Bridgeline Digital, Inc. - Quarter Report: 2015 June (Form 10-Q)

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ASSETS		June 30,				September 30,
		2015				2014
Current assets:
Cash and cash equivalents		$	583			$	1,256
Accounts receivable and unbilled receivables, net			3,155				3,342
Prepaid expenses and other current assets			605				747
Total current assets			4,343				5,345
Equipment and improvements, net			1,585				2,175
Intangible assets, net			1,136				1,582
Goodwill			23,141				23,141
Other assets			937				1,317
Total assets		$	31,142			$	33,560
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	1,256			$	1,126
Accrued liabilities			986				957
Accrued earnouts, current			507				487
Debt, current			360				985
Capital lease obligations, current			399				364
Deferred revenue			2,191				1,990
Total current liabilities			5,699				5,909
Accrued earnouts, net of current portion			76				381
Debt, net of current portion			7,593				5,935
Capital lease obligations, net of current portion			29				247
Other long term liabilities			1,008				1,155
Total liabilities			14,405				13,627
Commitments and contingencies
Stockholders’ equity:
Preferred stock - $0.001 par value; 1,000,000 shares authorized; 205,132 at June 30, 2015 and 0 at September 30, 2014, issued and outstanding (liquidation preference $2,082)			-				-
Common stock - $0.001 par value; 50,000,000 shares authorized; 4,441,381 at June 30, 2015 and 4,388,583 at September 30, 2014, issued and outstanding			5				5
Additional paid-in capital			49,993				47,790
Accumulated deficit			(32,904	)			(27,529	)
Accumulated other comprehensive loss			(357	)			(333	)
Total stockholders’ equity			16,737				19,933
Total liabilities and stockholders’ equity		$	31,142			$	33,560

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		Three Months Ended								Nine Months Ended
		June 30,								June 30,
		2015				2014				2015				2014
Net revenue:
Digital engagement services		$	2,956			$	4,233			$	9,227			$	12,392
Subscription and perpetual licenses			1,505				1,510				4,260				4,394
Managed service hosting			415				409				1,188				1,181
Total net revenue			4,876				6,152				14,675				17,967
Cost of revenue:
Digital engagement services			2,114				2,531				7,190				7,703
Subscription and perpetual licenses			473				422				1,366				1,271
Managed service hosting			76				66				224				218
Total cost of revenue			2,663				3,019				8,780				9,192
Gross profit			2,213				3,133				5,895				8,775
Operating expenses:
Sales and marketing			1,245				1,992				4,590				6,030
General and administrative			980				1,110				3,110				3,308
Research and development			373				613				1,442				1,715
Depreciation and amortization			422				510				1,315				1,515
Total operating expenses			3,020				4,225				10,457				12,568
Loss from operations			(807	)			(1,092	)			(4,562	)			(3,793	)
Interest and other expense, net			(278	)			(190	)			(643	)			(524	)
Loss before income taxes			(1,085	)			(1,282	)			(5,205	)			(4,317	)
Provision for income taxes			25				24				88				80
Net loss			(1,110	)			(1,306	)			(5,293	)			(4,397	)
Dividends on convertible preferred stock			(31	)			-				(82	)			-
Net loss applicable to common shareholders		$	(1,141	)		$	(1,306	)		$	(5,375	)		$	(4,397	)
Net loss per share attributable to common shareholders:
Basic and diluted		$	(0.26	)		$	(0.31	)		$	(1.24	)		$	(1.16	)
Number of weighted average shares outstanding:
Basic and diluted			4,348,865				4,259,297				4,321,132				3,805,689

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		Three Months Ended								Nine Months Ended
		June 30,								June 30,
		2015				2014				2015				2014
Net Loss		$	(1,110	)		$	(1,306	)		$	(5,293	)		$	(4,397	)
Net change in foreign currency translation adjustment			(2	)			(18	)			(24	)			(143	)
Comprehensive loss		$	(1,112	)		$	(1,324	)		$	(5,317	)		$	(4,540	)

