Bridgeline Digital, Inc. - Quarter Report: 2019 June (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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Form 10-Q

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 (Mark One)

☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended June 30, 2019

 

OR

 

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

 

Commission File Number 333-139298

 

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Bridgeline Digital, Inc.

(Exact name of registrant as specified in its charter)

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Delaware	52-2263942	52-2263942
State or other jurisdiction of incorporation or organization	IRS Employer Identification No.	IRS Employer Identification No.

 

100 Summit Drive
Burlington, Massachusetts	01803
(Address of Principal Executive Offices)	(Zip Code)

 

 

(781) 376-5555

(Registrant’s telephone number, including area code)   (Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ☒     No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files)   ☒  Yes    ☐  No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ☐

Accelerated filer  ☐

Non-accelerated filer  ☒

Smaller reporting company ☒

Emerging growth company  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

 

Securities registered pursuant to Section (12)b of the Act:

 

Title of each class	Trading Symbols(s)	Name of each exchange on which registered
Common Stock, par value $0.001	BLIN	NASDAQ

 

The number of shares of Common Stock par value $0.001 per share, outstanding as of August 10, 2019 was 2,794,308.

 

 

 

Bridgeline Digital, Inc.

 

Quarterly Report on Form 10-Q

 

For the Quarterly Period ended June 30, 2019

 

Index

 

		Page
Part I	Financial Information
Item 1.	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets (unaudited) as of June 30, 2019 and September 30, 2018	4
	Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended June 30, 2019 and 2018	5
	Condensed Consolidated Statements of Comprehensive Income/(Loss) (unaudited) for the three and nine months ended June 30, 2019 and 2018	6
	Condensed Consolidated Statements of Stockholders’ Equity (unaudited) for the three and nine months ended June 30, 2019 and June 30, 2018	7
	Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended June 30, 2019 and 2018	8
	Notes to Unaudited Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Qualitative and Quantitative Disclosures About Market Risk	41
Item 4.	Controls and Procedures	41
Part II	Other Information
Item 1.	Legal Proceedings	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 6.	Exhibits	43
Signatures		45

 

 

 

 

 

Bridgeline Digital, Inc.

 

Quarterly Report on Form 10-Q

 

For the Quarterly Period ended June 30, 2019

 

 

Statements contained in this Report on Form 10-Q that are not based on historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements may be identified by the use of forward-looking terminology such as “should,” “could,” “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intends,” “continue,” or similar terms or variations of those terms or the negative of those terms.  These statements appear in a number of places in this Form 10-Q and include statements regarding the intent, belief or current expectations of Bridgeline Digital, Inc. Forward-looking statements are merely our current predictions of future events. Investors are cautioned that any such forward-looking statements are inherently uncertain, are not guaranties of future performance and involve risks and uncertainties. Actual results may differ materially from our predictions. Important factors that could cause actual results to differ from our predictions include 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 volatility of the market price of our common stock, the ability to maintain our listing on the NASDAQ Capital market, the ability to raise capital, the performance of our products, our ability to respond to rapidly evolving technology and customer requirements, our ability to protect our proprietary technology, dependence on third parties, the security of our software and response to cyber security risks, our ability to meet our financial obligations and commitments, our dependence on our management team and key personnel, our ability to hire and retain future key personnel, or our ability to maintain an effective system of internal controls, and our ability to respond to government regulations. Although we have sought to identify the most significant risks to our business, we cannot predict whether, or to what extent, any of such risks may be realized, nor is there any assurance that we have identified all possible issues which we might face. We assume no obligation to update our forward-looking statements to reflect new information or developments. We urge readers to review carefully the risk factors described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018 as well as in the other documents that we file with the Securities and Exchange Commission. You can read these documents at www.sec.gov.

 

 

Where we say “we,” “us,” “our,” “Company” or “Bridgeline Digital” we mean Bridgeline Digital, Inc.

 

 

 

		June 30,				September 30,
		2019				2018
ASSETS
Current assets:
Cash and cash equivalents		$	1,298			$	644
Accounts receivable and unbilled receivables, net			1,658				1,721
Prepaid expenses			442				452
Other current assets			89				21
Total current assets			3,487				2,838
Property and equipment, net			315				80
Intangible assets, net			3,747				20
Goodwill			5,557				7,782
Other assets			103				280
Total assets		$	13,209			$	11,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	1,312			$	1,577
Accrued liabilities			1,172				580
Debt, current			-				1,017
Deferred revenue			1,832				594
Total current liabilities			4,316				3,768
Debt, net of current portion			-				2,574
Warrant liabilities			5,726				180
Other long term liabilities			13				54
Total liabilities			10,055				6,576
Commitments and contingencies
Stockholders’ equity:
Preferred stock - $0.001 par value; 1,000,000 shares authorized;
Series C Convertible Preferred stock:
11,000 shares authorized; 441 shares issued and outstanding at June 30, 2019			-				-
Series A Convertible Preferred stock:
264,000 shares and 262,310 shares at June 30, 2019 and 264,000 shares and 262,364 shares at September 30, 2018, issued and outstanding (liquidation preference $2,624 at June 30, 2019)			-				-
Common stock - $0.001 par value; 50,000,000 shares authorized;
2,794,308 at June 30, 2019 and 84,005 at September 30, 2018, issued and outstanding			3				-
Additional paid-in capital			75,585				66,553
Accumulated deficit			(72,101	)			(61,778	)
Accumulated other comprehensive loss			(333	)			(351	)
Total stockholders’ equity			3,154				4,424
Total liabilities and stockholders’ equity		$	13,209			$	11,000

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		Three Months Ended								Nine Months Ended
		June 30,								June 30,
		2019				2018				2019				2018
Net revenue:
Digital engagement services		$	1,118			$	1,578			$	3,102			$	5,559
Subscription and perpetual licenses			1,322				1,262				3,411				4,367
Managed service hosting			253				243				751				839
Total net revenue			2,693				3,083				7,264				10,765
Cost of revenue:
Digital engagement services			573				977				2,007				3,666
Subscription and perpetual licenses			834				510				2,010				1,503
Managed service hosting			84				47				222				213
Total cost of revenue			1,491				1,534				4,239				5,382
Gross profit			1,202				1,549				3,025				5,383
Operating expenses:
Sales and marketing			1,268				892				3,083				2,800
Support			201				99				436				245
General and administrative			785				625				2,216				2,156
Research and development			592				406				1,499				1,221
Depreciation and amortization			257				93				361				305
Goodwill impairment			-				4,615				3,732				4,615
Restructuring and acquisition related expenses			938				6				1,242				187
Total operating expenses			4,041				6,736				12,569				11,529
Loss from operations			(2,839	)			(5,187	)			(9,544	)			(6,146	)
Interest income (expense), net			7				(70	)			(305	)			(199	)
Amortization of debt discount			-				(28	)			(231	)			(82	)
Other income (expense), net			10,146				133				(79)				166
Income/(loss) before income taxes			7,314				(5,152	)			(10,159	)			(6,261	)
Provision for income taxes			3				10				7				11
Net income/(loss)			7,311				(5,162	)			(10,166	)			(6,272	)
Dividends on convertible preferred stock			(78	)			(79	)			(235	)			(231	)
Net income/(loss) applicable to common shareholders		$	7,233			$	(5,241	)		$	(10,401	)		$	(6,503	)
Net income/(loss) per share attributable to common shareholders:
Basic net income/(loss) per share		$	3.62			$	(61.78	)		$	(12.38	)		$	(77.00	)
Diluted net income/(loss) per share		$	3.56			$	(61.78	)		$	(12.38	)		$	(77.00	)
Number of weighted average shares outstanding:
Basic			1,996,326				84,825				839,975				84,457
Diluted			2,032,766				84,825				839,975				84,457

