BRIDGELINE DIGITAL, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

Edgar Glimpses |
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™, enables its customers to
maximize the performance of their mission critical websites, intranets, and
online stores. Bridgeline's Unbound (iAPPS®) platform deeply integrates Web
Content Management, eCommerce, eMarketing, Social Media management, and Web
Analytics to help marketers deliver online experiences that attract, engage and
convert their customers across all digital channels. Bridgeline's iAPPS platform
combined with its digital services assists customers in maximizing on-line
revenue, improving customer service and loyalty, enhancing employee knowledge,
and reducing operational costs. The iAPPSds ("distributed subscription") product
is a platform that empowers franchise and large dealer networks with
state-of-the-art web engagement management while providing superior oversight of
corporate branding. iAPPSds deeply integrates content management, eCommerce,
eMarketing and web analytics and is a self-service web platform that is offered
to each authorized franchise or dealer for a monthly subscription fee.



The iAPPS platform is delivered through a cloud-based SaaS ("Software as a
Service") 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 iAPPS software resides on a dedicated server in
either the customer's facility or by Bridgeline via cloud-based hosted services
model.



The iAPPS Platform is an award-winning application recognized around the globe.
Our teams of Microsoft Gold© certified developers have won over 100 industry
related awards. In 2017, our Marketing Automation platform was named a 2017 SIIA
CODiE Award finalist in the Best Marketing Solution category. In 2016, CIO
Review selected iAPPS as one of the 20 Most Promising Digital Marketing Solution
Providers. This followed accolades from the SIIA (Software and Information
Industry Association) which recognized iAPPS Content Manager with the 2015 SIIA
CODiE Award for Best Web Content Management Platform. Also in 2015, EContent
magazine named iAPPS Digital Engagement Platform to its Trendsetting Products
list. The list of 75 products and platforms was compiled by EContent's editorial
staff, and selections were based on each offering's uniqueness and importance to
digital publishing, media, and marketing. We were also recognized in 2015 as a
strong performer by Forrester Research, Inc in its independence report, "The
Forrester Wave ™: Through-Channel Marketing Automation Platforms, Q3 2015." In
recent years, our iAPPS Content Manager and iAPPS Commerce products were
selected as finalists for the 2014, 2013, and 2012 CODiE Awards for Best Content
Management Solution and Best Electronic Commerce Solution, globally. In 2014 and
2013, Bridgeline Digital won twenty-five Horizon Interactive Awards for
outstanding development of web applications and websites. Also in 2013, the Web
Marketing Association sponsored Internet Advertising Competition honored
Bridgeline Digital with three awards for iAPPS customer websites and B2B
Magazine selected Bridgeline Digital as one of the Top Interactive Technology
companies in the United States. KMWorld Magazine Editors selected Bridgeline
Digital as one of the 100 Companies That Matter in Knowledge Management and also
selected iAPPS as a Trend Setting Product in 2013.



Bridgeline Digital was incorporated under the laws of the State of Delaware on .




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Locations


The Company's corporate office is located in Burlington, Massachusetts. The Company has one wholly-owned subsidiary, Bridgeline Digital Pvt. Ltd. located in Bangalore, India.




Reverse Stock Split



On , the Company's Shareholders and the Board of Directors approved
a reverse stock split pursuant to which all classes of our 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 1 share of common stock for every 5 shares of common stock ("1-for-5
reverse stock split"). The 1-for-5 reverse stock split was effective as of close
of business on  and the Company's stock began trading on a
split-adjusted basis on .



The reverse stock split reduced the number of shares of the Company's common
stock currently outstanding from approximately 21 million shares to
approximately 4.2 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. Upon the effectiveness of the 1-for-5 reverse stock split, each five
shares of the Company's issued and outstanding common stock were automatically
combined and converted into one issued and outstanding share of common stock,
par value $.001. The Company did not issue any fractional shares in connection
with the reverse stock split. Instead, fractional share interests were rounded
up to the next largest whole share. 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 remains at 50 million shares and the par value
remains $0.001. Our consolidated financial statements have been retroactively
adjusted to reflect the effects of the 1-for-5 reverse stock split.





Customer Information



We currently have over 3,000 active customers. For the three months ended
, two customers represented 11% and 12% of the Company's total
revenue. For the three months ended , one customer represented
12% of the Company's total revenue.

