Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington,, D.C. 20549

 

Form 10-Q

 (Mark

(Mark One)

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

 

For the quarterly period ended DecemberMarch 31, 20172023

 

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

alogo01.jpg

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.

80Blanchard Road

 

IRS Employer Identification No.

100 Sylvan Road, Suite G700

Burlington,Woburn, Massachusetts

 

0180301801

(Address of Principal Executive Offices)

 

(Zip Code)

 

(781) 376-5555

(Registrant’sRegistrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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

 

(Former name, former address and former fiscal year, if changed since last report)Title of each class

Trading Symbols(s)

Name of each exchange on which registered

Common Stock, par value $0.001

BLIN

NASDAQ

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files)files)   ☒  Yes    ☐  No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large“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

☐

(Do not check if a smaller reporting company)

  ☒

Smaller reporting company

☒

Emerging growth 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 SectionSection 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 ☒

 

The number of shares of Common Stockcommon stock par value $0.001$0.001 per share, outstanding as of February 10, 2018May 15, 2023 was 4,200,219.10,417,609.

 

1

 

 

Bridgeline Digital, Inc.

 

Quarterly Report on Form 10-Q

 

For the Quarterly Period ended December 31, 2017March 31, 2023

 

Index

 

Page

Part I

Financial Information

Item 1.

Condensed Consolidated Financial Statements

Condensed Consolidated Balance Sheets (unaudited) as of DecemberMarch 31, 20172023 and September 30, 20172022

4

Condensed Consolidated Statements of Operations (unaudited) for the three and six months ended DecemberMarch 31, 20172023 and 20162022

5

   
 

Condensed ConsolidatedConsolidated Statements of Comprehensive LossIncome/(Loss) (unaudited) for the three and six months ended December March 31, 20172023 and 20162022

6

Condensed Consolidated Statements of Cash FlowsStockholders’ Equity (unaudited) for the three and six months ended DecemberMarch 31, 20172023 and 20162022

7

   

Notes to Unaudited Condensed Consolidated Financial Statements of Cash Flows (unaudited) for the three and six months ended March 31, 2023 and 2022

8

Notes to Unaudited Condensed Consolidated Financial Statements

9

Item 2.

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

21

Item 3.

Qualitative and Quantitative Disclosures About Market Risk

33

Item 4.

Controls and Procedures

33

Part II

Other Information

Item 1.

Legal Proceedings

3422

   

Item 2.3.

Qualitative and Quantitative Disclosures About Market Risk

29

Item 4.

Controls and Procedures

29

PartII

Other Information

Item 1.

Legal Proceedings

30

Item 1A.

Risk Factors

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds 

3430

   

Item 3.

Defaults Upon Senior Securities

Item 6.

Exhibits

3530

   
Signatures

Item 4.

36

Mine Safety Disclosures

30

Item 5.

Other Information

30

Item 6.

Exhibits

31

Signatures

32

 

2

  

 

Bridgeline Digital, Inc.

 

Quarterly Report on Form 10-Q

 

For the Quarterly Period ended DecemberMarch 31,, 2017 2023

 

 

Statements contained in this Report on Form 10-Q, thatother than statements or characterizations of historical fact, are not based on historical facts are “forward-looking statements”forward-looking statements. These “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.1995, 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 maycan often be identified by the use of forward-looking terminologywords such as “should,” “could,” “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intends,” “continue,”"anticipates," "expects," "intends," "plans," "predicts," "believes," "seeks," "estimates," "may," "will," "should," "would," "could," "potential," "continue," "ongoing," similar expressions, and variations or similar terms or variationsnegatives of those terms or the negative of those terms.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. Forward-looking statements are merely our current predictions of future events. Investors are cautioned that any suchThese forward-looking statements are inherently uncertain, are not guarantiesguarantees of future performanceresults and involveare subject to risks, uncertainties and uncertainties. Actual results may differ materially from our predictions. Important factors that could cause actual resultsassumptions, including, but not limited to, differ from our predictions include the impact of the weakness inCOVID–19 pandemic and related public health measures that may affect our financial results; business operations and the U.S.business of our customers, suppliers and international economies onpartners; our business,ability to retain and upgrade current customers; increasing our inabilityrecurring revenue; our ability to manage our future growth effectively or profitably, fluctuations inattract new customers; our revenue and quarterly results,growth rate; our license renewal rate, the impacthistory of competitionnet loss and our ability to achieve or maintain marginsprofitability, instability in the financial markets, including the banking sector; our liability for any unauthorized access to our data or market share, the limited marketour users’ content, including through privacy and data security breaches; any decline in demand for our common stock,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, stock; the ability to maintain our listing on the NASDAQ Capital market, the ability to raise capital, the performance of our products, our ability to respond to rapidly evolving technology and customer requirements, our ability to protect our proprietary technology, the security of our software, our dependence on our management team and key personnel, our ability to hire and retain future key personnel,Market; or our ability to maintain an effective system of internal controls.  Although we have sought to identifycontrols as well as other risks described in our filings with the most significant risks to our business, we cannot predict whether, or to what extent, anySecurities and Exchange Commission.Any of such risks may be realized, nor is therecould cause our actual results to differ materially and adversely from those expressed in any assurance that we have identified all possible issues which we might face. We assumeforward-looking statement. Bridgeline Digital, Inc. assumes no obligation to, and does not currently intend to, update ourany such forward-looking statements, to reflect new information or developments. except as required by applicable law. We urge readers toreview carefully the risk factors described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017as well as2022, and in the other documents that we file with the Securities and Exchange Commission. You can read these documents at www.sec.gov.

www.sec.gov.

 

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

 

3
Table of Contents
 

  

PART I—FINANCIAL INFORMATION

Item 1.

Item 1.Condensed Consolidated Financial Statements.

Condensed Consolidated Financial Statements.

 

BRIDGELINE DIGITAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

  

(Unaudited)

March 31,

2023

  

September 30,

2022

 

ASSETS

        

Current assets:

        

Cash and cash equivalents

 $2,819  $2,856 

Accounts receivable, net

  1,148   1,182 

Prepaid expenses and other current assets

  463   242 

Total current assets

  4,430   4,280 

Property and equipment, net

  214   268 

Operating lease assets

  489   589 

Intangible assets, net

  5,582   6,268 

Goodwill

  15,985   15,985 

Other assets

  106   123 

Total assets

 $26,806  $27,513 
         

LIABILITIES AND STOCKHOLDERS’ EQUITY

        

Current liabilities:

        

Current portion of long-term debt

 $210  $429 

Current portion of operating lease liabilities

  186   199 

Accounts payable

  1,250   972 

Accrued liabilities

  1,060   995 

Current portion of purchase price and contingent consideration payable

  -   250 

Deferred revenue

  2,420   1,943 

Total current liabilities

  5,126   4,788 

Long-term debt, net of current portion (Note 7)

  552   588 

Operating lease liabilities, net of current portion

  303   390 

Warrant liabilities

  281   749 

Other long-term liabilities

  672   646 

Total liabilities

  6,934   7,161 
         

Commitments and contingencies (Note 13)

          

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, 2023 and September 30, 2022

  -   - 

Common stock - $0.001 par value; 50,000,000 shares authorized; 10,417,609 shares issued and outstanding at March 31, 2023, and September 30, 2022

  10   10 

Additional paid-in capital

  100,881   100,704 

Accumulated deficit

  (80,733

)

  (80,142

)

Accumulated other comprehensive loss

  (286

)

  (220

)

Total stockholders’ equity

  19,872   20,352 

Total liabilities and stockholders’ equity

 $26,806  $27,513 

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


BRIDGELINE DIGITAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(Unaudited)

 

 

 

December 31,

  

September 30,

 
  

2017

  

2017

 
ASSETS        
         

Current assets:

        

Cash and cash equivalents

 $1,117  $748 

Accounts receivable and unbilled receivables, net

  3,208   3,026 

Prepaid expenses and other current assets

  464   352 

Total current assets

  4,789   4,126 

Property and equipment, net

  181   209 

Intangible assets, net

  191   263 

Goodwill

  12,641   12,641 

Other assets

  303   334 

Total assets

 $18,105  $17,573 
         

LIABILITIES AND STOCKHOLDERS’ EQUITY

        
         

Current liabilities:

        

Accounts payable

 $1,175  $1,241 

Accrued liabilities

  980   920 

Debt, current

  42   - 

Deferred revenue

  1,380   1,466 

Total current liabilities

  3,577   3,627 
         

Debt, net of current portion

  3,142   2,500 

Other long term liabilities

  444   172 

Total liabilities

  7,163   6,299 
         

Commitments and contingencies

        
         

Stockholders’ equity:

        

Preferred stock - $0.001 par value; 1,000,000 shares authorized; 250,927 at December 31, 2017 and 243,536 at September 30, 2017, issued and outstanding (liquidation preference $2,585)

  -   - 

Common stock - $0.001 par value; 50,000,000 shares authorized; 4,200,219 at December 31, 2017 and at September 30, 2017, issued and outstanding

  4   4 

Additional paid-in capital

  66,043   65,869 

Accumulated deficit

  (54,754)  (54,249)

Accumulated other comprehensive loss

  (351)  (350)

Total stockholders’ equity

  10,942   11,274 

Total liabilities and stockholders’ equity

 $18,105  $17,573 
  

Three Months Ended
March 31,

  

Six Months Ended
March 31,

 
  

2023

  

2022

  

2023

  

2022

 

Net revenue:

                
Subscription and perpetual licenses  3,273   3,306   6,502   6,723 

Digital engagement services

 $821  $811  $1,675  $1,680 

Total net revenue

  4,094   4,117   8,177   8,403 

Cost of revenue:

                

Subscription and perpetual licenses

  840   868   1,701   1,697 

Digital engagement services

  422   466   840   917 

Total cost of revenue

  1,262   1,334   2,541   2,614 

Gross profit

  2,832   2,783   5,636   5,789 

Operating expenses:

                

Sales and marketing

  1,386   1,267   2,595   2,498 

General and administrative

  756   775   1,588   1,648 

Research and development

  926   865   1,673   1,724 

Depreciation and amortization

  381   416   759   840 

Restructuring and acquisition related expenses

  45   66   45   164 

Total operating expenses

  3,494   3,389   6,660   6,874 

Loss from operations

  (662

)

  (606

)

  (1,024

)

  (1,085

)

Change in fair value of contingent consideration, interest expense and other, net

  (10

)

  523   (19

)