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		Three Months Ended								Nine Months Ended
		June 30,								June 30,
		2019				2018				2019				2018
Net income/(loss)		$	7,311			$	(5,162	)		$	(10,166	)		$	(6,272	)
Other Comprehensive Income:
Net change in foreign currency translation adjustment			19				(1	)			18				(1	)
Comprehensive income/(loss)		$	7,330			$	(5,163	)		$	(10,148	)		$	(6,273	)

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		For the Three and Nine Months Ended June 30, 2019
																										Accumulated
		Preferred Stock								Common Stock								Additional								Other				Total
																		Paid in				Accumulated				Comprehensive				Stockholders’
		Shares				Amount				Shares				Amount				Capital				Deficit				Loss				Equity
Balance at October 1, 2018			262			$	-				85			$	-			$	66,553			$	(61,778	)		$	(351	)		$	4,424
Issuance of common stock											28				-				4,377												4,377
Stock-based compensation expense																			97												97
Preferred B stock conversion to common											168				-				-												-
Dividends - issued																							(79	)							(79	)
Net loss																							(4,955	)							(4,955	)
Prior Period Adjustment - ASC 606 adoption																							78								78
Foreign currency translation																															-
Balance at December 31, 2018			262				-				282				-				71,027				(66,734	)			(351	)			3,942
Issuance of common stock											40				-				476												476
Stock-based compensation expense																			38												38
Preferred B stock conversion to common											3																				-
Dividends - issued																							(78	)							(78	)
Net loss																							(12,522	)							(12,522	)
Foreign currency translation																											(1	)			(1	)
Balance at March 31, 2019			262				-				325				-				71,541				(79,334	)			(352	)			(8,145	)
Issuance of common stock, net of issuance costs											1,382				3				3,969												3,972
Stock-based compensation expense																			74												74
Series C Convertible Preferred stock issuance and conversion to common			1								1,087								1												1
Dividends - issued																							(78	)							(78	)
Net income																							7,311								7,311
Foreign currency translation																											19				19
Balance at June 30, 2019			263			$	-				2,794			$	3			$	75,585			$	(72,101	)		$	(333	)		$	3,154

		For the Three and Nine Months Ended June 30, 2018
																										Accumulated
		Preferred Stock								Common Stock								Additional								Other				Total
																		Paid in				Accumulated				Comprehensive				Stockholders’
		Shares				Amount				Shares				Amount				Capital				Deficit				Loss				Equity
Balance at October 1, 2017			244			$	-				84			$	-			$	65,873			$	(54,249	)		$	(350	)		$	11,274
Stock-based compensation expense																			99												99
Stock dividends - issued			7																75												75
Stock dividends - declared																							(75	)							(75	)
Net loss																							(430	)							(430	)
Foreign currency translation																											(1	)			(1	)
Balance at December 31, 2017			251				-				84				-				66,047				(54,754	)			(351	)			10,942
Stock-based compensation expense																			97												97
Issuance of common stock - restricted shares											-				-				49												49
Stock dividends - issued			7																76												76
Stock dividends - declared			1				-																(77	)							(77	)
Net loss																							(680	)							(680	)
Foreign currency translation																															-
Balance at March 31, 2018			259				-				84				-				66,269				(55,511	)			(351	)			10,407
Stock-based compensation expense																			102												102
Issuance of common stock - restricted shares											-				-				24												24
Stock dividends - issued			-				1												39												40
Stock dividends - declared			-				-																(79	)							(79	)
Net loss																							(5,162	)							(5,162	)
Foreign currency translation																															-
Balance at June 30, 2018			259			$	1				84			$	-			$	66,434			$	(60,752	)		$	(351	)		$	5,332

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		Nine Months Ended
		June 30,
		2019				2018
Cash flows from operating activities:
Net loss		$	(10,166	)		$	(6,272	)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss on disposal of property and equipment			9				60
Amortization of intangible assets			310				214
Depreciation			50				85
Other amortization			32				50
Goodwill impairment			3,732				4,615
Amortization of debt discount			231				82
Warrant liability expense			11,272				-
Change in fair value of warrant liabilities			(11,204	)			(156	)
Stock-based compensation			210				374
Changes in operating assets and liabilities
Accounts receivable and unbilled receivables			971				923
Prepaid expenses			3				(40	)
Other current assets and other assets			129				-
Accounts payable and accrued liabilities			329				(201	)
Deferred revenue			722				(625	)
Other liabilities			62				(81	)
Total adjustments			6,858				5,300
Net cash used in operating activities			(3,308	)			(972	)
Cash flows used in investing activities:
Software development capitalization costs			(12	)			-
Purchase of property and equipment			(21	)			(30	)
Acquisition of businesses			(5,638	)			-
Net cash used in investing activities			(5,671	)			(30	)
Cash flows provided by financing activities:
Proceeds from issuance of common stock, net of issuance costs			4,700				-
Proceeds from issuance of preferred stock, net of issuance costs			9,123				-
Proceeds from term notes from Montage Capital, net of issuance costs			-				953
Borrowing on bank line of credit			75				888
Payments on bank line of credit			(2,156	)			(1,121	)
Payments on term notes from Montage Capital			(922	)			-
Payments on promissory term notes			(941	)			-
Cash dividends paid on Series A convertible preferred stock			(235	)			(38	)
Net cash provided by financing activities			9,644				682
Effect of exchange rate changes on cash and cash equivalents			(11	)			(1	)
Net increase (decrease) in cash and cash equivalents			654				(321	)
Cash and cash equivalents at beginning of period			644				748
Cash and cash equivalents at end of period		$	1,298			$	427
Supplemental disclosures of cash flow information:
Cash paid for:
Interest		$	307			$	190
Income taxes		$	11			$	14
Non cash investing and financing activities:
Consideration paid in Common Stock in connection with acquisition of business		$	480			$	-
Dividends on convertible preferred stock		$	235			$	114

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1.   Description of Business

 

Overview

 

Bridgeline Digital, The Digital Engagement Company™ (the “Company”), helps customers with their digital experience from websites and intranets to online stores and campaigns and integrates Web Content Management, eCommerce, Marketing Automation, Site Search, Authenticated Portals, Social Media Management, Translation and Web Analytics to help organizations deliver digital experiences. The Bridgeline Unbound platform is delivered through a cloud-based SaaS (“Software as a Service”) multi-tenant business model, providing maintenance, daily technical operation and support; or via a traditional perpetual licensing business model, in which the software resides on a dedicated server in either the customer’s facility or hosted by Bridgeline via a cloud-based hosted services model.