Results of Operations for the Three Months Ended compared to the Three Months Ended




Total revenue for the three months ended  and the three months
ended  was $4.0 million. We had a net loss of ($430)
thousand for the three months ended  and ($408) thousand for
the three months ended . Net loss per share applicable to
common shareholders was ($0.12) for the three months ended  and
the three months ended .



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                                           Three Months      Three Months
                                               Ended             Ended
                                           December 31,      December 31,          $              %
(in thousands)                                 2017              2016            Change        Change
Revenue
Digital engagement services                $       2,060     $       2,026     $       34             2 %
% of total revenue                                    52 %              51 %
Subscription and perpetual licenses                1,606             1,725           (119 )          (7 %)
% of total revenue                                    40 %              43 %
Managed service hosting                              303               240             63            26 %
% of total revenue                                     8 %               6 %
Total revenue                                      3,969             3,991            (22 )          (1 %)

Cost of revenue

Digital engagement services                        1,397             1,128            269            24 %
% of digital engagement revenue                       68 %              56 %
Subscription and perpetual licenses                  480               496            (16 )          (3 %)
% of subscription and perpetual licenses
revenue                                               30 %              29 %
Managed service hosting                               80                71              9            13 %
% of managed service hosting                          26 %              30 %
Total cost of revenue                              1,957             1,695            262            15 %
Gross profit                                       2,012             2,296           (284 )         (12 %)
Gross profit margin                                   51 %              58 %

Operating expenses
Sales and marketing                                1,104             1,294           (190 )         (15 %)
% of total revenue                                    28 %              32 %
General and administrative                           736               791            (55 )          (7 %)
% of total revenue                                    19 %              20 %
Research and development                             407               360             47            13 %
% of total revenue                                    10 %               9 %
Depreciation and amortization                        108               185            (77 )         (42 %)
% of total revenue                                     3 %               5 %
Restructuring expenses                                 -                31            (31 )        (100 %)
% of total revenue                                     0 %               1 %
Total operating expenses                           2,355             2,661           (306 )         (11 %)
% of total revenue                                    59 %              67 %

Loss from operations                                (343 )            (365 )           22            (6 %)
Interest and other expense, net                      (86 )             (31 )          (55 )         177 %
Loss before income taxes                            (429 )            (396 )          (33 )           8 %
Provision for income taxes                             1                12            (11 )         (92 %)
Net loss                                   $        (430 )   $        (408 )   $      (22 )           5 %

Non-GAAP Measure
Adjusted EBITDA                            $         (94 )   $          10     $     (104 )      (1,040 %)






Revenue


Our revenue is derived from three sources: (i) digital engagement services (ii) subscription and perpetual licenses and (iii) managed service hosting.

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Digital Engagement Services



Digital engagement services revenue is comprised of iAPPS digital engagement
related services and other digital engagement related services generated from
non-iAPPS related engagements. In total, revenue from digital engagement
services increased $34 thousand, or 2%, for the three months ended  compared to three months ended . Digital engagement
services revenue as a percentage of total revenue increased to 52% from 51% for
the three months ended  compared to the prior period. The
increase as a percentage of total revenue is attributable to the decreases in
subscription and license revenue for the three months ended 
compared to the prior quarter.



Subscription and Perpetual Licenses




Revenue from subscription and perpetual licenses decreased $119 thousand, or 7%,
to $1.6 million for the three months ended  compared to $1.7
million for the three months ended .  The decrease for the
three months ended  compared to the prior period is a decline
in perpetual licenses as demand for perpetual licenses can vary and we did not
sell any perpetual licenses in the three months ended .
Subscription and perpetual license revenue as a percentage of total revenue
decreased to 40% for the three months ended  from 43% compared
to the three months ended . The decrease as a percentage of
revenues is attributable to the decreases in iAPPS subscriptions and perpetual
licenses.



Managed Service Hosting



Revenue from managed service hosting increased $63 thousand, or 26%, to $303
thousand for the three months ended  compared to $240 thousand
for the three months ended . The increase is due to new hosting
contracts for iAPPs perpetual licenses sold in fiscal 2017. Managed services
revenue as a percentage of total revenue increased to 8% for the three months
ended  from 6% compared to the three months ended . The increase as a percentage of revenue is attributable to the increase in
iAPPS customer hosting contracts.