  435 

Change in fair value of warrant liabilities

  171   434   468   2,875 

Income (loss) before income taxes

  (501

)

  351   (575

)

  2,225 

Provision for income taxes

  10   5   16   8 

Net income (loss)

  (511

)

  346   (591

)

  2,217 

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

                

Basic net income (loss) per share

 $(0.05

)

 $0.03  $(0.06

)

 $0.22 

Diluted net income (loss) per share

 $(0.05

)

 $0.03  $(0.06

)

 $0.10 

Number of weighted average shares outstanding:

                

Basic

  10,417,609   10,204,276   10,417,609   10,196,550 

Diluted

  10,430,710   10,340,910   10,430,766   10,423,786 

 

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

 

4
Table of Contents

 

BRIDGELINE DIGITAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSCOMPREHENSIVE INCOME/(LOSS)

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

(Unaudited)

 

  

Three Months Ended

 
  

December 31,

 
  

2017

  

2016

 

Net revenue:

        

Digital engagement services

 $2,060  $2,026 

Subscription and perpetual licenses

  1,606   1,725 

Managed service hosting

  303   240 

Total net revenue

  3,969   3,991 

Cost of revenue:

        

Digital engagement services

  1,397   1,128 

Subscription and perpetual licenses

  480   496 

Managed service hosting

  80   71 

Total cost of revenue

  1,957   1,695 

Gross profit

  2,012   2,296 

Operating expenses:

        

Sales and marketing

  1,104   1,294 

General and administrative

  736   791 

Research and development

  407   360 

Depreciation and amortization

  108   185 

Restructuring charges

  -   31 

Total operating expenses

  2,355   2,661 

Loss from operations

  (343)  (365)

Interest and other expense, net

  (86)  (31)

Loss before income taxes

  (429)  (396)

Provision for income taxes

  1   12 

Net loss

  (430)  (408)

Dividends on convertible preferred stock

  (75)  (68)

Net loss applicable to common shareholders

 $(505) $(476)

Net loss per share attributable to common shareholders:

        

Basic and diluted

 $(0.12) $(0.12)

Number of weighted average shares outstanding:

        

Basic and diluted

  4,200,219   4,011,724 
  

Three Months Ended
March 31,

  

Six Months Ended
March 31,

 
  

2023

  

2022

  

2023

  

2022

 

Net income (loss)

 $(511

)

 $346  $(591

)

 $2,217 

Other comprehensive income (loss):

                

Net change in foreign currency translation adjustment

  (5

)

  42   (66

)

  83 

Comprehensive income (loss)

 $(516

)

 $388  $(657

)

 $2,300 

 

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

 

5
Table of Contents

 

BRIDGELINE DIGITAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERSCOMPREHENSIVE’ EQUITYLOSS

 (in thousands)(in thousands, except share data)

(Unaudited)

 

  

Three Months Ended

 
  

December 31,

 
  

2017

  

2016

 

Net Loss

 $(430) $(408)
         

Other Comprehensive income: Net change in foreign currency translation adjustment

  1   2 

Comprehensive loss

 $(429) $(406)
  

For the Three and Six Months Ended March 31, 2023

 
                          

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, 2022

  350  $-   10,417,609  $10  $100,704  $(80,142

)

 $(220

)

 $20,352 

Stock-based compensation expense

  -   -   -   -   93   -   -   93 

Net income (loss)

  -   -   -   -   -   (80

)

  -   (80

)

Foreign currency translation

  -   -   -   -   -   -   (61

)

  (61

)

Balance at December 31, 2022

  350  $-   10,417,609  $10  $100,797  $(80,222

)

 $(281

)

 $20,304 

Stock-based compensation expense

  -   -   -   -   84   -   -   84 

Net income (loss)

  -   -   -   -   -   (511

)

  -   (511

)

Foreign currency translation

  -   -   -   -   -   -   (5

)

  (5

)

Balance at March 31, 2023

  350  $-   10,417,609  $10  $100,881  $(80,733

)

 $(286

)

 $19,872 

  

For the Three and Six Months Ended March 31, 2022

 
                          

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, 2021

  350  $-   10,187,128  $10  $100,207  $(82,287

)

 $(353

)

 $17,577 

Stock-based compensation expense

  -   -   -   -   63   -   -   63 

Issuance of common stock – warrants exercised

  -   -   17,148   -   -   -   -   - 

Net income (loss)

  -   -   -   -   -   1,872   -   1,872 

Foreign currency translation

  -   -   -   -   -   -   41   41 

Balance at December 31, 2021

  350  $-   10,204,276  $10  $100,270  $(80,415

)

 $(312

)

 $19,553 

Stock-based compensation expense

  -   -   -   -   52   -   -   52 

Issuance of common stock – stock options exercised

  -   -   13,333   -   19   -   -   19 

Net income (loss)

  -   -   -   -   -   346   -   346 

Foreign currency translation

  -   -   -   -   -   -   42   42 

Balance at March 31, 2022

  350  $-   10,217,609  $10  $100,341  $(80,069

)

 $(270

)

 $20,012 

 

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

 

6
Table of Contents
 

 

BRIDGELINE DIGITAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 (in(in thousands)

(Unaudited)

 

  

Three Months Ended

 
  

December 31,

 
  

2017

  

2016

 

Cash flows from operating activities:

        

Net loss

 $(430) $(408)

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

        

Amortization of intangible assets

  72   71 

Depreciation

  36   89 

Other amortization

  16   39 

Debt discount amortization

  22   - 

Stock-based compensation

  125   122 

Changes in operating assets and liabilities

        

Accounts receivable and unbilled receivables

  (182)  (81)

Prepaid expenses and other assets

  (50)  39 

Accounts payable and accrued liabilities

  (37)  (390)

Deferred revenue

  (86)  187 

Other liabilities

  (61)  39 

Total adjustments

  (145)  115 

Net cash used in operating activities

  (575)  (293)

Cash flows used in investing activities:

        

Software development capitalization costs

  -   (21)

Purchase of property and equipment

  (8)  - 

Net cash used in investing activities

  (8)  (21)

Cash flows provided by financing activities:

        
         

Proceeds from issuance of common stock, net of issuance costs

  -   891 

Proceeds from term notes

  953   - 

Borrowing on bank line of credit

  300   355 

Payments on bank line of credit

  (300)  (80)

Contingent acquisition payments

  -   (75)

Principal payments on capital leases

  -   (12)

Net cash provided by financing activities

  953   1,079 

Effect of exchange rate changes on cash and cash equivalents

  (1)  2 

Net increase in cash and cash equivalents

  369   767 

Cash and cash equivalents at beginning of period

  748   661 

Cash and cash equivalents at end of period

 $1,117  $1,428 

Supplemental disclosures of cash flow information:

        

Cash paid for:

        

Interest

 $64  $33 

Income taxes

 $9  $17 

Non cash investing and financing activities:

        

Accrued dividends on convertible preferred stock

 $76  $68 
  

Six Months Ended

March,

 
  

2023

  

2022

 

Cash flows from operating activities:

        

Net income (loss)

 $(591

)

 $2,217 

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

        

Amortization of intangible assets

  686   797 

Depreciation and other amortization

  87   43 

Change in fair value of contingent consideration

  -   (471

)

Change in fair value of warrant liabilities

  (468

)

  (2,875

)

Stock-based compensation

  177   115 

Changes in operating assets and liabilities

        

Accounts receivable

  33   (38

)

Prepaid expenses and other current assets

  (221

)

  (284

)

Other assets

  -   (21

)

Accounts payable and accrued liabilities

  322   157 

Deferred revenue

  544   (506

)

Other liabilities

  (38

)

  (17

)

Total adjustments

  1,122   (3,100

)

Net cash provided by (used in) operating activities

  531   (883

)

Cash flows from investing activities:

        

Software development capitalization costs

  -   (46

)

Purchase of property and equipment

  (16

)

  (30

)

Net cash used in investing activities

  (16

)

  (76

)

Cash flows from financing activities:

        

Proceeds from stock option exercises

  -   19 

Payments of contingent consideration and deferred cash payable

  (250

)

  (2,681

)

Payments of long-term debt

  (329

)

  (494

)

Net cash used in financing activities

  (579

)

  (3,156

)

Effect of exchange rate changes on cash and cash equivalents

  27   (51

)

Net decrease in cash and cash equivalents

  (37

)

  (4,166

)

Cash and cash equivalents at beginning of period

  2,856   8,852 

Cash and cash equivalents at end of period

 $2,819  $4,686 
         

Supplemental disclosures of cash flow information:

        

Cash paid for:

        

Interest

 $29  $22 

Income taxes

 $42  $31 

 

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

 

7
Table of Contents

 

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 Theis a marketing technology company that offers a suite of products that help companies grow online revenue by driving more traffic to their websites, converting more visitors to purchasers, and increasing average order value.

HawkSearch is a site search, recommendation, and personalization application, built for marketers, merchandisers, and developers to enhance, normalize, and enrich an online customer's content search and product discovery experience. HawkSearch leverages advanced artificial intelligence, machine learning and industry-leading merchandising features to deliver accurate and highly relevant results and recommendations derived from multiple data sources.

Celebros Search is a commerce-oriented site search product that provides Natural Language Processing with artificial intelligence to present relevant search results based on long-tail keyword searches with support for multiple languages.

Woorank is a Search Engine Optimization (“SEO”) audit tool that generates an instant performance audit of the site’s technical, on-page, and off-page SEO.  Woorank’s clear, actionable insights help companies increase their search engine ranking, while boosting website traffic, audience engagement, conversion, and customer retention rates.

Our Unbound platform is a Digital Engagement Company™, helps customers with their digital experience from websites and intranets to online stores. Bridgeline’s iAPPS® platform integratesExperience Platform that includes Web Content Management, eCommerce, eMarketing, Social Media management,Digital Marketing, and Web Analytics to deliverAnalytics. The Unbound platform, combined with its professional services, assists customers in powering engaging digital experiences to its customers. iAPPSds is a platform for large franchisethat drive lead generation, increase revenue, improve customer service and multi-unit organizationsloyalty, enhance employee knowledge, and also integrates Web Content Management, eCommerce, eMarketing, Social Media management, and Web Analytics.reduce operational costs. 

 

The iAPPSTruPresence product empowers large franchises, brand networks, and other multi-unit organizations to manage a large hierarchy of digital properties at scale. TruPresence provides centralized and distributed management of content and products from parent sites down to multiple child sites for consistency in branding and messaging, while also enabling regional / local site owners to manage the local messaging, products and promotions specific to their local market.