 

The Company was incorporated under the laws of the State of Delaware on August 28, 2000.

 

Locations

 

The Company’s corporate office is located in Burlington, Massachusetts.  The Company has three wholly-owned subsidiaries: Bridgeline Digital Pvt. Ltd. located in Bangalore, India, Bridgeline Digital Canada, Inc. located in Ontario, Canada, and Stantive Technologies Pty. Ltd. located in Australia.

 

Increase in Authorized Shares and Reverse Stock Split

 

On April 26, 2019, the Company’s Shareholders and the Board of Directors approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to increase the total number of shares of Common Stock, par value $0.001 per share (“Common Stock”), authorized for issuance thereunder from 50 million shares to 2.5 billion shares (the “Increase in Authorized”). On the same date the Company’s Shareholders and the Board of Directors also approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to effect a reverse stock split of both its issued and outstanding and authorized shares of Common Stock, par value $0.001 per share, at a ratio of one (1) share of Common Stock for every fifty (50) shares of Common Stock at any time prior to December 31, 2019 (the “Reverse Split”) pursuant to which all classes of the Company’s issued and outstanding shares of Common Stock at the close of business on such date were combined and reconstituted into a smaller number of shares of Common Stock in a ratio of one (1) share of Common Stock for every fifty (50) shares of Common Stock (“1-for-50 reverse stock split”). The 1-for-50 reverse stock split was effective as of close of business on May 1, 2019 (the “Effective Date”) and the Company’s stock began trading on a split-adjusted basis on May 2, 2019.

 

The reverse stock split reduced the number of shares of the Company’s Common Stock authorized from 2.5 billion shares to 50 million shares. Proportional adjustments have been made to the conversion and exercise prices of the Company’s outstanding convertible preferred stock, warrants, restricted stock awards, and stock options, and to the number of shares issued and issuable under the Company’s Stock Incentive Plans. The Company did not issue any fractional shares in connection with the reverse stock split. Instead, any stockholder who would otherwise be entitled to receive a fractional share of Common Stock as a result of the reverse stock split is entitled to receive a cash payment in lieu thereof based on the average of the closing sales prices of a share of the Company’s Common Stock on the Nasdaq Capital Market during regular trading hours for the five consecutive trading days immediately preceding the Effective Date. The reverse stock split does not modify the rights or preferences of the Common Stock. The number of authorized shares of the Company’s Common Stock is 50 million shares and the par value remains $0.001.

 

The accompanying unaudited interim condensed consolidated financial statements as of June 30, 2019 and September 30, 2018 and for the three and nine months ended June 30, 2019 and 2018 and footnotes have been retroactively adjusted to reflect the effects of the 1-for-50 reverse stock split.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

Liquidity and Management’s Plans

 

The Company has incurred operating losses and used cash in its operating activities for the past several years. Cash was used to fund operations, develop new products, and build infrastructure. During the past two fiscal years and continuing into the current fiscal year, the Company has executed on a restructuring plan that included a reduction of workforce and office space, which significantly reduced operating expenses. The Company is continuing to maintain tight control over discretionary spending in the current fiscal year.

 

In the second quarter of this current fiscal year, the Company concluded a private offering that raised a net $9.2 million in cash. Proceeds were used to pay down the Heritage Bank of Commerce line of credit to zero and pay the Company’s outstanding loan to Montage Capital II, L.P in full. The Company has zero debt at June 30, 2019. Also, in the second quarter of the current fiscal year, the Company used cash to purchase the assets of Seevolution, Inc. and Stantive Technologies Group Inc., which assets included technology and customers. The Company believes the future revenues and cash flows from these newly acquired customers will supplement the working capital to sustain operations for the next twelve months. While there can be no assurances that the anticipated sales will be achieved for future periods to provide positive cash flows, the Company’s management believes it will have an appropriate cost structure to support the revenues that will be achieved. As such, management believes that it is probable that we will meet our working capital, capital expenditure and debt repayment needs, if any, for the next twelve months from the issuance date of this Form 10-Q.

 

 

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 balances and transactions have been eliminated in consolidation.

 

Unaudited Interim Financial Information

 

The unaudited 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 instructions to Form 10-Q and Regulation S-X, and in the opinion of the Company’s management these condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments and accruals, necessary for the fair presentation. The operating results for the three and nine months ended June 30, 2019 are not necessarily indicative of the results to be expected for the year ending September 30, 2019. The accompanying September 30, 2018 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. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended September 30, 2018 filed with the Securities and Exchange Commission on December 28, 2018.

 

Revenue Recognition

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09 or ASC 606), to supersede nearly all existing revenue recognition guidance under U.S. GAAP, which became effective for the Company on October 1, 2018. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. Under ASC 606, revenue is recognized when a customer obtains control of a promised good or service and is recognized in an amount that reflects the consideration that the entity expects to receive in exchange for the good or service. In addition, ASC 606 also includes subtopic ASC 340-40, Other Assets and Deferred Costs- Contracts with Customers, referred to herein as ASC 340-40, which provides guidance on accounting for certain revenue related costs including costs associated with obtaining and fulfilling a contract, discussed further below.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

The Company adopted the new revenue guidance using the modified retrospective method applied to those contracts which were not completed as of October 1, 2018. Results for reporting periods beginning after September 30, 2018 are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with historic revenue guidance.  The Company applied the new standard using practical expedients where:

 

	●	the measurement of the transaction price excludes all taxes assessed by governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer;
	●	the new revenue guidance has been applied to portfolios of contracts with similar characteristics;
	●	the modified retrospective approach has been applied only to contracts that are not completed contracts at the date of initial adoption; and
	●	the value of unsatisfied performance obligations for contracts with an original expected length of one year or less has not been disclosed.

 

Revenue recognition from the Company’s primary revenue streams remained substantially unchanged following adoption of ASC 606 and therefore did not have a material impact on its revenues. The impact of applying the new guidance in fiscal 2019 versus the prior guidance resulted in a change to the period over which sales commissions are amortized to incorporate an estimated customer life. This resulted in a longer amortization period for deferred commission expense, which reduces expense compared to the application of the prior guidance.  

 

Upon adoption, Other current assets increased by $59 due to the capitalization of the current portion of sales commissions and Other assets increased by $27 due to the capitalization of the noncurrent portion of sales commissions. Retained earnings decreased by $86 as a net result of these adjustments. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

 

The following tables summarize the impact of adopting ASC 606 on the Company’s condensed consolidated financial statements during the nine months ended and as of June 30, 2019:

 

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

 

 

 

 

The Company derives its revenue from three sources: (i) Software Licenses, which are comprised of subscription fees ("SaaS"), perpetual software licenses, and maintenance for post-customer support (“PCS”) on perpetual licenses, (ii) Digital Engagement Services, which are professional services to implement our products such as web development, digital strategy, information architecture and usability engineering and (iii) hosting of perpetual licenses. Customers who license the software on a subscription basis, which can be described as “Software as a Service” or “SaaS” and do not take possession of the software.  