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		Nine Months Ended
		June 30,
		2015				2014
Cash flows from operating activities:
Net loss		$	(5,293	)		$	(4,397	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of intangible assets			447				498
Depreciation			814				980
Other amortization			490				399
Stock-based compensation			244				339
Contingent earnout liability adjustment			131				-
Change in deferred taxes			45				-
Net loss on disposal of fixed assets			58				-
Changes in operating assets and liabilities
Accounts receivable and unbilled receivables			187				(640	)
Prepaid expenses and other assets			577				614
Accounts payable and accrued liabilities			(322	)			(1,139	)
Deferred revenue			201				546
Other liabilities			(216	)			(78	)
Total adjustments			2,656				1,519
Net cash used in operating activities			(2,637	)			(2,878	)
Cash flows used in investing activities:
Purchase of equipment and improvements			(52	)			(264	)
Software development capitalization costs			(50	)			(134	)
Contingent acquisition payments			(417	)			(464	)
Net cash used in investing activities			(519	)			(862	)
Cash flows provided by financing activities:
Proceeds from issuance of common stock, net of issuance costs			-				2,749
Proceeds from issuance of convertible debt, net of issuance costs			-				913
Proceeds from exercise of employee stock options			-				185
Proceeds from employee stock purchase plan			6				21
Proceeds from issuance of 200,000 shares of preferred stock, net of issuance costs			1,722				-
Proceeeds from bank term loan			1,460				-
Proceeds from term note from stockholder			2,000				-
Borrowings on bank line of credit			825				746
Payments on bank term loan			(2,460	)			(273	)
Payments on bank line of credit			(670	)			(1,336	)
Payments on subordinated promissory notes			(21	)			(86	)
Principal payments on capital leases			(355	)			(319	)
Net cash provided by financing activities			2,507				2,600
Effect of exchange rate changes on cash and cash equivalents			(24	)			(143	)
Net decrease in cash and cash equivalents			(673	)			(1,283	)
Cash and cash equivalents at beginning of period			1,256				2,830
Cash and cash equivalents at end of period		$	583			$	1,547
Supplemental disclosures of cash flow information:
Cash paid for:
Interest		$	163			$	50
Income taxes		$	43			$	10
Non cash investing and financing activities:
Equipment purchased under capital leases		$	172			$	89
Other assets included in accounts payable		$	2			$	-
Accrued dividends on convertible preferred stock		$	81				-

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1.   Description of Business

 

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 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.

 

In fiscal 2012, Bridgeline Digital announced the release of iAPPSds (“distributed subscription”), 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. On August 1, 2013, we acquired franchise web developer ElementsLocal, expanding Bridgeline Digital’s presence in the franchise market place.

 

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 Bridgeline’s co-managed hosting facility.

 

The iAPPS Platform is an award-winning application. Our teams of Microsoft Gold© certified developers have won over 100 industry related awards. 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 2015, the SIIA (Software and Information Industry Association) awarded iAPPS content managers the 2015 SIIA CODiE Award for Best Web Content Management Platform. 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 August 28, 2000.

 

Locations

 

The Company’s corporate office is in Burlington, Massachusetts.  The Company maintains regional field offices serving the following geographical locations: Atlanta, GA; Baltimore, MD; Boston, MA; Chicago, IL; Dallas, TX; Denver, CO; New York, NY; San Diego, CA; San Luis Obispo, CA; and Tampa, FL.  The Company has one wholly-owned subsidiary, Bridgeline Digital Pvt. Ltd. located in Bangalore, India. 

 

Reverse Stock Split

 

On May 4, 2015, 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 is effective as of close of business on May 7, 2015 and the Company’s stock began trading on a split-adjusted basis on May 8, 2015.

 

 BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

 

 

The reverse stock split reduces the number of shares of the Company’s common stock currently outstanding from approximately 22 million shares to approximately 4.4 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, convertible notes and stock options, and to the number of shares issued and issuable under the Company’s Amended and Restated Stock Incentive Plan. Upon the effectiveness of the 1-for-5 reverse stock split, each five shares of the Company’s issued and outstanding common stock have been 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.

 

The accompanying unaudited condensed consolidated financial statements and footnotes have been retroactively adjusted to reflect the effects of the 1-for-5 reverse stock split.

 

Liquidity

 

The Company has incurred operating losses and used cash in its operating activities for the past several years. Cash was used to fund acquisitions to broaden our geographic footprint, develop new products, and build infrastructure, while also ramping down a lower margin services model. The Company has worked on reducing operating expenses during the current fiscal year and management believes it will have an appropriate cost structure for the remainder of fiscal 2015. Management believes that operating expenses will be reduced to the point where the Company can drive positive Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, preferred stock dividends, and stock-based compensation charges). As such, management believes that the Company will provide sufficient cash flows to fund its operations in the ordinary course of business through at least the next twelve months. However, there can be no assurance that the anticipated sales level will be achieved. The Company also maintains a Loan and Security Agreement with BridgeBank (the “BridgeBank Loan Agreement”) which provides for up to $5 million of revolving credit advances. Borrowing is limited to the lesser of the $5 million or 80% of eligible receivables. In May 2015, the Company extended the term of its BridgeBank Loan Agreement from an expiration date of March 31, 2016 to June 30, 2016 and this was further amended in August 2015 to a maturity date of September 30, 2016. Additionally, the Company can borrow up to $2 million in out of formula borrowings, which are further guaranteed by a director/shareholder of the Company. Subsequent to the quarter end, the Company received $500 in a long-term note from a director/stockholder of the Company

 

2.   Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.

 

 

Unaudited Interim Financial Information

 

The accompanying interim Condensed Consolidated Balance Sheets as of June 30, 2015 and September 30, 2014, and the interim Condensed Consolidated Statements of Operations, Comprehensive Loss, and Cash Flows for the three and nine months ended June 30, 2015 and 2014 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), and with the same instructions to Form 10-Q and Regulation S-X, and in the opinion of the Company’s management have been prepared on the same basis as the audited consolidated financial statements as of and for the year ended September 30, 2014. These interim condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments and accruals, necessary for the fair presentation of the Company’s financial position at June 30, 2015 and September 30, 2014 and its results of operations and cash flows for the three and nine months ended June 30, 2015 and 2014. The results for the three and nine months ended June 30, 2015 are not necessarily indicative of the results to be expected for the year ending September 30, 2015. The accompanying September 30, 2014 Condensed Consolidated Balance Sheet has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by US GAAP for complete financial statements.

