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Bridgeline Digital, Inc. - Quarter Report: 2021 June (Form 10-Q)

blin20210630_10q.htm
 
 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


Form 10-Q


(Mark One)

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

 

For the quarterly period ended June 30, 2021

 

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

 


Bridgeline Digital, Inc.

(Exact name of registrant as specified in its charter)


 

Delaware

52-2263942

State or other jurisdiction of incorporation or organization

IRS Employer Identification No.

 

100 Sylvan Road, Suite G700

 

Woburn, Massachusetts

01801

(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 or a smaller reporting 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  ☒

Emerging growth company ☐

Smaller reporting company ☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

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 12, 2021 was 8,393,609.

 

1

 

 

 

Bridgeline Digital, Inc.

 

Quarterly Report on Form 10-Q

 

For the Quarterly Period Ended June 30, 2021

 

Index

 

   

Page

 

Part I

Financial Information

   
       

Item 1.

Condensed Consolidated Financial Statements

   
       
 

Condensed Consolidated Balance Sheets (unaudited) as of June 30, 2021 and September 30, 2020

4

 
       
 

Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended June 30, 2021 and 2020

5

 
       
 

Condensed Consolidated Statements of Comprehensive Loss (unaudited) for the three and nine months ended June 30, 2021 and 2020

6

 
       
 

Condensed Consolidated Statements of Stockholders’ Equity (unaudited) for the three and nine months ended June 30, 2021 and 2020

7

 
       
 

Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended June 30, 2021 and 2020

9

 
       
 

Notes to Unaudited Condensed Consolidated Financial Statements

10

 
       

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

31

 
       

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  

 

2

 

Bridgeline Digital, Inc.

 

Quarterly Report on Form 10-Q

 

For the Quarterly Period ended June 30, 2021

 

Statements contained in this Report on Form 10-Q, other than statements or characterizations of historical fact, are forward-looking statements. These forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, are based on our current expectations, estimates and projections about our industry, management's beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can often be identified by words such as "anticipates," "expects," "intends," "plans," "predicts," "believes," "seeks," "estimates," "may," "will," "should," "would," "could," "potential," "continue," "ongoing," similar expressions, and variations or negatives of these words. 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.  These forward-looking statements are not guarantees of future results and are subject to risks, uncertainties and assumptions, including, but not limited to, the impact of the coronavirus pandemic and related public health measures that may affect our financial results; business operations and the business of our customers, suppliers and partners; our ability to retain and upgrade current customers; increasing our recurring revenue; our ability to attract new customers; our revenue growth rate; our history of net loss and our ability to achieve or maintain profitability, our liability for any unauthorized access to our data or our users content, including through privacy and data security breaches; any decline in demand for our platform or products; changes in the interoperability of our platform across devices, operating systems, and third party applications that we do no control; competition in our markets; our ability to respond to rapid technological changes, extend our platform, develop new features or products, or gain market acceptance for such new features or products, particularly in light of potential disruptions to the productivity of our employees resulting from remote work; our ability to manage our growth or plan for future growth, and our acquisition of other businesses and the potential of such acquisitions to require significant management attention, disrupt our business, or dilute stockholder value; the volatility of the market price of our common stock; the ability to maintain our listing on the NASDAQ Capital Market; or our ability to maintain an effective system of internal controls as well as other risks described in our filings with the Securities and Exchange Commission.  Any of such risks could cause our actual results to differ materially and adversely from those expressed in any forward-looking statement. Bridgeline Digital, Inc. assumes no obligation to, and does not currently intend to, update any such forward-looking statements, except as required by applicable law. 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, 2020, and 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.

 

3

 

PART IFINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements.

 

 

BRIDGELINE DIGITAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(Unaudited)

 

  

June 30,

2021

  

September 30,

2020

 

ASSETS

        

Current assets:

        

Cash and cash equivalents

 $4,768  $861 

Accounts receivable, net

  1,325   665 

Prepaid expenses

  389   268 

Other current assets

  600   111 

Total current assets

  7,082   1,905 

Property and equipment, net

  248   238 

Operating lease assets

  533   294 

Intangible assets, net

  8,159   2,617 

Goodwill

  15,961   5,557 

Other assets

  80   49 

Total assets

 $32,063  $10,660 
         

LIABILITIES AND STOCKHOLDERS EQUITY

        

Current liabilities:

        

Current portion of long-term debt

 $755  $- 

Current portion of operating lease liabilities

  176   96 

Accounts payable

  2,169   1,311 

Accrued liabilities

  754   599 

Purchase price and contingent consideration payable (Note 15)

  6,187   - 

Paycheck Protection Program liability (Note 8)

  -   88 

Deferred revenues

  2,796   1,511 

Total current liabilities

  12,837   3,605 

Long-term debt, net of current portion

  1,288   - 

Operating lease liabilities, net of current portion

  356   198 

Warrant liabilities

  8,823   2,486 

Other long-term liabilities

  425   15 

Total liabilities

  23,729   6,304 
         

Commitments and contingencies

          
         

Stockholders’ equity:

        

Preferred stock - $0.001 par value; 1,000,000 shares authorized;

        

Series A Convertible Preferred stock:

        

264,000 shares authorized; no shares outstanding at June 30, 2021 and September 30, 2020

  -   - 

Series C Convertible Preferred stock:

        

11,000 shares authorized; 350 shares issued and outstanding at June 30, 2021 and September 30, 2020

  -   - 
Series D Convertible Preferred stock:        

4,200 shares authorized; 4,200 shares issued and outstanding at June 30, 2021 and no shares outstanding at September 30, 2020 (liquidation preference of $4,200 at June 30, 2021)

  -   - 

Common stock - $0.001 par value; 50,000,000 shares authorized;

        

6,801,243 shares at June 30, 2021 and 4,420,170 shares at September 30, 2020, issued and outstanding

  7   4 

Additional paid-in capital

  87,663   78,316 

Accumulated deficit

  (78,910

)

  (73,583

)

Accumulated other comprehensive loss

  (426

)

  (381

)

Total stockholders’ equity

  8,334   4,356 

Total liabilities and stockholders’ equity

 $32,063  $10,660 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4

 

 

BRIDGELINE DIGITAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(Unaudited)

 

  

Three Months Ended
June 30,

  

Nine Months Ended
June 30,

 
  

2021

  

2020

  

2021

  

2020

 

Net revenue:

                

Digital engagement services

 $821  $713  $2,543  $2,708 

Subscription and perpetual licenses

  2,624   1,919   6,612   5,494 

Total net revenue

  3,445   2,632   9,155   8,202 

Cost of revenue:

                

Digital engagement services

  449   395   1,297   1,432 

Subscription and perpetual licenses

  744   684   1,919   2,190 

Total cost of revenue

  1,193   1,079   3,216   3,622 

Gross profit

  2,252   1,553   5,939   4,580 

Operating expenses:

                

Sales and marketing

  760   312   1,729   2,130 

General and administrative

  608   464   1,681   1,936 

Research and development

  625   402   1,453   1,218 

Depreciation and amortization

  306   224   777   731 

Restructuring and acquisition related expenses

  568   1   862   373 

Total operating expenses

  2,867   1,403   6,502   6,388 

Income (loss) from operations

  (615

)

  150   (563

)

  (1,808

)

Interest expense and other, net

  (9

)

  (2

)

  (7

)

  (3

)

Government grant income (Note 8)

  -   -   88   - 

Change in fair value of warrant liabilities

  (4,161

)

  (1,843

)

  (6,020

)

  1,078 

Loss before income taxes

  (4,785

)

  (1,695

)

  (6,502

)

  (733

)

Provision for (benefit from) income taxes

  (1,176

)

  6   (1,175

)

  9 

Net loss

  (3,609

)

  (1,701

)

  (5,327

)

  (742

)

Dividends on convertible preferred stock

  -   -   -   (106

)

Deemed dividend on amendment of Series A convertible preferred stock

  -   -   -   (2,314

)

Net loss applicable to common shareholders

 $(3,609

)

 $(1,701) $(5,327

)

 $(3,162

)

Net loss per share attributable to common shareholders:

                

Basic

 $(0.61

)

 $(0.44

)

 $(1.04

)

 $(0.97

)

Diluted

 $(0.61

)

 $(0.44

)

 $(1.04

)

 $(0.97

)

Number of weighted average shares outstanding:

                

Basic

  5,939,021   3,876,677   5,117,586   3,264,734 

Diluted

  5,939,021   3,876,677   5,117,586   3,264,734 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5

 

 

BRIDGELINE DIGITAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(Unaudited)

 

  

Three Months Ended
June 30,

  

Nine Months Ended
June 30,

 
  

2021

  

2020

  

2021

  

2020

 

Net loss

 $(3,609

)

 $(1,701

)

 $(5,327

)

 $(742

)

Other comprehensive loss:

                

Net change in foreign currency translation adjustment

  14   36   (45

)

  (22

)

Comprehensive loss

 $(3,595

)

 $(1,665

)

 $(5,372) $(764

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6

 

 

BRIDGELINE DIGITAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands, except share data)

(Unaudited)

 

  

For the Three and Nine Months Ended June 30, 2021

 
                          

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, 2020

  350  $-   4,420,170  $4  $78,316  $(73,583) $(381) $4,356 

Stock-based compensation expense

                  51           51 

Net loss

                      (1,162)      (1,162)

Foreign currency translation

                          10   10 

Balance at December 31, 2020

  350  $-   4,420,170  $4  $78,367  $(74,745) $(371) $3,255 

Stock-based compensation expense

                  39           39 

Issuance of common stock – stock options exercised

          13,333       19           19 

Issuance of common stock – warrants exercised

          48,612       140           140 

Issuance of common stock, net of offering costs

          880,000   1   2,461           2,462 

Issuance of stock in connection with acquisition of business

          29,433       99           99 

Net loss

                      (556)      (556)

Foreign currency translation

                          (69)  (69)

Balance at March 31, 2021

  350  $-   5,391,548  $5  $81,125  $(75,301) $(440) $5,389 

Stock-based compensation expense

                  43           43 

Issuance of common stock – stock options exercised

          14,000       20           20 

Issuance of common stock – warrants exercised

          335,695   1   2,176           2,177 

Issuance of common stock, net of offering costs

          1,060,000   1   1,992           1,993 

Issuance of Series D convertible preferred stock, net of offering costs

  2,700               1,377           1,377 

Issuance of Series D convertible preferred stock in connection with acquisition of business

  1,500               930           930 

Net loss

                      (3,609)      (3,609)

Foreign currency translation

                          14   14 

Balance at June 30, 2021

  4,550  $-   6,801,243   7  $87,663  $(78,910) $(426) $8,334 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

7

 

  

For the Three and Nine Months Ended June 30, 2020

 
                          

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, 2019

  262,751  $-   2,798,475  $3  $75,620  $(71,489

)

 $(338

)

 $3,796 

Stock-based compensation expense

                  30           30 

Dividends on Series A convertible preferred stock

                      (79

)

      (79

)

Deemed dividend on amendment of Series A convertible preferred stock (Note 10)

                  2,314   (2,314

)

      - 

Net income

                      136       136 

Foreign currency translation

                          1   1 

Balance at December 31, 2019

  262,751  $-   2,798,475  $3  $77,964  $(73,746

)

 $(337

)

 $3,884 

Series A convertible preferred stock conversion to common

  (107,416)      613,806                   - 

Stock-based compensation expense

                  50           50 

Dividends on Series A convertible preferred stock

                      (27

)

      (27

)

Net income

                      822       822 

Foreign currency translation

                          (59)  (59

)

Balance at March 31, 2020

  155,335  $-   3,412,281  $3  $78,014  $(72,951

)

 $(396

)

 $4,670 

Series A convertible preferred stock dividend liabilities settled in shares

          112,960   1   188           189 

Series A convertible preferred stock conversion to common

  (154,894

)

      884,817                   - 

Series C convertible preferred stock conversion to common

  (86

)

      9,556                   - 

Stock-based compensation

                  53           53 

Net loss

                      (1,701

)

      (1,701

)

Foreign currency translation

                          36   36 

Balance at June 30, 2020

  355  $-   4,419,614  $4  $78,255  $(74,652

)

 $(360

)

 $3,247 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

8

 

 

BRIDGELINE DIGITAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

  

Nine Months Ended
June 30,

 
  

2021

  

2020

 

Cash flows from operating activities:

        

Net loss

 $(5,327) $(742

)

Adjustments to reconcile net loss to net cash used in operating activities:

        

Amortization of intangible assets

  726   678 

Depreciation

  38   40 

Other amortization

  13   13 

Change in fair value of warrant liabilities

  6,020   (1,078

)

Stock-based compensation

  133   133 

Deferred income taxes

  (1,181

)

  - 

Government grant income (Note 8)

  (88

)

  - 

Changes in operating assets and liabilities:

        

Accounts receivable

  75   486 

Prepaid expenses

  (67

)

  155 

Other current assets and other assets

  (186

)

  11 

Accounts payable and accrued liabilities

  100   (65

)

Deferred revenue

  75   174 

Other liabilities

  7   (32

)

Total adjustments

  5,665   515 

Net cash provided by (used in) operating activities

  338   (227

)

Cash flows from investing activities:

        

Software development capitalization costs

  (30

)

  - 

Purchase of property and equipment

  (52

)

  - 

Purchase of business, net of cash acquired

  (4,358

)

  - 

Net cash used in investing activities

  (4,440

)

  - 

Cash flows from financing activities:

        

Proceeds from issuance of common stock, net of issuance costs

  4,626   - 

Proceeds from issuance of Series D convertible preferred stock, net of issuance costs

  2,525    

Proceeds from stock option and warrant exercises

  1,354   - 

Proceeds received under Paycheck Protection Program

  -   1,048 

Payments of contingent consideration and deferred cash payable

  (45

)

   

Payments of long-term debt

  (494

)

  - 

Net cash provided by financing activities

  7,966   1,048 

Effect of exchange rate changes on cash and cash equivalents

  43   48 

Net increase in cash and cash equivalents

  3,907   869 

Cash and cash equivalents at beginning of period

  861   296 

Cash and cash equivalents at end of period

 $4,768  $1,165 

Supplemental disclosures of cash flow information:

        

Cash paid for:

        

Interest

 $27  $- 

Income taxes

 $-  $3 

Non cash investing and financing activities:

        

Consideration paid in stock in connection with acquisition of business

 $1,029  $- 

Offering costs settled by issuance of liability classified warrants

 $289  $- 

Dividends accrued on convertible preferred stock

 $-  $189 

Deemed dividend on amendment of Series A convertible preferred stock

 $-  $2,314 

 

9

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

1.   Description of Business

 

Overview

 

Bridgeline Digital Inc., The Digital Engagement Company (the “Company”), helps customers maximize the performance of their full 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.