Costs of Revenue



Total cost of revenue increased $262 thousand to $2.0 million or 15% for the
three months ended  compared to $1.7 million for the three
months ended . The gross profit margin declined to 51% for the
three months ended  compared to 58% for the three months ended
. The decline in the gross profit margin for the three months
ended  compared to the three months ended  is
attributable to an increase in cost of digital engagement services.



Cost of Digital Engagement Services




Cost of digital engagement services increased $269 thousand, or 24%, to $1.4
million for the three months ended  compared to $1.1 million
for the three months ended . The cost of digital engagement
services as a percentage of digital engagement services revenue increased to 68%
from 56% compared to the three months ended . The increase is
due to an increase in both internal costs and third party subcontractors that
were incurred at a lower gross margin in order to complete a project for a
strategic customer.



Cost of Subscription and Perpetual License




Cost of subscription and perpetual licenses decreased $16 thousand, or 3%, to
$480 thousand for the three months ended  compared to $496
thousand for the three months ended . The cost of subscription
and perpetual licenses as a percentage of subscription and perpetual license
revenue increased to 30% from 29% compared to the three months ended .




Cost of Managed Service Hosting




Cost of managed service hosting increased $9 thousand, or 13%, to $80 thousand
for the three months ended  compared to $71 thousand for the
three months ended . The cost of managed services as a
percentage of managed services revenue decreased to 26% from 30% compared to the
three months ended . The percentage decrease is attributable to
the transition of our network operations center from a co-managed facility at
Internap to a cloud-based model with Amazon Web Services.

.

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Operating Expenses



Sales and Marketing Expenses



Sales and marketing expenses decreased $190 thousand to $1.1 million, or 15%,
for the three months ended  compared to $1.3 million for the
three months ended . Sales and marketing expenses represented
28% and 32% of total revenue for the three months ended  and
2016, respectively. The decreases for the three months ended 
compared to the three months ended  is attributable to
decreases in sales personnel and marketing expenses.



Administrative Expenses



General and administrative expenses decreased $55 thousand, or 7%, to $736
thousand for the three months ended  compared to $791 thousand
for the three months ended .  General and administrative
expenses represented 19% and 20% of total revenue for the three months ended
 and 2016, respectively. The decrease in expense was due to
decreases in headcount and personnel expenses.



Research and Development



Research and development expense increased $47 thousand, or 13%, to $407
thousand for the three months ended  compared to $360 thousand
for the three months ended .  Research and development expenses
represented 10% and 9% of total revenue for the three months ended  and 2016, respectively. The increase in research and development expense is
due to an increase in compensation expenses.



Depreciation and Amortization




Depreciation and amortization expense decreased $77 thousand, or 42% to $108
thousand for the three months ended  compared to $185 thousand
for the three months ended .  Depreciation and amortization has
decreased due to asset retirements related to the termination and closing of
offices, as well as reductions in capital expenditures.  Depreciation and
amortization represented 3% and 5% of revenue for the three months ended
 and 2016.



Restructuring Expenses



Commencing in fiscal 2015, the Company's management approved, committed to and
initiated plans to restructure and further improve efficiencies by implementing
cost reductions. As part of these restructuring initiatives, we recorded $31
thousand for the three months ended .



Net Loss



Loss from operations



The loss from operations was ($343) thousand for three months ended , compared to a loss of $(365) thousand in the prior period. Operating
expenses decreased $306 thousand or 11% for the three months ended  compared to . We have made concerted efforts to bring our
operating expenses in line with projected revenues.



Income Taxes



The provision for income tax expense was $1 thousand and $12 thousand for the
three months ended  and 2016, respectively. Income tax expense
represents the estimated liability for federal and state income taxes owed,
including the alternative minimum tax. We have net operating loss carryforwards
and other deferred tax benefits that are available to offset future taxable
income.





Adjusted EBITDA


We also measure our performance based on a non-GAAP ("Generally Accepted Accounting Principles") measurement of earnings before interest, taxes, depreciation, and amortization and before stock-based compensation expense and impairment of goodwill and intangible assets ("Adjusted EBITDA").