 

  

 BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

 

Subsequent Events

 

The Company evaluated subsequent events through the date of this filing and concluded there were no material subsequent events requiring adjustment to or disclosure in these interim condensed consolidated financial statements, except as already disclosed in these financial statements.

 

Recent Accounting Pronouncements

 

In June 2014, the Financial Accounting Standards Board (“FASB”) issued a standards update on accounting for share-based payments when the terms of the award provide that a performance target could be achieved after a requisite service period. The standard is effective beginning January 1, 2016, with early adoption permitted. Management does not expect it to have a material impact on our consolidated financial position, results of operations or cash flows. 

 

In May 2014, the FASB issued a standard on revenue recognition providing a single, comprehensive revenue recognition model for all contracts with customers. The revenue standard is based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard is effective beginning January 1, 2017, with no early adoption permitted. The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. Management is currently evaluating the adoption method options and the impact of this new guidance on our condensed consolidated financial statements.

 

In April 2014, the FASB issued new accounting guidance on reporting discontinued operations and disclosures of disposals of components of an entity which clarifies the scope of what should be reported as discontinued operations and expands required disclosures. This new guidance is effective beginning October 1, 2015, with early adoption permitted. The impact of this guidance will be dependent on the nature and significance of any transactions within the scope of this new guidance.

 

In February 2015, the FASB issued new accounting guidance on simplifying the presentation of debt issuance costs. Debt issuance costs related to a recognized liability should be presented on the balance sheet as a direct reduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected. This new guidance is effective for reporting periods beginning after December 15, 2015. Management does not expect it to have a material impact on our consolidated financial position, results of operations or cash flows. 

 

 

All other Accounting Standards Updates issued but not yet effective are not expected to have a material effect on the Company’s future financial statements.

 

 

3. Accounts Receivable and Unbilled Receivables

 

Accounts receivable and unbilled receivables consists of the following:

 

 

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4.   Fair Value Measurement and Fair Value of Financial Instruments

 

The Company’s other financial instruments consist principally of accounts receivable, accounts payable, and debt. The Company believes the recorded values for accounts receivable and accounts payable approximate current fair values as of June 30, 2015 and September 30, 2014 because of their nature and durations. The carrying value of debt instruments also approximates fair value as of June 30, 2015 and September 30, 2014 based on acceptable valuation methodologies which use market data of similar size and situated debt issues.

 

 

 

 

 

 

Assets and liabilities of the Company measured at fair value on a recurring basis as of June 30, 2015 and September 30, 2014 are as follows:

 

 

 

The Company determines the fair value of acquisition-related contingent consideration based on assessment of the probability that the Company would be required to make such future payments. Changes to the fair value of contingent consideration are recorded in general and administrative expenses. The following table provides a rollforward of the fair value, as determined by Level 3 inputs, of the contingent consideration.

 

 

 BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

 

The following table summarizes the changes in contingent consideration for the three and nine months ended June 30, 2015 and 2014:

 

 

 

5.   Intangible Assets

 

 

The components of intangible assets are as follows:

 

 

 

Total amortization expense related to intangible assets for the three months ended June 30, 2015 and 2014 was $141 and $157, and $447 and $498 for the nine months ended June 30, 2015 and 2014, respectively, and are reflected in operating expenses on the Condensed Consolidated Statements of Operations. The estimated amortization expense for fiscal years 2015 (remaining), 2016, 2017, and 2018 and thereafter is $108, $430, $335, and $253, respectively.

 

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6.  Goodwill

 

Changes in the carrying amount of goodwill follows:

 

 

 

7.   Debt

 

Debt consists of the following:

 

  

 

Line of Credit and Bank Term Loan

 

In December 2013, the Company entered into a Loan and Security Agreement with BridgeBank (the “BridgeBank Loan Agreement”). The BridgeBank Loan Agreement replaced the Company’s prior credit facility with Silicon Valley Bank (“SVB”), which expired on December 31, 2013. The Loan Agreement has a 27 month term which expires on March 31, 2016. In May 2015, the Company extended the term to June 30, 2016 and this was further amended in August 2015 to a maturity date of September 30, 2016. The Loan Agreement provides for up to $5 million of revolving credit advances which may be used for acquisitions and working capital purposes. Borrowings are limited to the lesser of (i) $5 million and (ii) 80% of eligible receivables as defined. The Company can borrow up to $1.0 million in out of formula borrowings for specified periods of time.   Borrowings bear interest at BridgeBank’s prime plus 1.00% (4.25%) through June 1, 2015 and then increase to prime plus 5.00% (8.25%) in accordance with an amendment to the Loan and Security Agreement (see below).  The Company pays an annual commitment fee of 0.25%. Borrowings are secured by all of the Company’s assets and all of the Company’s intellectual property. The Company is also required to comply with certain financial and reporting covenants including an Asset Coverage Ratio. As of June 30, 2015, the Company had an outstanding balance under the BridgeBank Loan Agreement of $3.0 million. The Company was not compliance with all reporting covenants for the period ended May 31, 2015, but it received a waiver for this period from BridgeBank. The Company was in compliance as of June 30, 2015.