 

OrchestraCMS, delivered through a cloud-based SaaS, is the only content and digital experience platform built 100% native on Salesforce and helps customers create compelling digital experiences for their customers, partners, and employees; uniquely combining content with business data, processes and applications across any channel or device, including Salesforce Communities, social media, portals, intranets, websites, applications and services.

 

Celebros Search, delivered through a cloud-based SaaS, is a commerce-oriented site search product that provides for Natural Language Processing with artificial intelligence to present very relevant search results based on long-tail keyword searches in seven languages.

 

Woorank SRL (“Woorank”) is a leading SEO (“Search Engine Optimization”) audit and digital marketing tool that can look at a customer’s site through Google’s eyes and generate an instant audit of the site’s technical, on-page and off-page SEO. Woorank’s clear, actionable insights not only help companies increase their search ranking and website traffic, but also improve audience engagement, conversion, and customer retention rates (see Note 15).

 

Hawk Search, Inc. (“Hawk Search) is a robust, feature-rich next-generation search, recommendation, and personalization platform, built for marketers, merchandisers and developers that enhances, normalizes and enriches a customer's site search and browse experience. Hawk Search leverages advanced artificial intelligence, machine learning and industry leading analyzers to deliver the ultimate search experience and accurate results from federated data sources.  Whether a small or enterprise level B2C, B2B commerce business or content publishers, the Hawk Search feature set complements business objectives.

 

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 Woburn, Massachusetts.  The Company maintains regional field offices serving the following geographical locations: Boston, Massachusetts; Woodbury, New York; Chicago, Illinois; Raleigh, North Carolina; Ontario, Canada; and Brussels, Belgium. The Company has three wholly-owned subsidiaries: Bridgeline Digital Pvt. Ltd. located in Bangalore, India, Bridgeline Digital Canada, Inc. located in Ontario, Canada, Bridgeline Digital Belgium BV located in Brussels, Belgium.

 

Liquidity and Managements Plans

 

In March 2020, the World Health Organization declared the outbreak of novel coronavirus disease (“COVID-19”) as a pandemic. We expect our operations in all locations to be affected as the virus continues to proliferate. We have adjusted certain aspects of our operations to protect employees and customers while still meeting customers’ needs for vital technology. We will continue to monitor the situation closely and it is possible that we will implement further measures. In light of the uncertainty as to the severity and duration of the pandemic, the impact on our revenues, profitability and financial position is uncertain at this time.

 

In July 2021, the Company received approximately $7.4 million in cash relating the issuance of 1,850,630 shares of its common stock upon exercise of Series A Warrants, originally issued in March 2019, with an exercise price of $4 per share. 

 

On May 14, 2021, the Company offered and sold, in a registered direct offering, a total 1,060,000 shares of its common stock at a price of $2.28 per share. On the same day, the Company entered into securities purchase agreements with certain institutional investors in connection with a private placement of 2,700 shares of newly designated Series D Convertible Preferred Stock at a price of $1,000 per share and warrants to purchase up to an aggregate of 592,106 shares of common stock at an exercise price of $2.51 per share. The aggregate proceeds, net of cash paid for certain fees due to placement agents and transaction related expenses, of these two transactions that occurred on the same day was $4.6 million. Beginning on the six-month anniversary of the original issuance date, the Series D Preferred Stock (as defined in Note 10) holders are entitled to receive cumulative dividends at the annual rate per share of Preferred Stock as a percentage of the stated value per share of 9% on the last day of each calendar quarter.

 

10

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

On February 4, 2021, the Company offered and sold a total of 880,000 shares of its common stock, par value $0.001 per share, to certain institutional and accredited investors at a public offering price of $3.10 per share in a registered direct offering. The aggregate proceeds from this transaction, net of certain fees due to placement agents and transaction expenses, was approximately $2.5 million (see Note 10).

 

In connection with an acquisition of a business completed during the 2021 fiscal year third quarter, the Company recognized an obligation for a deferred payment representing a portion of the purchase price of $2.0 million payable on or before December 31, 2021, and contingent earn-out payments of $2.2 million which are payable, no later than December 31, 2022, in the event of achievement of certain revenue targets and operational goals.

 

In connection with an acquisition of a business completed during the 2021 fiscal year second quarter, the Company (1) assumed the outstanding long-term debt obligations of $2.1 million of the acquiree of which $755 thousand is payable over the next twelve months, (2) issued a seller note of $352 thousand to one of the selling shareholders payable over a five-year period, (3) deferred a portion of the purchase price of $488 thousand which is expected to be paid within the next twelve months and (4) recognized contingent earn-out payments of $1.6 million which are payable in the event of achievement of certain revenue targets and operational goals.

 

In prior years, the Company incurred operating losses and used cash to fund operations, develop new products, and build infrastructure. During its 2020 fiscal year, the Company executed an operating plan that reduced operating expenses that have not yet been realized for a full twelve-month period. The Company is continuing to maintain tight control over discretionary spending for the 2021 fiscal year. The Company believes it has sufficient revenue and working capital to support future growth.

 

On August 17, 2020, the Company entered into an arrangement with an investment banking firm to sell up to $4,796,090 of shares of the Company’s common stock, $0.001 par value. Refer to Note 10 under the caption, At the Market Offering, for a detailed description of this capital raising activity. There are no obligations for the sale or purchase of the Company’s common stock pursuant to this offering. Accordingly, there can be no assurances that the Company or investment banking firm will be successful in selling any portion of the shares available for sale pursuant to this offering. On December 18, 2020, the Company delivered written notice to Roth Capital Partners that it was suspending all offers and sales under the At the Market Offering Agreement (the “Suspension Period”), during which time the Company will not make any sales of Placement Shares. No other definitive agreements for additional financing are in place as of the issuance date of this Form 10-Q, and there can be no assurances that additional sources of financing could be obtained on terms that are favorable or acceptable to the Company and that revenue growth and improvement in cash flows can be achieved. No adjustments have been made to the accompanying consolidated financial statements as a result of this uncertainty.

 

 

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 (“U.S. 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 their fair presentation. The operating results for the three and nine months ended June 30, 2021, are not necessarily indicative of the results to be expected for the year ending September 30, 2021. The accompanying September 30, 2020 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 U.S. 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, 2020, as filed with the U.S. Securities and Exchange Commission (“SEC”) on December 23, 2020.

 

11

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

Intangibles Goodwill and Other - Internal-Use Software

 

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-15, which addresses a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The effective date of this new standard for the Company was October 1, 2020. Under the new standard, customers will apply the same criteria for capitalizing implementation costs as they would for an arrangement that has a software license. As of October 1, 2020, the Company did not have significant implementation costs incurred in a cloud computing arrangement that is a service contract and therefore upon adoption the impact of the new standard on its consolidated financial statements and related disclosures was not material. All future implementation costs in such arrangements will be capitalized and amortized over the life of the arrangement, which may have a material impact in those future periods if such costs are material.

 

Fair Value

 

In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement, which changes the fair value measurement disclosure requirements of Accounting Standards Codification (“ASC”) 820. The effective date of this new standard for the Company was October 1, 2020. As the adoption of this standard was limited to revised disclosures, the impact of the new standard on its consolidated financial statements was not material.

 

Accounting Pronouncements Pending Adoption

 

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. ASU 2016-13 is effective for smaller reporting companies for annual reporting periods beginning after December 15, 2022, including interim periods within those annual reporting periods, with early adoption permitted. The Company is currently evaluating the impact of the new standard 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 consolidated financial statements or related disclosures.

 

 

3. Accounts Receivable

 

Accounts receivable consist of the following:

 

  

As of
June 30, 2021

  

As of
September 30, 2020

 

Accounts receivable

 $1,351  $698 

Allowance for doubtful accounts

  (26

)

  (33

)

Accounts receivable, net

 $1,325  $665 

 

As of June 30, 2021, one customer represented approximately 16% of accounts receivable. As of September 30, 2020, three customers represented approximately 15%, 14% and 10% of accounts receivable. For the three and nine months ended June 30, 2021, no customers exceeded 10% of the Company’s total revenues. For the three and nine months ended June 30, 2020, one customer represented approximately 11% and 12%, respectively, of the Company’s total revenue.

 

12

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

4.   Fair Value Measurement and Fair Value of Financial Instruments

 

The Company’s financial instruments consist principally of accounts receivable, accounts payable, warrant liabilities and long-term debt arrangements. 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.

 

The Company believes the carrying value of its accounts receivable and accounts payable approximate fair value as of June 30, 2021 and September 30, 2020, due to their short-term nature.

 

The Company’s warrant liabilities are measured at fair value at each reporting period with changes in fair value recognized in earnings during the period. The fair value of the Company’s warrant liabilities are valued utilizing Level 3 inputs. Warrant liabilities are valued using a Monte Carlo option-pricing model, which takes into consideration the volatilities of comparable public companies, due to the relatively low trading volume of the Company’s common stock. The Monte Carlo option-pricing model uses certain assumptions, including expected life and annual volatility. The range and weighted average volatilities of comparable public companies utilized was 27.5% - 70.7% and 57.8%, respectively, as of June 30, 2021, and 26.2% - 70.7% and 43.5%, respectively, as of September 30, 2020. The volatility utilized in the Monte Carlo option-pricing model was determined by weighing 60% to the Company-specific volatility and 40% on comparable public companies. The significant inputs and assumptions utilized were as follows:

 

  

 

As of June 30, 2021As of September 30, 2020 At inception 
  

Montage

Capital

  

Series C

Preferred

  

Series D

Preferred

  

Montage

Capital

  

Series C

Preferred

  

Series D

Preferred

 

Volatility

  87.3

%

  92.0%  86.5

%

  84

%

  84.1

%

  86.3%

Risk-free rate

  0.70

%

  0.50%  0.90

%

  0.28

%

  0.20

%

  0.90%

Stock price

 $4.30  $4.30  $4.30  $1.86  $1.86  $2.50 

 

The Company recognized gains/(losses) of ($4,161) and ($1,843) for the three months ended June 30, 2021 and 2020, respectively, and ($6,020) and $1,078 for the nine months ended June 30, 2021 and 2020, respectively, related to the change in fair value of warrant liabilities. The changes in fair value of warrant liabilities for the three and nine months ended June 30, 2021, were due to changes in inputs, primarily an increase in stock price and the risk-free rate, to the Monte Carlo option-pricing model. The changes in fair value of warrant liabilities for the three and nine months ended June 30, 2020, were due to changes in inputs, primarily an increase and decline, respectively, in stock price and the risk-free rate, to the Monte Carlo option-pricing model.

 

13

 

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, 2021 and September 30, 2020, are as follows:

 

  

As of June 30, 2021

     
  

Level 1

  

Level 2

  

Level 3

  

Total

 
                 

Liabilities:

                

Warrant liability - Montage

 $-  $-  $13  $13 

Warrant liability - Series A and C

  -   -   6,225   6,225 

Warrant liability – Series D

  -   -   2,585   2,585 

Total Liabilities

 $-  $-  $8,823  $8,823 

 

  

As of September 30, 2020

     
  

Level 1

  

Level 2

  

Level 3

  

Total

 
                 

Liabilities:

                

Warrant liability - Montage

 $-  $-  $26  $26 

Warrant liability - Series A, B and C

  -   -   2,460   2,460 

Total Liabilities

 $-  $-  $2,486  $2,486 

 

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

 

  

Nine months

ended June 30,

2021

 

Balance at beginning of period, October 1, 2020

 $2,486 

Additions

  - 

Exercises

  - 

Adjustment to fair value

  1,441 

Balance at end of period, December 31, 2020

 $3,927 

Additions

  - 

Exercises

  (140)

Adjustment to fair value

  418 

Balance at end of period, March 31, 2021

 $4,205 

Additions

  1,319 

Exercises or payments

  (862)

Adjustment to fair value

  4,161 

Balance at end of period, June 30, 2021

 $8,823 

 

 

5.   Intangible Assets

 

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

 

  

As of
June 30, 2021

  

As of
September 30, 2020

 

Domain and trade names

 $745  $10 

Customer related

  5,730   1,500 

Technology

  1,684   1,107 

Balance at end of period

 $8,159  $2,617 

 

14

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

Total amortization expense related to intangible assets was $285 and $207 related to intangible assets for the three months ended June 30, 2021 and 2020, respectively, and $726 and $678 for the nine months ended June 30, 2021 and 2020, respectively, and is reflected in Operating expenses on the Condensed Consolidated Statements of Operations. The estimated amortization expense for fiscal year 2021 (remaining), 2022, 2023, 2024, 2025 and thereafter is $397, $1,494, $1,415, $1,032, $748, and $3,073 respectively.

 

 

6.   Accrued Liabilities

 

Accrued liabilities consist of the following:

 

  

As of
June 30,

2021

  

As of
September 30,

2020

 

Compensation and benefits

 $447  $368 

Professional fees

  59   29 

Taxes

  80   46 

Insurance

  16   - 

Other

  152   156 

Balance at end of period

 $754  $599 

 

 

7.   Long-term Debt

 

On March 1, 2021, the Company assumed the outstanding long-term debt obligations of an acquired business and issued a seller note to one of the selling shareholders (see Note 15). The assumed debt obligations and seller note are denominated in Euros.

 

Long-term debt consisted of the following:

 

  

As of June 30,

2021

 

Vendor loan payable (“Vendor loan”), accruing interest at 4.0% per annum. Principal and interest are payable in two lump-sum installments and the loan matures on February 1, 2023.

 $724 

Term loan payable, accruing interest at fixed rates ranging between .99% to 1.5% per annum, payable in monthly or quarterly payments of interest and principal and matures on October 10, 2022.