We believe this non-GAAP financial measure of Adjusted EBITDA is useful to management and investors in evaluating our operating performance for the periods presented and provide a tool for evaluating our ongoing operations.

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Adjusted EBITDA, however, is not a measure of operating performance under GAAP
and should not be considered as an alternative or substitute for GAAP
profitability measures such as (i) income from operations and net income, or
(ii) cash flows from operating, investing and financing activities, both as
determined in accordance with GAAP. Adjusted EBITDA as an operating performance
measure has material limitations since it excludes the financial statement
impact of income taxes, net interest expense, amortization of intangibles,
depreciation, restructuring charges, other amortization and stock-based
compensation, and therefore does not represent an accurate measure of
profitability. As a result, Adjusted EBITDA should be evaluated in conjunction
with net income for a complete analysis of our profitability, as net income
includes the financial statement impact of these items and is the most directly
comparable GAAP operating performance measure to Adjusted EBITDA. Our definition
of Adjusted EBITDA may also differ from and therefore may not be comparable with
similarly titled measures used by other companies, thereby limiting its
usefulness as a comparative measure. Because of the limitations that Adjusted
EBITDA has as an analytical tool, investors should not consider it in isolation,
or as a substitute for analysis of our operating results as reported under GAAP.



The following table reconciles net (loss) income (which is the most directly
comparable GAAP operating performance measure) to EBITDA, and EBITDA to Adjusted
EBITDA (in thousands):



                                      Three Months Ended
                                         December 31,
                                      2017           2016
Net loss                            $    (430 )     $  (408 )
Provision for income tax                    1            12
Interest expense, net                      86            31
Amortization of intangible assets          72            71
Depreciation                               36            89
Restructuring charges                       -            31
Other amortization                         16            39
Stock based compensation                  125           145
Adjusted EBITDA                     $     (94 )     $    10






Adjusted EBITDA decreased compared to the first quarter of fiscal 2017. However,
a decrease in operating expenses of $306 thousand compensated for the decrease
in the gross profit of $284 thousand.





Liquidity and Capital Resources



Cash Flows



Operating Activities



Cash used in operating activities was $575 thousand for the three months ended
 compared to cash used in operating activities of $293 thousand
for the three months ended . This increase in the use of cash
compared to the prior period was primarily to an increase in accounts receivable
and decrease in accounts payable.



Investing Activities



Cash used in investing activities was $8 thousand for the three months ended
 compared to $21 thousand for the three months ended .  We do not expect to expend significant dollars for computer equipment
or to capitalize any software in the next twelve months.





Financing Activities



Cash provided by financing activities was $953 thousand for the three months
ended  compared to $1.1 million for the three months ended
.  Cash provided by financing activities for the three months
ended  is primarily attributable to a new term loan for gross
proceeds of $1.0 million with Montage Capital II, L.P.



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Capital Resources and Liquidity Outlook




In the first quarter of fiscal 2018, we entered into a Loan and Security
Agreement with Montage Capital II, L.P. ("Montage Loan"). The Montage Loan has a
thirty-six (36) month term which expires on . The Montage Loan
provides for up to $1.5 million of borrowing in the form of a non-revolving term
loan which may be used by the Company for working capital purposes. $1 million
of borrowing was advanced on the date of closing. An additional $500 thousand of
borrowing will be available at the Company's option in the event that the
Company achieves certain financial milestones and is otherwise in compliance
with its loan covenants. The Loan is subordinate to the Company's senior debt
facility with Heritage Bank of Commerce ("Heritage Bank"). We also have a
borrowing facility with Heritage Bank from which we can borrow, and this line is
subject to financial covenants that must be met.



We believe that the cash balance as of  of $1.1 million as well
as collections from accounts receivable will be sufficient to meet the Company's
obligations for a minimum of twelve months from the financial statement issuance
date. Our borrowing facility with Heritage Bank is subject to financial
covenants that must be met. It is not certain that all or part of this line will
be available to us in the future; and other sources of financing may not be
available to us in a timely basis if at all, or on terms acceptable to us. If we
fail to obtain acceptable funding when needed, we may not have sufficient
resources to fund our normal operations, and this would have a material adverse
effect on our business.


Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, financings or other relationships with unconsolidated entities or other persons, other than our operating leases and contingent acquisition payments.




We currently do not have any variable interest entities. We do not have any
relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special purpose entities,
which would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes. Therefore,
we are not materially exposed to any financing, liquidity, market or credit risk
that could arise if we had engaged in such relationships.



Commitments and Contingencies


As of , we have no material commitments or contingencies.

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Critical Accounting Policies



Critical Accounting Policies



These critical accounting policies and estimates by our management were prepared
in accordance with accounting principles generally accepted in the United States
of America ("US GAAP") and should be read in conjunction with Note 2 Summary of
Significant Accounting Policies to the Consolidated Financial Statements of our
Annual Report on Form 10-K filed with the Securities and Exchange Commission on
.



The preparation of financial statements in accordance US GAAP requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses in the reporting period. We regularly make estimates
and assumptions that affect the reported amounts of assets and liabilities. The
most significant estimates included in our financial statements are the
valuation of accounts receivable and long-term assets, including intangibles,
goodwill and deferred tax assets, stock-based compensation, amounts of revenue
to be recognized on service contracts in progress, unbilled receivables, and
deferred revenue. We base our estimates and assumptions on current
facts, historical experience and various other factors that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities and the
accrual of costs and expenses that are not readily apparent from other sources.
The actual results experienced by us may differ materially and adversely from
our estimates. To the extent there are material differences between our
estimates and the actual results, our future results of operations will be
affected.



We consider the following accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment:



  ? Revenue recognition;




  ? Allowance for doubtful accounts;



? Accounting for cost of computer software to be sold, leased or otherwise

    marketed;




  ? Accounting for goodwill and other intangible assets; and




  ? Accounting for stock-based compensation.






Revenue Recognition



Overview



The Company enters into arrangements to sell digital engagement services
(professional services), software licenses or combinations thereof. Revenue is
categorized into (i) digital engagement services; (ii) managed service hosting;
and (iii) subscriptions and perpetual licenses.



The Company recognizes revenue as required by the Revenue Recognition Topic of
the Codification. Revenue is generally recognized when all of the following
conditions are satisfied: (1) there is persuasive evidence of an arrangement;
(2) delivery has occurred or the services have been provided to the customer;
(3) the amount of fees to be paid by the customer is fixed or determinable; and
(4) the collection of the fees is reasonably assured. Billings made or payments
received in advance of providing services are deferred until the period these
services are provided.



The Company maintains a reseller channel to supplement our direct sales force
for our iAPPS platform. Resellers are generally located in territories where the
Company does not have a direct sales force. Customers generally sign a license
agreement directly with us. Revenue from perpetual licenses sold through
resellers is recognized upon delivery to the end user as long as evidence of an
arrangement exists, collectability is probable, and the fee is fixed and
determinable. Revenue for subscription licenses is recognized monthly as the
services are delivered.



Digital Engagement Services

Digital engagement services include professional services primarily related to
the Company's web development solutions that address specific customer needs
such as digital strategy, information architecture and usability engineering,
.Net development, rich media development, back end integration, search engine
optimization, quality assurance and project management.



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Digital engagement services are contracted for on either a fixed price or time
and materials basis.  For its fixed price engagements, after assigning the
relative selling price to the elements of the arrangement, the Company applies
the proportional performance model (if not subject to contract accounting) to
recognize revenue based on cost incurred in relation to total estimated cost at
completion. The Company has determined that labor costs are the most appropriate
measure to allocate revenue among reporting periods, as they are the primary
input when providing application development services. Customers are invoiced
monthly or upon the completion of milestones. For milestone based projects,
since milestone pricing is based on expected hourly costs and the duration of
such engagements is relatively short, this input approach principally mirrors an
output approach under the proportional performance model for revenue recognition
on such fixed priced engagements. For time and materials contracts, revenues are
recognized as the services are provided.



Digital engagement services also include retained professional services
contracted for on an "on call" basis or for a certain number of hours each
month. Such arrangements generally provide for a guaranteed availability of a
number of professional services hours each month on a "use it or lose it"
basis.  For retained professional services sold on a stand-alone basis the
Company recognizes revenue as the services are delivered or over the term of the
contractual retainer period. These arrangements do not require formal customer
acceptance and do not grant any future right to labor hours contracted for but
not used.


