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

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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Form 10-Q

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(Mark One)

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

 

For the quarterly period ended March 31, 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

 

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Bridgeline Digital, Inc.

(Exact name of registrant as specified in its charter)

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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, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  

 

Large accelerated filer  ☐

Accelerated filer  ☐

Non-accelerated filer  ☒ 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 May 14, 2021 was 6,451,548.

 

 

Bridgeline Digital, Inc.

 

Quarterly Report on Form 10-Q

 

For the Quarterly Period ended March 31, 2021

 

Index

 

		Page
Part I	Financial Information
Item 1.	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets (unaudited) as of March 31, 2021 and September 30, 2020	4
	Condensed Consolidated Statements of Operations (unaudited) for the three and six months ended March 31, 2021 and 2020	5
	Condensed Consolidated Statements of Comprehensive Income/(Loss) (unaudited) for the three and six months ended March 31, 2021 and 2020	6
	Condensed Consolidated Statements of Stockholders’ Equity (unaudited) for the three and six months ended March 31, 2021 and 2020	7
	Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended March 31, 2021 and 2020	8
	Notes to Unaudited Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Qualitative and Quantitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	38
Part II	Other Information
Item 1.	Legal Proceedings	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 6.	Exhibits	40
Signatures		41

 

 

 

		March 31, 2021				September 30, 2020
ASSETS
Current assets:
Cash and cash equivalents		$	3,497			$	861
Accounts receivable, net			717				665
Prepaid expenses			394				268
Other current assets			537				111
Total current assets			5,145				1,905
Property and equipment, net			240				238
Operating lease assets			584				294
Intangible assets, net			3,856				2,617
Goodwill			8,018				5,557
Other assets			86				49
Total assets		$	17,929			$	10,660
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	659			$	-
Current portion of operating lease liabilities			191				96
Accounts payable			1,236				1,311
Accrued liabilities			701				599
Purchase price and contingent consideration payable (Note 15)			2,006				-
Paycheck Protection Program liability (Note 8)			-				88
Deferred revenues			1,666				1,511
Total current liabilities			6,459				3,605
Long-term debt, net of current portion			1,461				-
Operating lease liabilities, net of current portion			393				198
Warrant liabilities			4,205				2,486
Other long-term liabilities			22				15
Total liabilities			12,540				6,304
Commitments and contingencies
Stockholders’ equity:
Preferred stock - $0.001 par value; 1,000,000 shares authorized;
Series C Convertible Preferred stock:
11,000 shares authorized; 350 shares issued and outstanding at March 31, 2021 and September 30, 2020			-				-
Series A Convertible Preferred stock:
264,000 shares authorized; no shares outstanding at March 31, 2021 and September 30, 2020			-				-
Common stock - $0.001 par value; 50,000,000 shares authorized;
5,391,548 shares at March 31, 2021 and 4,420,170 shares at September 30, 2020, issued and outstanding			5				4
Additional paid-in capital			81,125				78,316
Accumulated deficit			(75,301	)			(73,583	)
Accumulated other comprehensive loss			(440	)			(381	)
Total stockholders’ equity			5,389				4,356
Total liabilities and stockholders’ equity		$	17,929			$	10,660

 

		Three Months Ended March 31,								Six Months Ended March 31,
		2021				2020				2021				2020
Net revenue:
Digital engagement services		$	885			$	899			$	1,722			$	1,995
Subscription and perpetual licenses			1,989				1,839				3,988				3,575
Total net revenue			2,874				2,738				5,710				5,570
Cost of revenue:
Digital engagement services			474				457				848				1,026
Subscription and perpetual licenses			592				727				1,175				1,517
Total cost of revenue			1,066				1,184				2,023				2,543
Gross profit			1,808				1,554				3,687				3,027
Operating expenses:
Sales and marketing			524				786				969				1,818
General and administrative			608				723				1,073				1,472
Research and development			479				426				828				816
Depreciation and amortization			240				249				471				507
Restructuring and acquisition related expenses			84				367				294				372
Total operating expenses			1,935				2,551				3,635				4,985
Income (loss) from operations			(127	)			(997	)			52				(1,958	)
Interest expense and other, net			(4	)			(1	)			2				(1	)
Government grant income (Note 8)			-				-				88				-
Change in fair value of warrant liabilities			(418	)			1,820				(1,859	)			2,921
Income (loss) before income taxes			(549	)			822				(1,717	)			962
Provision for income taxes			7				-				1				3
Net income (loss)			(556	)			822				(1,718	)			959
Dividends on convertible preferred stock			-				(27	)			-				(106	)
Deemed dividend on amendment of Series A convertible preferred stock			-				-				-				(2,314	)
Net income (loss) applicable to common shareholders		$	(556	)		$	795			$	(1,718	)		$	(1,461	)
Net income (loss) per share attributable to common shareholders:
Basic		$	(0.11	)		$	0.25			$	(0.36	)		$	(0.49	)
Diluted		$	(0.11	)		$	0.17			$	(0.36	)		$	(0.50	)
Number of weighted average shares outstanding:
Basic			4,999,938				3,124,174				4,706,869				2,960,435
Diluted			4,999,938				4,412,935				4,706,869				3,027,147