 

Revenue is recognized when control of these services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. If the consideration promised in a contract includes a variable amount, for example, overage fees, contingent fees or service level penalties, the Company includes an estimate of the amount it expects to receive for the total transaction price if it is probable that a significant reversal of cumulative revenue recognized will not occur. The Company’s subscription service arrangements are non-cancelable and do not contain refund-type provisions. Revenue is reported net of applicable sales and use tax.

 

The Company recognizes revenue from contracts with customers using a five-step model, which is described below:

 

•

Identify the customer contract;

•

Identify performance obligations that are distinct;

•

Determine the transaction price;

•

Allocate the transaction price to the distinct performance obligations; and

•

Recognize revenue as the performance obligations are satisfied.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

Identify the customer contract

 

A customer contract is generally identified when there is approval and commitment from both the Company and its customer, the rights have been identified, payment terms are identified, the contract has commercial substance and collectability and consideration is probable.

 

Identify performance obligations that are distinct

 

A performance obligation is a promise to provide a distinct good or service or a series of distinct goods or services.  A good or service that is promised to a customer is distinct if the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and a company’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.  

 

Determine the transaction price

 

The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer, excluding sales taxes that are collected on behalf of government agencies.  

 

Allocate the transaction price to the distinct performance obligations

 

The transaction price is allocated to each performance obligation based on the relative standalone selling prices (“SSP”) of the goods or services being provided to the customer.  The Company determines the SSP of its goods and services based upon the historical average sales prices for each type of software license and professional services sold.  

 

 Recognize revenue as the performance obligations are satisfied

 

Revenues are recognized when or as control of the promised goods or services is transferred to customers.  Revenue from SaaS licenses is recognized ratably over the subscription period beginning on the date the license is made available to customers. Most subscription contracts are three-year terms. Customers who license the software on a perpetual basis receive rights to use the software for an indefinite time period and an option to purchase post-customer support (“PCS”). PCS revenue is recognized ratably on a straight-line basis over the period of performance and the perpetual license is recognized upon delivery.  The Company also offers hosting services for those customers who purchase a perpetual license and do not want to run the software in their environment. Revenue from hosting is recognized ratably over the service period, ranging from one to three-year terms. The Company recognizes revenue from professional services as the services are provided.

 

Disaggregation of Revenue

 

The Company provides disaggregation of revenue based on geography and product groupings within the notes (Note 13) as it believes this best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

Deferred Revenue

 

Amounts that have been invoiced are recorded in accounts receivable and deferred revenue or revenue, depending on whether the revenue recognition criteria have been met. Deferred revenue represents amounts billed for which revenue has not yet been recognized. Deferred revenue that will be recognized during the succeeding 12-month period is recorded as current deferred revenue, and the remaining portion is recorded as noncurrent deferred revenue included in Other long-term liabilities. Deferred revenue during the nine months ended June 30, 2019 increased by $1.2 million.  As of June 30, 2019, approximately $13 of revenue is expected to be recognized from remaining performance obligations for contracts with original performance obligations that exceed one year.  The Company expects to recognize revenue on approximately 99% of these remaining performance obligations over the next 12 months, with the balance recognized thereafter.  

 

 

 

Deferred Capitalized Commission Costs

 

The incremental direct costs of obtaining a contract, which primarily consist of sales commissions paid for new subscription contracts are deferred and amortized on a straight-line basis over a period of approximately three years.  The Company evaluated both qualitative and quantitative factors, including the estimated life cycles of its offerings, renewal rates, and its customer attrition to determine the amortization periods for the capitalized costs. The initial amortization period will generally be the customer contract term, which is typically thirty-six (36) months, with some exceptions. Deferred capitalized commission expense that will be recorded as expense during the succeeding 12-month period is recorded as current deferred capitalized commission costs, and the remaining portion is recorded as long-term deferred capitalized commission costs. Total deferred capitalized commissions were $66 as of the quarter ended June 30, 2019 compared to $77 as of the year ended September 30, 2018. Current deferred capitalized commission costs are included in Other current assets in the Condensed Consolidated Balance Sheet and noncurrent deferred capitalized commission costs are included in Other assets in the Condensed Consolidated Balance Sheet. Amortization expense for the three and nine months ended June 30, 2019 was $19 and $53, respectively.

 

Accounting Pronouncements Pending Adoption

 

Leases

 

In February 2016, the FASB issued ASU No. 2016-02, which is guidance on accounting for leases. ASU No. 2016-02 requires lessees to recognize most leases on their balance sheets for the rights and obligations created by those leases. The guidance requires enhanced disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases and will be effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is evaluating the impact of the guidance on its consolidated financial position, results of operations and related disclosures.

 

Earnings Per Share

 

In July 2017, the FASB issued ASU No. 2017-11, which simplifies the accounting for certain financial instruments with down round features. This new standard will reduce income statement volatility for many companies that issue warrants and convertible instruments containing such features. ASU 2017-11 is effective for public companies in 2019 and all other entities in 2020. Management is currently evaluating the impact of the new guidance on its consolidated financial statements.

 

Compensation – Stock Compensation

 

In June 2018, the FASB issued ASU 2018-07, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 is effective for interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted, but no earlier than the Company’s adoption date of Topic 606. The new guidance is required to be applied retrospectively with the cumulative effect recognized at the date of initial application. Management is currently evaluating the impact of the new guidance on its consolidated financial statements.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

Derivative Financial Instruments

 

In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815) Targeted Improvements to Accounting for Hedging Activities", which amends and simplifies existing guidance to allow companies to more accurately present the economic effects of risk management activities in the financial statements. The guidance is effective for annual reporting periods beginning after December 15, 2018 including interim reporting periods within those annual reporting periods and early adoption is permitted. Management is currently evaluating the impact of the new guidance on its consolidated financial statements.

 

Intangibles – Goodwill and Other - Internal-Use Software

 

In August 2018, the FASB issued ASU 2018-15, which addresses a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. Under the new guidance, customers will apply the same criteria for capitalizing implementation costs as they would for an arrangement that has a software license. ASU 2018-15 is effective for interim periods in fiscal years beginning after December 15, 2019, with early adoption permitted.

 

Fair Value

 

In August 2018, the FASB issued ASU 2018-13, which is guidance that changes the fair value measurement disclosure requirements of ASC 820. This guidance is will be effective for all entities for fiscal years beginning after December 15, 2019, including interim periods therein. Early adoption is permitted for any eliminated or modified disclosures upon issuance of this ASU. The Company is evaluating the impact the update will have on its disclosures.

 

Financial Instruments – Credit Losses

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years with early adoption permitted. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements and related disclosures.