 

 

 BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

 

In December 2014, the Company signed an Amendment to its Loan and Security Agreement with Bridge Bank (the “Amendment”). As part of the Amendment Mr. Michael Taglich, a member of the Board of Directors, signed an unconditional guaranty (the “Guaranty”) and promise to pay the Company’s lender, Bridge Bank, N.A all indebtedness in an amount not to exceed $1 million in connection with the out of formula borrowings. The Amendment also modified certain monthly financial reporting requirements and financial covenants on a prospective basis commencing as of the effective date of the Amendment. In July 2015, the Company further amended its Loan and Security Agreement with Bridge Bank to obtain a waiver for the May 2015 reporting covenants in conjunction with further assurance from Mr. Taglich to extended the Guaranty to an amount not to exceed $2 million in connection with the out of formula borrowings.

 

Under the terms of the Guaranty, the Guarantor authorizes Lender, without notice or demand and without affecting its liability hereunder, from time to time to: (a) renew, compromise, extend, accelerate, or otherwise change the time for payment, or otherwise change the terms, of the Indebtedness or any part thereof, including increase or decrease of the rate of interest thereon, or otherwise change the terms of the Indebtedness; (b) receive and hold security for the payment of this Guaranty or any Indebtedness and exchange, enforce, waive, release, fail to perfect, sell, or otherwise dispose of any such security; (c) apply such security and direct the order or manner of sale thereof as Lender in its discretion may determine; and (d) release or substitute any Guarantor or any one or more of any endorsers or other guarantors of any of the Indebtedness.

 

To secure all of Guarantor's obligations hereunder, Guarantor assigns and grants to Lender a security interest in all moneys, securities, and other property of Guarantor now or hereafter in the possession of Lender, all deposit accounts of Guarantor maintained with Lender, and all proceeds thereof. Upon default or breach of any of Guarantor's obligations to Lender, Lender may apply any deposit account to reduce the Indebtedness, and may foreclose any collateral as provided in the Uniform Commercial Code and in any security agreements between Lender and Guarantor.

 

Subordinated Convertible Debt

 

On September 30, 2013, the Company entered into a Note Purchase Agreement (the "Purchase Agreement") with accredited investors pursuant to which Bridgeline Digital sold an aggregate of $2.0 million of 10% secured subordinated convertible notes (the "Notes"). The gross proceeds to Bridgeline Digital at the closing of this private placement were $2.0 million. The Notes accrue interest at a rate of ten percent (10%) per annum and mature on September 30, 2016. Interest on the Notes is payable quarterly in cash. The Notes are convertible at the election of the holder into shares of common stock of Bridgeline Digital at a conversion price equal to $6.50 per share at any time prior to the maturity date, provided that no holder may convert the Notes if such conversion would result in the holder beneficially owning more than 4.99% of the number of shares of Bridgeline Digital common stock outstanding at the time of conversion.

 

On November 6, 2013, the Company entered into an amendment (the "Amendment") to the Purchase Agreement by and among Bridgeline Digital and the accredited investors’ party thereto. The Amendment increased the aggregate amount of 10% secured subordinated convertible notes (the "New Notes") able to be sold by Bridgeline Digital to $3.0 million. On November 6, 2013, Bridgeline Digital sold an additional $1.0 million of New Notes (the "Second Closing"). The gross proceeds to Bridgeline Digital at the Second Closing of this private placement were $1.0 million. The Notes accrue interest at a rate of ten percent (10%) per annum and mature on November 6, 2016. Interest on the Notes is payable quarterly in cash. The Notes are convertible at the election of the holder into shares of common stock of Bridgeline Digital at a conversion price equal to $6.50 per share at any time prior to the maturity date, provided that no holder may convert the Notes if such conversion would result in the holder beneficially owning more than 4.99% of the number of shares of Bridgeline Digital common stock outstanding at the time of conversion.

 

The Notes are secured by all of Bridgeline Digital's assets. The security interest granted to the holders of the Notes is subordinate to the security interest held by Bridgeline Digital's senior lender, BridgeBank. Bridgeline Digital may prepay any portion of the principal amount of the outstanding Notes at any time, provided that if Bridgeline Digital prepays any principal on or before September 30, 2014, Bridgeline Digital will pay a penalty equal to 10% of the principal amount being prepaid. Under certain circumstances Bridgeline Digital has the right to force conversion of the Notes into shares of Bridgeline Digital common stock in the event the Bridgeline Digital common stock trades in excess of $13.00 per share for 20 trading days out of any 30 trading day period.