 

		Three Months Ended March 31,								Six Months Ended March 31,
		2021				2020				2021				2020
Net income (loss)		$	(556	)		$	822			$	(1,718	)		$	959
Other comprehensive loss:
Net change in foreign currency translation adjustment			(69	)			(59	)			(59	)			(58	)
Comprehensive income (loss)		$	(625	)		$	763			$	(1,777	)		$	901

 

		For the Three and Six Months Ended March 31, 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

		For the Three and Six Months Ended March 31, 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

 

		Six Months Ended March 31,
		2021				2020
Cash flows from operating activities:
Net income (loss)		$	(1,718	)		$	959
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Amortization of intangible assets			441				470
Depreciation			24				28
Other amortization			6				9
Change in fair value of warrant liabilities			1,859				(2,921	)
Stock-based compensation			90				80
Government grant income (Note 8)			(88	)			-
Changes in operating assets and liabilities, net of business acquired
Accounts receivable			(49	)			386
Prepaid expenses			(112	)			59
Other current assets and other assets			(129	)			16
Accounts payable and accrued liabilities			(254	)			733
Deferred revenue			126				109
Other liabilities			7				(18	)
Total adjustments			1,921				(1,049	)
Net cash provided by (used in) operating activities			203				(90	)
Cash flows from investing activities:
Software development capitalization costs			(30	)			-
Purchase of property and equipment			(27	)			-
Cash acquired in business combination, net of cash payments of purchase price			404				-
Net cash provided by investing activities			347				-
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs			2,462				-
Proceeds from stock option and warrant exercises			19				-
Payments of long-term debt			(377	)			-
Net cash provided by financing activities			2,104				-
Effect of exchange rate changes on cash and cash equivalents			(18	)			28
Net increase (decrease) in cash and cash equivalents			2,636				(62	)
Cash and cash equivalents at beginning of period			861				296
Cash and cash equivalents at end of period		$	3,497			$	234
Supplemental disclosures of cash flow information:
Cash paid for:
Interest		$	19			$	-
Income taxes		$	-			$	3
Non cash investing and financing activities (see Note 15):
Consideration paid in common stock in connection with acquisition of business		$	99			$	-
Dividends accrued on convertible preferred stock		$	-			$	106
Deemed dividend on amendment of Series A convertible preferred stock		$	-			$	2,314

 

1.   Description of Business

 

Overview

 

Bridgeline Digital, 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.

 

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; New York, New York; 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, and Bridgeline Digital Belgium BV located in Brussels, Belgium.

 

Liquidity and Management’s 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.

 

On May 11, 2021 the Company entered into a Definitive Purchase Agreement (the “Hawk Purchase Agreement”) with Svanaco, Inc., an Illinois corporation, and Svanawar, Inc., an Illinois corporation (collectively, the “Sellers”) to purchase all of the issued and outstanding shares of Hawk Search, Inc., an Illinois corporation (“Hawk Search”) (the “Acquisition”). The total consideration under the Purchase Agreement is approximately $9.25 million, subject to certain working capital adjustments (the “Purchase Price”).  The Purchase Price is payable as follows: (i) an initial cash payment of approximately $5.75 million, (ii) an issuance of approximately $1.50 million of newly designated shares of the Company’s preferred stock, par value $0.001 per share, and (3) approximately $2.0 million in cash, to be paid on or before December 31, 2021.  In addition, the Purchase Price may be increased to $11.83 million by an additional payment to Sellers of approximately $2.58 million, in cash, as an additional earn-out based upon Hawk Search’s revenue performance after the consummation of the Acquisition (the “Closing”), payable to Sellers no later than December 31, 2022.  