OrchestraCMS is the only content and digital experience platform built 100% native on Salesforce and helps customers create websites and intranets for their customers, partners, and employees. The software uniquely combines content with business data, processes and applications across any channel or device, including Salesforce Communities, social media, portals, intranets, websites, applications and services.

All of Bridgeline’s software is deliveredavailable through a cloud-based SaaS (“Software as a Service”Service (“SaaS”) multi-tenant business model, providing maintenance, daily technical operationwhose flexible architecture provides customers hosting and support; orsupport. Additionally, Unbound and HawkSearch have the option to be available via a traditional perpetual licensing business model, in which the iAPPS software residescan reside on a dedicated server ininfrastructure either on premise at the customer’s facility, or hostedmanage-hosted by Bridgeline via a cloud-based, dedicated hosted services model.

 

Bridgeline Digital was incorporated under the laws of the State of Delaware on August 28, 2000.

 

Locations

 

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

Reverse Stock Split

On June 29, 2017, maintains regional field offices serving the Company’s Shareholdersfollowing geographical locations: Woodbury, New York; Rosemont, Illinois; Atascadero, California; Ontario, Canada; and the Board of Directors approved a reverse stock split pursuant to which all classes of our issued and outstanding shares of common stock at the close of business on such date were combined and reconstituted into a smaller number of shares of common stock in a ratio of 1 share of common stock for every 5 shares of common stock (“1-for-5 reverse stock split”). The 1-for-5 reverse stock split was effective as of close of business on July 24, 2017 and the Company’s stock began trading on a split-adjusted basis on July 25, 2017.

The reverse stock split reduced the number of shares of the Company’s common stock currently outstanding from approximately 21 million shares to approximately 4.2 million shares. Proportional adjustments have been made to the conversion and exercise prices of the Company’s outstanding convertible preferred stock, warrants, restricted stock awards, and stock options, and to the number of shares issued and issuable under the Company’s Stock Incentive Plans. Upon the effectiveness of the 1-for-5 reverse stock split, each five shares of the Company’s issued and outstanding common stock were automatically combined and converted into one issued and outstanding share of common stock, par value $.001. The Company did not issue any fractional shares in connection with the reverse stock split. Instead, fractional share interests were rounded up to the next largest whole share. The reverse stock split does not modify the rights or preferences of the common stock. The number of authorized shares of the Company’s common stock remains at 50 million shares and the par value remains $0.001.

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

Liquidity and Management’s PlansBrussels, Belgium.

 

The Company has a Loanfour wholly-owned subsidiaries: Bridgeline Digital Pvt. Ltd., located in Bangalore, India; Bridgeline Digital Canada, Inc., located in Ontario, Canada; Hawk Search Inc. located in Rosemont, Illinois and Security Agreement (“Heritage Agreement”) with Heritage Bank of Commerce (“Heritage Bank”) which has a maturity date of June 15, 2019. The Heritage Agreement currently provides for $2.5 million of revolving credit advances and may be used for acquisitions and working capital purposes. The credit advances may not exceed the monthly borrowing base capacity, which will fluctuate based on monthly accounts receivable balances. The Company may request credit advances if the borrowing capacity is more than the current outstanding loan advance, and must pay down the outstanding loan advance if it exceeds the borrowing capacity. As of December 31, 2017, the Company had an outstanding balance under the Heritage Agreement of $2.5 million.Bridgeline Digital Belgium BV, located in Brussels, Belgium.

 

89
Table of Contents

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

  

On October 10, 2017, the Company entered into a Loan and Security Agreement (the “Montage Loan” or “Loan Agreement”) with Montage Capital II, L.P. (“Montage”). The Montage Loan has a thirty-six (36) month term which expires on October 10, 2020. The Loan Agreement provides for up to $1.5 million of borrowing in the form of a non-revolving term loan which may be used by the Company for working capital purposes. $1 million of borrowing was advanced on the date of closing (the “First Tranche”). An additional $500 thousand of borrowing will be available at the Company’s option in the event that the Company achieves certain financial milestones and is otherwise in compliance with its loan covenants (the “Second Tranche”).

 

On May 19, 2017, the Company filed a Registration Statement on Form S-3 with the Securities and Exchange Commission in relation to the registration of securities of the Company having an aggregate public offering price of up to $10 million. The determinate number of shares of common stock, preferred stock, warrants, and units of any combination thereof (collectively, the “Securities”) may be offered and sold from time to time, but shall not exceed $10 million in total. There have been no securities sold as of December 31, 2017.

Historically, the Company has had operating losses and working capital deficiencies, but has undertaken a long term cost reduction plan that includes staff reductions and office lease consolidations to compensate for the shortfalls. The Company will continue to follow through with its plan and closely monitor and adjust such expenditures throughout the next twelve months. While there can be no assurance that anticipated sales will be achieved for future periods, the Company’s management believes it  has an appropriate cost structure in place to support the revenues that will be achieved under the Company’s operating plan. Management believes that it is probable that working capital, capital expenditure and debt repayment needs for the next twelve months from the financial statement date of issuance will be met. The cash balance as of December 31, 2017 of $1.1 million as well as collections from accounts receivable will be sufficient to meet the Company’s obligations for a minimum of twelve months from the financial statement issuance date. While not currently included in the Company’s operating plan and forecast, it may raise additional capital or borrow on its credit facility with Heritage Bank and/or advance the second tranche of funds from Montage Capital, if the respective financial milestones are met, in order to fund future operations. The ability to raise funds through these means may be helpful to the Company if the anticipated sales levels are not achieved or it cannot reduce operating expenses to account for any shortfalls.

 

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 (“USU.S. GAAP”), and with the instructions to Form 10-Q and Regulation S-X, and in the opinion of the Company’s management. Thesemanagement, these condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments and accruals, necessary for thetheir fair presentation. The operating results for the three and sixmonths ended DecemberMarch 31, 20172023 are not necessarily indicative of the results to be expected for the year ending September 30, 2018.2023. The accompanying September 30, 20172022 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 USU.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, 2017.2022, filed with the Securities and Exchange Commission (“SEC”) on December 21, 2022.

Recently Adopted Accounting Pronouncements

 

Subsequent EventsDebt—Debt with Conversion and Other Options

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06,Debt—Debt with Conversion and Other Options (Subtopic470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic815-40) (“ASU 2020-06”). The ASU 2020-06 simplifies the accounting for convertible instruments and application of the equity classification guidance and made certain disclosure amendments. In addition, this ASU also amends certain aspects of the earnings per share (“EPS”) guidance. ASU 2020-06 is effective for financial reporting periods beginning after December 15, 2021, except smaller reporting companies for which this ASU is effective for financial reporting periods beginning after December 15, 2023. Early adoption is permitted, and an entity should adopt this ASU as of the beginning of its annual fiscal year. The Company evaluated subsequent events throughelected to early adopt ASU 2020-06 as of the datefirst day of this filing and concluded there werethe fiscal year ending noSeptember 30, 2023 material subsequent events requiring, using the modified retrospective approach which allows for a cumulative-effect adjustment to the opening balance of retained earnings or disclosureaccumulated deficit in thesethe period of adoption. The adoption of ASU 2020-06 did not have any impact on the accumulated deficit or any other components of the condensed consolidated balance sheet as of October 1, 2022 nor did it have a material impact on earnings per share for the three and six months ended March 31, 2023.

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 condensedperiods 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 exceptand related disclosures.

Business Combinations

In October 2021, the FASB issued ASU No.2021-08,Business Combinations (Topic 606): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires that an entity recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 as already disclosedif it had originated the contracts. Generally, this should result in thesean acquirer recognizing and measuring the acquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements.statements, if the acquiree prepared financial statements in accordance with U.S. GAAP. The amendment in this update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The guidance should be applied prospectively to business combinations occurring on or after the effective date of the amendment in this update. The Company is evaluating the potential impact of this adoption 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.

910
Table of Contents

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

  

Recent Accounting Pronouncements

Revenue Recognition

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (“ASU”) No.2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for the Company in the first quarter of fiscal 2019.Companies may adopt ASU 2014-09 using either the retrospective method, under which each prior reporting period is presented under ASU 2014-09, with the option to elect certain permitted practical expedients, or the modified retrospective method, under which a company adopts ASU 2014-09 from the beginning of the year of initial application with no restatement of comparative periods, with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application, with certain additional required disclosures. The Company plans to adopt the standard using the full retrospective method to restate each prior reporting period presented. Additionally, as the Company continues to assess the new standard along with industry trends and additional interpretive guidance, the Company may adjust its implementation plan accordingly.

As the Company is continuing to assess all potential impacts of the new standard, it currently believes that the impact will not be significant. A large portion of the Company’s business is for the licensing of Software-as-a-Service (SaaS) term-based software licenses bundled with maintenance and support. Under current GAAP, the revenue attributable to these software licenses is recognized ratably over the term of the arrangement because VSOE does not exist for the undelivered maintenance and support element as it is not sold separately. To apply the revenue standard, a company must first determine whether a contract includes a promise of a license of intellectual property. A separate promise of a license exists when (1) the customer has the contractual right to take possession of the software at any time without significant penalty and (2) the customer can run the software on its own hardware or contract with another party unrelated to the vendor to hoist of the software. Neither of these criteria are met with our current SaaS licensing arrangements, therefore, revenue recognition will continue to be recognized over the period of service. Revenue recognition related to our professional services is expected to remain substantially unchanged.

Another significant provision under ASU 2014-09 includes the capitalization and amortization of costs associated with obtaining a contract, such as sales commissions. Currently, the Company expenses sales commissions in the period incurred. Under ASU 2014-09, direct and incremental costs to acquire a contract are capitalized and amortized using a systematic basis over the pattern of transfer of the goods and services to which the asset relates. While we are continuing to assess the impact of this provision of ASU 2014-09, we likely will be required to capitalize incremental costs such as commissions and amortize those costs over the period the capitalized assets are expected to contribute to future cash flows. Due to the complexity of certain of our contracts, the actual accounting treatment required under the new standard for these arrangements may be dependent on contract-specific terms and therefore may vary in some instances.

Leases

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

Income Taxes

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code that will affect the Company’s fiscal year ending September 30, 2018, including, but not limited to, reducing the U.S. federal corporate tax rate.  The Tax Act reduces the federal corporate tax rate to 21 percent in the fiscal year ending September 30, 2018.  The reduction of the corporate tax rate will cause the Company to reduce its deferred tax asset to the lower federal base rate and adjust the allowance against the deferred tax asset by the same amount. The Company has not yet determined the impact the rate reduction will have on its gross deferred tax asset and liabilities and offsetting valuation allowance. The Company has a full allowance against the deferred tax asset and as a result there was no impact to income tax expense for the quarter ended December 31, 2017.