  497 

Term loan payable, accruing interest at 1.3% per annum, payable in quarterly installments and matures on April 30, 2027.

  470 

Seller’s note payable (“Seller’s note”), due to one of the selling shareholders, accruing interest at a fixed rate of 4.0% per annum. The Seller’s note is payable over 5 installments and matures on January 1, 2026.

  352 

Total debt

  2,043 

Less current portion:

  (755)

Long-term debt, net of current portion

 $1,288 

 

15

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

At June 30, 2021, future maturities of long-term debt are as follows:

 

Fiscal year:    

2021 (remaining)

 $119 

2022

  636 

2023

  461 

2024

  166 

2025

  166 

Thereafter

  495 

Total commitments

 $2,043 

 

 

8.   Paycheck Protection Program

 

On April 17, 2020, Bridgeline Digital, Inc. entered into a loan with BNB Bank as the lender in an aggregate principal amount of $1,048 (“PPP Loan”) pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The PPP Loan is evidenced by a promissory note (“Note”). Subject to the terms of the Note, the PPP Loan bears interest at a fixed rate of one percent (1%) per annum, with the first six months of interest deferred, has an initial term of two years, and is unsecured and guaranteed by the U.S. Small Business Administration (“SBA”). Payments are deferred for at least the first six months and payable in 18 equal consecutive monthly installments of principal and interest commencing upon expiration of the deferral period of the PPP Loan Date. The Company may apply to the lender for forgiveness of the PPP Loan, with the amount which may be forgiven equal to the sum of payroll costs, covered rent obligations, and covered utility payments incurred by the Company during the twenty-four week period beginning on April 21, 2020, calculated in accordance with the terms of the CARES Act. The Note provides for prepayment and customary events of default, including, among other things, cross-defaults on any other loan with the lender. The PPP Loan may be accelerated upon the occurrence of an event of default.

 

U.S. GAAP does not contain authoritative accounting standards for forgivable loans provided by governmental entities to a for-profit entity. Absent authoritative accounting standards, interpretative guidance issued and commonly applied by financial statement preparers allows for the selection of accounting policies amongst acceptable alternatives. Based on facts and circumstances outlined below, the Company determined it most appropriate to account for the PPP Loan proceeds as an in-substance government grant by analogy to International Accounting Standards 20 (“IAS 20”), Accounting for Government Grants and Disclosure of Government Assistance. Under the provisions of IAS 20, “a forgivable loan from government is treated as a government grant when there is reasonable assurance that the entity will meet the terms for forgiveness of the loan.” IAS 20 does not define “reasonable assurance” however, based on certain interpretations, it is analogous to “probable” as defined in FASB ASC 450-20-20 under U.S. GAAP, which is the definition the Company has applied to its expectations of PPP Loan forgiveness. Under IAS 20, government grants are recognized in earnings on a systematic basis over the periods in which the Company recognizes costs for which the grant is intended to compensate (i.e., qualified expenses). Further, IAS 20 permits for the recognition in earnings either separately under a general heading such as other income, or as a reduction of the related expenses. The Company has elected to recognize government grant income separately within other income to present a clearer distinction in its consolidated financial statements between its operating income and the amount of net income resulting from the PPP Loan and subsequent expected forgiveness. The Company believes this presentation method promotes greater comparability amongst all periods presented.

 

The Company applied for full PPP Loan forgiveness on March 29, 2021 and received approval from the SBA in August 2021. The Company classifies unexpended loan proceeds on the accompanying consolidated balance sheets as a current or noncurrent liability based on the contractual maturities of the underlying loan agreement. During the first quarter of fiscal 2021, the remaining loan proceeds were expended on qualified expenses and as a result, the Company recognized $88 as government grant income. As of September 30, 2020, unexpended loan proceeds of $88 were classified as a current liability.

 

16

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

9.   Restructuring and Acquisition Related Expenses

 

Acquisition Related Expenses

 

In connection with the acquisition of businesses completed during the fiscal 2021 second and third quarters (see Note 15), the Company incurred acquisition expenses of $568 during the three months ended June 30, 2021 and $862 during the nine months ended June 30, 2021, which are included in Restructuring and acquisition related expenses in the Condensed Consolidated Statements of Operations. There were no acquisition related expenses incurred during the three and nine months ended June 30, 2020.

 

Restructuring Activities

 

During the three and nine months ended June 30, 2020, the Company recognized $1 thousand and $373 thousand, respectively, related to a reduction in force in its U.S. and Canada operations aimed at improving efficiencies by combining functions, certain responsibilities and eliminating redundancies, which resulted in a reduction of 15 positions. During the three and nine months ended June 30, 2020, the Company paid $1 related to this reduction in force. There were no restructuring related expenses incurred during the three and nine months ended June 30, 2021.

 

 

10.   Stockholders Equity

 

Series A Convertible Preferred Stock

 

The Company has designated 264,000 shares of its preferred stock as Series A Convertible Preferred Stock (“Series A Preferred Stock”). The shares of Series A 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 Series A 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.

 

On December 31, 2019 (the “Amendment Date”), the Company filed a First Amended and Restated Certificate of Designations of the Series A Convertible Preferred Stock (the “Series A Amendment”) with the Secretary of State for the State of Delaware, which amended and restated the Series A Preferred Stock, as more particularly set forth below:

 

Conversion Price: Reduces the conversion price from $812.50 per share to $1.75 per share, subject to adjustment in the event of stock splits or stock dividends.

 

Mandatory Conversion: The Company has the right, in its sole discretion, to require the holders to convert shares of the Series A Preferred Stock into Conversion Shares if (i) the Company’s common stock has closed at or above $2.28 ($32.50 prior to the Series A Amendment) for fifteen (ten prior to the Series A Amendment) 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.

 

Companys Redemption Option: The Company may redeem all or a portion of the outstanding shares of Series A Preferred Stock, at its option, provided that the Company provide ten business days’ prior written notice of its intent to redeem the Series A Preferred Stock to the holder and in cash at a price per share of Series A Preferred Stock equal to 100% of the Stated Value of such shares of Series A Preferred Stock plus all accrued and unpaid dividends. Notwithstanding, the holder may convert its Series A Preferred Stock prior to the exercise of the Company’s redemption option.

 

Dividends: Each outstanding share of Series A Preferred Stock is entitled to receive cumulative dividends, payable quarterly in arrears, at a rate of 5% per annum for the first eighteen months commencing on January 1, 2020 after which time the dividend rate will increase to 12% per annum (the dividend rate was 12% per annum prior to the Series A Amendment). Dividends are payable in cash or, at the election of the Company, by delivery of additional shares (“PIK Shares”) of Series A Preferred Stock, subject to a cap of 64,000 PIK Shares, in the aggregate. Any accrued but unpaid dividends on the shares of Preferred Stock to be converted shall also be converted into common stock at the conversion price.

 

17

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

In the event of any liquidation, dissolution, or winding up of the Company, the holders of shares of Series A 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 Series A Preferred Stock shall vote with the common stock on an as-converted basis.

 

Prior to fiscal 2019, the Company had issued 64,000 shares of Series A Preferred Stock as PIK Shares to the Series A preferred shareholders, which is the maximum amount of cumulative PIK Shares authorized. Therefore, all future dividend payments will be cash dividends.

 

The Company determined that the Series A Amendment represented an extinguishment for accounting purposes. In making this determination, the Company considered the significance of the contractual terms added and revisions to existing contractual terms, including, but not limited to, the significant change in the conversion price and the addition of the Company’s redemption option. These additions and revisions to existing contractual terms were considered to be qualitatively significant. The extinguishment of equity-classified convertible preferred stock is recognized as a deemed dividend measured as the difference between (1) the fair value of the consideration transferred; that is, the Series A Preferred Stock, as amended, and (2) the carrying value of the Series A Preferred Stock. At the Amendment Date, the fair value of the Series A Preferred Stock, as amended, was approximately $2,629 and its carrying value was approximately $315, resulting in a deemed dividend of $2,314 recognized as an increase to accumulated deficit and an increase to additional paid-in capital, which was included as a component of net loss applicable to common shareholders during the nine months ended June 30, 2020. The estimated Amendment Date fair value of the Series A Preferred Stock was determined using the present value of probability weighted scenario analysis based on the per share publicly traded closing stock price of the Company’s common stock.

 

Series C Convertible Preferred Stock

 

The Company has designated 11,000 shares of its preferred stock as Series C Convertible Preferred Stock (“Series C Preferred Stock”). The Company may not effect, and a holder 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. As of June 30, 2021, the Company had 350 shares of Series C Preferred Stock outstanding which were convertible into an aggregate of 38,889 shares of the Company’s common stock.

 

Registered Offering of Common Stock and Private Placement of Series D Convertible Preferred Stock (the May 2021 Offerings)

 

On May 14, 2021, the Company offered and sold a total of 1,060,000 shares of its common stock, to certain institutional investors at a public offering price of $2.28 per share in a registered direct offering (“RD Offering”). The RD Offering was registered under the Securities Act of 1933, as amended, pursuant to a prospectus supplement to the Company's currently effective registration statement on Form S-3.

 

Additionally, on May 14, 2021, the Company entered into securities purchase agreements, with certain institutional investors pursuant to which the Company offered and sold a total of 2,700 units (“Units”) at a purchase price of $1,000 per Unit (“Private Placement”). Each Unit consisted of (i) one share of the Company’s newly designated Series D Convertible Preferred Stock (“Series D Preferred Stock”) and (ii) warrants to purchase common stock up to one-half of the shares issuable upon conversion of the Series D Preferred Stock as a part of the Units.  In total, the Company issued 2,700 shares of Series D Preferred Stock and warrants to purchase up to 592,106 shares of common stock.

 

Joseph Gunnar & Company, LLC acted as lead placement agent for both the RD Offering and the Private Placement (collectively, the “May 2021 Offerings”) and Taglich Brothers, Inc. acted as co-placement agent for the May 2021 Offerings (the "Placement Agents"). As compensation for their services, the Company paid to the Placement Agents a fee equal to 8% of the aggregate purchase price paid and reimbursed the Placement Agents for certain expenses incurred in connection with the May 2021 Offerings. In addition, the Company issued to the Placement Agents warrants, in substantially the same form as the Series D Preferred Warrants, to purchase an aggregate of 179,536 shares of common stock

 

In connection with the Private Placement, the Company filed the Certificate of Designation of Preferences, Rights and Limitations of the Series D Convertible Preferred Stock, with the Secretary of State for the State of Delaware, designating 4,200 shares of the Company’s preferred stock as Series D Preferred. The terms and conditions set forth in the Certificate of Designation are summarized below:

 

18

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

Stated Value: Each share of Series D Preferred Stock has a stated value of $1,000 per share.

 

Dividends: Commencing six months after the issuance date and terminating upon receipt of Stockholder Approval, as discussed below, Series D Preferred holders are entitled to receive cumulative dividends at a rate of 9% per annum of the stated value per share. The Company will pay dividends, if accrued, on the last day of each calendar quarter with respect to the Series D Preferred Stock held by a holder during such calendar quarter.

 

Voting: Shares of Series D Preferred Stock have no general voting rights. However, as long as any shares of Series D Preferred Stock are outstanding, the Company may not, without the affirmative vote of the holders of a majority of the then outstanding shares of Series D Preferred Stock, (i) alter or change adversely the powers, preferences or rights given to the Series D Preferred Stock or alter or amend the Certificate of Designation, (ii) amend its certificate of incorporation or other charter documents in any manner that adversely affects any rights of the holders of Series D Preferred Stock, (iii) increase the number of authorized shares of Series D Preferred, or (iv) enter into any agreement with respect to any of the foregoing.

 

Liquidation Preference: Prior to Stockholder Approval, upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary , the holders of Series D Preferred Stock will be entitled to receive out of the Company’s assets an amount equal to the Stated Value, plus any accrued and unpaid dividends thereon and any other fees or liquidated damages then due and owing thereon under the Certificate of Designation, before any distribution or payment is made to the holders of any other securities and if the Company’s assets will be insufficient to pay in full such amounts, then the entire assets to be distributed to the holders of Series D Preferred Stock will be ratably distributed among such holders in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full.

 

After Stockholder Approval, the Series D Preferred Stock will have no liquidation preference.

 

Conversion: Each share of Series D Preferred Stock is convertible, at any time after the issuance date at the option of the holder thereof, into that number of shares of common stock determined by dividing the stated value by the conversion price which is $2.28 (subject to adjustment for the effect of stock dividends, stock splits, recapitalizations and the like); provided, however, that holders of the Series D Preferred Stock may not convert any of their Series D Preferred Stock into conversion shares unless and until the Stockholder Approval Date. In addition, holders of Series D Preferred Stock are prohibited from converting Series D Preferred Stock into conversion shares if, as a result of such conversion, the holder, together with its affiliates, would own more than 4.99% (or 9.99% upon the election of the holder prior to the issuance of the Series D Preferred Stock) of the total number of shares of common stock then issued and outstanding. Series D Preferred Stock issued in Private Placement, subject to Stockholder Approval, is convertible into an aggregate of 1,184,211 shares of common stock.

 

Stockholder Approval - The Company’s common stock is listed on the Nasdaq Capital Market, and, as such, its subject to the applicable rules of the Nasdaq Stock Market LLC, including Nasdaq Listing Rule 5635(a), which requires stockholder approval in connection with the acquisition of another company (see Note 15) if the Nasdaq-listed company will issue 20% or more of its common stock. For purposes of Nasdaq Listing Rule 5635(a), the issuance of any common stock in the Acquisition (see Note 15) and the May 2021 Offerings would be aggregated together. Thus, to permit the issuance of common stock upon conversion of the Series D Preferred Stock and upon exercise of the warrants issued in the Private Placement, the Company must first obtain stockholder approval of these issuances. The Company has determined that such prohibition does not represent an inability for the Company to satisfy its obligation to deliver shares upon conversion, as the holders’ conversion option itself is contingent upon Stockholder Approval. On June 29, 2021, the Company filed with the SEC, a Preliminary Proxy Statement included in which, among other matters, is the proposal to obtain Stockholder Approval regarding these issuances in its Annual Meeting of stockholders to be held on August 19, 2021. The Company determined that the Series D Preferred Stock should be classified as permanent equity.

