security of our software and response to cyber security risks, our ability to meet our financial obligations and commitments, our dependence on our management team and key personnel, our ability to hire and retain future key personnel, our ability to maintain an effective system of internal controls, or our ability to respond to government regulations . These and other risks are more fully described herein and in our other filings with the Securities and Exchange Commission. This section should be read in combination with the accompanying audited consolidated financial statements and related notes prepared in accordance with United States generally accepted accounting principles. Overview Bridgeline Digital, The Digital Engagement Company, helps customers maximize the performance of their full digital experience from websites and intranets to eCommerce experiences. Bridgeline’s Unbound platform 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. 17 Bridgeline Digital was incorporated under the laws of the State of Delaware on August 28, 2000. Locations The Company’s corporate office is located in Woburn, Massachusetts. The Company maintains regional field offices serving the following geographical locations: Boston, MA; and New York, NY. The Company has three wholly-owned subsidiaries: Bridgeline Digital Pvt. Ltd. located in Bangalore, India; Bridgeline Digital Canada, Inc. located in Ontario, Canada; and Stantive Technologies Group Pty, Ltd. located in Australia. Sales and Marketing Bridgeline employs a direct sales force and each sale takes on average three to six months to complete. Each franchise/multi-unit organization sale takes on average one year to complete. Our direct sales force focuses its efforts selling to medium-sized and large companies. These companies are generally categorized in the following vertical markets: (i) financial services; (ii) franchises/multi-unit organizations; (iii) retail brand names; (iv) health services and life sciences; (v) technology (software and hardware); (vi) credit unions and regional banks, and (vii) associations and foundations. We have five sales geographic locations in the United States. Acquisitions Bridgeline will continue to evaluate expanding its distribution of Bridgeline Unbound and its interactive development capabilities through acquisitions. We may make additional acquisitions in the foreseeable future. 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, 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, 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, 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. 18 (in thousands) Years Ended September 30, $ % 2020 2019 Change Change Net Revenue Digital engagement services $ 3,409 $ 4,117 $ (708 ) (17% ) % of total net revenue 31 % 41 % Subscription and perpetual licenses 7,498 5,835 1,663 29 % % of total net revenue 69 % 59 % Total net revenue 10,907 9,952 955 10 % Cost of revenue Digital engagement services 1,831 2,070 (239 ) (12 )% % of digital engagement services revenue 54 % 50 % Subscription and perpetual licenses 2,676 3,290 (614 ) (19 )% % of subscription and perpetual revenue 36 % 56 % Total cost of revenue 4,507 5,360 (853 ) (16 )% Gross profit 6,400 4,592 1,808 39 % Gross profit margin 59 % 46 % Operating expenses Sales and marketing 2,614 4,824 (2,210 ) (46 )% % of total revenue 24 % 48 % General and administrative 2,455 3,246 (791 ) (24 )% % of total revenue% 23 % 33 % Research and development 1,641 2,185 (544 ) (25 )% % of total revenue 15 % 22 % Depreciation and amortization 968 620 348 56 % % of total revenue 9 % 6 % Goodwill impairment - 3,732 (3,732 ) (100 )% % of total revenue 0 % 38 % Restructuring and acquisition related expenses 366 1,053 (687 ) (65 )% % of total revenue 3 % 11 % Total operating expenses 8,044 15,660 (7,616 ) (49 )% Loss from operations (1,644 ) (11,068 ) 9,424 (85 )% Interest expense and other, net (7 ) (303 ) 296 (98 )% Government grant income 960 - 960 100 % Amortization of debt discount - (231 ) 231 (100 )% Warranty liability expense - (11,272 ) 11,272 (100 )% Change in fair value of warrant liabilities 1,028 13,404 (12,376 ) (92 )% Income (loss) before income taxes 337 (9,470 ) 9,807 (104 )% Provision for income taxes 11 4 7 175 % Net income/(loss) $ 326 $ (9,474 ) $ 9,800 (103 )% Non-GAAP Measure: Adjusted EBITDA $ (116 ) $ (5,385 ) $ 5,269 (98 )% Revenue Our revenue is derived from two sources: (i) digital engagement services and (ii) subscription and perpetual licenses. 19 Digital Engagement Services Digital engagement services revenue is comprised of Bridgeline Unbound implementation and retainer-related services. 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 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 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 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 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 $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 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 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 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 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 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. 20 Depreciation and Amortization Depreciation and amortization expense increased by $348 thousand, or 56%, to $968 thousand in fiscal 2020 from $620 thousand in fiscal 2019. Depreciation and amortization as a percentage of total revenue increased to 9% in fiscal 2020 from 6% in fiscal 2019. 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 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 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 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. The Company’s sub-lease assumptions include the rates to be charged to a sub-tenant and the timing of the sub-lease arrangement. All of the vacated lease space is currently contractually occupied by a new sub-tenant for the remaining life of the lease. 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 $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 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. 21 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 $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. 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. Generally, after a change in control, a loss corporation cannot deduct NOL carryforwards in excess of the Section 382 limitation. Due to these “change of ownership” provisions, utilization of NOL carryforwards may be subject to an annual limitation on utilization against taxable income in future periods. The Company has not performed a Section 382 analysis. However, if performed, Section 382 may be found to limit potential future utilization of our NOL carryforwards. The Company also has approximately $28 million in state NOLs which expire on various dates through 2039. 