Subscriptions and Perpetual Licenses


The Company licenses its software on either a perpetual or subscription basis.
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"). For arrangements that consist of a perpetual
license and PCS, as long as Vendor Specific Objective Evidence ("VSOE") exists
for the PCS, then PCS revenue is recognized ratably on a straight-line basis
over the period of performance and the perpetual license is recognized on a
residual basis. Under the residual method, the fair value of the undelivered
elements is deferred and the remaining portion of the arrangement fee is
allocated to the delivered elements and recognized as revenue, assuming all
other revenue recognition criteria have been met.



Customers may also license the software on a subscription basis, which can be
described as "Software as a Service" or "SaaS". SaaS is a model of software
deployment where an application is hosted as a service provided to customers
across the Internet. Subscription agreements include access to the Company's
software application via an internet connection, the related hosting of the
application, and PCS. Customers receive automatic updates and upgrades, and new
releases of the products as soon as they become available. Customers cannot take
possession of the software.  Subscription agreements are either annual or
month-to-month arrangements that provide for termination for convenience by
either party upon 90 days' notice. Revenue is recognized monthly as the services
are delivered. Set up fees paid by customers in connection with subscription
services are deferred and recognized ratably over the longer of the life of
subscription period or the expected lives of customer relationships. The Company
continues to evaluate the length of the amortization period of the set up fees
as it gains more experience with customer contract renewals.



Managed Service Hosting


Managed service hosting includes hosting arrangements that provide for the use
of certain hardware and infrastructure for those customers who do not wish to
host our applications independently. Hosting agreements are either annual or
month-to-month arrangements that provide for termination for convenience by
either party generally upon 30-days' notice. Revenue is recognized monthly as
the hosting services are delivered.  Set up fees paid by customers in connection
with managed hosting services are deferred and recognized ratably over the life
of the hosting period.


Multiple Element Arrangements


 In accounting for multiple element arrangements, the Company follows either ASC
Topic 605-985 Revenue Recognition Software or ASC Topic 605-25 Revenue
Recognition Multiple Element Arrangements, as applicable. In , the
FASB issued Accounting Standards Update No. 2009-13, Revenue Recognition:
Multiple-Deliverable Revenue Arrangements ("ASU 2009-13"). ASU 2009-13 provides
amendments to certain paragraphs of previously issued ASC Subtopic 605-25 -
Revenue Recognition: Multiple-Deliverable Revenue Arrangements. In accordance
with ASU 2009-13, each deliverable within a multiple-deliverable revenue
arrangement is accounted for as a separate unit of accounting if both of the
following criteria are met (1) the delivered item has value to the customer on a
standalone basis and (2) for an arrangement that includes a right of return
relative to the delivered item, delivery or performance of the delivered item is
considered probable and within our control. If the deliverables do not meet the
criteria for being a separate unit of accounting then they are combined with a
deliverable that does meet that criterion. The accounting guidance also requires
that arrangement consideration be allocated at the inception of an arrangement
to all deliverables using the relative selling price method. The accounting
guidance also establishes a selling price hierarchy for determining the selling
price of a deliverable. The Company determines selling price using VSOE, if it
exists; otherwise, it uses Third-party Evidence ("TPE"). If neither VSOE nor TPE
of selling price exists for a unit of accounting, the Company uses Estimated
Selling Price ("ESP").



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VSOE is generally limited to the price at which the Company sells the element in
a separate stand-alone transaction. TPE is determined based on the prices
charged by our competitors for a similar deliverable when sold separately. It is
difficult for us to obtain sufficient information on competitor pricing, so we
may not be able to substantiate TPE. If the Company cannot establish selling
price based on VSOE or TPE then it will use ESP. ESP is derived by considering
the selling price for similar services and our ongoing pricing strategies. The
selling prices used in allocations of arrangement consideration are analyzed at
minimum on an annual basis and more frequently if business necessitates a more
timely review. The Company has determined that it has VSOE on its SaaS
offerings, certain application development services, managed hosting services,
and PCS because it has evidence of these elements sold on a stand-alone basis.