 

The Series D Preferred Stock contains an embedded conversion feature that could affect the ultimate settlement of the Series D Preferred Stock. The Company determined that the embedded conversion feature’s economic characteristics and risks were clearly and closely related to the economic characteristics and risks of the Series D Preferred Stock. As a result, the embedded conversion feature was not required to be bifurcated from the Series D Preferred Stock.

 

The Series D Preferred Stock issued contains a beneficial conversion feature, which arises when a debt or equity security is issued with an embedded conversion option that is deemed beneficial to the investor, that is, in-the-money, at inception, as the conversion option has an effective conversion price that is less than the market price of the underlying stock at the commitment date. An embedded beneficial conversion feature is required to be recognized separately by allocating a portion of the proceeds equal to the intrinsic value, at the commitment date, of the feature to additional paid-in capital. As discussed below, the May 2021 Offerings cash proceeds allocated to the Series D Preferred Stock based on its relative fair value resulted in an effective conversion price of $1.41, which was below the commitment date fair value of the underlying shares of common stock of $2.50, resulting in a beneficial conversion feature measured at approximately $1.3 million. At June 30, 2021, the Company has not yet recognized the impact of the beneficial conversion feature due to holder conversion restrictions. The holder conversion restriction will be resolved upon Stockholder Approval, at which time the beneficial conversion feature will be immediately exercisable, at the option of the holder, and the Company will recognize full accretion of the beneficial conversion feature as a deemed dividend paid to the Series D Preferred Stock. Such deemed dividend shall be included as a component of net loss attributable to common stockholders in the period it is recognized.

 

19

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

As noted above, in connection with the May 2021 Offerings, the Company issued Series D Preferred Warrants and Placement Agents Warrants to purchase up to 592,106 and 179,536 shares of common stock, respectively. The Series D Preferred and Placement Agents Warrants (hereinafter referred to collectively as the “Series D Warrants”) are puttable at the option of the holder in the event of a Fundamental Transaction, as defined in the respective warrant agreements. The put features requires the Company to pay holders an amount of cash equal to the Black Scholes Value, as defined in the respective warrant agreements, of the remaining unexercised portion of the Series D Warrants on the date of consummation of such Fundamental Transaction. The Company determined that the Series D Warrants are required to be classified as liabilities measured at fair value at their issuance date. The Series D Warrants are required to be subsequently remeasured at fair value each reporting period with changes in fair value recognized in period earnings (see Note 4).

 

As the common stock in RD Offering was sold concurrently with the Units sold in the Private Placement, for any common purchasers, inclusive of purchaser affiliated entities, the aggregate proceeds from the May 2021 Offerings were allocated, on an investor-by-investor basis, to the Series D Preferred Warrants based on their fair value and the residual proceeds to the common stock and Series D Preferred Stock based on their relative fair values. Accordingly, the May 2021 Offerings proceeds, net of certain fees due to placement agents, inclusive of the fair value of warrants issued to placement agents, and transaction related expenses, of $4.3 million were allocated $1,030 to the Series D Preferred Warrants based on their issuance-date fair value, $1,915 to common stock and $1,323 to Series D Preferred Stock based on their respective relative fair values.

 

The issuance date fair value of the Series D Warrants issued to placement agents was determined to be incremental cost directly attributable to the May 2021 Offerings and was charged by the Company against proceeds along with other fees paid to the Placement Agents.

 

Registration Rights

 

The registration rights agreement, entered into in connection with the Series D Preferred Stock Units Private Placement, requires the Company to file with the SEC a registration statement no later than 15 days after the Closing Date (issuance date) registering for resale the maximum number of common shares issuable upon conversion of the Series D Preferred Shares and the exercise of the Series D Warrants. Such registration rights agreement requires the Company to use commercially reasonable best efforts to have the registration statement declared effective by the SEC, as soon as practicable, but in no event later than the effectiveness deadline of 60 days after the closing date (or in the event of a full review by the SEC the effectiveness deadline will be 90 days after the closing date). If such registration statement is not effective by the contractually agreed upon date or such registration statement effectiveness is not maintained, then, the Company is required to make payments on account of liquidated damages to the investors of 2% of their Series D Preferred Stock Units subscription amount on the date of such events, and on each monthly anniversary thereafter until the effectiveness is cured.

 

Pursuant to the terms of the registration rights agreement, the Company on May 28, 2021, filed a registration statement on Form S-3 with the SEC to register the common shares issuable upon the conversion of the Series D Preferred Shares and the exercise of the Series D Warrants. As of the date of issuance of these consolidated financial statements, the registration statement has not been declared effective by the SEC resulting in an event of default under the registration rights agreement. The Company has negotiated with the holders of these instruments to waive any payment of liquidated damages that would have been owed under this arrangement if the registration statement is declared effective on or before August 19, 2021.

 

Registered Offering and Sale of Common Stock

 

On February 4, 2021, the Company offered and sold a total of 880,000 shares of its common stock, par value $0.001 per share, to certain institutional and accredited investors at a public offering price of $3.10 per share in a registered direct offering (the “Offering”). The Offering was registered under the Securities Act of 1933, as amended, pursuant to a prospectus supplement to the Company’s currently effective registration statement on Form S-3 (File No. 333-239104), which was initially filed with the SEC on June 12, 2020, and was declared effective on June 25, 2020. The Company filed the final prospectus supplement for the Offering on or about February 5, 2021. The Offering closed on February 8, 2021, and resulted in proceeds, net of certain fees due to placement agents and transaction expenses, to the Company of approximately $2.5 million. The net proceeds received by the Company will be used for general corporate purposes, including general working capital.

 

20

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

Joseph Gunnar & Company, LLC acted as lead placement agent for the Offering, and Taglich Brothers, Inc. acted as co-placement agent for the Offering (the “Placement Agents”). As compensation for their services, the Company paid to the Placement Agents a fee equal to 8% of the aggregate purchase price paid for shares placed by the Placement Agents at closing and reimbursed the Placement Agents for certain expenses incurred in connection with the Offering. In addition, the Company issued to the Placement Agents warrants to purchase an aggregate of 58,169 shares of common stock (the “Placement Agent Warrants”). The Placement Agent Warrants have a term of five years from the date of issuance and an exercise price of $3.875 per share.

 

At the Market Offering

 

On August 17, 2020, the Company entered into an arrangement with an investment banking firm (the “Manager”) to sell up to $4,796,090 of shares of the Company’s common stock with a par value of $0.001 (the “ATM Offering”). Pursuant to the ATM Offering, shares may be sold on a daily basis, commencing no earlier than August 17, 2020, at a gross sales price equal to the market price for shares of the Company’s common stock on the NASDAQ Capital Market at the time of sale of such shares. The Manager has no obligation to purchase shares of the Company’s common stock and is only obligated to use its commercially reasonable efforts consistent with its normal trading and sales practices to sell shares of the Company’s common stock. Accordingly, there can be no assurances that the Manager will be successful in selling any portion of the shares available for sale under the ATM Offering. The Company shall pay to the Manager a placement fee of 2.5% of the gross sales price of shares sold. The ATM Offering shall remain in effect until the earlier of August 17, 2021, or upon written notice of termination by either the Company or the Manager. On December 18, 2020, the Company delivered written notice to Roth Capital Partners that it was suspending all offers and sales under the Suspension Period, during which time the Company will not make any sales of Placement Shares. Other than the suspension of the ATM Offering, the At the Market Offering Agreement remains in full force and effect during the Suspension Period.

 

The Company currently intends to use the net proceeds from the sale of shares pursuant to the ATM Offering for working capital and general corporate purposes. As of June 30, 2021, there have been no shares of common stock sold under the ATM Offering.

 

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 former debt holders of the Company and to former owners and employees of acquired companies that have become employees of the Company. The Company’s Amended and Restated Stock Incentive Plan (the “Plan”) provided for the issuance of up to 5,000 shares of common stock. This Plan expired in August 2016. As of June 30, 2021, there were 3,246 options outstanding under the Plan. On April 29, 2016, the stockholders approved a new stock incentive plan, The 2016 Stock Incentive Plan (the “2016 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. In November 2019, the Company increased the number of common shares available for issuance under the 2016 Plan from 10,000 shares to 800,000 shares. There were no revisions to exercise prices, terms or any other underlying provisions of existing stock options outstanding. As of June 30, 2021, there were 651,455 options outstanding and 148,545 shares available for future issuance under the 2016 Plan.

 

Compensation Expense

 

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 revenue and a portion to Operating expenses depending on the employee’s department. During the three and nine months ended June 30, 2021 and 2020, compensation expense related to share-based payments was as follows:

 

  

Three Months Ended
June 30,

  

Nine Months Ended
June 30,

 
  

2021

  

2020

  

2021

  

2020

 

Cost of revenue

 $6  $7  $18  $14 

Operating expenses

  37   46   115   119 
  $43  $53  $133  $133 

 

As of June 30, 2021, the Company had approximately $316 of unrecognized compensation costs related to unvested options, which is expected to be recognized over a weighted-average period of 2.0 years.

 

21

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

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 fundraising 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.

 

Montage Warrant - As additional consideration for a prior loan arrangement which was paid in full in a prior period not presented, the Company issued to Montage Capital an eight-year warrant (the “Montage Warrant”) to purchase 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 has 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. As of June 30, 2021, the number of shares issuable upon exercise of the Montage Warrants were 1,327 shares.

 

Series A, B and C Preferred Warrants - In March 2019, in connection with the issuance of the Company’s Series C Preferred Stock, the Company issued warrants to purchase the Company’s common stock. These warrants were designated as (i) Series A Warrants with an initial term of 5.5 years and an exercise price of $4; (ii) Series B Warrants with an initial term of 24 months and an exercise price of $4; and (iii) Series C Warrants with an initial term of 5.5 years and an exercise price of $0.05 (collectively, hereinafter referred to as the “Series C Preferred Warrants”). The Company also issued warrants with an exercise price of $4 to purchase shares of the Company’s common stock to the Placement Agents. The Company may not effect, and a holder 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. During the three and nine months ended June 30, 2021, 328,750 Series A Warrants were exercised, 2,556,875 Series B Warrants expired unexercised and 6,945 and 55,557, respectively, Series C Warrants were exercised.

 

As of June 30, 2021, the number of shares issuable upon exercise of the (i) Series A Warrants were 2,228,125 shares; (ii) Series C Warrants were 13,738 shares; and (iii) the placement agent warrants issued in connection with the Series C Preferred Stock were 127,848 shares.

 

Series D Preferred Warrants - The Units sold in Private Placement on May 14, 2021 also consisted of Series D Warrants to purchase up to 592,106 shares of common stock. The Series D Preferred Warrants issued on May 14, 2021 have an initial exercise date of November 14, 2021, with a term of five and half of years which ends on November 16, 2026. Series D Preferred Warrants have an exercise price of $2.51.

 

In addition, pursuant to the May 2021 Offerings the Company issued to the Placement Agents warrants to purchase an aggregate of 179,536 shares of common stock. The Placement Agents Warrants issued on May 14, 2021 have an initial exercise date of November 14, 2021, with a term of five years which ends on May 12, 2026. The Placement Agent Warrants have an exercise price of $2.85.

 

The Company may not effect, and a holder will not be entitled to, convert the Series D Preferred Stock or exercise any May 2021 Offering 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. As of June 30, 2021, no Series D Warrants have been exercised and the aggregate number of shares issuable upon exercise was 592,106 and 179,536 shares for investors and placement agents, respectively.

 

The Montage Warrants, Series C Preferred Warrants, the placement agent warrants issued in connection with the Series C Preferred Stock, and the Series D Warrants were all determined to be derivative liabilities and are subject to remeasurement each reporting period (see Note 4).

 

22

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

Total warrants outstanding as of June 30, 2021, were as follows:

 

  

Issue

         

Type

 

Date

 

Shares

  

Price

 

Expiration

Placement Agent

 

7/15/2016

  880  $230.00 

7/15/2021

Investors

 

11/9/2016

  4,271  $175.00 

5/9/2022

Director/Shareholder

 

12/31/2016

  120  $1,000.00 

12/31/2021

Financing (Montage)

 

10/10/2017

  1,327  $132.50 

10/10/2025

Director/Shareholder

 

12/31/2017

  120  $1,000.00 

12/31/2021

Investors

 

10/19/2018

  3,120  $25.00 

10/19/2023

Placement Agent

 

10/16/2018

  10,000  $31.25 

10/16/2023

Investors

 

3/12/2019

  162,345  $4.00 

10/19/2023

Investors

 

3/12/2019

  2,228,125  $4.00 

9/12/2024

Investors

 

3/12/2019

  13,738  $0.05 

9/12/2024

Placement Agent

 

3/12/2019

  127,848  $4.00 

9/12/2024

Placement Agent

 

2/4/2021

  58,169  $3.88 

2/4/2026

Investors

 

5/14/2021

  592,106  $2.51 

11/16/2026

Placement Agent

 

5/14/2021

  179,536  $2.85 

5/12/2026

Total

    3,381,705      

 

Summary of Option and Warrant Activity and Outstanding Shares

 

During the three and nine months ended June 30, 2021, the Company granted options to purchase 95,500 shares at an exercise price of $2.51, which vest ratably over a three-year period commencing on June 1, 2021. All such options granted expire ten years from the date of grant.

 

During the three months ended December 31, 2019, the Company granted options to purchase 681,353 shares at an exercise price of $1.40, of which (a) 70,000 shares vest on November 20, 2020 and the remainder vest ratably over a three-year period commencing November 20, 2019, and (b) 1,000 shares at an exercise price of $1.61 which vest ratably over a three-year period commencing on December 2, 2019. All such options granted expire ten years from the date of grant.