 

 

 BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

 

The Notes contain customary events of default. Upon the occurrence of any event of default the interest rate under the Notes will increase. In addition, upon the occurrence of a payment default under the Notes, Bridgeline Digital must pay a premium equal to 20% of the outstanding principal amount of the Notes. In the event of a change in control of Bridgeline Digital while the Notes are outstanding, Bridgeline Digital will provide the holders of the Notes with the opportunity to convert the Notes immediately prior to the change in control. In the event the holders of the Notes do not elect to convert the Notes, Bridgeline Digital may prepay all outstanding principal and accrued interest under the Notes.

 

The placement agent for both transactions was Taglich Brothers, Inc. As compensation for the initial transaction on September 30, 2013, Bridgeline Digital paid a fee of $160 and issued to Taglich Brothers, Inc., or its designees, five-year warrants to purchase an aggregate of 30,770 shares of common stock at an exercise price equal to $6.50 per share. The warrants are first exercisable on March 30, 2014, and provide the holders piggyback registration rights with respect to the shares of common stock underlying the warrants and contain a cashless exercise provision. As compensation for the Second Closing, Bridgeline Digital paid Taglich Brothers, Inc. a fee of $80 and issued to Taglich Brothers, Inc., or its designees, five-year warrants to purchase an aggregate of 15,385 shares of common stock at an exercise price equal to $6.50 per share. The warrants are first exercisable on May 6, 2014, provide the holders piggyback registration rights with respect to the shares of common stock underlying the warrants and contain a cashless exercise provision. Fair market value of the warrants are $49 and is included in current liabilities and non-current debt with the offsetting amount recorded to additional paid in capital in the Condensed Consolidated Balance Sheet. The fair market value of the warrants will be amortized on a straight-line basis over the estimated life of two years.

 

The shares of common stock issuable upon conversion of the Notes and upon exercise of the warrants are restricted securities and may be sold only pursuant to Rule 144 or in another transaction exempt from the registration requirements under the Securities Act of 1933. Pursuant to the terms of the Purchase Agreement, Bridgeline Digital has agreed to provide piggyback registration rights with respect to the shares of common stock issuable upon conversion of the Notes in the event Bridgeline Digital files a registration statement, with certain limited exceptions.

 

Term Notes from Shareholder

 

On January 7, 2015, Bridgeline issued a Term Note to Michael Taglich to document a loan by Michael Taglich to Bridgeline of $500. The funds were received in December 2014 and are reflected in Long Term Debt on the Balance Sheet. The terms of the Note provide that Bridgeline will pay interest at a rate of 7% per annum and the note will mature on June 30, 2016. On February 9, 2015, the Company entered into a second Term Note (“Second Note”) for $500 with Mr. Taglich. The terms of the Second Note provide that Bridgeline will pay interest at a rate of 7% per annum and the note will mature on September 1, 2016. On May 12, 2015, the Company entered into a third Term Note (“Third Note”) for $500 with Mr. Taglich. The terms of the Third Note provide that Bridgeline will pay interest at a rate of 7% per annum and the note will mature on September 1, 2016. Subsequent to the end of the quarter, the Company entered into a fourth Term Note (“Fourth Note”) for $500 with Mr. Taglich. The terms of the Fourth Note provide that Bridgeline will pay interest at a rate of 8% per annum and the note will mature on July 21, 2016.

 

In consideration of the loan by Michael Taglich and a personal guaranty delivered by Michael Taglich to Bridge Bank, N.A. for the benefit of Bridgeline on December 19, 2014 (the “Guaranty”), on January 7, 2015 the Company issued Michael Taglich a warrant to purchase 60,000 shares of Common Stock of the Company at a price equal to $4.00 per share. Mr. Taglich was also issued additional warrants in the amount of 60,000 in conjunction with the Second note of $500. The warrants have a term of five years and are exercisable six months after the date of issuance. Bridgeline agreed to provide piggyback registration rights with respect to the shares of common stock underlying the warrants. On January 7, 2015, Bridgeline also entered into a side letter with Michael Taglich pursuant to which Bridgeline agreed in the event the Guaranty remains outstanding for a period of more than 12 months, on each anniversary of the date of issuance of the Guaranty while the Guaranty remains outstanding Bridgeline will issue Michael Taglich a warrant to purchase 30,000 shares of common stock, which warrant shall contain the same terms as the warrant issued to Michael Taglich on January 7, 2015. In May 2015, Mr. Taglich was issued additional warrants in the amount of 60,000 at an exercise price of $4.00 in conjunction with the Third note of $500. In July 2015, Mr. Taglich was issued warrants in the amount of 160,000 at an exercise price of $1.75 in conjunction with the Fourth note of $500.

 

The fair value of the warrants issued to Mr. Taglich is $180 which is reflected as a debt discount in current liabilities with the offsetting amount recorded to additional paid in capital in the Condensed Consolidated Balance Sheet. Amortization of the debt discount is $52 through June 30, 2015.