The changes included in the Tax Act are broad and complex. The final transition impacts of the Tax Act may differ from the above estimate, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the company has utilized to calculate the transition impact. The Securities Exchange Commission has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. We currently anticipate finalizing and recording any resulting adjustments by the end of our current fiscal year ending September 30, 2018.

 

10

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

Cash Flows

In August 2016, the FASB issued ASU 2016-15, which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows, specifically certain cash receipts and cash payments. The standard is effective for public business entities financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective method. Management does not expect the adoption of this Standard to have a material impact on our consolidated cash flows.

In November 2016, the FASB issued ASU No.2016-18 which requires entities to include in their cash and cash-equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents. As a result, companies will no longer present transfers between cash and cash equivalents, and restricted cash and restricted cash equivalents in the statement of cash flows. The guidance is effective for annual and interim periods beginning after December 15, 2017. Early adoption of ASU 2016-18 is permitted, including adoption in an interim period. Management is currently evaluating the adoption of ASU 2016-18 on its consolidated financial statements.

Goodwill

In January 2017, the FASB issued ASU No.2017-04 to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance will be applied prospectively and is effective for annual reporting periods ending December 31, 2020 and thereafter with early adoption permitted. Management is currently evaluating the impact of the new guidance on its consolidated financial statements.

Business Combinations

In January 2017, the FASB issued ASU No.2017-01, which amended the existing FASB Accounting Standards Codification Topic 805 Business Combinations. The standard provides additional guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting, including acquisitions, disposals, goodwill, and consolidation. ASU 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted. Management is currently evaluating the impact of the new guidance on its consolidated financial statements.

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

3.  Accounts Receivable and Unbilled Receivables

 

Accounts receivable and unbilled receivables consistsconsist of the following:

 

  

As of

  

As of

 
  

December 31, 2017

  

September 30, 2017

 

Accounts receivable

 $3,090  $3,174 

Unbilled receivables

  204   41 

Subtotal

  3,294   3,215 

Allowance for doubtful accounts

  (86)  (189)

Accounts receivable and unbilled receivables, net

 $3,208  $3,026 
  

As of
March 31,

2023

  

As of
September 30,

2022

 

Accounts receivable

 $1,299  $1,332 

Allowance for doubtful accounts

  (151

)

  (150

)

Accounts receivable, net

 $1,148  $1,182 

 

For theAs of three months ended DecemberMarch 31, 20172023 and December 31, 2016,September 30, 2022, oneno customer represented more thanexceeded 10% of accounts receivable. For the three months ended December 31, 2017, two customers represented 11% and 12%of the Company’s total revenue. For the three months ended December 31, 2016, one customer represented 12% of the Company’s total revenue.

  

11

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

44..   Fair Value Measurement and Fair Value of Financial Instruments

The Company’s otherCompany’s financial instruments consist principally of accounts receivable, accounts payable, warrant liabilities, contingent consideration and debt.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, under U.S. GAAP, 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 believescarrying value of the recorded values forCompany’s accounts receivable and accounts payable and short term debt approximate currentapproximates fair values asvalue due to their short-term nature. As of DecemberMarch 31, 20172023 and September 30, 20172022, becausethe aggregate fair values of their short-term naturelong-term debts were $0.6 million and durations. The$0.9 million, respectively, with an aggregate carrying value of long term debt also approximates$0.8 million and $1.0 million, respectively. The fair value as of December 31, 2017 and September 30, 2017is based upon the Company's abilityon interest rates that are currently available to acquire similar debt at similar maturities. In the three months ended December 31, 2017, the Company recorded a liability associatedfor issuance of debt with a conversion feature embeddedsimilar terms and remaining maturities. If measured at fair value in athe financial statements, the debt would be classified as Level 2 in the fair value hierarchy.

The Company’s warrant to purchase common stock issued to Montage Capital.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 liability will utilize aliabilities are valued utilizing Level 3 input. To determine the value of the warrant liability, the Company usedinputs. Warrant liabilities are valued using a Monte Carlo option-pricing model, which takes into consideration the market valuesvolatilities of comparable public companies, considering among other factors,due to the userelatively low trading volume of multiples of earnings, and adjusted to reflect the restrictions on the ability of our shares to trade in an active market.Company’s common stock. The Monte Carlo option-valuationoption-pricing model also uses certain assumptions, to determine the fair value, including expected life and annual volatility. SuchThe range and weighted average volatilities of comparable public companies utilized was 27.7% - 93.3% and 54.4%, respectively, as of March 31, 2023, and 26.6% - 64.3% and 55.3%, respectively, as of September 30, 2022. 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 used to value the warrant liability include an expected life of eight (8) years, annual volatility of 80%,and a risk-free interest rate of 2.24%.assumptions utilized were as follows:

 

The fair value of the warrant liability was valued at the loan execution date in the amount of $341 and will be revalued at the end of each reporting period to fair value. The fair value at December 31, 2017 was $338 and is included in other long term liabilities in the Condensed Consolidated Balance Sheet. Changes in fair value are included in interest expense in the Condensed Statement of Operations in the period the change occurs.

Assets and liabilities of the Company measured at fair value on a recurring basis as of December 31, 2017 are as follows:

      

As of December 31, 2017

     
  

Level 1

  

Level 2

  

Level 3

  

Total

 
                 

Liabilities:

                

Warrant liability

 $-  $-  $338  $338 

Total Liabilities

 $-  $-  $338  $338 
  

As of March 31, 2023

  

As of September 30, 2022

 
  

Montage
Capital

  

Series C

Preferred

  

Series D

Preferred

  

Montage

Capital

  

Series C

Preferred

  

Series D

Preferred

 

Volatility

  78.2

%

  64.8

%

  78.5

%

  82.0

%

  83.9

%

  84.7

%

Risk-free rate

  3.90

%

  4.40

%

  3.74

%

  4.20

%

  4.20

%

  4.10

%

Stock price

 $0.91  $0.91  $0.91  $1.31  $1.31  $1.31 

 

12
11
Table of Contents

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

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

  

Three Months Ended

December 31,

 
  

2017

 

Balance at beginning of period, October 1, 2017

 $- 

Additions

  341 

Adjustment to fair value

  (3)

Balance at end of period, December 31, 2017

 $338 

5.   Intangible Assets

The componentsCompany recognized gains of intangible assets are as follows:

  

As of

  

As of

 
  

December 31, 2017

  

September 30, 2017

 

Domain and trade names

 $10  $10 

Customer related

  125   179 

Non-compete agreements

  56   74 

Balance at end of period

 $191  $263 

Total amortization expense related to intangible assets$171 and $434 for the three months ended DecemberMarch 31, 20172023 and 2016 was $72 and $71,2022, respectively, and $468 and $2,875 for the six months ended March 31, 2023 and 2022, respectively, related to the change in fair value of warrant liabilities. The changes in fair value of warrant liabilities were due to changes in inputs, primarily a change in the stock price, to the Monte Carlo option-pricing model.

The Company’s contingent consideration obligations were from arrangements resulting from acquisitions completed in prior periods not presented that involved potential future payment of consideration that was contingent upon the achievement of revenue targets and operational goals. Contingent consideration is reflected in operating expensesrecognized at its estimated fair value at the date of acquisition based on the Condensed Consolidated StatementsCompany’s expected probability of Operations. future payment, discounted using a weighted-average cost of capital in accordance with accepted valuation methodologies.

The Company reviews and re-assesses the estimated amortization expense for fiscal yearsfair value of contingent consideration liabilities at each reporting period and the updated fair value could differ materially from the initial estimates. The Company measures contingent consideration recognized in connection with acquisitions at fair value on a recurring basis using significant unobservable inputs classified as Level 20183 (remaining) inputs. The Company uses a simulation-based model to estimate the fair value of contingent consideration on the acquisition date and at each reporting period. The simulation model uses certain inputs and assumptions, including revenue projections, an estimate of revenue discount and volatility rate based on comparable public companies’ data, and risk-free rate. Significant increases or decreases to either of these inputs in isolation could result in a significantly higher or lower liability with a higher liability limited to the contractual maximum of the contingent consideration liabilities. Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate on the acquisition date and each reporting period and the amount paid will be recognized in earnings.

Assets and liabilities of the Company measured at fair value on a recurring basis as of March 31, 2023 and 2019September 30, 2022, is $175 and $16, respectively.are as follows:

  

As of March 31, 2023

     
  

Level 1

  

Level 2

  

Level 3

  

Total

 
                 

Liabilities:

                

Warrant liabilities:

                

Montage

 $-  $-  $12  $12 

Series A and C

  -   -   31   31 

Series D

  -   -   238   238 

Total warrant liabilities

 $-  $-  $281  $281 

 

 

6.   Restructuring

Commencing in fiscal 2015 and through fiscal 2017, the Company’s management approved, committed to and initiated plans to restructure and further improve efficiencies by implementing cost reductions in line with expected decreases in revenue. The Company renegotiated several office leases and relocated to smaller space, while also negotiating sub-leases for the original space. In addition, the Company executed a general work-force reduction and recognized costs for severance and termination benefits. These restructuring charges and accruals require estimates and assumptions, including contractual rental commitments or lease buy-outs for vacated office space and related costs, and estimated sub-lease income. The Company’s sub-lease assumptions include the rates to be charged to a sub-tenant and the timing of the sub-lease arrangement. All of the vacated lease space is currently contractually occupied by a new sub-tenant for the remaining life of the lease. In the second quarter of fiscal 2017, the Company initiated a plan to shut down its operations in India. All of these estimates and assumptions will be monitored on a quarterly basis for changes in circumstances with the corresponding adjustments reflected in the Condensed Consolidated Statement of Operations.