 

The weighted-average option fair values, as determined using the Black-Scholes option valuation model, and the assumptions used to estimate these values for stock options granted during the nine months ended June 30, 2021 and 2020, are as follows:

 

  

June 30,

 
  

2021

  

2020

 

Weighted-average fair value per share option

 $1.80  $0.96 

Expected life (in years)

  6.0   6.0 

Volatility

  81.49

%

  76.29

%

Risk-free interest rate

  1.04

%

  1.61

%

Dividend yield

  0.0

%

  0.0

%

 

The expected option term is the number of years the Company estimates the options will be outstanding prior to exercise based on historical trends of employee turnover. Expected volatility is based on historical daily price changes of the Company’s common stock for a period equal to the expected life. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant. The expected dividend yield is zero since the Company does not currently pay cash dividends on its common stock and does not anticipate doing so in the foreseeable future.

 

23

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

A summary of combined stock option and warrant activity for the nine months ended June 30, 2021, are as follows:

 

  

Stock Options

  

Stock Warrants

 
      

Weighted

      

Weighted

 
      

Average

      

Average

 
      

Exercise

      

Exercise

 
  

Options

  

Price

  

Warrants

  

Price

 
                 

Outstanding, October 1, 2020

  613,201  $4.76   5,495,999  $4.37 

Granted

  95,500   2.51   829,811   2.68 

Exercised

  (27,333

)

  1.40   (384,307

)

  3.43 

Forfeited/Exchanged

  (26,447

)

  2.34   (120)  1,000 

Expired

  (220

)

  470.77   (2,559,678

)

  4.20 

Outstanding, June 30, 2021

  654,701  $4.46   3,381,705  $4.16 

Options vested and exercisable, June 30, 2021

  223,786  $9.84         

 

As of June 30, 2021, the aggregate intrinsic value of options outstanding and exercisable was $1,765 and $629, respectively, and the weighted average remaining contractual term was 8.6 and 8.3 years, respectively.

 

 

11.   Net Income (Loss) Per Share Attributable to Common Shareholders

 

The Company presents basic and diluted earnings per share information for its common stock. The Series D Preferred Stock was considered participating securities, which means the security may participate in undistributed earnings with common stock. The holders of the Series D Preferred Stock are entitled to share in dividends, on an as-converted basis, if the holders of common stock were to receive dividends, other than dividends in the form of common stock. The Company is required to use the two-class method when computing earnings per share. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. In determining the amount of net earnings to allocate to common stockholders, earnings are allocated to both common and participating securities based on their respective weighted-average shares outstanding for the period. Securities are deemed not to be participating in losses if there is no obligation to fund such losses. The Series D Preferred Stock does not participate in losses, and as a result, the Company does not allocate losses to these securities in periods of loss. Diluted earnings per share for the common stock is computed using the more dilutive of the two-class method or the “if-converted” and treasury stock methods.

 

Basic loss per share is computed by dividing net loss applicable to common shareholders by the weighted average number of common shares outstanding.  Diluted net loss per share attributable 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 and warrants using the “treasury stock” method and convertible preferred stock using the “as-if-converted” method.  The computation of diluted earnings per share does not include the effect of outstanding stock options, warrants and convertible preferred stock that are considered anti-dilutive.

 

For the three and nine months ended June 30, 2021 and 2020, diluted net loss per share was the same as basic net loss per share, as the effects of all the Company’s potential common stock equivalents were anti-dilutive as the Company reported a net loss applicable to common shareholders for the periods and the impact of in-the-money warrants was also anti-dilutive. Potential common stock equivalents excluded include the Company’s Convertible Preferred Stock, stock options and warrants (see Note 10) and 216,590 contingently issuable shares associated with an acquired business (see Note 15).

 

24

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

12.  Revenues and Other Related Items

 

Disaggregated Revenues

 

The Company disaggregates revenue from contracts with customers by geography and product grouping, as it believes this best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

 

The Company’s revenue by geography (based on customer address) is as follows:

 

  

Three Months Ended
June 30,

  

Nine Months Ended
June 30,

 

Revenues:

 

2021

  

2020

  

2021

  

2020

 

United States

 $1,978  $2,171  $6,495  $6,828 

International

  1,467   461   2,660   1,374 
  $3,445  $2,632  $9,155  $8,202 

 

The Company’s revenue by type is as follows:

 

  

Three Months Ended
June 30,

  

Nine Months Ended
June 30,

 

Revenues:

 

2021

  

2020

  

2021

  

2020

 

Digital engagement services

 

$

821

  

$

713

  

$

2,543

  

$

2,708

 

Subscription

  

2,330

   

1,591

   

5,713

   

4,498

 

Perpetual licenses

  

-

   

5

   

-

   

13

 

Maintenance

  

93

   

92

   

268

   

259

 

Hosting

  

201

   

231

   

631

   

724

 
  

$

3,445

  

$

2,632

  

$

9,155

  

$

8,202

 

 

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 is expected to 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. As of June 30, 2021, approximately $22 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.  

 

The following table summarizes the classification and net change in deferred revenue as of and for the nine months ended June 30, 2021:

 

  

Deferred Revenue

 
  

Current

  

Long Term

 

Balance as of October 1, 2020

 $1,511  $15 

Increase

  228   10 

Balance as of December 31, 2020

 $1,739  $25 

Decrease

  (73

)

  (3

)

Balance as of March 31, 2021

 $1,666  $22 

Increase

  1,130   - 

Balance as of June 30, 2021

 $2,796  $22 

 

25

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

13.  Income Taxes

 

During the three and nine months ended June 30, 2021 and 2020, the Company recognized an income tax expense (benefit) as follows:

 

  

Three Months Ended
June 30,

  

Nine Months Ended
June 30,

 
  

2021

  

2020

  

2021

  

2020

 

Income tax expense

 $5  $6  $6  $9 

Change in valuation allowance

  (1,181

)

  -   (1,181

)

  - 

Net income tax expense (benefit)

 $(1,176

)

 $6  $(1,175

)

 $9 

 

Income tax expense consists of estimated liability for federal and state income taxes owed by the Company.  Net operating loss carryforwards are estimated to be sufficient to offset any potential taxable income for all periods presented. As of June 30, 2021, and September 30, 2020, the Company had a full valuation allowance on its net deferred tax assets.

 

The acquisition of Hawk Search, Inc. (see Note 15) resulted in the recognition of deferred tax liabilities of approximately $1,181, related to intangible assets. Prior to the business combination, the Company had a full valuation allowance on its net deferred tax assets. The deferred tax liabilities generated from the business combination netted against the Company’s pre-existing deferred tax assets. Consequently, the impact of such resulted in the release of $1,181 of the pre-existing valuation allowance against the deferred tax assets and corresponding deferred tax benefit recognized during the three and nine months ended June 30, 2021.

 

 

14.  Leases

 

The Company leases facilities in the United States for its corporate and regional field offices. During the nine months ended June 30, 2021, the Company was also a lessee/sublessor for certain office locations.

 

Determination of Whether a Contract Contains a Lease

 

We determine if an arrangement is a lease at inception or modification of a contract and classify each lease as either an operating or finance lease at commencement. The Company reassesses lease classification subsequent to commencement upon a change to the expected lease term or a modification to the contract. Operating leases represent the Company’s right to use an underlying asset as lessee for the lease term and lease obligations represent the Company’s obligation to make lease payments arising from the lease.

 

A contract contains a lease if the contract conveys the right to control the use of the identified property or equipment, explicitly or implicitly, for a period of time in exchange for consideration. Control of an underlying asset is conveyed if we obtain the rights to direct the use of and obtain substantially all of the economic benefit from the use of the underlying asset. At commencement, contracts containing a lease are further evaluated for classification as an operating lease or finance lease based on their terms.

 

ROU Model and Determination of Lease Term

 

The Company uses the right of use (“ROU”) model to account for leases, which requires an entity to recognize a lease liability and ROU asset on the lease commencement date. A lease liability is measured equal to the present value of the remaining lease payments over the lease term and is discounted using the incremental borrowing rate, as the rates implicit in the Company’s leases are not readily determinable. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. Lease payments include payments made before the commencement date and any residual value guarantees, if applicable. The initial ROU asset consists of the initial measurement of the lease liability, adjusted for any payments made before the commencement date, initial direct costs and lease incentives earned. When determining the lease term, the Company includes option periods when it is reasonably certain that those options will be exercised.

 

Lease Costs

 

For operating leases, minimum lease payments, including minimum scheduled rent increases, are recognized as operating lease costs on a straight-line basis over the applicable lease terms. Some operating lease arrangements include variable lease costs, including real estate taxes, insurance, common area maintenance or increases in rental costs related to inflation. Such variable payments, other than those dependent upon a market index or rate, are excluded from the measurement of the lease liability and are expensed when the obligation for those payments is incurred.

 

26

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

Significant Assumptions and Judgements

 

Management makes certain estimates and assumptions regarding each new lease and sublease agreement, renewal and amendment, including, but not limited to, property values, market rents, useful life of the underlying property, discount rate and probable term, all of which can impact (1) the classification as either an operating or finance lease, (2) measurement of lease liabilities and ROU assets and (3) the term over which the ROU asset and leasehold improvements are amortized. The amount of depreciation and amortization, interest and rent expense would vary if different estimates and assumptions were used.

 

The components of net lease costs were as follows:

 

  Three Months Ended
June 30,
  Nine Months Ended
June 30,
 
  

2021

  

2020

  

2021

  2020 

Condensed Consolidated Statement of Operations:

                

Operating lease cost

 $27  $62  $74  $247 

Variable lease cost

  14   46   41   141 

Less: Sublease income, net

  (25

)

  (18)  (76)  (73)

Total

 $16  $90  $39  $315 

 

Cash paid for amounts included in the measurement of lease liabilities was $170 for the nine months ended June 30, 2021, which all represents operating cash flows from operating leases. As of June 30, 2021, the weighted average remaining lease term was 3.4 years and the weighted average discount rate was 7.0%.

 

At June 30, 2021, future minimum rental commitments under non-cancelable leases with initial or remaining terms in excess of one year, which have commenced, were as follows:

 

  

Payments

Operating

Leases

  

Receipts
Subleases

  

Net Leases

 

Fiscal year:

            

2021 (remaining)

 $58  $25  $33 

2022

  185   101   84 

2023

  173   101   72 

2024

  116   34   82 

2025

  71   -   71 

Thereafter

  7   -   7 

Total lease commitments

 $610  $261  $349 

Less: Amount representing interest

  (78

)

        

Present value of lease liabilities

 $532         

Less: current portion

  (176

)

        

Operating lease liabilities, net of current portion

 $356         

 

At September 30, 2020, future minimum rental commitments under non-cancelable leases with initial or remaining terms in excess of one year were as follows:

 

  

Payments

Operating

Leases

  

Receipts
Subleases

  

Net Leases

 

Fiscal year:

            

2021

 

$

96

  

$

101

  

$

(5

)

2022

  

82

   

101

   

(19

)

2023

  

85

   

101

   

(16

)

2024

  

87

   

36

   

51

 

2025

  

88

   

-

   

88

 

Total lease commitments

 

$

438

  

$

339

  

$

99

 

 

27

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

15.  Acquisitions

 

Woorank Acquisition

 

On March 1, 2021, the Company, pursuant to a Share Purchase Agreement (the “Purchase Agreement”), acquired all of the issued and outstanding shares of Woorank, an entity located in Belgium. The Company accounted for the Woorank transaction as a business combination in accordance with ASC Topic 805, Business Combinations. The purchase price consisted of (1) cash paid at closing, (2) deferred cash payable in installments post-closing, (3) a seller note issued to one of the selling shareholders, and (4) amounts payable to one selling shareholder as consideration for assistance with certain matters related to the acquisition for a period of one-year from the closing date of the acquisition. The Purchase Agreement also provides for additional consideration, in the event of achievement of certain revenue targets and operational goals, to the selling shareholders pursuant to three separate earn-out provisions. Under certain conditions, up to € 600 thousand (approximately $723 thousand) of the purchase price is payable, at the Company’s discretion, in shares of the Company’s common stock, par value $0.001 per share (“common stock”), at a price per share equal to the greater of (i) the closing price of the Company’s common stock on the date of issuance or (ii) $3.38. On the closing date, the Company issued 29,433 shares of its common stock for a portion of the purchase price. At June 30, 2021, € 550 thousand of the remaining purchase price and related earn-out may be settled, at the Company’s option, in shares of the Company’s common stock.

 

The Company accounted for the Woorank transaction as a business combination. The Company determined that the fair value of the gross assets acquired was not concentrated in a single identifiable asset of a group of similar assets. Assets acquired and liabilities assumed have been recognized at their estimated fair values as of the acquisition date. The fair value of common stock issued as part of consideration transferred was determined based on the acquisition date closing market price of the Company’s common stock.  The fair value of contingent consideration was determined based on the probability of achievement of the revenue targets and operational goals, which includes estimating future revenues. The fair value of intangible assets was based on valuations using a discounted cash flow model (Level 3 inputs) which requires significant estimates and assumptions, including estimating future revenues and costs. The fair value of debt obligations assumed was based on the interest rates underlying these instruments in relation to the market rates available for similar instruments. The excess of the purchase price over the assets acquired and liabilities assumed was recognized as goodwill. The goodwill is attributable to expected synergies and customer cross selling opportunities between the Company and Woorank.

 

Hawk Search Acquisition

 

On May 28, 2021, the Company, pursuant to a Share Purchase Agreement (the “Hawk Purchase Agreement”), acquired all of the issued and outstanding shares of Hawk Search, Inc., an Illinois corporation (“Hawk Search”). The purchase price consisted of (1) an initial cash payment at closing, (2) issuance of 1,500 shares of the Company’s newly designated Series D Preferred Stock, and (3) deferred cash payable on or before December 31, 2021. The Hawk Purchase Agreement also provides for additional consideration, in the event of achievement of certain revenue targets, to the selling shareholders as an additional earn-out, payable no later than December 31, 2022.  