 

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:

 

 

 

As of June 30, 2019, one customer represented more than 10% of accounts receivable. As of September 30, 2018, two customers represented more than 10% of accounts receivable. For the three months ended June 30, 2019, two customers represented 14% and 11% of the Company’s total revenue. For the nine months ended June 30, 2019, two customers represented 16% and 12% of the Company’s total revenue. For the three months ended June 30, 2018, two customers each represented 12% and one customer represented 11% of the Company’s total revenue. For the nine months ended June 30, 2018, two customers represented 14% and 12% of the Company’s total revenue.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

 

4.   Acquisitions

 

On February 13, 2019, the Company entered into an Asset Purchase Agreement with Seevolution Inc, a Delaware corporation, Celebros, Inc., a Delaware corporation, and Elisha Gilboa, an individual and shareholder of Seevolution, (the “Seevolution Asset Purchase Agreement”). The Seevolution Asset Purchase Agreement sets forth the terms and conditions pursuant to which the Company acquired certain assets in exchange for consideration paid consisting of (i) $418 in cash at the time of the purchase, (ii) the payment of $100 of additional cash to be paid out $10 per month for ten months starting April 30, 2019 and (iii) 40,000 shares of Bridgeline Digital common stock. 

 

The Company accounted for the Seevolution transaction as an asset acquisition. Goodwill is not recognized in an asset purchase. 

 

On March 13, 2019, the Company entered into an Asset Purchase Agreement with Stantive Technologies Group Inc., (“Stantive”) a corporation organized under the laws of Ontario, Canada to purchase substantially all of the assets of Stantive and assume certain liabilities. The Company also acquired all of the outstanding stock of Stantive Technologies Group, Pty, a company incorporated in Australia, which was a subsidiary of Stantive. The total purchase price, including cure costs, for Stantive and its Australian subsidiary was approximately $5.2 million in cash.

 

The Company accounted for the Stantive transaction as a business combination in accordance with ASC Topic 805, Business Combinations. 

 

 

The Company assessed the fair market value of the acquired companies as of the respective purchase dates, as follows:

 

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

As part of the Seevolution acquisition, of the $1 million allocated to intangible assets, $602 is allocated to customer relationships, $401 is allocated to technology with an average useful life of five years, and $21 is allocated to trademarks with an average useful life of one year. Amortization expense of intangible assets was $55 and $83 for the three and nine months ended June 30, 2019.

 

As part of the Stantive acquisition, of the $3 million allocated to intangible assets, $1.7 million is allocated to customer relationships and $1.2 million is allocated to technology with an average useful life of five years, and $75 is allocated to trademarks with an average useful life of one year. Amortization expense of intangible assets was $182 and $212 for the three and nine months ended June 30, 2019.

 

Total revenue from the Seevolution and Stantive acquisitions totaled $968 and $1,263 for the three and nine months ended June 30, 2019. Total earnings from the two acquisitions is impracticable to disclose as the acquisitions were asset purchases and the operations were merged with existing operations and not accounted for separately.

 

Pro Forma Information

 

The following is the unaudited pro forma information assuming the Stantive acquisition occurred on October 1, 2017:

 

 

 

 

5.   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 measures its financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. Additionally, companies are required to provide disclosure and categorize assets and liabilities measured at fair value into one of three different levels depending on the assumptions (i.e., inputs) used in the valuation. Level 1 provides the most reliable measure of fair value while Level 3 generally requires significant management judgment. Financial assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. The fair value hierarchy is defined as follows:

 

Level 1—Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.

 

Level 2—Valuations are based on quoted prices for similar assets or liabilities in active markets, or quoted prices in markets that are not active for which significant inputs are observable, either directly or indirectly.

 

Level 3—Valuations are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Inputs reflect management’s best estimate of what market participants would use in valuing the asset or liability at the measurement date.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

The Company believes the recorded values for accounts receivable and accounts payable and short-term debt approximate current fair values as of June 30, 2019 and September 30, 2018 because of their short-term nature and durations. The carrying value of long-term debt also approximates fair value as of September 30, 2018 based upon the Company’s ability to acquire similar debt at similar maturities and renew current debt instruments under similar terms as the original debt.

 

In October 2017, the Company recorded a liability associated with a warrant to purchase common stock issued to Montage Capital II, L.P (“Montage Capital”). The fair value of the warrant liability utilizes a Level 3 input. To determine the value of the warrant liability, the Company used a Monte Carlo option-pricing model, which takes into consideration the market values of comparable public companies, considering among other factors, the use of multiples of earnings, and adjusted to reflect the restrictions on the ability of our shares to trade in an active market. The Monte Carlo option-valuation model also uses certain assumptions to determine the fair value, including expected life and annual volatility. The initial valuation assumptions included an expected life of eight (8) years, volatility of 80%, and a risk-free interest rate of 2.24%. At June 30, 2019, volatility decreased to 76%, the risk-free rate was 1.84% and the Company’s stock price declined to $2.45 per share.

 

The fair value of the warrant liability was valued at the loan execution date in the amount of $341 and is revalued at the end of each reporting period to fair value. The fair value of the warrant is included in Warrant liabilities in the Condensed Consolidated Balance Sheets. Changes in fair value are included in Other income (expense),net in the Statements of Operations in the period the change occurs. the Company recorded a gain (income) of $96 in the quarter ended June 30, 2019. In total, the Company has recorded net gains (income) as a result in the change in fair value of $315 since the original valuation in October 2017. The fair value of the Montage Capital warrant at June 30, 2019 is $26.

 

In connection with the private offering of Series C Convertible Preferred Stock issued on March 12, 2019, the Company issued Series A, Series B and Series C warrants (“collectively, the “Series C Preferred Warrants”) to accredited investors and the placement agents. These Series C Preferred Warrants have been classified as liabilities with the fair value determined using the Monte Carlo option-pricing model. The fair value of the Series C Preferred Warrants are included in Warrant liabilities in the Condensed Consolidated Balance Sheets. The initial valuation assumptions included an average expected life of five and one-half (5.5) years, volatility of 76.8%, and a risk-free interest rate of 2.4%. The fair value of the Series C Preferred Warrants as of June 30, 2019 is $5.7 million. Changes in fair value are included in Other income (expense),net in the Statements of Operations in the period the change occurs. The Company recorded a gain (income) of $10.1 million in the quarter ended June 30, 2019. The resulting gain was primarily due to changes in inputs to the valuation model, including a decline in the stock price. At June 30, 2019, volatility increased to 80.8%, the risk-free rate was 1.84% and the Company’s stock price declined to $2.45 per share. There were also exercises of the Series C warrants during the quarter ended June 30, 2019, which also contributed to the decrease in the value of the liability by $4.8 million.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

Assets and liabilities of the Company measured at fair value on a recurring basis as of June 30, 2019 and September 30, 2018 are as follows:

 

 

 

 

 

The following table provides a rollforward of the fair value, as determined by Level 3 inputs, of the warrant liabilities:

 

 

 

 

6. Goodwill

 

The carrying value of goodwill is not amortized, but is typically tested for impairment annually, as well as, whenever events or changes in circumstances indicate that the carrying amount of a reporting unit may not be recoverable. The purpose of an impairment test is to identify any potential impairment by comparing the carrying value of a reporting unit including goodwill to its fair value. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.  