When the Company licenses its software on a perpetual basis in a multiple
element arrangement that arrangement typically includes PCS and application
development services, we follow the guidance of ASC Topic 605-985. In assessing
the hierarchy of relative selling price for PCS, we have determined that VSOE is
established for PCS. VSOE for PCS is based on the price of PCS when sold
separately, which has been established via annual renewal rates. Similarly, when
the Company licenses its software on a perpetual basis in a multiple element
arrangement that also includes managed service hosting ("hosting"), we have
determined that VSOE is established for hosting based on the price of the
hosting when sold separately, which has been established based on renewal rates
of the hosting contract.  Revenue recognition for perpetual licenses sold with
application development services are considered on a case by case basis. The
Company has not established VSOE for perpetual licenses or fixed price
development services and therefore in accordance with ASC Topic 605-985, when
perpetual licenses are sold in multiple element arrangements including
application development services where VSOE for the services has not been
established, the license revenue is deferred and recognized using contract
accounting. The Company has determined that services are not essential to the
functionality of the software and it has the ability to make estimates necessary
to apply proportional performance model. In those cases where perpetual licenses
are sold in a multiple element arrangement that includes application development
services where VSOE for the services has been established, the license revenue
is recognized under the residual method and the application services are
recognized upon delivery.



In determining VSOE for the digital engagement services element, the
separability of the services from the software license and the value of the
services when sold on a standalone basis are considered. The Company also
considers the categorization of the services, the timing of when the services
contract was signed in relation to the signing of the perpetual license contract
and delivery of the software, and whether the services can be performed by
others. The Company has concluded that its application development services are
not required for the customer to use the product but, rather enhance the
benefits that the software can bring to the customer. In addition, the services
provided do not result in significant customization or modification of the
software and are not essential to its functionality, and can also be performed
by the customer or a third party. If an application development services
arrangement does qualify for separate accounting, the Company recognizes the
perpetual license on a residual basis. If an application development services
arrangement does not qualify for separate accounting, the Company recognizes the
perpetual license under the proportional performance model as described above.



When subscription arrangements are sold with application development services,
the Company uses its judgment as to whether the application development services
qualify as a separate unit of accounting. When subscription service arrangements
involve multiple elements that qualify as separate units of accounting, the
Company allocates arrangement consideration in multiple-deliverable arrangements
at the inception of an arrangement to all deliverables based on the relative
selling price model in accordance with the selling price hierarchy, which
includes: (i) VSOE when available; (ii) TPE if VSOE is not available; and (iii)
ESP if neither VSOE or TPE is available. For those subscription arrangements
sold with multiple elements whereby the application development services do not
qualify as a separate unit of accounting, the application services revenue is
recognized ratably over the subscription period. Subscriptions also include a
PCS component, and the Company has determined that the two elements cannot be
separated and must be recognized as one unit over the applicable service period.
Set up fees paid by customers in connection with subscription arrangements are
deferred and recognized ratably over the longer of the life of the hosting
period or the expected lives of customer relationships, which generally range
from two to three years. The Company continues to evaluate the length of the
amortization period of the set up fees as it gains more experience with customer
contract renewals and our newer product offerings.



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. Invoicing 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.



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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.



Reimbursable Expenses



In connection with certain arrangements, reimbursable expenses are incurred and
billed to customers and such amounts are recognized as both revenue and cost of
revenue.


Allowance for Doubtful Accounts




We maintain an allowance for doubtful accounts which represents estimated losses
resulting from the inability, failure or refusal of our clients to make required
payments.



We analyze historical percentages of uncollectible accounts and changes in
payment history when evaluating the adequacy of the allowance for doubtful
accounts. We use an internal collection effort, which may include our sales and
services groups as we deem appropriate. Although we believe that our allowances
are adequate, if the financial condition of our clients deteriorates, resulting
in an impairment of their ability to make payments, or if we underestimate the
allowances required, additional allowances may be necessary, resulting in
increased expense in the period in which such determination is made.



Accounting for Cost of Computer Software to be Sold, Leased or Otherwise Marketed




We charge research and development expenditures for technology development to
operations as incurred.  However, in accordance with Codification 985-20 Costs
of Software to be Sold Leased or Otherwise Marketed, we capitalize certain
software development costs subsequent to the establishment of technological
feasibility. Based on our product development process, technological feasibility
is established upon completion of a working model. Certain costs incurred
between completion of a working model and the point at which the product is
ready for general release is capitalized if significant. Once the product is
available for general release, the capitalized costs are amortized in cost of
sales.