 

The Company accounted for the Hawk Search transaction as a business combination. The Company determined that the fair value of the gross assets acquired was not concentrated in a single identifiable asset of a group of similar assets. Assets acquired and liabilities assumed have be recognized at their estimated fair values as of the acquisition date. The fair value of Series D Preferred Stock issued as part of consideration transferred was determined based on the price paid by third-party investors in the Private Placement (see Note 10) which occurred in close proximity to the acquisition date. As more fully described in Note 10, the Series D Preferred Stock contains an embedded beneficial conversion feature. The intrinsic value of $724 was calculated as of the acquisition date. At June 30, 2021, the Company has not recognized the impact of the beneficial conversion feature due to holder conversion restrictions. The fair value of contingent consideration was determined based on the probability of achievement of the revenue targets and operational goals, which includes estimating future revenues. The fair value of intangible assets was based on valuations using a discounted cash flow model (Level 3 inputs) which requires significant estimates and assumptions, including estimating future revenues and costs. The excess of the purchase price over the assets acquired and liabilities assumed was recognized as goodwill. The goodwill is attributable to expected synergies and customer cross selling opportunities between the Company and Hawk Search.

 

28

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

The acquisition date fair value of consideration transferred was as follows:

 

  

Woorank

  

Hawk Search

  

Total

 

Cash paid at or in close proximity to closing

 $285  $4,800  $5,085 

Future deferred payments

  426   2,000   2,426 

Common stock (29,433 shares at $3.38 per share)

  99   -   99 

Series D Convertible Preferred Stock (1,500 shares at $618 per share)

  -   930   930 

Seller’s note

  352   -   352 

Contingent consideration (earn-outs)

  1,617   2,190   3,807 

Total consideration paid

 $2,779  $9,920  $12,699 

 

The preliminary acquisition date fair value of assets acquired and liabilities assumed was as follows:

 

  

Woorank

  

Hawk Search

  

Total

 

Assets acquired:

            

Cash

 $627  $100  $727 

Non-cash current assets

  351   780   1,131 

Property and equipment

  5   -   5 

Intangible assets:

            

Acquired software

  282   560   842 

Customer relationships

  1,280   3,410   4,690 

Domain and trade names

  116   620   736 

Goodwill

  2,864   7,540   10,404 

Total assets acquired

  5,525   13,010   18,535 
             

Liabilities assumed:

            

Current liabilities

  198   1,909   2,107 

Assumed debt obligations

  2,145   -   2,145 

Deferred tax liabilities

  403   1,181   1,584 

Total liabilities assumed

  2,746   3,090   5,836 
             

Total consideration paid

 $2,779  $9,920  $12,699 

 

The average useful lives of the identifiable intangible assets acquired were as follows:

 

  

Woorank

  

Hawk Search

 
  

(in years)

 

Acquired software

  5   5 

Customer relationships

  8   10 

Domain and trade names

  12   15 

 

Total revenue from the Woorank and Hawk Search acquisitions was $456 and $467, respectively, for the three months ended June 30, 2021, and $609 and $467, respectively, for the nine months ended June 30, 2021. Total earnings from the acquisition is impracticable to disclose as the operations were merged with existing operations and certain costs were not accounted for separately.

 

29

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

Pro Forma Information (Unaudited)

 

The following is the unaudited pro forma information assuming the acquisitions occurred on October 1, 2019:

 

  Three Months Ended
June 30,
  Nine Months Ended
June 30,
 
  

2021

  

2020

  

2021

  2020 
                 

(in thousands, except per share data)

                
                 

Revenue

 $4,553  $4,448  $13,456  $13,439 
                 

Net income (loss) applicable to common shareholders - basic

  (3,417)  (1,553)  (5,525)  (3,575)

Net income (loss) applicable to common shareholders - diluted

  (3,417)  (1,553)  (5,525)  (3,575)
                 

Net income (loss) per share attributable to common shareholders:

                

Basic

 $(0.58) $(0.40) $(1.08) $(1.10)

Diluted

 $(0.58) $(0.40) $(1.08) $(1.10)
                 

Weighted average common shares outstanding - basic

  5,939,021   3,876,677   5,117,586   3,264,734 

Weighted average common shares outstanding - diluted

  5,939,021   3,876,677   5,117,586   3,264,734 

 

 

16.  Related Party Transactions

 

In November 2018, the Company engaged Taglich Brothers, Inc., on a non-exclusive basis, to perform advisory and investment banking services to identify possible acquisition target possibilities. Michael Taglich, a director and shareholder of the Company, is the President and Chairman of Taglich Brothers, Inc. Fees for the services were $8 per month for three months and $5 thereafter, cancellable at any time. Taglich Brothers, Inc. could also earn a success fee ranging from $200 for a revenue target acquisition of under $5 million up to $1 million for an acquisition target over $200 million.

 

In connection with the February and May 2021 Offerings (see Note 10), Taglich Brothers, Inc. received warrants to purchase 82,945 shares of the Company’s common stock with a weighted average exercise price of $3.21 and weighted average term of 5.0 years.

 

 

17.  Legal Proceedings

 

The Company is subject to ordinary routine litigation and claims incidental to its business. As of June 30, 2021, the Company was not engaged with any material legal proceedings.

 

 

18. 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.

 

30

 
 

Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations.

 

All statements included in this section, other than statements or characterizations of historical fact, are forward-looking statements. These forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, are based on our current expectations, estimates and projections about our industry, management's beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can often be identified by words such as "anticipates," "expects," "intends," "plans," "predicts," "believes," "seeks," "estimates," "may" "will," "should," "would," "could," "potential," "continue," "ongoing," similar expressions, and variations or negatives of these words. These statements appear in a number of places and include statements regarding the intent, belief or current expectations of Bridgeline Digital, Inc. These forward-looking statements are not guarantees of future results and are subject to risks, uncertainties and assumptions, including, but not limited to, the impact of the coronavirus pandemic and related public health measures on our financial results; business operations and the business of our customers, suppliers and partners; our ability to retain and upgrade current customers; increasing our recurring revenue; our ability to attract new customers; our revenue growth rate; our history of net loss and our ability to achieve or maintain profitability; our liability for any unauthorized access to our data or our users content, including through privacy and data security breaches; any decline in demand for our platform or products; changes in the interoperability of our platform across devices, operating systems, and third party applications that we do no control; competition in our markets; our ability to respond to rapid technological changes, extend our platform, develop new features or products, or gain market acceptance for such new features or products, particularly in light of potential disruptions to the productivity of our employees resulting from remote work; our ability to manage our growth or plan for future growth, and our acquisition of other businesses and the potential of such acquisitions to require significant management attention, disrupt our business, or dilute stockholder value; the volatility of the market price of our common stock; the ability to maintain our listing on the NASDAQ Capital Market; or our ability to maintain an effective system of internal controls as well as other risks described in our filings with the Securities and Exchange Commission. Any of such risks could cause our actual results to differ materially and adversely from those expressed in any forward-looking statement. 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, 2020 as well as in the other documents that we file with the Securities and Exchange Commission.

 

This section should be read in combination with the accompanying unaudited condensed consolidated financial statements and related notes prepared in accordance with United States generally accepted accounting principles.

 

Overview

 

Bridgeline Digital Inc., The Digital Engagement Company, helps customers maximize the performance of their full digital experience from websites and intranets to eCommerce experiences. Bridgeline’s Unbound platform integrates Web Content Management, eCommerce, eMarketing, Social Media management, and Web Analytics (Insights) with the goal of assisting marketers to deliver digital experiences that attract, engage, nurture, and convert their customers across all channels. Bridgeline offers a core accelerator framework for rapidly implementing digital experiences on the Bridgeline Unbound platform, which provides customers with cost-effective solutions in addition to velocity to market.

 

Bridgeline’s Unbound platform combined with its professional services assists customers in digital business transformation, driving lead generation, increasing revenue, improving customer service and loyalty, enhancing employee knowledge, and reducing operational costs. The Bridgeline Unbound platform bridges the gaps between Web Content Management, eCommerce, eMarketing, and social and web analytics by providing all of these components in one unified and deeply integrated platform.

 

Our Unbound Franchise product empowers large franchises, healthcare networks, associations/chapters and other multi-unit organizations to manage a large hierarchy of digital properties at scale. The platform provides an easy-to-use administrative console that enables corporate marketing to provide consistency in branding and messaging while providing flexible publishing capabilities at the local-market level. The platform empowers brand networks to unify, manage, scale and optimize a hierarchy of web properties and marketing campaigns on a global, national and local level.

 

The Unbound platform is delivered through a cloud-based software as a service (“SaaS”) multi-tenant business model, whose flexible architecture provides customers with state of the art deployment providing maintenance, daily technical operation and support; or via a traditional perpetual licensing business model, in which the software resides on a dedicated server in either the customer’s facility or hosted by Bridgeline via a cloud-based hosted services model.

 

OrchestraCMS, delivered through a cloud-based SaaS, is the only content and digital experience platform built 100% native on Salesforce and helps customers create compelling digital experiences for their customers, partners, and employees; uniquely combining content with business data, processes and applications across any channel or device, including Salesforce Communities, social media, portals, intranets, websites, applications and services.

 

Celebros Search, delivered through a cloud-based SaaS, is a commerce-oriented site search product that provides for Natural Language Processing with artificial intelligence to present very relevant search results based on long-tail keyword searches in seven languages.

 

31

 

Woorank SRL (“Woorank”) is a leading SEO (“Search Engine Optimization”) audit and digital marketing tool that can look at a customer’s site through Google’s eyes and generate an instant audit of the site’s technical, on-page and off-page SEO. Woorank’s clear, actionable insights not only help companies increase their search ranking and website traffic, but also improve audience engagement, conversion, and customer retention rates.

 

Hawk Search, Inc. (“Hawk Search) is a robust, feature-rich next-generation search, recommendation, and personalization platform, built for marketers, merchandisers and developers that enhances, normalizes and enriches a customer's site search and browse experience. Hawk Search leverages advanced artificial intelligence, machine learning and industry leading analyzers to deliver the ultimate search experience and accurate results from federated data sources.  Whether a small or enterprise level B2C, B2B commerce business or content publishers, the Hawk Search feature set complements business objectives.

 

Locations

 

The Company’s corporate office is located in Woburn, Massachusetts.  The Company maintains regional field offices serving the following geographical locations: Boston, Massachusetts; Woodbury, New York; Chicago, Illinois; Raleigh, North Carolina; Ontario, Canada; and Brussels, Belgium. The Company has three wholly-owned subsidiaries: Bridgeline Digital Pvt. Ltd. located in Bangalore, India, Bridgeline Digital Canada, Inc. located in Ontario, Canada, Bridgeline Digital Belgium BV located in Brussels, Belgium.

 

Customer Information

 

For the three and nine months ended June 30, 2021, no customers exceeded 10% of the Company’s total revenue. For the three and nine months ended June 30, 2020, one customer represented approximately 11% and 12%, of the Company’s total revenue, respectively.

 

Results of Operations for the Three and Nine Months Ended June 30, 2021 compared to the Three and Nine Months Ended June 30, 2020

 

Total revenue for the three months ended June 30, 2021 was approximately $3.4 million and approximately $2.6 million for the three months ended June 30, 2020. We had a net loss of approximately $3.6 million and approximately $1.7 million for the three months ended June 30, 2021 and 2020, respectively. Included in the net loss for the three months ended June 30, 2021 and 2020, was a loss of approximately $4.2 million and $1.8 million, respectively, as a result of the change in fair value of certain warrant liabilities. Basic and diluted net loss per share attributable to common shareholders was ($0.61) for the three months ended June 30, 2021 and ($0.44) for the three months ended June 30, 2020.

 

Total revenue for the nine months ended June 30, 2021 was approximately $9.2 million and approximately $8.2 million for the nine months ended June 30, 2020. We had a net loss of approximately $5.3 million for the nine months ended June 30, 2021, and $742 thousand for the nine months ended June 30, 2020. Included in the net loss for the nine months ended June 30, 2021 and 2020, was a gain (loss) of approximately ($6.0) million and $1.1 million, respectively, as a result of the change in fair value of certain warrant liabilities. During the nine months ended June 30, 2020, the Company amended its Series A Convertible Preferred Stock, resulting in a deemed dividend of approximately $2.3 million charged against net income to arrive at net loss applicable to common shareholders for purposes of calculating earnings per share. Basic and diluted net loss per share attributable to common shareholders was ($1.04) for the nine months ended June 30, 2021 and ($0.97) for the nine months ended June 30, 2020.

 

32

 

(in thousands)

 

Three Months Ended
June 30,

                   

Nine Months Ended
June 30,

                 
                    $    

%

                    $    

%

 

Revenue

 

2021

   

2020

   

Change

   

Change

   

2021

   

2020

   

Change

   

Change

 

Digital engagement services

  $ 821     $ 713     $ 108       15 %   $ 2,543     $ 2,708       (165 )     (6

%)

% of total net revenue

    24

%

    27

%

                    28

%

    33

%

               

Subscription and perpetual licenses

    2,624       1,919       705       37 %     6,612       5,494       1,118       20 %

% of total net revenue

    76

%

    73

%

                    72

%

    67

%

               

Total net revenue

    3,445       2,632       813       31 %     9,155       8,202       953       12 %
                                                                 

Cost of revenue

                                                               

Digital engagement services

    449       395       54       14 %     1,297       1,432       (135

)

    (9

%)

% of digital engagement services revenue

    55

%

    55

%

                    51

%

    53

%

               

Subscription and perpetual licenses

    744       684       60       9 %     1,919       2,190       (271

)

    (12

%)

% of subscription and perpetual revenue

    28

%

    36

%

                    29

%

    40

%

               

Total cost of revenue

    1,193       1,079       114       11 %     3,216       3,622       (406

)

    (11 %)

Gross profit

    2,252       1,553       699       45 %     5,939       4,580       1,359       30 %

Gross profit margin

    65

%

    59

%

                    65

%

    56

%

               
                                                                 

Operating expenses

                                                               

Sales and marketing

    760       312       448       144 %     1,729       2,130       (401

)

    (19

%)

% of total revenue

    22

%

    12

%

                    19

%

    26

%

               

General and administrative

    608       464       144       31 %     1,681       1,936       (255

)

    (13

%)

% of total revenue

    18

%

    18

%

                    18

%

    24

%

               

Research and development

    625       402       223       55 %     1,453       1,218       235       19 %

% of total revenue

    18

%

    15

%

                    16

%

    15

%

               

Depreciation and amortization

    306       224       82       37 %     777       731       46       6 %

% of total revenue

    9

%

    9

%

                    8

%

    9

%

               

Restructuring and acquisition related expenses

    568       1       567       56,700 %     862       373       489       131 %

% of total revenue

    16

%

    0

%

                    9

%

    5

%

               

Total operating expenses

    2,867       1,403       1,464       104 %     6,502       6,388       114       2 %
                                                                 

Income (loss) from operations

    (615

)

    150       (765

)

    (510

%)

    (563

)

    (1,808

)

    1,245       (69

%)

Interest expense and other, net

    (9

)

    (2

)

    (7

)

    350 %     (7

)

    (3

)

    (4

)

    133 %

Government grant income

    -       -       -       0 %     88       -       88       100 %

Change in fair value of warrant liabilities

    (4,161

)

    (1,843

)

    (2,318

)

    126 %     (6,020

)

    1,078       (7,098

)

    (658

%)

Loss before income taxes

    (4,785

)

    (1,695

)

    (3,090

)

    182 %     (6,502

)

    (733

)

    (5,769

)

    787 %

Provision for (benefit from) income taxes

    (1,176

)

    6       (1,182

)

    (19,700

%)

    (1,175

)

    9       (1,184

)

    (13,156

%)

Net loss

  $ (3,609

)

  $ (1,701

)

  $ (1,908

)

    112 %   $ (5,327

)

  $ (742

)

  $ (4,585 )     618 %

Non-GAAP Measure:

                                                               

Adjusted EBITDA

  $ 302     $ 428     $ (126

)

    (29 %)   $ 1,209     $ (571

)

  $ 1,780       (312 %)

 

Revenue

 

Our revenue is derived from two sources: (i) digital engagement services and (ii) subscription and perpetual licenses.