 

An interim test was performed at December 31, 2018, as a decline in the stock price and other negative qualitative factors led management to conclude that there was a potential impairment. The fair value was calculated using the Company’s market price.  In performing the interim impairment test, Management concluded that goodwill was impaired and recorded a charge of $3.7 million. This amount is reflected as a reduction in goodwill of $3.7 million in the Company’s Condensed Consolidated Balance Sheet as of June 30, 2019 with the offset as an expense in the Company’s Condensed Consolidated Statement of Operations. There was no additional impairment at June 30, 2019. 

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

On March 13, 2019, the Company entered into an Asset Purchase Agreement with Stantive and recorded goodwill of $1.5 million, which represented the excess of purchase price over the fair market value of the assets acquired.

 

Changes in the carrying value of goodwill are as follows:

 

 

 

 

7.   Intangible Assets

 

The components of intangible assets, net of accumulated amortization, are as follows:

 

 

 

Total amortization expense related to intangible assets for the nine months ended June 30, 2019 and the year ended September 30, 2018 was $306 and $242, respectively, and is reflected in operating expenses on the Condensed Consolidated Statements of Operations. The estimated amortization expense for fiscal year 2019 (remaining), 2020, 2021, 2022 and thereafter is $238, $900, $858, $763, and $988, respectively.

 

 

 

8.   Restructuring and Acquisition Related Expenses

 

Restructuring Expenses

 

Commencing in fiscal 2015 and through fiscal 2019, the Company’s management approved, committed to and initiated plans to restructure and further improve efficiencies by implementing cost reductions in line with expected decreases in revenue. The Company renegotiated several office leases and relocated to smaller space, while also negotiating sub-leases for the original space. In addition, the Company executed a general work-force reduction and recognized costs for severance and termination benefits. These restructuring charges and accruals require estimates and assumptions, including contractual rental commitments or lease buy-outs for vacated office space and related costs, and estimated sub-lease income. The Company’s sub-lease assumptions include the rates to be charged to a sub-tenant and the timing of the sub-lease arrangement. All of the vacated lease spaces are currently contractually occupied by new sub-tenants for the remaining life of the lease. In the second quarter of fiscal 2017, the Company initiated a plan to shut down its operations in India, which is targeted to be completed in fiscal 2019. In the third quarter of fiscal 2019, the Company incurred further restructuring expenses related to a work-force reduction primarily for its international operations and recognized costs for severance and termination benefits.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

All of these estimates and assumptions will be monitored on a quarterly basis for changes in circumstances with the corresponding adjustments reflected in the consolidated statement of operations. All of these estimates and assumptions will be monitored on a quarterly basis for changes in circumstances with the corresponding adjustments reflected in the Condensed Consolidated Statements of Operations.

 

The following table summarizes the restructuring activity for the nine months ended June 30, 2019:

 

 

 

 

The components of the accrued restructuring liabilities is as follows:

 

 

 

As of June 30, 2019, $441 was reflected in Accrued liabilities in the Condensed Consolidated Balance Sheet. As of September 30, 2018, $53 is reflected in Accrued liabilities and $25 is reflected in Other long term liabilities in the Condensed Consolidated Balance Sheet.

 

Acquisition Related Expenses

 

In connection with the acquisition of Stantive, the Company incurred legal, accounting and consulting fees of $124 and $428 for the three and nine months ended June 30, 2019, respectively, which is included in Restructuring and acquisition related expenses in the Condensed Consolidated Statements of Operations.

 

 

 

9.   Debt

 

The Company has a Line of Credit with Heritage Bank of Commerce (“Heritage Bank”). As of June 30, 2019, the Company has no borrowings on the Line of Credit. The Company’s debt as of September 30, 2018 consisted of the Line of Credit from Heritage Bank, a term loan with Montage Capital II, L.P. (“Montage Capital”), and Promissory Term Notes.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

Debt at September 30, 2018 consists of the following:

 

 

 

 

Heritage Line of Credit

 

In June 2016, the Company entered into a new Loan and Security Agreement (“Heritage Agreement”), with Heritage Bank. The Heritage Agreement had an original term of 24 months but was further amended in February 2019 to a maturity date of February 29, 2020. The Company paid an annual commitment fee of 0.4% of the commitment amount in the first year and 0.2% in the following years.  The facility fee will be $6 on each anniversary thereafter. Borrowings are secured by all of the Company’s assets and all of the Company’s intellectual property. The Company is required to comply with certain financial and reporting covenants including an Asset Coverage Ratio and an Adjusted EBITDA metric. The Company was in compliance with the Adjusted EBITDA metric as of June 30, 2019.

 

The Heritage Agreement provides for up to $2.5 million of revolving credit advances which may be used for acquisitions and working capital purposes. Borrowings are limited to the lesser of (i) $2.5 million and (ii) 75% of eligible receivables as defined. The Company can borrow up to $1.0 million in out of formula borrowings for specified periods of time. The borrowings or credit advances may not exceed the monthly borrowing base capacity, which will fluctuate based on monthly accounts receivable balances. The Company may request credit advances if the borrowing capacity is more than the current outstanding loan advance and must pay down the outstanding loan advance if it exceeds the borrowing capacity.  As of June 30, 2019, the Company had no outstanding balance under the Heritage Agreement.

 

Amendments – Heritage Bank

 

The Company and Heritage Bank have executed numerous amendments since the origination of the Heritage Agreement. Those amendments that are significant as of June 30, 2019 are the following:

 

The first amendment, executed on August 15, 2016, included a decrease in the revolving line of credit from $3.0 million to $2.5 million. The second amendment, executed on December 14, 2016, included a minimum cash requirement of $250 in the Company’s accounts at Heritage. On October 6, 2017, a fourth amendment was executed, which included a consent to the Company’s incurrence of additional indebtedness from Montage Capital and the grant of a second position lien to Montage Capital. In addition, Heritage Bank and Montage Capital entered into an Intercreditor Agreement dated October 10, 2017 and acknowledged by the Company. On September 21, 2018, the ninth amendment was executed and addressed the minimum unrestricted cash requirements for the Company’s accounts at Heritage Bank upon repayment of certain Promissory Term Notes issued by the Company on September 7, 2018 in the principal amount of $941. On December 27, 2018, the tenth amendment was executed, which extended the maturity date of the Loan Agreement to January 1, 2020, as well as, set new financial covenants for fiscal 2019. On February 14, 2019, the eleventh amendment was executed, which extended the maturity date of the Loan Agreement to February 29, 2020, as well as, set new financial covenants for fiscal 2019. On May 15, 2019, the twelfth amendment was executed, which included a waiver for a failed covenant metric.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

Montage Capital II, L.P. Loan Agreement

 

On October 10, 2017, the Company entered into a Loan and Security Agreement (the “Montage Agreement” or “Montage Loan”) with Montage Capital. The Montage Agreement has a thirty-six (36) month term which matures on October 10, 2020. $1 million of borrowing was advanced on the date of closing. Borrowings bear interest at the rate of 12.75% per annum.