 

 

The Closing of the Acquisition is conditioned upon, among other things, the Acquisition Closing on or before May 28, 2021, obtaining all necessary consents and approvals for to the Acquisition, and the Company securing financing to fund the Purchase Price in an amount and on the terms satisfactory to the Company in its sole and absolute discretion.  The Purchase Agreements contain customary representations, warranties, agreements and conditions to completing stock purchases, indemnification rights and obligations of the parties.

 

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, for gross proceeds of approximately $2.4 million prior to deduction of commissions and offering expenses. Additionally, 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 (the “Series D 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 “Warrants”). The Company received gross proceeds from the private placement of approximately $2.7 million, prior to deduction of commissions and offering expenses. Beginning on the six month anniversary of the original issuance date, the Series D Preferred Stock 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.

 

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 second quarter, the Company (1) assumed the outstanding long-term debt obligations of $2.1 million of the acquiree of which $659 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.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

 

2.   Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

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

 

Unaudited Interim Financial Information

 

The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), and with the instructions to Form 10-Q and Regulation S-X, and in the opinion of the Company’s management these condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments and accruals, necessary for their fair presentation. The operating results for the three and six months ended March 31, 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 US GAAP for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended September 30, 2020, as filed with the Securities and Exchange Commission on December 23, 2020.

 

Reclassifications

 

Certain amounts in the prior period financial statements have been reclassified to conform to the presentation in the current period financial statements. These reclassifications had no effect on the previously reported net loss.

 

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 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.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

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 March 31, 2021, two customers represented approximately 28% and 18% of accounts receivable. As of September 30, 2020, three customers represented approximately 15%, 14% and 10% of accounts receivable. For the three months ended March 31, 2021 and 2020, one customer represented approximately 10% and 13% of the Company’s total revenue, respectively. For the six months ended March 31, 2021 and 2020, one customer represented approximately 10% and 12% of the Company’s total revenue, respectively.

 

 

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 March 31, 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 27.8% - 72.2% and 45.3%, respectively, as of March 31, 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:

 

 

The Company recognized gains/(losses) of ($418) and $1,820 for the three months ended March 31, 2021 and 2020, respectively, and ($1,859) and $2,921 for the six months ended March 31, 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 six months ended March 31, 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 six months ended March 31, 2020, were due to changes in inputs, primarily a decline in stock price and the risk-free rate, to the Monte Carlo option-pricing model.

 

 

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 March 31, 2021 and September 30, 2020, are as follows:

 

 

 

 

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

 

 

 

 

5.   Intangible Assets

 

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

 

 

Total amortization expense related to intangible assets was $223 and $230 related to intangible assets for the three months ended March 31, 2021 and 2020, respectively, and $441 and $470 for the six months ended March 31, 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 $579, $1,063, $982, $596, and $311, and $325 respectively.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

 

6.   Accrued Liabilities

 

Accrued liabilities consist of the following:

 

 

 

 

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:

 

 

At March 31, 2021, future maturities of long-term debt are as follows:

 

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

 

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 has performed initial calculations for the PPP Loan forgiveness according to the terms and conditions of the SBA’s Loan Forgiveness Application (Revised January 19, 2021) and, based on such calculations, expects that the PPP Loan will be forgiven in full, based on usage of related proceeds. In addition, the Company has determined it is probable the Company will meet all the conditions of the PPP Loan forgiveness. However, there can be no assurances that the Company will ultimately meet the conditions for forgiveness of the loan or that the Company will not take actions that could cause the Company to be ineligible for forgiveness of the loan, in whole or in part. 

 

The Company applied for full PPP Loan forgiveness on March 29, 2021. In accordance with the terms and conditions under the Payroll Protection Program Flexibility Act of 2020 (the “Flexibility Act”), the lender has 60 days from receipt of the completed application to issue a decision to the SBA. If the lender determines that the borrower is entitled to forgiveness, in whole or in part, of the amount applied for under the statute and applicable regulations, the lender must request payment from the SBA at the time the lender issues its decision to the SBA. The SBA will, subject to any SBA review of the loan or loan application, remit the appropriate forgiveness amount to the lender, plus any interest accrued through the date of payment, not later than 90 days after the lender issues its decision to the SBA. The amount the Company borrowed is within the “safe-harbor” limitations of the SBA. 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.