 

 

 BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

 

Subordinated Promissory Notes

 

In May 2012, the Company assumed two Promissory Notes in connection with the acquisition of MarketNet, Inc. The first Promissory Note in the amount of $63 is payable in eight equal installments of $8, including interest accrued at 5%, and matured in May 2014. This note was paid in full as of September 30, 2014. The second Promissory Note in the amount of $80 is payable in twelve equal installments of $7, including interest accrued at 5%. This note was paid in full as of May 31, 2015.

 

8.   Other Long Term Liabilities

 

Deferred Rent

 

In connection with the leases in Massachusetts, New York, and in San Luis Obispo, the Company made investments in leasehold improvements at these locations of approximately $1.6 million, of which the respective landlords funded approximately $857. The capitalized leasehold improvements are being amortized over the initial lives of each lease. The improvements funded by the landlords are treated as lease incentives. Accordingly, the funding received from the landlords was recorded as fixed asset additions and a deferred rent liability on the Condensed Consolidated Balance Sheet. As of June 30, 2015, $211 was reflected in Accrued Liabilities and $516 is reflected in Other Long Term Liabilities. The deferred rent liability is being amortized as a reduction of rent expense over the lives of the leases.

 

9.   Shareholders’ Equity

 

 

 

 BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

 

Preferred Stock

 

On October 27, 2014, the Company sold 40,000 shares of Series A convertible preferred stock (the “Preferred Stock”) at a purchase price of $50.00 per share for gross proceeds of $2.0 million in a private placement. Net proceeds to the Company after offering expenses were approximately $1.8 million. The shares of Preferred Stock may be converted, at the option of the holder at any time, into such number of shares of common stock (“Conversion Shares”) equal (i) to the number of shares of Preferred Stock to be converted, multiplies by the stated value of $50.00 (the “Stated Value”) and (ii) divided by the conversion price in effect at the time of conversion. The initial conversion price is $3.25, and is subject to adjustment in the event of stock splits or stock dividends. Any accrued but unpaid dividends on the shares of Preferred Stock to be converted shall also be converted in common stock at the conversion price. A mandatory provision also may provide that the Company will have the right to require the holders to convert shares of Preferred Stock into Conversion Shares if (i) the Company’s common stock has closed at or above $6.50 per share for ten consecutive trading days and (ii) the Conversion Shares are (A) registered for resale on an effective registration statement or (B) may be resold pursuant to Rule 144.

 

In the event of any liquidation, dissolution, or winding up of the Company, the holders of shares of Preferred Stock will be entitled to receive in preference to the holders of common stock, the amount equal to the stated value per share of Series A Preferred Stock plus declared and unpaid dividends, if any. After such payment has been made, the remaining assets of the Company will be distributed ratably to the holders of common stock.

 

Cumulative dividends are payable at a rate of 6% per year. If the Company does not pay the dividends in cash, then the Company may pay dividends in any quarter by delivery of additional shares of Preferred Stock (“PIK Election”). If the Company shall make the PIK Election with respect to the dividend payable, it shall deliver a number of shares of Preferred Stock equal to (A) the aggregate dividend payable to such holder as of the end of the quarter divided by (B) the lesser of (x) the then effective Conversion Price or (y) the average VWAP for the five (5) consecutive Trading Days prior to such dividend payment date. If, after two years, any Preferred Stock are outstanding the cash dividend rate will increase to 12.0% per year. The Company shall have the right to force conversion of the Preferred Stock into shares of Common Stock at any time after the Common Stock trades in excess of $6.50 per share. The Preferred Shares shall vote with the Common on an as converted basis.

 

In December 2014, the Company elected to declare a stock dividend (PIK election) for the first dividend payment date of January 2, 2015. The Company issued 2,132 preferred convertible shares in January 2015 to the preferred shareholders. In March 2015, the Company elected to declare a stock dividend (PIK election) for the second dividend payment date of April 1, 2015. The Company issued 3,000 preferred convertible shares in April 2015 to the preferred shareholders. In July 2015, the Company elected to declare a stock dividend (PIK election) for the third dividend payment of July 1, 2015. The Company issued 3,090 preferred convertible shares in July 2015 to the preferred shareholders.

 

Common Stock

 

In June 2013, the Company sold 460,000 shares of common stock at $5.00 per share for gross proceeds of $2.3 million in a private placement. Net proceeds to the Company after offering expenses were approximately $2.1 million. In addition, the Company issued the investors and placement agent and its affiliates five year warrants to purchase an aggregate of 92,000 and 46,000 shares, respectively, of Bridgeline’s common stock at a price equal to $6.25 per share. There are no plans to register the common stock issued in this offering, however in the event the Company does register other Common stock, the Company agreed to provide piggyback registration rights with respect to the shares of common stock sold in the offering and underlying the warrants.

 

In January 2014, the Company issued 11,380 shares of common stock at $5.80 per share to four members of its Board of Directors in lieu of cash payments for their services as board members. The shares vested in equal installments on a monthly basis through the end of the service period of September 30, 2014. The aggregate fair value of the shares is $66 and was expensed over the service period. In March 2015, the Company issued 20,417 shares of common stock at $2.40 per share to four members of its Board of Directors in lieu of cash payments for their services as board members. The shares vested in equal installments on a monthly basis through the end of the service period of September 30, 2015. The aggregate fair value of the shares is $50 and is being expensed over the service period.