  

As of September 30, 2022

     
  

Level 1

  

Level 2

  

Level 3

  

Total

 
                 

Liabilities:

                

Warrant liabilities:

                

Montage

 $-  $-  $12  $12 

Series A and C

  -   -   234   234 

Series D

  -   -   503   503 

Total warrant liabilities

  -   -   749   749 

Contingent consideration obligations

  -   -   250   250 

Total Liabilities

 $-  $-  $999  $999 

 

13
12
Table of Contents

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

The following table summarizesprovides a rollforward of the restructuring activityfair value, as determined by Level 3 inputs, as follows:

  

Contingent

Consideration

Obligations

  

Warrant

Liabilities

 

Balance at beginning of period, October 1, 2022

 $250  $749 

Additions

  -   - 

Payments or exercises

  (250

)

  - 

Adjustment to fair value

  -   (297

)

Balance at end of period, December 31, 2022

 $-  $452 

Additions

  -   - 

Payments or exercises

  -   - 

Adjustment to fair value

  -   (171

)

Balance at end of period, March 31, 2023

 $-  $281 

5.Intangible Assets

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

  

As of
March 31,

2023

  

As of
September 30,

2022

 

Domain and trade names

 $657  $682 

Customer related

  4,101   4,522 

Technology

  824   1,064 

Balance at end of period

 $5,582  $6,268 

Total amortization expense was $344 and $396 related to intangible assets for the three months ended DecemberMarch 31, 2023 and 2012022, respectively, and $686 and $797 for the 7:six

  

Facility Closures

and Other Costs

 

Balance at beginning of period, October 1, 2017

 $176 

Charges to operations

  - 

Cash disbursements

  (67)

Changes in estimates

  - 

Balance at end of period, December 31, 2017

 $109 

The components of the accrued restructuring liabilities is as follows:

  

As of

  

As of

 
  

December 31, 2017

  

September 30, 2017

 

Facilities and related

 $103  $133 

Other

  6   43 

Total

 $109  $176 

As of months ended DecemberMarch 31, 2023 and 2017,2022, $57 wasrespectively, and is reflected in Accrued Liabilities and $52 in Other Long Term Liabilities inoperating expenses on the Condensed Consolidated Balance Sheet. AsStatements of Operations. The estimated amortization expense for fiscal year September 30, 2017, $1192023 is reflected in Accrued Liabilities(remaining), 2024,2025,2026, and $572027 and thereafter is reflected in Other Long Term liabilities in the Condensed Consolidated Balance Sheet.$668, $1,018, $725, $668, $555 and $1,948, respectively. 

  

 

76..   DebtAccrued Liabilities

 

Debt at December 31, 2017 and September 30, 2017 consistsAccrued liabilities consist of the following:

 

  

As of

  

As of

 
  

December 31, 2017

  

September 30, 2017

 

Line of credit borrowings

 $2,500  $2,500 

Term loan - Montage Capital

  1,000   - 

Subtotal debt

 $3,500  $2,500 

Other (debt discount)

 $(316)  - 

Total debt

 $3,184  $2,500 

Less current portion

 $42  $- 

Long term debt, net of current portion

 $3,142  $2,500 

Heritage Line of Credit

In June 2016, the Company entered into a new Loan and Security Agreement with Heritage Bank of Commerce (“Heritage Agreement” or “Loan Agreement”). The Heritage Agreement had and original a term of 24 months but was amended in 2017 to a maturity date of June 9, 2019. The Company paid an annual commitment fee of 0.4% of the commitment amount in the first year and 0.2% in the second year.  The facility fee is $6 on each anniversary thereafter. Borrowings are secured by all of the Company’s assets and all of the Company’s intellectual property. The Company is required to comply with certain financial and reporting covenants including an Asset Coverage Ratio and an Adjusted EBITDA metric. The Company was in compliance with all financial covenants as of December 31, 2017.

  

As of
March 31,

2023

  

As of
September 30,

2022

 

Compensation and benefits

 $540  $477 

Professional fees

  171   186 

Taxes

  83   98 

Insurance

  86   - 

Other

  180   234 

Balance at end of period

 $1,060  $995 

 

1413
Table of Contents

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

  

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. The Heritage Agreement provides forassumed debt obligations and seller note are denominated in Euros.

Long-term debt consisted of the following:

  

As of
March 31,

2023

  

As of
September 30,

2022

 

Term loan payable, accruing interest at 3-Month EURIBOR plus 1.3% per annum, payable in quarterly installments starting in April 2023 and matures in July 2028.

 $435  $389 

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 in September 2025.

  327   292 

Vendor loan payable (“Vendor loan”), accruing interest at 3.0% per annum. Matured in March 2023.

  -   292 

Term loan payable, accruing interest at fixed rates ranging between 0.99% to 1.5% per annum, payable in monthly or quarterly payments of interest and principal. Matured in October 2022.

  -   44 

Total debt

  762   1,017 

Less: current portion

  (210

)

  (429

)

Long-term debt, net of current portion

 $552  $588 

At March 31, 2023, future maturities of long-term debt are as follows:

Fiscal year:

    

2023 (remaining)

 $105 

2024

  210 

2025

  210 

2026

  79 

2027

  79 

Thereafter

  79 

Total long-term debt

 $762 

8.Stockholders’ Equity

Under our Certificate of Incorporation, we are authorized, subject to limitations prescribed by Delaware law and our Charter, to issue up to $1,000,000 shares of preferred stock in 2.5one millionor more series, to establish from time to time the number of revolving credit advances whichshares to be included in each series and to fix the designation, powers, preferences and rights of the shares of each series and any of its qualifications, limitations or restrictions. Our Board of Directors can increase or decrease the number of shares of any series, but not below the number of shares of that series then outstanding, without any further vote or action by our stockholders. Our Board of Directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of the common stock.   

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 maybe used for acquisitions and working capital purposes. Borrowings are limitedconverted, at the option of the holder at any time, into such number of shares of common stock equal to (i) the lessernumber of (i) $2.5 millionshares of Series A Preferred Stock to be converted, multiplied by the stated value of $10 and (ii) 75%divided by the conversion price in effect at the time of eligible receivables as defined. The Company can borrow up to $1.0 million in out of formula borrowings for specified periods of time. The borrowings or credit advances may not exceed the monthly borrowing base capacity, which will fluctuate based on monthly accounts receivable balances. The Company may request credit advances if the borrowing capacity is more than the current outstanding loan advance, and must pay down the outstanding loan advance if it exceeds the borrowing capacity.  Borrowings accrue interest at Wall Street Journal Prime Rate plus 1.75%, (currently 6%).conversion. As of DecemberMarch31,2023 and September 30, 2022, the Company had no shares of Series A Preferred Stock outstanding.

Series B Convertible Preferred Stock

The Company has designated 5,000 shares of its preferred stock as Series B Convertible Preferred Stock (“Series B Preferred Stock”). The shares of Series B Preferred Stock may be converted, at the option of the holder at any time, into such number of shares of common stock equal to (i) the number of shares of Series B Preferred Stock to be converted, multiplied by the stated value of $1,000 and (ii) divided by the conversion price in effect at the time of conversion. As of March 31, 2017,2023 and September 30, 2022, the Company had an outstanding balance under the Loan Agreementno shares of $2.5 million.

A Director and Shareholder of the Company, Michael Taglich, signed an unconditional guaranty (the “Guaranty”) and promise to pay Heritage Bank all indebtedness in an amount not to exceed $1.5 million in connection with the out of formula borrowings. Under the terms of the Guaranty, the Guarantor authorizes Lender, without notice or demand and without affecting its liability hereunder, from time to time to: (a) renew, compromise, extend, accelerate, or otherwise change the time for payment, or otherwise change the terms, of the Indebtedness or any part thereof, including increase or decrease of the rate of interest thereon, or otherwise change the terms of the Indebtedness; (b) receive and hold security for the payment of this Guaranty or any Indebtedness and exchange, enforce, waive, release, fail to perfect, sell, or otherwise dispose of any such security; (c) apply such security and direct the order or manner of sale thereof as Lender in its discretion may determine; and (d) release or substitute any Guarantor or any one or more of any endorsers or other guarantors of any of the Indebtedness.

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

Amendments – Heritage Bank

An amendment to the Heritage Agreement (“First Amendment”) was executed on August 15, 2016 and included a waiver for the Adjusted EBITDA metric for the quarter ended June 30, 2016. The First Amendment also included a decrease in the revolving line of credit from $3.0 million to $2.5 million, the Adjusted EBITDA metric for the quarter ended September 30, 2016, and also included a minimum cash requirement of $500 in the Company’s accounts at Heritage, which was waived for the period ended September 30, 2016.

On December 14, 2016, a second amendment to the Heritage Agreement (“Second Amendment”) was executed. The Second Amendment included a minimum cash requirement of $250 in its accounts at Heritage and the Adjusted EBITDA metrics for the first half of fiscal 2017.

On August 10, 2017, the third Amendment was executed (“Third Amendment”). The Third Amendment extended the maturity date of the loan to June 9, 2019.

On October 6, 2017, a fourth amendment to the Heritage Agreement (“Fourth Amendment”) was executed. The Fourth Amendment included a consent to the Company’s incurrence of additional indebtedness from Montage Capital (“Montage”) and the grant of a second position lien to Montage (See Subsequent Events). In addition, Heritage and Montage entered into an Intercreditor Agreement dated October 10, 2017, and acknowledged by the Company.

On November 27,2017, a fifth amendment to the Heritage Agreement (“Fifth Amendment”) was executed. The Fifth Amendment included the Adjusted EBITDA metrics for the second half of fiscal 2017 and the firstsix months of fiscal 2018. Thereafter, the Company and Heritage shall mutually agree upon minimum quarterly Adjusted EBITDA amounts for each fiscal year within thirty days following the beginning of each fiscal year.Series B Preferred Stock outstanding. 

 

1514
Table of Contents

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

Montage Capital II, L.P. Loan AgreementSeries C Convertible Preferred Stock

On October 10, 2017, theThe Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Montage Capital II, L.P.has designated 11,000 shares of its preferred stock as Series C Convertible Preferred Stock (“Montage”Series C Preferred Stock”). The Loan Agreement has a shares of Series C Preferred Stock thirty-sixmay (36) month term which expires on October 10, 2020. The Loan Agreement provides for up be converted, at the option of the holder at any time, into such number of shares of common stock equal to $1.5 million(i) the number of borrowing in the formshares of a non-revolving term loan which may Series C Preferred Stock to be usedconverted, multiplied by the Company for working capital purposes. $1 millionstated value of borrowing was advanced on$1,000 and (ii) divided by the date of closing (the “First Tranche”). An additional $500 thousand of borrowing will be availableconversion price in effect at the Company’s option in the event that the Company achieves certain financial milestones and is otherwise in compliancetime of conversion. Series C Preferred Stock vote on an as-converted basis along with its loan covenants (the “Second Tranche”). Borrowings bear interest at the rate of 12.75% per annum. The Company paid a fee of $47 to Montage at closing. Interest only payments are due and payable during the firstnine months of the Loan. Commencing on July 1, 2018, the Company shall be obligated to make principal payments of $26 per month if only the First Tranche has been received and $39 if the Company has received both the First Tranche and the Second Tranche. All remaining principal and interest shall be due and payable at maturity. Borrowings are secured by a second position lien on all of the Company’s assets including intellectual property and general intangibles. Pursuant to the Loan Agreement, the Company is also required to comply with certain financial covenants.  The Loan is subordinate to the Company’s senior debt facility with Heritage Bank of Commerce (“Heritage”). Heritage consented to the Company’s incurrence of additional indebtedness from Montage and the grant of a second position lien to Montage. In addition, Heritage and Montage entered into an intercreditor agreement dated October 10, 2017, and acknowledged by the Company.