 

Digital Engagement Services

 

Digital engagement services revenue is comprised of implementation and retainer related services. In total, revenue from digital engagement services increased $108 thousand, or 15%, to $821 thousand for the three months ended June 30, 2021, compared to $713 thousand for the three months ended June 30, 2020, and decreased $165 thousand, or 6%, to $2.5 million for the nine months ended June 30, 2021 compared to $2.7 million for the nine months ended June 30, 2020. The increase for the three months ended June 30, 2021 compared to the prior period was primarily due to additional revenue recognized from acquisitions of businesses during fiscal 2021. The decrease for the nine months ended June 30, 2021 compared to the prior period was primarily due to decreases in new service engagements. Digital engagement services revenue as a percentage of total revenue decreased to 24% from 27% for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, and decreased to 28% from 33% for the nine months ended June 30, 2021 compared to the nine months ended June 30, 2020. The decrease as a percentage of total revenue is attributable to increases in revenues generated from subscription and perpetual licenses during the three and nine months ended June 30, 2021.

 

33

 

Subscription and Perpetual Licenses

 

Revenue from subscription (SaaS) and perpetual licenses increased $705 thousand, or 37%, to $2.6 million for the three months ended June 30, 2021 compared to $1.9 million for the three months ended June 30, 2020, and increased $1.1 million, or 20%, to $6.6 million for the nine months ended June 30, 2021 compared to $5.5 million for the nine months ended June 30, 2020.  The increase for the three and nine months ended June 30, 2021 compared to the prior period is primarily due to significant multi-year license renewals across our diverse portfolio of Fortune 500 companies and the inclusion of revenue of $923 and $1,076, respectively, from the Company’s fiscal 2021 acquisitions. Subscription and perpetual license revenue as a percentage of total revenue increased to 76% from 73% for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, and increased to 72% from 67% for the nine months ended June 30, 2021 compared to the nine months ended June 30, 2020. The increase as a percentage of total revenue for the three months ended June 30, 2021 is primarily attributable to the additional increase in subscription and perpetual licenses during the period compared to digital services revenue and for the nine months ended June 30, 2021 is primarily attributable to the overall decreases in digital engagement services revenue.

 

Costs of Revenue

 

Total cost of revenue increased $114 thousand, or 11%, to $1.2 million for the three months ended June 30, 2021 compared to $1.1 million for the three months ended June 30, 2020, and decreased $406 thousand, or 11%, to $3.2 million for the nine months ended June 30, 2021 compared to $3.6 million for the nine months ended June 30, 2020. The gross profit margin increased to 65% for the three months ended June 30, 2021 compared to 59% for the three months ended June 30, 2020 and increased to 65% for the nine months ended June 30, 2021 compared to 56% for the nine months ended June 30, 2020. The increase in the gross profit margin for the three and nine months ended June 30, 2021 compared to the prior period is primarily attributable to decreases in headcount and the use of third-party consultants and increases in the proportion of license revenue, which are generally associated with higher margins, to digital engagement service revenue.

 

Cost of Digital Engagement Services

 

Cost of digital engagement services increased $54 thousand, or 14%, to $449 thousand for the three months ended June 30, 2021 compared to $395 thousand for the three months ended June 30, 2020 and decreased $135 thousand, or 9%, to $1.3 million for the nine months ended June 30, 2021 compared to $1.4 million for the nine months ended June 30, 2020. The increase for the three months ended June 30, 2021 compared to the prior period is primarily due to the allocation of support team and third-party subcontractor costs and additional costs related to the fiscal 2021 business acquisitions. The decrease for the nine months ended June 30, 2021 compared to the prior period is primarily due to allocation of support team and third-party subcontractor costs. The cost of digital engagement services as a percentage of digital engagement services revenue remained consistent at 55% for the three months ended June 30, 2021 and 2020 and decreased to 51% for the nine months ended June 30, 2021 compared to 53% for the nine months ended June 30, 2020. The decrease as a percentage of revenues for the nine months ended June 30, 2021 compared to the prior period is primarily due to the overall decreases in digital engagement services revenue.

 

Cost of Subscription and Perpetual License

 

Cost of subscription and perpetual licenses increased $60 thousand, or 9%, to $744 thousand for the three months ended June 30, 2021 compared to $684 thousand for the three months ended June 30, 2020, and decreased $271 thousand, or 12%, to $1.9 million for the nine months ended June 30, 2021 compared to $2.2 million for the nine months ended June 30, 2020. The increase for the three months ended June 30, 2021 compared to the prior period is primarily due to the allocation of support team and third-party subcontractor costs and additional costs related to the fiscal 2021 business acquisitions. The decrease for the nine months ended June 30, 2021 compared to the prior period is primarily due to a reduction within our fixed costs to operate our cloud-based hosting model with Amazon Web Services and variable internal support costs. The cost of subscription and perpetual licenses as a percentage of subscription and perpetual license revenue decreased to 28% for the three months ended June 30, 2021 compared to 36% for the three months ended June 30, 2020, and decreased to 29% for the nine months ended June 30, 2021 compared to 40% for the nine months ended June 30, 2020.  The decrease as a percentage of revenues for the nine months ended June 30, 2021 compared to the prior period is primarily due to the overall increases in subscription and perpetual license revenue.

 

Operating Expenses

 

Sales and Marketing Expenses

 

Sales and marketing expenses increased $448 thousand, or 144%, to $760  thousand for the three months ended June 30, 2021 compared to $312 thousand for the three months ended June 30, 2020, and decreased $401 thousand, or 19%, to $1.7 million for the nine months ended June 30, 2021 compared to $2.1 million for the nine months ended June 30, 2020.  Sales and marketing expenses represented 22% and 12% of total revenue for the three months ended June 30, 2021 and 2020, respectively, and 19% and 26% of total revenue for the nine months ended June 30, 2021 and 2020, respectively. The increase for the three months ended June 30, 2021 compared to the prior period is attributable to the allocation of third-party subcontractor costs and additional costs related to the fiscal 2021 business acquisitions.  The decrease for the nine months ended June 30, 2021 compared to the prior period is attributable to a decrease in headcount as well as decreased commission expenses incurred.

 

34

 

General and Administrative Expenses

 

General and administrative expenses increased $144 thousand, or 31%, to $608 thousand for the three months ended June 30, 2021 compared to $464 thousand for the three months ended June 30, 2020 and decreased $255 thousand, or 13%, to $1.7 million for the nine months ended June 30, 2021 compared to $1.9 million for the nine months ended June 30, 2020.  General and administrative expenses represented 18% of total revenue for each of the three months ended June 30, 2021 and 2020, and 18% and 24% of total revenue for the nine months ended June 30, 2021 and 2020, respectively. The increase for the three months ended June 30, 2021 compared to the prior period was primarily due to the allocation of third-party subcontractor costs and additional costs related to the fiscal 2021 business acquisitions. The decrease for the nine months ended June 30, 2021 compared to the prior period was primarily due to a decrease in headcount.

 

Research and Development

 

Research and development expense increased $223 thousand, or 55%, to $625 thousand for the three months ended June 30, 2021 compared to $402 thousand for the three months ended June 30, 2020, and increased $235 thousand, or 19%, to $1.5 million for the nine months ended June 30, 2021 compared to $1.2 million for the nine months ended June 30, 2020. Research and development expenses represented 18% and 15% of total revenue for the three months ended June 30, 2021 and 2020, respectively, and 16% and 15% of total revenue for the nine months ended June 30, 2021 and 2020, respectively. The increase for the three and nine months ended June 30, 2021 compared to the prior period is primarily attributable to the allocation of support team and third-party subcontractor costs and additional costs related to the fiscal 2021 business acquisitions. 

 

Depreciation and Amortization

 

Depreciation and amortization expense increased $82 thousand, or 37%, to $306 thousand for the three months ended June 30, 2021 compared to $224 thousand for the three months ended June 30, 2020, and increased $46 thousand, or 6%, to $777 thousand for the nine months ended June 30, 2021 compared to $731 thousand for the nine months ended June 30, 2020. The increase for the three and nine months ended June 30, 2021 is primarily due to an increase of amortization of intangible assets resulting from acquisitions. Depreciation and amortization represented 9% of total revenue for each of the three months ended June 30, 2021 and 2020, and 8% and 9% of total revenue for the nine months ended June 30, 2021 and 2020, respectively,

 

Restructuring and Acquisition Related Expenses

 

In connection with the acquisition of businesses completed during the fiscal 2021 second and third quarters, the Company incurred acquisition expenses of $568 during the three months ended June 30, 2021 and $862 during the nine months ended June 30, 2021.

 

During the three and nine months ended June 30, 2020, the Company recognized $1 thousand and $373 thousand, respectively, related to a reduction in force in its U.S. and Canada operations aimed at improving efficiencies by combining functions, certain responsibilities and eliminating redundancies, which resulted in a reduction of 15 positions.

 

Net Loss

 

Income (loss) from Operations

 

The income (loss) from operations was ($615) thousand for the three months ended June 30, 2021 compared to $150 thousand for the three months ended June 30, 2020, and a loss of $563 thousand for the nine months ended June 30, 2021 compared to a loss of $1.8 million for the nine months ended June 30, 2020. Operating expenses increased $1.5 million, or 104%, to $2.9 million for the three months ended June 30, 2021 compared to $1.4 million for the three months ended June 30, 2020, and increased $114 thousand, or 2%, to $6.5 million for the nine months ended June 30, 2021 compared to $6.4 million for the nine months ended June 30, 2020. The increases for the three and nine months ended June 30, 2021 compared to the prior period were primarily due to additional costs related to the acquisition of businesses in fiscal 2021.

 

Other Income (Expense), net

 

The Company recognized a loss related to the change in fair value of warrant liabilities of $4.2 million for the three months ended June 30, 2021 compared to $1.8 million for the three months ended June 30, 2020, and a loss of $6.0 million for the nine months ended June 30, 2021 compared to a gain of $1.1 million for the nine months ended June 30, 2020.

 

35

 

During the first quarter of fiscal 2021, the Company recognized government grant income of $88 thousand associated with proceeds received under the Paycheck Protection Program, based on the actual expenditures for qualified expenses during the period, in which the Company received approval of full forgiveness from the SBA in August 2021. As of the first quarter of fiscal 2021, the Company expended all loan proceeds on qualified expenses incurred during the period. The Company applied for full PPP Loan forgiveness on March 29, 2021. Although the Company believes it is probable that the PPP Loan will be forgiven, the Company cannot provide any objective assurance that it will obtain forgiveness in whole or in part.

 

Income Taxes

 

The provision for (benefit from) income taxes was ($1.2) million for the three and nine months ended June 30, 2021 and $6 thousand and $9 thousand for the three and nine months ended June 30, 2020, respectively. Income tax expense consists of estimated liability for federal and state income taxes owed by the Company.  Net operating loss carryforwards are estimated to be sufficient to offset any potential taxable income for all periods presented. As of June 30, 2021, and September 30, 2020, the Company had a full valuation allowance on its net deferred tax assets.

 

The acquisition of Hawk Search, Inc. resulted in the recognition of deferred tax liabilities of approximately $1,181, related to intangible assets. Prior to the business combination, the Company had a full valuation allowance on its net deferred tax assets. The deferred tax liabilities generated from the business combination netted against the Company’s pre-existing deferred tax assets. Consequently, the impact of such resulted in the release of $1,181 of the pre-existing valuation allowance against the deferred tax assets and corresponding deferred tax benefit recognized during the three and nine months ended June 30, 2021.

 

Adjusted EBITDA

 

We also measure our performance based on a non-GAAP (“Generally Accepted Accounting Principles”) measurement of earnings before interest, taxes, depreciation, amortization, stock-based compensation expense, impairment of goodwill and intangible assets, non-cash warrant related expenses, change in fair value of derivative instruments and restructuring and acquisition related charges (“Adjusted EBITDA”).

 

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

 

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

 

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

 

   

Three Months Ended
June 30,

   

Nine Months Ended
June 30,

 
   

2021

   

2020

   

2021

   

2020

 

Net loss

  $ (3,609

)

  $ (1,701

)

  $ (5,327

)

  $ (742

)

Provision for (benefit from) income tax

    (1,176

)

    6       (1,175

)

    9  

Interest expense, net

    9       2       7       3  

Government grant income

    -       -       (88

)

    -  

Change in fair value of warrants

    4,161       1,843       6,020       (1,078

)

Amortization of intangible assets

    285       208       726       678  

Depreciation

    14       12       38       40  

Restructuring and acquisition related charges

    568       1       862       373  

Other amortization

    7       4       13       13  

Stock-based compensation

    43       53       133       133  

Adjusted EBITDA

  $ 302     $ 428     $ 1,209     $ (571

)

 

36

 

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

 

Liquidity and Capital Resources

 

Cash Flows

 

Operating Activities

 

Cash provided by (used in) operating activities was $338 thousand for the nine months ended June 30, 2021 compared to ($227) thousand for the nine months ended June 30, 2020. The change in cash provided by operating activities compared to the prior period was primarily due to an increase in net income (loss) after consideration of non-cash items partially offset by decreases in accounts receivables and increases in accounts payable and accrued liabilities.