 

On May 10, 2018, the first amendment to the Montage Agreement (the “First Amendment”) was executed. The First Amendment included the Adjusted EBITDA metrics for the third quarter of fiscal 2018 and a waiver for not achieving the Adjusted EBITDA metrics for the quarter ended March 31, 2018. A second amendment to the Montage Agreement (the “Second Amendment”) was executed on October 22, 2018. The Second Amendment included modifications to financial covenants and addressed the minimum unrestricted cash requirements for the Company’s accounts at Heritage Bank upon repayment of debt incurred by the Company pursuant to certain Promissory Term Notes (see below) issued by the Company on September 7, 2018 in the amount of $941. A third amendment to the Montage Agreement (the “Third Amendment”) was executed on December 7, 2018 and included the new financial covenants for fiscal 2019. The Montage Loan was paid in full and discharged on March 13, 2019. A loss on early extinguishment of debt of $221 was recorded in the three months ended March 31, 2019 related to the remaining unamortized debt discount expense.

 

Promissory Term Notes

 

On September 7, 2018, the Company sold and issued subordinate promissory notes (the “Promissory Term Notes”) to certain accredited investors (“Purchasers”), pursuant to which it issued to the Purchasers (i) Promissory Term Notes, in the aggregate principal amount of approximately $941. The Promissory Term Notes had an original issue discount of fifteen percent (15%), bore interest at a rate of twelve percent (12%) per annum, and had a maturity date of the earlier to occur of (a) six months from the date of execution of the Purchase Agreement, or (b) the consummation of a debt or equity financing resulting in the gross proceeds to the Company of at least $3.0 million. After recording $141 of original issue discount and debt issuance costs of $40, the Company received net cash proceeds in the aggregate amount of $760 for the Promissory Term Notes. On October 19, 2018, the Company completed an equity financing resulting in gross proceeds of $5.0 million and repaid the Promissory Term Notes including accrued interest of $13 for a total of $954 on October 23, 2018.

 

Further, Heritage Bank and Montage Capital both approved the issuance of the Promissory Term Notes and the repayment terms and each Purchaser also entered into a Subordination Agreement with the two parties, pursuant to which the Purchasers agreed to subordinate (i) all of the Company’s indebtedness and obligations to the Purchasers, whether presently existing or arising in the future, to all of the Company’s indebtedness the both Heritage Bank and Montage Capital and (ii) all of the Purchasers’ security interests, if any, to all of Heritage Bank’s and Montage Capital’s security interests in property of the Company.

 

 

10.   Shareholders’ Equity

 

Preferred Stock Series A Convertible Stock

 

In October 2014, the Company designated 264,000 shares of its Preferred stock (the “Preferred Stock”) as Series A convertible preferred stock and sold 200,000 shares of Series A convertible preferred stock at a purchase price of $10.00 per share for gross proceeds of $2.0 million in a private placement. 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, multiplied by the stated value of $10.00 (the “Stated Value”) and (ii) divided by the conversion price in effect at the time of conversion. The current conversion price is $812.50 and is subject to adjustment in the event of stock splits or stock dividends. As of June 30, 2019, a total of 1,636 preferred shares have been converted to 20 shares of common stock.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

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 $1,625 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. The Preferred Shares shall vote with the Common Stock on an as converted basis.

 

Effective January 1, 2017, cumulative dividends are payable at a rate of 12% per year. The Company has issued 64,000 shares of Preferred Stock as PIK dividends to the preferred shareholders, which is the maximum amount of cumulative PIK dividends authorized. Therefore, all future dividend payments will be cash dividends. Total cash dividend payments for the nine months ended June 30, 2019 were $235.

 

Preferred Stock Series B Convertible Stock

 

On October 16, 2018, in connection with a public offering, the Company issued 4,288 Series B Convertible Preferred Stock, par value $0.001 per share, with each share of Series B Convertible Preferred Stock convertible into 40 shares of the Company’s common stock at a conversion price of $25.00 per share. As of June 30, 2019, all of the shares of Series B Convertible Preferred Stock were converted into 171,520 shares of common stock.

 

Series C Preferred Convertible Stock and Associated Warrants

 

On March 12, 2019, the Company entered into Securities Purchase Agreements with certain accredited investors (each, a “Purchaser”), pursuant to which the Company offered and sold to the Purchasers an aggregate of 10,227.5 units (“Units”) for $1,000 per Unit, with such Units consisting of (i) an aggregate of 10,227.5 shares of the Company’s newly designated Series C Convertible Preferred Stock, par value $0.001 per share (“Series C Preferred stock”); (ii) warrants to purchase an aggregate of 1,136,390 shares of Company common stock, par value $0.001 per share (“Common Stock”), subject to adjustment (as set forth below), with a term of 5.5 years (“Series A Warrants”); (iii) warrants to purchase an aggregate of 1,136,390 shares of Common Stock, subject to adjustment (as set forth below), with a term of 24 months (“Series B Warrants”); and (iv) warrants to purchase an aggregate of 1,420,486 shares with a term of 5.5 years (“Series C Warrants,” and together with the Series A Warrants and Series B Warrants, the “Series C Preferred Warrants”). The Company also issued warrants to purchase an aggregate of 127,848 shares of the Company’s Common Stock to the placement agents that were also subject to the same resets as described below.

 

At the time of issuance, no shares of Series C Preferred stock could be converted into Conversion Shares and no Series C Preferred Warrants could be exercised for shares of Common Stock, unless and until such time that the Company had obtained approval from its stockholders, at an annual or special meeting or via written consent, to (i) issue the Conversion Shares and warrants upon the conversion and exercise of the Series C Preferred stock and associated warrants, respectively, which number of shares in the aggregate exceeds 20% of the Company’s shares of Common Stock issued and outstanding immediately prior to the Closing Date, as required by Nasdaq Marketplace Rule 5635(d) (the “Issuance Approval”), and (ii) amend its Amended and Restated Certificate of Incorporation, as amended (“Charter”) to increase the number of shares of Common Stock available for issuance thereunder (or effect a reverse stock split of its issued and outstanding shares of Common Stock so as to effectively increase the number of shares of Common Stock available for issuance) by a sufficient amount to permit the conversion of all outstanding Series C Preferred stock into Conversion Shares and all Series C Preferred Warrants into warrant shares (the “Authorized Share Approval,” and together with the Issuance Approval, the “Stockholder Approvals”). In addition, the Company may not effect, and a Purchaser will not be entitled to, convert the Series C Preferred stock or exercise any Series C Preferred Warrants, which, upon giving effect to such conversion or exercise, would cause (i) the aggregate number of shares of Common Stock beneficially owned by the Purchaser (together with its affiliates) to exceed 4.99% (or, at the election of the holder, 9.99%) of the number of shares of Common Stock outstanding immediately after giving effect to the exercise. The Stockholder Approvals were obtained on April 26, 2019 and the Company’s Charter was amended on April 29, 2019. As of June 30, 2019, a total of 9,786.50 shares of Series C Preferred stock have been converted to 1,087,443 shares of Common Stock.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

The Company determined that the Series C Preferred stock and the Series C Preferred Warrants are each separate freestanding financial instruments issued in a single transaction (the Private Placement) and that Series C Warrants have been determined to be derivative liabilities, which are measured at fair value on a recurring basis. The net proceeds of that single transaction were allocated to each of the freestanding financial instruments based on their fair values. The purchase price was allocated to the Series C Preferred Warrants first leaving no value for the Series C Preferred stock, as the Series C Warrants were fair valued at $21.5 million and the total proceeds were only $10.3 million. The final allocation of the proceeds resulted in a charge against income of $11.2 million for the excess of the fair value over the net proceeds, which was recorded in the second quarter of fiscal 2019.