As additional consideration for the Loan, the Company issued to Montage an eight-year warrant (the “Warrant”) to purchase 66,315 shares of the Company’s common stock, at a priceare not entitled to receive dividends, unless specifically declared by our Board of Directors, and in the event of any liquidation, dissolution or winding up of the Company the holders of Series C Preferred Stock are entitled to receive in preference to the holders of common stock, Series A Preferred Stock, Series B Preferred Stock and any other stock, the amount equal to $2.65the stated value per share whichof Series C Preferred Stock. The Company may increasenot 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 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 March31,2023 and September 30, 2022, the Company had 350 shares of Series C Preferred Stock outstanding, which were convertible into an aggregate of 100,08238,889 shares of the Company’s common stock in the event that Montage advances the Second Tranche. The 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 shall have the right to receive an equity buy-out of either $250 if only the First Tranche has been advanced or $375 if both the First Tranche and the Second Tranche have been advanced. If the equity buy-out is exercised, the Warrant will be surrendered to the Company for cancellation. The fair value of the Warrant was initially valued at $341 at the loan execution. The Warrant is classified as a liability with an offsetting entry to debt discounts, which will be amortized over the life of the Loan Agreement. Total amortization of the debt discount for the three months ended December 31, 2017 was $25.

8.   Other Long Term Liabilities

Deferred Rent

In connection with the lease in Massachusetts, the Company made an investment in leasehold improvements at this location of approximately $1.4 million, of which approximately $657 was funded by the landlord. The capitalized leasehold improvements are being amortized over the initial life of the lease. The improvements funded by the landlord are treated as lease incentives. Accordingly, the funding received from the landlord was recorded as a fixed asset addition and a deferred rent liability on the Condensed Consolidated Balance Sheets. As of December 31, 2017, $150 was reflected in Accrued Liabilities and $11 is reflected in Other long term liabilities on the Condensed Consolidated Balance Sheet. As of September 30, 2017, $154 was reflected in Accrued Liabilities and $43 is reflected in Other long term liabilities on the Condensed Consolidated Balance Sheet. The deferred rent liability is being amortized as a reduction of rent expense over the life of the lease.stock. 

 

Warrant Liability

The warrant issued to Montage Capital is included in Other Long Term Liabilities in the Condensed Consolidated Balance Sheet. The fair value of the warrant was valued at the loan execution date in the amount of $341 and will be revalued at the end of each reporting period to fair value. The fair value at December 31, 2017 was $338. Changes in fair value are recorded as expense in the period the change occurs.

9.   Shareholders’ Equity

Series D Convertible Preferred Stock

 

In October 2014, theThe Company sold 200,000has designated 4,200 shares of its preferred stock as Series D Convertible Preferred Stock (“Series D Preferred Stock”).  The shares of Series A convertible preferred stock (the “Preferred Stock”) at a purchase price of $10.00 per share for gross proceeds of $2.0 million in a private placement. The shares ofD 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 to (i) to the number of shares of Series D Preferred Stock to be converted, multiplied by the stated value of $10.00 (the “Stated Value”)$1,000 and (ii) divided by the conversion price in effect at the time of conversion. The current conversion price isCompany $16.25,may not effect, and is subjecta holder will not be entitled to adjustment inconvert, the event of stock splits or stock dividends. Any accrued but unpaid dividends on the shares ofSeries D Preferred Stock or exercise any Series D Preferred Warrants, which, upon giving effect to be converted shall also be converted in common stock at thesuch conversion price. A mandatory provision also may provide that the Company will have the right to require the holders to convert shares of Preferred Stock into Conversion Shares ifor exercise, would cause (i) the Company’s common stock has closed at or above $32.50 per share for ten consecutive trading days and (ii) the Conversion Shares are (A) registered for resale on an effective registration statement or (B) may be resold pursuant to Rule 144.Asaggregate number ofDecember 31, 2017, a total of 1,636 preferred shares have been converted to 1,007 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, 2023 and September 30, 2022, the Company had no shares of Series D Preferred Stock outstanding.

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. 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. The 2016 Plan provides for the issuance in the aggregate of up to 1,650,000 shares of common stock associated with awards granted under the Stock Incentive Plan. As of March 31, 2023, there were 1,184,538 options outstanding and 212,407 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 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, 2023 and 2022, compensation expense related to share-based payments was as follows:

  

Three Months Ended
March 31,

  

Six Months Ended
March 31,

 
  

2023

  

2022

  

2023

  

2022

 

Cost of revenue

 $1  $5  $6  $13 

Operating expenses

  83   47   171   102 
  $84  $52  $177  $115 

As of March 31, 2023, the Company had approximately $0.6 million of unrecognized compensation costs related to unvested options, which is expected to be recognized over a weighted-average period of 1.9 years.

 

1615
Table of Contents

 

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 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 Company may pay dividends in cash or Preferred Stock. Effective January 1, 2017, cumulative dividends are payable at a rate of 12% per year, as after two years, any Preferred Stock dividends increase from 6% to 12% per year. If the Company does not pay the dividends in cash, then the Company may pay dividends in any quarter by delivery of additional shares of Preferred Stock (“PIK Election”) up to 64,000 shares cumulatively. If the Company shall make the PIK Election with respect to the dividend payable, it shall deliver a number of shares of Preferred Stock equal to (A) the aggregate dividend payable to such holder as of the end of the quarter divided by (B) the lesser of (x) the then effective Conversion Price or (y) the average VWAP for the five (5) consecutive Trading Days prior to such dividend payment date. The Company shall have the right to force conversion of the Preferred Stock into shares of Common Stock at any time after the Common Stock trades in excess of $32.50 per share. The Preferred Shares shall vote with the Common on an as converted basis.

As of December 31, 2017, the Company has issued 52,563 preferred convertible shares (PIK shares) to the preferred shareholders. The Company elected to declare a PIK dividend for the next quarterly payment due January 1, 2018. The total PIK dividend declared for January 1, 2018 is 7,567 preferred stock shares at a dividend rate of 12%.

Stock Incentive Plans

The Company has granted common stock, common stock warrants, and common stock option awards (the “Equity Awards”) to employees, consultants, advisors and debt holders of the Company and to former owners and employees of acquired companies that have become employees of the Company. On April 29, 2016, the stockholders approved a new stock incentive plan, The 2016 Stock Incentive Plan (the “2016 Plan”). The 2016 Plan replaced an older plan that had expired in August 2016. The 2016 Plan authorizes the award of incentive stock options, non-statutory stock options, restricted stock, unrestricted stock, performance shares, stock appreciation rights and any combination thereof to employees, officers, directors, consultants, independent contractors and advisors of the Company. Initially, a total of 500,000 shares of the Company’s Common Stock is reserved for issuance under this new plan. As of December 31, 2017, there were 224,166 options outstanding under this plan and 275,834 shares available for future issuance.

Common Stock Warrants

 

The Company typically issues warrants to individual investors and placement agents to purchase shares of the Company’sCompany’s common stock in connection with public and private placement fund raising activities. Warrants mayalso be issued to individuals or companies in exchange for services provided forto the company.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 Sections 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.

Series A and 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 $4.00; (ii) Series B Warrants, which expired unexercised during the Company’s 2021 fiscal year, with an initial term of 24 months and an exercise price of $4.00; 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 $4.00 to purchase shares of the Company’s common stock to the Placement Agents. The Company maynot 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, 2023, the number of shares issuable upon exercise of the (i) Series A Warrants were 872,625 shares; (ii) Series C Warrants were 13,738 shares; (iii) the Placement Agent Warrants issued in connection with the Series C Preferred Stock were 11,992 shares; and (iv) Investor Warrants were 41,621 shares.

Series D Preferred Warrants – In May 2021, in connection with the issuance of the Company’s Series D Preferred Stock, the Company issued warrants to purchase the Company’s common stock. These warrants consisted of (i) warrants issued to investors in Series D Preferred Stock to purchase in the aggregate up to 592,106 shares of common stock with an initial term of five and a half years which ends on November 16, 2026 andan initial exercise price of $2.51 and (ii) Placement Agents warrants to purchase an aggregate of 179,536 shares of common stock with an initial term of five years which ends on May 12, 2026 and an initial exercise price of $2.85. Collectively, these warrants are referred to as the “Series D Preferred Warrants.”

The Company may not effect, and a holder will not be entitled to convert, the Series D Preferred Stock or exercise any Series D 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, 2023, 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 A and 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).

 

1716
Table of Contents

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

As of

During Decembersix months ended March 31, 2023, 2017, the total warrants outstanding were issued as follows: 227,655 warrants were issued to the placement agents in connection with private placements, 311,938 warrants were issued to individual investors in connection with private placements, debt issuances and bank guarantees, and 66,3152022, there were no warrants exercised and 26,605 Placement Agent Warrants were issued to Montage Capital. Certain of the Company’s officers and directors have also been issued warrants. Included in the total warrants outstanding are warrants to purchase 8,600 shares of common stock issued to the Company’s CEO and President, Roger Kahn, in connection with the November 2016 Private Placement, in which he purchased shares of common stock. Also included in the total warrants outstanding are warrants to purchase 152,812 shares of common stock issued to Michael Taglich. Michael Taglich is a member of the Board of Directors and a shareholder. Michael Taglich has been issued warrants in connection with his participation as an investor in private offerings and issuance of loans to the Company. He has also guaranteed $1.5 million in connection with the Company’s out of formula borrowings on its credit facility with Heritage Bank for which he received warrants totaling 80,000. Michael Taglich is also a principal of Taglich Brothers, Inc who have been the placement agents for many of the Company’s private placements.

exercised, respectively. 