 

In March 2014, the Company sold 640,000 shares of common stock at $4.75 per share for gross proceeds of $3 million in a private placement. Net proceeds to the Company after offering expenses were approximately $2.7 million. In addition, the Company issued the placement agent five year warrants to purchase an aggregate of 64,000 shares of Bridgeline’s common stock at a price equal to $5.25 per share. There are no plans to register the common stock issued in this offering, however in the event the Company does register other common stock, the Company agreed to provide piggyback registration rights with respect to the shares of common stock sold in the offering and underlying the warrants.

 

In March 2015, the Company issued 40,834 shares of common stock at $2.40 per share to four members of our Board of Directors in lieu of cash payments for their services as board members. The shares vest in equal installments on a monthly basis through the end of the service period of September 30, 2015. The aggregate fair value of the shares is $98 and will be expensed over the service period. A total of $25 and $74 was recorded as expense in the three and nine months ended June 30, 2015.

 

 

 BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

 

Contingent Consideration

 

In connection with the acquisition of ElementsLocal on August 1, 2013, the Company issued 105,288 common shares to the sellers of ElementsLocal. In addition, contingent consideration not to exceed 67,693 shares of Bridgeline Digital common stock is contingently issuable to the sellers of ElementsLocal. The contingent consideration is payable quarterly over the 12 consecutive calendar quarters following the acquisition, contingent upon the acquired business achieving certain revenue targets. Through June 30, 2015, the stockholders of ElementsLocal earned 65,801 shares of common stock.

 

In connection with the acquisition of MarketNet on May 31, 2012, contingent consideration of 40,867 shares of Bridgeline Digital common stock is contingently issuable to the sole stockholder of MarketNet. The contingent consideration is payable quarterly over the 12 consecutive calendar quarters following the acquisition, contingent upon the acquired business achieving certain operating and revenue targets. The common stock has been issued and is being held in escrow pending satisfaction of the applicable earnout targets. Through June 30, 2015, the sole stockholder of MarketNet earned 37,462 shares of common stock.

 

In connection with the acquisition of Magnetic Corporation on October 3, 2011, contingent consideration of 33,334 shares of Bridgeline Digital common stock was contingently issuable to the sole stockholder of Magnetic. The contingent consideration was payable quarterly over the 12 consecutive calendar quarters following the acquisition, contingent upon the acquired business achieving certain operating and revenue targets. As of June 30, 2015, the sole stockholder of Magnetic earned the full value or 33,334 shares of common stock. 

 

Amended and Restated Stock Incentive Plan

 

Effective August 2014, the Company’s Amended and Restated Stock Incentive Plan (the “Plan”) provides for the issuance of up 900,000 shares of common stock. The Plan authorizes the award of incentive stock options, non-statutory stock options, restricted stock, unrestricted stock, performance shares, stock appreciation rights and any combination thereof to employees, officers, directors, consultants, independent contractors and advisors of the Company. Options granted under the Plan may be granted with contractual lives of up to ten years. There were 719,212 options outstanding reserved under the Plan as of June 30, 2015 and 180,788 shares available for future issuance.

 

Employee Stock Purchase Plan

 

On April 12, 2012, the Company’s stockholders approved and adopted the Bridgeline Digital, Inc. 2012 Employee Stock Purchase Plan (the “ESPP”). Under the terms of the ESPP, the Company will grant eligible employees the right to purchase shares of Bridgeline common stock through payroll deductions at a price equal to 85% of the fair market value of Bridgeline common stock on the purchase termination date of defined offering or purchase periods. Each offering period is six months in duration. The ESPP permits the Company to offer up to 60,000 shares of common stock. The maximum number of shares of common stock that may be purchased by all participants in any purchase period may not exceed 30,000 shares. During the nine months ended June 30, 2015, employees purchased 2,958 shares for the most recent offering period and have purchased 3,443 for during the fiscal year.

 

 

Common Stock Warrants

 

On October 21, 2010, the Company issued 10,000 common stock warrants to purchase shares of the Company’s common stock to a non-employee consultant as compensation for services rendered. The warrants vested over a one year period and expire on October 15, 2015. Of the warrants issued, 5,000 are exercisable at an exercise price of $5.00 per share and 5,000 are exercisable at an exercise price of $10.00 per share.  

 

 

 BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

 

On May 31, 2012, the Company issued five year warrants to the placement agent in the Company’s private placement. The warrants are exercisable to purchase 43,587 shares of the Company’s common stock at a price equal to $7.00 per share.  

 

On June 19, 2013, the Company issued five year warrants to the investors and placement agent in the Company’s private placement. The warrants are exercisable to purchase 92,000 and 46,000 shares, respectively, of the Company’s common stock at a price equal to $6.25 per share.  