 

Common Stock

 

Public Offering

 

On October 16, 2018, the Company issued and sold in a public offering (the “Offering”) an aggregate of (i) 28,480 Class A Units (the “Class A Units”) at a price of $25.00 per Class A Unit, consisting of (i) one share of the Company’s common stock and one five-year warrant to purchase one share of Company common stock at an exercise price of $25.00 per share and (ii) 4,288 Class B Units, consisting of one share of Series B Convertible Preferred Stock and a Warrant to purchase one share of common stock. The net proceeds to the Company from the Offering, after deducting the underwriter’s fees and expenses, was approximately $4.4 million. 

 

In addition, the Company granted the underwriter of the Offering a 45-day option (the “Over-allotment Option”) to purchase up to an additional 30,000 shares of common stock and additional warrants to purchase an additional 30,000 shares of common stock. At the time of the Offering, the underwriter partially exercised the Over-allotment Option by electing to purchase from the Company additional warrants to purchase 8,000 shares of common stock.

 

Amended and Restated Stock Incentive Plan

 

The Company has granted common stock, common stock warrants, and common stock option awards (the “Equity Awards”) to employees, consultants, advisors and debt holders of the Company and to former owners and employees of acquired companies that have become employees of the Company. On April 29, 2016, the stockholders approved a new stock incentive plan, The 2016 Stock Incentive Plan (the “2016 Plan”). The 2016 Plan replaced an older plan that had expired in August 2016. No new shares will be granted under the old plan. The 2016 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. Initially, a total of 10,000 shares of the Company’s Common Stock is reserved for issuance under the 2016 Plan. As of June 30, 2019, there were 7,859 options outstanding under this plan and 5,399 shares available for future issuance.

 

Compensation expense

 

The Company estimates the fair value of stock options using the Black-Scholes-Merton option valuation model.  Compensation expense is generally recognized on a graded accelerated basis over the vesting period of grants. Compensation expense is recorded in the Condensed Consolidated Statements of Operations with a portion charged to Cost of Goods Sold and a portion to Operating Expenses depending on the employee’s department. During the three and nine months ended June 30, 2019, the Company recognized $74 and $209, respectively, as compensation expense related to share based payments related to stock options. For the three and nine months ended June 30, 2018, the Company recognized $126 and $373, respectively, as compensation expense related to share based payments related to stock options. As of June 30, 2019, the Company had approximately $59 of unrecognized compensation costs related to unvested options, which the Company expects to recognize through fiscal 2021.

 

Common Stock Warrants

 

The Company typically issues warrants to individual investors and placement agents to purchase shares of the Company’s common stock in connection with public and private placement fund raising activities. Warrants may also be issued to individuals or companies in exchange for services provided for the Company. The warrants are typically exercisable six months after the issue date, expire in five years, and contain a cashless exercise provision and piggyback registration rights.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

Montage Warrant - As additional consideration for the Montage Loan, the Company issued to Montage Capital an eight-year warrant (the “Montage Warrant”) to purchase 1,326 shares of the Company’s common stock at a price equal to $132.50 per share. The Montage Warrant contains an equity buy-out provision upon the earlier of (1) dissolution or liquidation of the Company, (2) any sale or distribution of all or substantially all of the assets of the Company or (3) a “Change in Control” as defined within the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934. Montage Capital shall have the right to receive an equity buy-out of $250. If the equity buy-out is exercised, the Montage Warrant will be surrendered to the Company for cancellation. The fair value of the Montage warrant liability at June 30, 2019 is $26 and is included in Warrant liabilities in the Condensed Consolidated Balance Sheet.

 

Series A, B and C Preferred Warrants - Reset Dates and Reset Price - The Series A Warrants and Series B Warrants had an initial exercise price of $9.00 per share; provided, however, that the exercise price of the Series A Warrants and Series B Warrants could be reset up to three times (each, a “Reset Date”), as more specifically set forth in the Series C Warrants, to a price equal to the greater of (i) 80% of the average of the two lowest VWAP days out of the 20 consecutive trading days immediately preceding the Reset Date, and (ii) $4.00 (the “Floor”) (the “Reset Price”). Upon the applicable Reset Date, the number of shares of Common Stock issuable pursuant to the Series A Warrants and Series B Warrants would also be adjusted, as more specifically set forth in the Series C Warrants. The Series C Warrants, were not exercisable until the applicable Reset date. At the First Reset Date, which was May 29, 2019, the Reset Price was set to the Floor price of $4.00 per share. Therefore, there will be no future Reset Dates or Reset Prices. The shares were fixed to the following at the Reset Date: the number of shares of Common Stock issuable upon exercise of the Series A Warrants is 2,556,875 shares, Series B Warrants is 2,556,875 shares, and Series C Warrants is 1,420,486. The number of shares of Common Stock issuable upon exercise of warrants issued to the placement agents is 127,848 shares.

During the three months ended June 30, 2019, shareholders exercised 1,347,050 shares of the Series C Warrants. There were no Series A, B or placement agents warrants exercised as of June 30, 2019. The fair value of the total warrant liability related to the Series A, B and C warrants and the placement agent warrants at June 30, 2019 is $5.7 million and is included in Warrant liabilities in the Condensed Consolidated Balance Sheets.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

Total warrants outstanding as June 30, 2019 were as follows:

 

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

Summary of Option and Warrant Activity and Outstanding Shares

 

 

 

As of June 30, 2019, there are 5,688 options available for exercise.  All options are out-of-the-money and have a zero intrinsic value.

 

 

11.  Net Income/(Loss) Per Share

 

 

Basic and diluted net income/(loss) per share is computed as follows:

 

 

 

 

Basic net income/(loss) per share is computed by dividing net income/(loss) available to common shareholders by the weighted average number of common shares outstanding.  Diluted net income/(loss) per share applicable to common shareholders is computed using the weighted average number of common shares outstanding during the period plus the dilutive effect of outstanding stock options, warrants and convertible preferred stock using the “treasury stock” method. For the three months ended June 30, 2019, stock options of 7,848 and warrants to purchase 5,424,562 shares of common stock were not included in the computation of diluted net income per share because they were considered antidilutive. For the three months ended June 30, 2018 and both the nine months ended June 30, 2019 and 2018, the diluted net loss per share is the same as the basic net loss per share as the effects of all the Company’s potential common stock equivalents are antidilutive because the Company reported a loss for the periods.