 

Pursuant to the Flexibility Act, the Company’s PPP Loan agreement will be amended in the event that no amount or less than all of the PPP Loan is forgiven. In addition, starting in August 2021, the Company will be required to make principal and interest payments, or an adjustment amount based on the loan amendment over the remaining term of the PPP Loan until such time as the loan is fully settled. 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.

 

 

 

9.   Restructuring and Acquisition Related Expenses

 

Acquisition Related Expenses

 

In connection with the acquisition of a business completed during the fiscal 2021 second quarter (See Note 15), the Company incurred acquisition expenses of $84 during the three months ended March 31, 2021 and $294 during the six months ended March 31, 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 six months ended March 31, 2020.

 

Restructuring Activities

 

In March 2020, the Company recognized $365 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 six months ended March 31, 2020, the Company paid $155 related to this reduction in force. There were no restructuring related expenses incurred during the three and six months ended March 31, 2021.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

 

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.

 

Company’s 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.

 

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.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

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. 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 March 31, 2021, the Company had 350 shares of Series C Preferred Stock outstanding.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

Common Stock

 

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 U.S. Securities and Exchange Commission (“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.

 

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 March 31, 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 March 31, 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 March 31, 2021, there were 569,955 options outstanding and 230,045 shares available for future issuance under the 2016 Plan.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

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 six months ended March 31, 2021 and 2020, compensation expense related to share-based payments was as follows:

 

 

As of March 31, 2021, the Company had approximately $235 of unrecognized compensation costs related to unvested options, which are expected to be recognized over a weighted-average period of 1.7 years.

 

 

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 March 31, 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 six months ended March 31, 2021, 2,556,875 Series B Warrants expired unexercised and 48,612 Series C Warrants were exercised.

 

As of March 31, 2021, the number of shares issuable upon exercise of the (i) Series A Warrants were 2,556,875 shares; (ii) Series C Warrants were 20,683 shares; and (iii) the placement agent warrants issued in connection with the Series C Preferred Stock were 127,848 shares.

 

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

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

Total warrants outstanding as March 31, 2021 were as follows:

 

 

Summary of Option and Warrant Activity and Outstanding Shares

 

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. There were no options granted during the three and six months ended March 31, 2021.

 

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 six months ended March 31, 2020, are as follows:

 

 

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.

 

 

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 six months ended March 31, 2021 are as follows:

 

 

As of March 31, 2021, the aggregate intrinsic value of options outstanding and exercisable was $832 and $318, respectively, and the weighted average remaining contractual term was 8.6 and 8.5 years, respectively.

 

 

 

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

 

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.

 

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

 

 

For the three and six months ended March 31, 2021, 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 Series A Convertible Preferred Stock, Series C Convertible Preferred Stock, stock options and warrants (see Note 10) and 216,590 contingently issuable shares associated with an acquired business (see Note 15).

 

Potential common stock equivalents excluded from the computation of diluted net income (loss) per share because inclusion would have been anti-dilutive included stock options and warrants to purchase common stock totaling 593,201 and 5,403,954, respectively, for the three months ended March 31, 2020, and for the six months ended March 31, 2020, included stock options and warrants to purchase common stock totaling 690,201 and 5,403,954, respectively, and preferred stock convertible into an aggregate of 934,109 common shares.

 

 

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:

 

 

The Company’s revenue by type is as follows:

 

 

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 March 31, 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 six months ended March 31, 2021:

 

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

 

13.  Income Taxes

 

Income tax expense consists of the estimated liability for 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 March 31, 2021, and September 30, 2020, the Company had a full valuation allowance on its net deferred tax assets.

 

 

 

14.  Leases

 

The Company leases facilities in the United States for its corporate and regional field offices. During the six months ended March 31, 2021, the Company is 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.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

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.

 

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:

 

 

Cash paid for amounts included in the measurement of lease liabilities was $117 for the six months ended March 31, 2021, all of which represents operating cash flows from operating leases. As of March 31, 2021, the weighted average remaining lease term was 3.6 years and the weighted average discount rate was 7.0%.