 

On September 30, 2013, the Company issued five year warrants to the placement agent in the Company’s placement of subordinated convertible debt. The warrants are exercisable to purchase 30,770 of the Company’s common stock at a price equal to $6.50 per share.   The warrants are first exercisable on March 30, 2014, provide the holders piggyback registration rights with respect to the shares of common stock underlying the warrants and contain a cashless exercise provision.

 

On November 1, 2013, the Company issued five year warrants to the placement agent in the Company’s placement of subordinated convertible debt. The warrants are exercisable to purchase 15,385 shares of the Company’s common stock at a price equal to $6.50 per share. The warrants are first exercisable on May 6, 2014, provide the holders piggyback registration rights with respect to the shares of common stock underlying the warrants and contain a cashless exercise provision.

 

In March 2014, the Company issued five year warrants to the investors and placement agent in the Company’s private placement. The warrants are exercisable to purchase 64,000 shares of the Company’s common stock at a price equal to $5.25 per share.  

 

On October 28, 2014, the Company issued five year warrants to the placement agent in the Company’s private placement of series A convertible preferred stock. The warrants are exercisable to purchase 61,539 shares of the Company’s common stock at a price equal to $3.25 per share.

 

In connection with a $1 million term notes issued in the three months ended June 30, 2015, the Company issued warrants to an investor shareholder. The warrants are exercisable to purchase 60,000 shares of the Company’s common stock at a price equal to $4.00 per share with a five year term and 160,000 shares of the Company’s common stock at a price equal to $1.75 per share with a three year term.

 

As of June 30, 2015: (i) placement agent warrants to purchase 43,587, 46,000, 46,155, 28,460, and 61,539 shares at an exercise price of $7.00, $6.25, $6.50, $5.25 and $3.25, respectively are outstanding; (ii) investor warrants to purchase 92,000, 35,540, 180,000 and 160,000 shares at an exercise price of $6.25, $5.25, $4.00and $1.75, and (iii) warrants issued to a non-employee consultant to purchase 5,000 shares at an exercise price of $5.00 and 5,000 shares at an exercise price of $10.00 are outstanding.

 

 

Summary of Option and Warrant Activity and Outstanding Shares

 

 

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10.  Accumulated Other Comprehensive Loss

 

The following table presents changes in accumulated other comprehensive loss for three and nine months June 30, 2015 and 2014:

 

 

 

11.   Net Loss Per Share

 

 

Basic and diluted net loss per share is computed as follows:

 

 

 

Basic net loss per share is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding.  Diluted net income per share is computed using the weighted average number of common shares outstanding during the period plus the dilutive effect of outstanding stock options and warrants using the “treasury stock” method.  The computation of diluted earnings per share does not include the effect of outstanding stock options and warrants that are anti-dilutive.

 

For the three and nine months ended June 30, 2015, 196,416 and 394,506 options were excluded from the computation of diluted net loss per share as the effect was anti-dilutive to the Company’s net loss.  For the three and nine months ended June 30, 2014, options to purchase shares of 66,795 and 100,713 were excluded from the computation of diluted net loss per share as the effect was anti-dilutive to the Company’s net loss. All warrants to purchase 708,281 shares of common stock and contingent shares to be issued in connection with prior acquisitions of Marketnet, Magnetic and ElementsLocal have also been excluded as they are anti-dilutive to the Company’s net loss. Also, excluded in the computation of diluted loss per share are the Series A convertible preferred stock shares as they are anti-dilutive to the Company’s net loss.

 

12.  Income Taxes

 

Income tax expense was $25 and $24 for the three months ended June 30, 2015 and 2014 and $88 and $80 for the nine months ended June 30, 2015 and 2014. Income tax expense consists of the estimated liability for federal and state income taxes owed by the Company, including the alternative minimum tax.  Net operating loss carry forwards are estimated to be sufficient to offset additional taxable income for all periods presented.

 

The Company does not provide for U.S. income taxes on the undistributed earnings of its Indian subsidiary, which the Company considers to be a permanent investment.

 

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13.  Related Party Transactions

 

In October 2013, Mr. Michael Taglich joined the Board of Directors. Mr. Taglich is the Chairman and President of Taglich Brothers, Inc. a New York based securities firm. Taglich Brothers, Inc. was the agent for the private placement of convertible preferred stock in October 2014. Fees paid to Taglich Brothers, Inc. in connection with the October 2014 convertible preferred stock were $160. Mr. Taglich personally owns more than 5% of Bridgeline stock. Other employees, affiliates and clients of Taglich Brothers, Inc. own approximately 600,000 shares of Bridgeline common stock and 40,427 shares of convertible preferred stock. The Company has issued $2 million in interest bearing term notes to Mr. Taglich with maturity dates ranging from June 2016 to September 2016. Mr. Taglich has also guaranteed $2 million in connection with the Company’s out of formula borrowings on its credit facility with Bridge Bank.

 

14.  Legal Proceedings

 

The Company is subject to ordinary routine litigation and claims incidental to its business. As of June 30, 2015 the Company was not engaged with any material legal proceedings.

 

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