 

Total warrants outstanding as DecemberMarch 31, 20172023, were as follows:

 

Type

 

Issue

Date

 

Shares

  

Price

 

Expiration

Financing (Montage)

 

10/10/2017

  1,327  $132.50 

10/10/2025

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

  41,621  $4.00 

10/19/2023

Investors

 

3/12/2019

  872,625  $4.00 

9/12/2024

Investors

 

3/12/2019

  13,738  $0.05 

9/12/2024

Placement Agent

 

3/12/2019

  11,992  $4.00 

9/12/2024

Placement Agent

 

2/4/2021

  31,564  $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

  1,757,629      

 

  

Issue

         

Type

 

Date

 

Shares

  

Price

 

Expiration

            

Investors

 

6/19/2013

  18,400  $31.25 

6/19/2018

Placement Agent

 

6/19/2013

  9,200  $31.25 

6/19/2018

Placement Agent

 

9/30/2013

  6,157  $32.50 

9/30/2018

Placement Agent

 

11/6/2013

  3,078  $32.50 

11/6/2018

Placement Agent

 

3/28/2014

  12,800  $26.25 

3/28/2019

Placement Agent

 

10/28/2014

  12,308  $16.25 

10/28/2019

Director/Shareholder

 

12/31/2014

  12,000  $20.00 

12/31/2019

Director/Shareholder

 

2/12/2015

  12,000  $20.00 

2/12/2020

Director/Shareholder

 

5/12/2015

  12,000  $20.00 

5/12/2020

Director/Shareholder

 

7/21/2015

  32,000  $8.75 

7/21/2018

Director/Shareholder

 

12/31/2015

  6,000  $20.00 

12/31/2020

Placement Agent

 

5/17/2016

  86,778  $3.75 

5/17/2021

Placement Agent

 

5/11/2016

  53,334  $3.75 

5/11/2021

Placement Agent

 

7/15/2016

  44,000  $4.60 

7/15/2021

Investors

 

11/9/2016

  213,538  $3.50 

5/22/2022

Director/Shareholder

 

12/31/2016

  6,000  $20.00 

12/31/2021

Financing

 

10/10/2017

  66,315  $2.65 

10/10/2025

Total

    605,908      

Summary of Option and Warrant Activity and Outstanding Shares

During the three months ended March 31, 2023 and 2022, no options were granted. During the six months ended March 31, 2023, the Company granted options to purchase 50,000 shares at an exercise price of $1.34, which vest ratably over a three-year period. During the six months ended March 31, 2022, the Company granted options to purchase 5,000 shares at an exercise price of $3.99, which vest ratably over a three-year period commencing on October 1, 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 periods ended are as follows:

  

Six months ended March 31,

 
  

2023

  

2022

 

Weighted-average fair value per share option

 $1.12  $2.96 

Expected life (in years)

  6.0   6.0 

Volatility

  108.5

%

  90.8

%

Risk-free interest rate

  3.8

%

  1.1

%

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.

A summary of combined restricted stock, stock option and warrant activity for the three months ended March 31, 2023, is as follows:

  

Restricted Stock

  

Stock Options

  

Stock Warrants

 
          

Weighted
Average

      

Weighted
Average

 
  

Awards

  

Awards

  

Exercise
Price

  

Warrants

  

Exercise
Price

 

Outstanding, October 1, 2022

  200,000   1,157,927  $3.49   1,757,629  $3.64 

Granted

  -   50,000   1.34   -   - 

Exercised

  -   -   -   -   - 

Forfeited

  -   (23,333

)

  2.51   -   - 

Expired

  -   (56

)

  1,946.43   -   - 

Outstanding, March 31, 2023

  200,000   1,184,538  $3.33   1,757,629  $3.64 

Options vested and exercisable, March 31, 2023

      807,035  $4.00         

As of March 31, 2023, there was no aggregate intrinsic value of options outstanding and exercisable, and the weighted-average remaining contractual term was 8.0 and 7.6 years, respectively.
 

1817
Table of Contents

 

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

Summary of Option and Warrant Activity and Outstanding Shares

 

  

Stock Options

  

Stock Warrants

 
      

Weighted

      

Weighted

 
      

Average

      

Average

 
      

Exercise

      

Exercise

 
  

Options

  

Price

  

Warrants

  

Price

 
                 

Outstanding, September 30, 2017

  450,646  $7.02   539,593  $8.18 

Granted

  800  $2.92   66,315  $2.65 

Exercised

  -  $-   -   - 

Forfeited or expired

  (1,520) $(4.82)  -   - 

Outstanding, December 31, 2017

  449,926  $7.02   605,908  $7.57 

19.0.   Net LossIncome (Loss) Per Share Attributable to Common Shareholders

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

  

Three Months Ended

 

(in thousands, except per share data)

 

December 31,

 
  

2017

  

2016

 

Net loss

 $(430) $(408)

Accrued dividends on convertible preferred stock

  (75)  (68)

Net loss applicable to common shareholders

 $(505) $(476)
         

Weighted average common shares outstanding - basic and diluted

  4,200   4,012 
         

Net loss per share attributable to common shareholders:

        

Basic and diluted

 $(0.12) $(0.12)

 

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

For the three months ended December 31, 2017, all options to purchase shares of the Company’s common stock were considered anti-dilutive, as the options were all valued at less than the current market price. Warrants to purchase 605,908 shares of common stock and the Series A convertible preferred stock sharesthat are considered anti-dilutive.

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

(in thousands, except per share data)

 

Three Months Ended
March 31,

  

Six Months Ended
March 31,

 
  

2023

  

2022

  

2023

  

2022

 

Numerator:

                

Net income (loss) – basic earnings per share

 $(511

)

 $346  $(591) $2,217 

Effect of dilutive securities:

                

Change in fair value of in-the-money warrant derivative liabilities

  (3

)

  (4

)

  (5

)

  (1,144

)

Net income (loss) applicable to common shareholders - diluted earnings per share

 $(514

)

 $342  $(596

)

 $1,073 
                 

Denominator:

                

Weighted-average shares outstanding for basic earnings per share

  10,417,609   10,204,276   10,417,609   10,196,550 

Effect of dilutive securities:

                

Options

  -   84,361   -   163,530 

Warrants

  13,101   13,384   13,157   24,817 

Preferred stock

  -   38,889   -   38,889 

Weighted-average shares outstanding for diluted earnings per share

  10,430,710   10,340,910   10,430,766   10,423,786 
                 

Basic net income (loss) per share

 $(0.05

)

 $0.03  $(0.06

)

 $0.22 

Diluted net income (loss) per share

 $(0.05

)

 $0.03  $(0.06

)

 $0.10 

Potential common stock equivalents excluded from the computation of diluted net income (loss) per share because their inclusion would have also been excludedanti-dilutive were as theyfollows (in shares):

  

Three Months Ended
March 31,

  

Six Months Ended
March 31,

 
  

2023

  

2022

  

2023

  

2022

 

Stock options

  1,184,538   263,938   1,184,538   242,938 

Warrants

  1,743,891   1,748,162   1,743,891   1,156,056 

Series C Convertible Preferred Stock

  350   -   350   - 

10.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 anti-dilutive toaffected by economic factors.

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

  

Three Months Ended
March 31,

  

Six Months Ended
March 31,

 

Revenues:

 

2023

  

2022

  

2023

  

2022

 

United States

 $3,331  $3,121  $6,626  $6,481 

International

  763   996   1,551   1,922 
  $4,094  $4,117  $8,177  $8,403 

The largest concentration within the Company’s net loss.international revenue geography is within Canada.

 

For theLong-lived assets located in foreign jurisdictions aggregated approximately $6.3 million and $6.7 million as of three months ended DecemberMarch 31, 2016,2023 all options to purchase shares of the Company’s common stock were considered anti-dilutive, as the options were all valued at less than the current market price. Warrants to purchaseand 548,281September 30, 2022, shares of common stock and the Series A convertible preferred stock shares have also been excluded as they are anti-dilutive to the Company’s net loss.respectively.

 

1918
Table of Contents

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

The Company’s revenue by type is as follows:

  

Three Months Ended
March 31,

  

Six Months Ended
March 31,

 

Revenues:

 

2023

  

2022

  

2023

  

2022

 

Subscription

 $2,869  $2,953  $5,701  $6,032 

Maintenance

  146   120   282   237 

Hosting

  258   233   519   454 
Digital engagement services  821   811   1,675   1,680 
  $4,094  $4,117  $8,177  $8,403 

For the 1three and 1six.  Income Taxes months ended March 31, 2023 and 2022,no customers exceeded 10% of the Company’s total revenue.

 

Income tax expense was $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 1not yet been recognized. Deferred revenue that is expected to be recognized during the succeeding 12-month period is recorded as current deferred revenue, and $12the remaining portion is recorded as noncurrent deferred revenue included in Other long-term liabilities.  

The following table summarizes the classification and net change in deferred revenue as of and for the three and sixmonths ended DecemberMarch 31, 2017 2023:and

  

Deferred Revenue

 
  

Current

  

Long-Term

 

Balance as of October 1, 2022

 $1,943  $384 

Increase (decrease)

  (30

)

  (12

)

Balance as of December 31, 2022

 $1,913  $372 

Increase (decrease)

  507   (24)

Balance as of March 31, 2023

 $2,420  $348 

2016.11.Income Taxes

Income tax expense consists of the estimated liability for federal and state income taxes owed by the Company, including the alternative minimum tax.Company.  Net operating loss carry forwardscarryforwards are estimated to be sufficient to offset additionalany potential taxable income for all periods presented. During the three months ended March 31, 2023 and 2022, the Company recognized an income tax expense of $10 and $5, respectively, and during the six months ended March 31, 2023 and 2022, the Company recognized an income tax of $16 and $8, respectively.

12.Leases

 

The Company leases facilities in the United States for its corporate and regional field offices. During the three and six months ended March 31, 2023, the Company was also a lessee/sublessor for certain office locations.

The components of net lease costs were as follows:

  

Three Months Ended
March 31,

  

Six Months Ended
March 31,

 
  

2023

  

2022

  

2023

  

2022

 

Condensed Consolidated Statement of Operations:

                

Operating lease cost

 $50  $34  $100  $78 

Variable lease cost

  10   11   20   27 

Less: Sublease income, net

  (19

)

  (20

)

  (37

)

  (51

)

Total

 $41  $25  $83  $54 

Cash paid for amounts included in the measurement of lease liabilities was $116 thousand and $177 thousand for the six months ended March 31, 2023 and 2022, all of which represents operating cash flows from operating leases. As of March 31, 2023, the weighted average remaining lease term was 3.3 years and the weighted average discount rate was 7.0%.