 

At March 31, 2021, future minimum rental commitments under non-cancelable leases with initial or remaining terms in excess of one year were as follows:

 

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

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:

 

 

 

 

15.  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 March 31, 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 be recognized at their estimated fair values as of the acquisition date. 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 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 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.

 

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

 

 

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

 

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

The average useful lives of the identifiable intangible assets acquired was five years for acquired software, eight years for customer relationships and twelve years for domain and trade names.

 

Total revenue from the Woorank acquisition totaled $153 for the three months ended March 31, 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.

 

 

Pro Forma Information (Unaudited)

 

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

 

 

 

 

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 acquisition of a business completed during the fiscal 2021 second quarter (See Note 15), Taglich Brothers, Inc. received 29,084 Placement Agent Warrants which have a term of five years from the date of issuance and an exercise price of $3.875 per share.

 

 

 

17.  Legal Proceedings

 

The Company is subject to ordinary routine litigation and claims incidental to its business. As of March 31, 2021, the Company was not engaged with any material legal proceedings.

 

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

 

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 additional disclosure in these interim condensed consolidated financial statements, other than as disclosed below.

 

Hawk Search Acquisition

 

On May 11, 2021 the Company entered into a Definitive Purchase Agreement (the “Hawk Purchase Agreement”) with Svanaco, Inc., an Illinois corporation, and Svanawar, Inc., an Illinois corporation (collectively, the “Sellers”) to purchase all of the issued and outstanding shares of Hawk Search, Inc., an Illinois corporation (“Hawk Search”) (the “Acquisition”). The total consideration under the Purchase Agreement is approximately $9.25 million, subject to certain working capital adjustments (the “Purchase Price”).  The Purchase Price is payable as follows: (i) an initial cash payment of approximately $5.75 million, (ii) an issuance of approximately $1.50 million of newly designated shares of the Company’s preferred stock, par value $0.001 per share, and (3) approximately $2.0 million in cash, to be paid on or before December 31, 2021.  In addition, the Purchase Price may be increased to $11.83 million by an additional payment to Sellers of approximately $2.58 million, in cash, as an additional earn-out based upon Hawk Search’s revenue performance after the consummation of the Acquisition (the “Closing”), payable to Sellers no later than December 31, 2022.  

 

The Closing of the Acquisition is conditioned upon, among other things, the Acquisition Closing on or before May 28, 2021, obtaining all necessary consents and approvals for to the Acquisition, and the Company securing financing to fund the Purchase Price in an amount and on the terms satisfactory to the Company in its sole and absolute discretion.  The Purchase Agreements contain customary representations, warranties, agreements and conditions to completing stock purchases, indemnification rights and obligations of the parties.

 

The initial accounting for the transaction is incomplete at the date these consolidated financial statements are available to be issued, as the information necessary to complete such evaluation is in the process of being obtained and more thoroughly evaluated.  The Company has not yet determined fair value of consideration transferred, the acquired assets and liabilities to be acquired nor the fair value or probabilities of contingent consideration to be transferred.  Accordingly, such disclosures cannot be made.

 

Registered Offering of Common Stock and Private Placement of Series D Convertible Preferred Stock

 

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, for gross proceeds of approximately $2.4 million prior to deduction of commissions and offering expenses. Additionally, 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 (the “Series D 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 “Warrants”). The Company received gross proceeds from the private placement of approximately $2.7 million, prior to deduction of commissions and offering expenses.

 

The Series D Preferred Stock is convertible into an aggregate of approximately 1,184,211 shares of common stock at a conversion price of $2.28 per share, subject to certain ownership limitations, upon the Company obtaining shareholder approval to provide for the full conversion of the Series D Preferred Stock and the full exercise of the Warrants (“Shareholder Approval”). Beginning on the six month anniversary of the original issuance date, the Series D Preferred Stock 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, which right will terminate upon receipt of Shareholder Approval. Until Shareholder Approval is obtained, the Series D Preferred Stockholders have preferential liquidation rights over the Company's common stockholders and holders of the Company’s outstanding preferred stock. The Warrants are exercisable six months from the date of issuance and will expire five and a half years following the date of issuance.

 

Joseph Gunnar & Co. is acting as the lead placement agent and Taglich Brothers, Inc. is acting as co-placement agent. The Company intends to use the net proceeds of the offerings to fund certain cash payments payable in accordance with the Hawk Purchase Agreement and for general working capital purposes.