 

Investing Activities

 

Cash used in investing activities was $4.4 million for the nine months ended June 30, 2021, which primarily related to net cash paid for the purchase of businesses during the second and third fiscal quarters of 2021. We did not have any cash flows from investing activities for the nine months ended June 30, 2020.

 

Financing Activities

 

Cash provided by financing activities was $8.0 million for the nine months ended June 30, 2021 compared to $1.0 million for the nine months ended June 30, 2020.  Cash provided by financing activities for the nine months ended June 30, 2021 was primarily attributable to cash proceeds of approximately $8.5 million related to the issuance of common stock, Series D convertible preferred stock and stock and warrant exercises partially offset by re-payments of long-term debt assumed in connection with the acquisition of a business. Cash provided by financing activities for the nine months ended June 30, 2020 was attributable to the proceeds received under the Paycheck Protection Program.

 

Capital Resources and Liquidity Outlook 

 

In March 2020, the World Health Organization declared the outbreak of novel coronavirus disease (“COVID-19”) as a pandemic. We expect our operations in all locations to be affected as the virus continues to proliferate. We have adjusted certain aspects of our operations to protect employees and customers while still meeting customers’ needs for vital technology. We will continue to monitor the situation closely and it is possible that we will implement further measures. In light of the uncertainty as to the severity and duration of the pandemic, the impact on our revenue, profitability and financial position is uncertain at this time.

 

In July 2021, the Company received approximately $7.4 million in cash relating the issuance of 1,850,630 shares of its common stock upon exercise of Series A Warrants, originally issued in March 2019, with an exercise price of $4 per share.

 

On May 14, 2021, the Company offered and sold, in a registered direct offering, a total of 1,060,000 shares of its common stock at a price of $2.28 per share. On the same day, the Company entered into securities purchase agreements with certain institutional investors in connection with a private placement of 2,700 shares of newly designated Series D Convertible Preferred Stock at a price of $1,000 per share and warrants to purchase up to an aggregate of 592,105 shares of common stock at an exercise price of $2.51 per share. The aggregate proceeds, net of cash paid for certain fees due to placement agents and transaction related expenses, of these two transactions that occurred on the same day was $4.6 million. Beginning on the six-month anniversary of the original issuance date, the Series D Convertible Preferred Stockholders are entitled to receive cumulative dividends at the annual rate per share of Preferred Stock as a percentage of the stated value per share of 9% on the last day of each calendar quarter.

 

On February 4, 2021, the Company offered and sold a total of 880,000 shares of its common stock, par value $0.001 per share, to certain institutional and accredited investors at a public offering price of $3.10 per share in a registered direct offering. The aggregate proceeds from this transaction, net of certain fees due to placement agents and transaction expenses, was approximately $2.5 million.

 

In connection with an acquisition of a business completed during the 2021 fiscal year third quarter, the Company recognized an obligation for a deferred payment representing a portion of the purchase price of $2.0 million payable on or before December 31, 2021 and contingent earn-out payments of $2.2 million which are payable, no later than December 31, 2022, in the event of achievement of certain revenue targets and operational goals.

 

37

 

In connection with an acquisition of a business completed during the 2021 fiscal year second quarter, the Company (1) assumed the outstanding long-term debt obligations of $2.1 million of the acquiree of which $755 thousand is payable over the next twelve months, (2) issued a seller note of $352 thousand to one of the selling shareholders payable over a five-year period, (3) deferred a portion of the purchase price of $487 thousand which is expected to be paid within the next twelve months, and (4) recognized contingent earn-out payments of $1.6 million which are payable in the event of achievement of certain revenue targets and operational goals.

 

In prior years, the Company incurred operating losses and used cash to fund operations, develop new products, and build infrastructure. During its 2020 fiscal year, the Company executed an operating plan that reduced operating expenses that have not yet been realized for a full twelve-month period. The Company is continuing to maintain tight control over discretionary spending for the 2021 fiscal year. The Company believes it has sufficient revenue and working capital to support future growth.

 

 

On August 17, 2020, the Company entered into an arrangement with an investment banking firm to sell up to $4,796,090 of shares of the Company’s common stock, $0.001 par value. Refer to Note 10 under the caption, At the Market Offering, for a detailed description of this capital raising activity. There are no obligations for the sale or purchase of the Company’s common stock pursuant to this offering. Accordingly, there can be no assurances that the Company or investment banking firm will be successful in selling any portion of the shares available for sale pursuant to this offering. On December 18, 2020, the Company delivered written notice to Roth Capital Partners that it was suspending all offers and sales under the At the Market Offering Agreement (the “Suspension Period”), during which time the Company will not make any sales of Placement Shares. No other definitive agreements for additional financing are in place as of the issuance date of this Form 10-Q, and there can be no assurances that additional sources of financing could be obtained on terms that are favorable or acceptable to the Company and that revenue growth and improvement in cash flows can be achieved. No adjustments have been made to the accompanying consolidated financial statements as a result of this uncertainty.

 

Off-Balance Sheet Arrangements

 

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

 

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

 

Commitments and Contingencies

 

The Company leases its facilities in the United States and Canada. The following summarizes our cash contractual obligations and commitments by maturity as of June 30, 2021:

 

(in thousands)

                                                       
                                                         

Payment obligations by year

 

FY21
(remaining)

   

FY22

   

FY23

   

FY24

   

FY25

   

Thereafter

   

Total

 

Operating leases

  $ 58     $ 185     $ 173     $ 116     $ 71     $ 7     $ 610  

Sublease income

    (25

)

    (101

)

    (101

)

    (34

)

    -       -       (261

)

Net cash contractual obligations

  $ 33     $ 84     $ 72     $ 82     $ 71     $ 7     $ 349  

 

Critical Accounting Policies

 

These critical accounting policies and estimates by our management were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and should be read in conjunction with Note 2 Summary of Significant Accounting Policies to the Consolidated Financial Statements of our Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 23, 2020.

 

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

 

38

 

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

 

 

Revenue recognition;

 

 

Allowance for doubtful accounts;

 

 

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

 

 

Accounting for goodwill and other intangible assets;

 

 

Accounting for Paycheck Protection Program; and

 

 

Accounting for stock-based compensation.

 

Revenue Recognition

 

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

 

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

 

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

 

 

Identify the customer contract;

 

Identify performance obligations that are distinct;

 

Determine the transaction price;

 

Allocate the transaction price to the distinct performance obligations; and

 

Recognize revenue as the performance obligations are satisfied.

 

Allowance for Doubtful Accounts

 

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

 

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

 

39

 

Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement

 

In accordance with Accounting Standards Codification (“ASC”) 350-40, Customers Accounting for Fees Paid in a Cloud Computing Arrangement, we capitalize implementation costs incurred in a cloud computing arrangement that is a service contract and amortize those costs over the term of the arrangement.

 

Accounting for Goodwill and Intangible Assets

 

Goodwill is tested for impairment annually during the fourth quarter of every year and more frequently if events and circumstances indicate that the asset might be impaired. The purpose of an impairment test is to identify any potential impairment by comparing the carrying value of a reporting unit including goodwill to its fair value. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.  

 

Factors that could lead to a future impairment include material uncertainties such as operational, economic and competitive factors specific to the key assumptions underlying the fair value estimate we use in our impairment testing that have a reasonable possibility of changing. This could include a significant reduction in projected revenues, a deterioration of projected financial performance, future acquisitions and/or mergers, and a decline in our market value as a result of a significant decline in our stock price.

 

Accounting for Stock-Based Compensation

 

At June 30, 2021, we maintained two stock-based compensation plans, one of which has expired but still contains vested and unvested stock options. The two plans are more fully described in Note 13 to the Consolidated Financial Statements of our Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 23, 2020.

 

The Company accounts for stock-based compensation awards in accordance with ASC 718 Compensation-Stock Topic of the Codification.  Share-based payments (to the extent they are compensatory) are recognized in our Consolidated Statements of Operations based on their fair values. 

 

We recognize stock-based compensation expense for share-based payments issued or assumed after October 1, 2006 that are expected to vest on a straight-line basis over the service period of the award, which is generally three years.  We recognize the fair value of the unvested portion of share-based payments granted prior to October 1, 2006 over the remaining service period, net of estimated forfeitures.  In determining whether an award is expected to vest, we use an estimated, forward-looking forfeiture rate based upon our historical forfeiture rate and reduce the expense over the recognition period. Estimated forfeiture rates are updated for actual forfeitures quarterly.  We also consider, each quarter, whether there have been any significant changes in facts and circumstances that would affect our forfeiture rate.  Although we estimate forfeitures based on historical experience, actual forfeitures in the future may differ.  In addition, to the extent our actual forfeitures are different than our estimates, we record a true-up for the difference in the period that the awards vest, and such true-ups could materially affect our operating results.

 

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

 

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

 

40

 

Accounting for Paycheck Protection Program

 

U.S. GAAP does not contain authoritative accounting standards for forgivable loans provided by governmental entities to a for-profit entity. Absent authoritative accounting standards, interpretative guidance issued and commonly applied by financial statement preparers allows for the selection of accounting policies amongst acceptable alternatives. Based on the facts and circumstances, the Company determined it most appropriate to account for the PPP Loan proceeds as an in-substance government grant by analogy to International Accounting Standards 20 (“IAS 20”), Accounting for Government Grants and Disclosure of Government Assistance. Under the provisions of IAS 20, “a forgivable loan from government is treated as a government grant when there is reasonable assurance that the entity will meet the terms for forgiveness of the loan.” IAS 20 does not define “reasonable assurance” however, based on certain interpretations, it is analogous to “probable” as defined in FASB ASC 450-20-20 under U.S. GAAP, which is the definition the Company has applied to its expectations of PPP Loan forgiveness. Under IAS 20, government grants are recognized in earnings on a systematic basis over the periods in which the Company recognizes costs for which the grant is intended to compensate (i.e., qualified expenses). Further, IAS 20 permits for the recognition in earnings either separately under a general heading such as other income, or as a reduction of the related expenses. The Company has elected to recognize government grant income separately within other income to present a clearer distinction in its consolidated financial statements between its operating income and the amount of net income resulting from the PPP Loan and subsequent expected forgiveness. The Company believes this presentation method promotes greater comparability amongst all periods presented.

 

Item 3.

Qualitative and Quantitative Disclosures About Market Risk.

 

Not required.

 

Item 4.

Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of June 30, 2021.

 

Changes in Internal Control over Financial Reporting

 

There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on Controls

 

Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving the desired control objectives. Our management recognizes that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that its objectives will be met. Similarly, an evaluation of controls cannot provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected.

 

41

 

 

PART II OTHER INFORMATION

 

Item 1.

Legal Proceedings.

 

From time to time we are subject to ordinary routine litigation and claims incidental to our business. We are not currently involved in any legal proceedings that we believe are material beyond those previously disclosed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 23, 2020.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

There were no sales of unregistered equity securities in the nine months ended June 30, 2021.

 

42

 

 

Item 6.

Exhibits.

 

Exhibit No.   Description of Document
     

1.1

 

Underwriting Agreement (incorporated by reference to Exhibit 1.1 to our Form 8-K filed on October 19, 2018)

     

3.1

 

Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q filed on May 15, 2013)

     

3.3

 

Certificate of Designations of the Series A Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on November 4, 2014)

     

3.4

 

Amended and Restated By-laws (incorporated by reference to Exhibit 3.2 to our current Report on Form 10-Q filed on February 17, 2015)

     

3.5

 

Certificate of Designations of the Series B Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on October 19, 2018)

     

3.6

 

Amended and Restated By-laws (incorporated by reference to Exhibit 3.1 to our current Report on Form 8-K filed on December 14, 2018)

     

4.1

 

Registration Rights Agreement, dated November 3, 2016, by and between Bridgeline Digital, Inc. and the Investors party thereto (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K Filed on November 4, 2016) 

     

10.1

 

Share Purchase Agreement, by and between the Company and Woorank SRL., dated February 2, 2021 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K Filed on February 3, 2021) 

     

10.2

 

Form of Securities Purchase Agreement, dated February 4, 2021 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K Filed on February 9, 2021) 

     

10.3

 

Form of Placement Agent Warrant, dated February 4, 2021 (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K Filed on February 9, 2021) 

     

10.4

 

Employment Agreement dated September 13, 2019 between Bridgeline Digital, Inc. and Roger “Ari” Kahn (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K Filed on September 19, 2018)

     

10.5

 

First Amendment to Roger “Ari” Kahn’s Employment Agreement dated February 25, 2021 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K Filed on March 2, 2021)

     

31.1

 

Certification required by Rule 13a-14(a) or Rule 15d-14(a).

     

31.2

 

Certification required by Rule 13a-14(a) or Rule 15d-14(a).

     

32.1

 

Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).

 

43

 

32.2

 

Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).

     

101.INS*

 

Inline XBRL Instance

     

101.SCH*

 

Inline XBRL Taxonomy Extension Schema

     

101.CAL*

 

Inline XBRL Taxonomy Extension Calculation

     

101.DEF*

 

Inline XBRL Taxonomy Extension Definition

     

101.LAB*

 

Inline XBRL Taxonomy Extension Labels

     

101.PRE*

 

Inline XBRL Taxonomy Extension Presentation

     

104

 

Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101)

 

*Management compensatory plan

**XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 and 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

44

 

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

   

Bridgeline Digital, Inc.

   

(Registrant)

     

August 16, 2021

 

/s/    Roger Kahn

Date

 

Roger Kahn

President and Chief Executive Officer

(Principal Executive Officer)

     
     

August 16, 2021  

 

/s/    Mark G. Downey

Date

 

Mark G. Downey

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

45