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 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. GAAP. 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. 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. 22 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, 2020 2019 Net income (loss) $ 326 $ (9,474 ) Provision for income tax 11 4 Interest expense and other, net 7 303 Government grant income (960 ) - Amortization of debt discount - 231 Warrant liability expense - 11,272 Change in fair value of warrants (1,028 ) (13,404 ) Amortization of intangible assets 891 544 Depreciation 61 66 Goodwill impairment - 3,732 Restructuring and acquisition related charges 366 1,053 Other amortization 16 39 Stock-based compensation 194 249 Adjusted EBITDA $ (116 ) $ (5,385 ) 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 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 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 $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. 23 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. Inflation Inflationary increases can cause pressure on wages and the cost of benefits offered to employees. We believe that the relatively moderate rates of inflation in recent years have not had a significant impact on our operations. 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. Contractual Obligations We lease our facilities in the United States and Canada. We currently have no future commitments that extend past fiscal 2025. The following summarizes our future contractual obligations: (in thousands) Payment obligations by year FY21 FY22 FY23 FY24 FY25 Total Operating leases $ 210 $ 170 $ 173 $ 120 $ 88 $ 761 24 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 U.S. GAAP. The preparation of consolidated 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 periods. We regularly make estimates and assumptions that affect the reported amounts of assets and liabilities. 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. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected. We consider the following accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment: ● Revenue recognition; ● Allowance for doubtful accounts; ● Accounting for cost of computer software to be sold, leased or otherwise marketed; ● Accounting for goodwill and other intangible assets; ● Accounting for Payroll Protection Program; and ● Accounting for stock-based compensation. Revenue Recognition Overview 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: ● Identify the customer contract; ● Identify performance obligations that are distinct; ● Determine the transaction price; ● Allocate the transaction price to the distinct performance obligations; and ● Recognize revenue as the performance obligations are satisfied. Identify the customer contract A customer contract is generally identified when there is approval and commitment from both the Company and its customer, the rights have been identified, payment terms are identified, the contract has commercial substance and collectability and consideration is probable. 25 Identify performance obligations that are distinct A performance obligation is a promise to provide a distinct good or service or a series of distinct goods or services. A good or service that is promised to a customer is distinct if the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and a company’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. Determine the transaction price The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer, excluding sales taxes that are collected on behalf of government agencies. Allocate the transaction price to distinct performance obligations 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 type of software license and professional services sold. Recognize revenue as the performance obligations are satisfied 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. Most subscription contracts are three-year terms. Customers who license the software on a perpetual basis receive rights to use the software for an indefinite time period and an option to purchase post-customer support (“PCS”). PCS revenue is recognized ratably on a straight-line basis over the period of performance and the perpetual license is recognized upon delivery. The Company also offers hosting services for those customers who purchase a perpetual license and do not want to run the software in their environment. Revenue from hosting is recognized ratably over the service period, ranging from one to three-year terms. The Company recognizes revenue from professional services as the services are provided. Customer Payment Terms Payment terms with customers typically require payment 30 days from invoice date. Payment terms may vary by customer but generally do not exceed 45 days from invoice date. Invoicing for digital engagement services are either monthly or upon achievement of milestones and payment terms for such billings are within the standard terms described above. 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. Our digital engagement services agreements with customers do not provide for any refunds for services or products and therefore no specific reserve for such is maintained. In the infrequent instances where customers raise a concern over delivered products or services, we have endeavored to remedy the concern and all costs related to such matters have been insignificant in all periods presented. Warranty Certain arrangements include a warranty period, which is generally 30 days from the completion of work. In hosting arrangements, we provide warranties of up-time reliability. We continue to monitor the conditions that are subject to the warranties to identify if a warranty claim may arise. If we determine that a warranty claim is probable, then any related cost to satisfy the warranty obligation is estimated and accrued. Warranty claims to date have been immaterial. 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. 26 Accounting for Cost of Computer Software to be Sold, Leased or Otherwise Marketed We charge research and development expenditures for technology development to operations as incurred. However, in accordance with 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 over the estimated useful life of the asset. 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 September 30, 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 of these consolidated financial statements. 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 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. 27 Accounting for Payroll 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 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. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Not required. 28