Accounting for Goodwill and Intangible Assets




Goodwill is tested for impairment annually during the fourth quarter of every
year and more frequently if events and circumstances indicate that the asset
might be impaired. We assess goodwill at the consolidated level as one reporting
unit. In assessing goodwill for impairment, an entity has the option to assess
qualitative factors to determine whether events or circumstances indicate that
it is not more likely than not that the fair value of a reporting unit is less
than its carrying amount. If this is the case, then performing the quantitative
two-step goodwill impairment test is unnecessary. An entity can choose not to
perform a qualitative assessment for any or all of its reporting units, and
proceed directly to the use of the two-step impairment test. In assessing
qualitative factors to determine whether it is more likely than not that the
fair value of a reporting unit is less than its carrying amount, we assess
relevant events and circumstances that may impact the fair value and the
carrying amount of a reporting unit. The identification of relevant events and
circumstances and how these may impact a reporting unit's fair value or carrying
amount involve significant judgments by management. These judgments include the
consideration of macroeconomic conditions, industry and market considerations,
cost factors, overall financial performance, events which are specific to
Bridgeline and trends in the market price of our common stock. Each factor is
assessed to determine whether it impacts the impairment test positively or
negatively, and the magnitude of any such impact.



For fiscal 2017, the Company performed the annual assessment of goodwill during
the fourth quarter of that year and concluded that it was not more likely than
not that the fair values of the reporting units were less than their carrying
amounts. We used the option to assess qualitative factors to determine whether
events or circumstances indicate that it is not more likely than not that the
fair value of a reporting unit is less than its carrying amount. We concluded
that it was not more likely than not that the fair value of our reporting unit
was less than the corresponding carrying amount, and therefore it was not
necessary to perform the two-step impairment test. The key qualitative factors
that led to our conclusion included the following: (i) access to capital (ii)
market acceptance of our products (iii) improvements in financial metrics and
(iv) market value of the Company.



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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 , we maintained two stock-based compensation plans, one of
which has expired but still contains vested and unvested stock options and are
more fully described in Note 11 to the Consolidated Financial Statements of our
Annual Report on Form 10-K filed with the Securities and Exchange Commission on
.



The Company accounts for stock-based compensation awards in accordance with the
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  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  over the remaining service period, net of estimated
forfeitures.  In determining whether an award is expected to vest, we use an
estimated, forward-looking forfeiture rate based upon our historical forfeiture
rate and reduce the expense over the recognition period. Estimated forfeiture
rates are updated for actual forfeitures quarterly.  We also consider, each
quarter, whether there have been any significant changes in facts and
circumstances that would affect our forfeiture rate. Although we estimate
forfeitures based on historical experience, actual forfeitures in the future may
differ.  In addition, to the extent our actual forfeitures are different than
our estimates, we record a true-up for the difference in the period that the
awards vest, and such true-ups could materially affect our operating results.



We estimate the fair value of employee stock options using the
Black-Scholes-Merton option valuation model. The fair value of an award is
affected by our stock price on the date of grant as well as other assumptions
including the estimated volatility of our stock price over the term of the
awards and the estimated period of time that we expect employees to hold their
stock options.  The risk-free interest rate assumption we use is based upon
United States treasury interest rates appropriate for the expected life of the
awards.  We use the historical volatility of our publicly traded options in
order to estimate future stock price trends.  In order to determine the
estimated period of time that we expect employees to hold their stock options,
we use historical trends of employee turnovers.  Our expected dividend rate is
zero since we do not currently pay cash dividends on our common stock and do not
anticipate doing so in the foreseeable future. The aforementioned inputs entered
into the option valuation model we use to fair value our stock awards are
subjective estimates and changes to these estimates will cause the fair value of
our stock awards and related stock-based compensation expense we record to vary.



We record deferred tax assets for stock-based awards that result in deductions on our income tax returns, based on the amount of stock-based compensation recognized and the statutory tax rate in the jurisdiction in which we will receive a tax deduction.




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