19

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

At March 31, 2023, future minimum rental commitments under non-cancelable leases with initial or remaining terms in excess of one year were as follows:

  

Operating

Leases

  

Receipts
Subleases

  

Net Leases

 

Fiscal year:

            

2023 (remaining)

 $117   37   80 

2024

  157   25   132 

2025

  141   -   141 

2026

  72   -   72 

2027

  61   -   61 

Thereafter

  9   -   9 

Total lease commitments

  557   62   495 

Less: Amount representing interest

  (68

)

        

Present value of lease liabilities

  489         

Less: current portion

  (186

)

        

Operating lease liabilities, net of current portion

 $303         

13.Commitments and Contingencies

The Company leases certain of its buildings under noncancelable lease agreements. Refer to the Leases footnote (Note 12) of the Notes to the Condensed Consolidated Financial Statements for additional information.

The Company frequently warrants that the technology solutions it develops for its clients will operate in accordance with the project specifications without defects for a specified warranty period, subject to certain limitations that the Company believes are standard in the industry. In the event that defects are discovered during the warranty period, and none of the limitations apply, the Company is obligated to remedy the defects until the solution that the Company provided operates within the project specifications. The Company is not typically obligated by contract to provide its clients with any refunds of the fees they have paid, although a small number of its contracts provide for the payment of liquidated damages upon default. The Company has purchased insurance policies covering professional errors and omissions, property damage and general liability that reduce its monetary exposure for warranty-related claims and enable it to recover a portion of any future amounts paid.

The Company’s contracts typically provide for testing and client acceptance procedures that are designed to mitigate the likelihood of warranty-related claims, although there can be no assurance that such procedures will be effective for each project.  The Company has not paid any material amounts related to warranties for its solutions.  The Company sometimes commits unanticipated levels of effort to projects to remedy defects covered by its warranties.  The Company’s estimate of its exposure to warranties on contracts is immaterial as of March 31, 2023 and September 30, 2022.

The Company’s agreements with customers generally require the Company to indemnify the customer against claims in which the Company’s products infringe third-party patents, copyrights, or trademarks and indemnify against product liability matters. As of March 31, 2023 and September 30, 2022, the Company has not experienced any losses related to the indemnification obligations and no significant claims with respect thereto were outstanding.  The Company does not provide for U.S. income taxes onexpect significant claims related to the undistributed earningsindemnification obligations and, consequently, concluded that the fair value of these obligations is negligible, and no related reserves were established.

Litigation

The Company is subject to ordinary routine litigation and claims incidental to its Indian subsidiary, which business. As of March 31, 2023, the Company considers to be a permanent investment.was not engaged with any material legal proceedings.

20

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

  

 

 

114.2.  Related Party Transactions

 

In October 2013, Mr. Michael Taglich joined the Board of Directors. Michael Taglich is the Chairman and President of Taglich Brothers, Inc. (“Taglich Brothers”), a New York based securities firm. Taglich Brothers Inc were the Placement Agents for many of the Company’sCompany’s private offerings and debt issuances. In connection with previous private offerings and debt issuances which occurred prior to the fiscal years presented in 2012,2013,2014, and 2016. Theythese consolidated financial statements, Taglich Brothers were also thegranted Placement Agent for the Company’sWarrants to purchase 10,926 shares of common stock at a weighted average price of $761.61 per share. As of $3March 31, 2023, million subordinated debt offering in 2013 and the Series A Preferred stock sale in 2015.Michael Taglich beneficially owns approximately 22% of Bridgeline stock. Michael Taglich has also guaranteed $1.5 million in connection with the Company’s out of formula borrowings on its credit facility with Heritage Bank. Michael Taglich’s brother, Robert Taglich is a former member3.6% of the Company’s Boardstock.

In consideration of Directorsprevious loans made by Michael Taglich to the Company and beneficially owns approximatelythe personal guaranty on a former 8%third-party credit facility no longer maintained by the Company, Mr. Taglich has been issued warrants to purchase common stock totaling 1,080 shares at an exercise price of $1,000 per share.

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 per month thereafter, cancellable at any time. Taglich Brothers Inc. could also earn a success fee ranging from $200 thousand for a revenue target acquisition of under $5 million up to $1 million for an acquisition target over $200 million.

Michael Taglich purchased 350 units in the amount of $350 of Series C Preferred Stock and associated warrants in the private transaction consummated on March 13, 2019. Mr. Taglich’s purchase was subject to stockholder approval pursuant to Nasdaq Marketplace Rule 5635(c), for which approval by the stockholders of the Company was obtained on April 26, 2019.

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

  

 

115.3Subsequent Events.  Legal Proceedings

 

The Company isevaluated 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.

21

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

Item 2.

Management’s 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 ordinary routine litigationchange. 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 claims incidental to its business. Asvariations or negatives of December 31, 2017, these words. These statements appear in a number of places and include statements regarding the Company was not engaged with any material legal proceedings.

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This section containsBridgeline Digital, Inc. These forward-looking statements that involveare not guarantees of future results and are subject to risks, uncertainties and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of a variety of factors and risksassumptions, including, the impact of the weakness in the U.S. and international economies on our business, our inabilitybut not limited to, manage our future growth effectively or profitably, fluctuations in our revenue and quarterly results, our license renewal rate, the impact of competitionthe COVID–19 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 marginsprofitability; instability in the financial markets, including the banking sector; our liability for any unauthorized access to our data or market share, the limited marketour 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,stock; the ability to maintain our listing on the NASDAQ Capital Market, the volatility of the market price of our common stock, the ability to raise capital, the performance of our products, our ability to respond to rapidly evolving technology and customer requirements, our ability to protect our proprietary technology, the security of our software and response to cyber security risks, our ability to meet our financial obligations and commitments, our dependence on our management team and key personnel, our ability to hire and retain future key personnel,Market; or our ability to maintain an effective system of internal controls or our ability to respond to government regulations. These andas well as other risks are more fully described herein and in our other 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, 2022, 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 auditedunaudited condensed consolidated financial statements and related notes prepared in accordanceaccordance with United States generally accepted accounting principles.

Overview

 

BridgelineWe offer a suite of marketing technology products that help companies grow online revenue by driving more traffic to their websites, converting more visitors to purchasers, and increasing average order value.

HawkSearch is a site search, recommendation, and personalization application, built for marketers, merchandisers, and developers to enhance, normalize, and enrich an online customer's content search and product discovery experience. HawkSearch leverages advanced artificial intelligence, machine learning and industry-leading merchandising features to deliver accurate and highly relevant results and recommendations derived from multiple data sources.

Celebros Search is a commerce-oriented site search product that provides Natural Language Processing with artificial intelligence to present relevant search results based on long-tail keyword searches with support for multiple languages.

Woorank is a Search Engine Optimization (“SEO”) audit tool that generates an instant performance audit of the site’s technical, on-page, and off-page SEO.  Woorank’s clear, actionable insights help companies increase their search engine ranking, while boosting website traffic, audience engagement, conversion, and customer retention rates.

Our Unbound platform is a Digital The Digital Engagement Company™, enables its customers to maximize the performance of their mission critical websites, intranets, and online stores. Bridgeline’s Unbound (iAPPS®) platform deeply integratesExperience Platform that includes Web Content Management, eCommerce, eMarketing, Social Media management,Digital Marketing, and Web Analytics to help marketers deliver online experiences that attract, engage and convert their customers across all digital channels. Bridgeline’s iAPPSAnalytics. The Unbound platform, combined with its digitalprofessional services, assists customers in maximizing on-linepowering engaging digital experiences that drive lead generation, increase revenue, improvingimprove customer service and loyalty, enhancingenhance employee knowledge, and reducingreduce operational costs. The iAPPSds (“distributed subscription”) product is a platform that empowers franchise and large dealer networks with state-of-the-art web engagement management while providing superior oversight of corporate branding. iAPPSds deeply integrates content management, eCommerce, eMarketing and web analytics and is a self-service web platform that is offered to each authorized franchise or dealer for a monthly subscription fee.

 

The iAPPSTruPresence product empowers large franchises, brand networks, and other multi-unit organizations to manage a large hierarchy of digital properties at scale. TruPresence provides centralized and distributed management of content and products from parent sites down to multiple child sites for consistency in branding and messaging, while also enabling regional / local site owners to manage the local messaging, products and promotions specific to their local market.

OrchestraCMS is the only content and digital experience platform built 100% native on Salesforce and helps customers create websites and intranets for their customers, partners, and employees. The software uniquely combines content with business data, processes and applications across any channel or device, including Salesforce Communities, social media, portals, intranets, websites, applications and services.

All of Bridgeline’s software is deliveredavailable through a cloud-based SaaS (“Software as a Service”Service (“SaaS”) multi-tenant business model, whose flexible architecture provides customers with state ofhosting and support. Additionally, Unbound and HawkSearch have the art deployment providing maintenance, daily technical operation and support; oroption to be available via a traditional perpetual licensing business model, in which the iAPPS software residescan reside on a dedicated server ininfrastructure either on premise at the customer’s facility, or manage-hosted by Bridgeline via a cloud-based, dedicated hosted services model.

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

 

Bridgeline Digital was incorporated under the laws of the State of Delaware on August 28, 2000.

 

21
22
Table of Contents

 

Locations

 

The Company’sCompany’s corporate office is located in Burlington,Woburn, Massachusetts.  The Company maintains regional field offices serving the following geographical locations: Woodbury, New York; Rosemont, Illinois; Atascadero, California; Ontario, Canada; and Brussels, Belgium.

The Company has onefour wholly-owned subsidiary,subsidiaries: Bridgeline Digital Pvt. Ltd., located in Bangalore, India.

Reverse Stock Split

On June 29, 2017, the Company’s ShareholdersIndia; Bridgeline Digital Canada, Inc., located in Ontario, Canada; Hawk Search Inc. located in Rosemont, Illinois and the Board of Directors approved a reverse stock split pursuant to which all classes of our issued and outstanding shares of common stock at the close of business on such date were combined and reconstituted into a smaller number of shares of common stockBridgeline Digital Belgium BV, located in a ratio of 1 share of common stock for every 5 shares of common stock (“1-for-5 reverse stock split”). The 1-for-5 reverse stock split was effective as of close of business on July 24, 2017 and the Company’s stock began trading on a split-adjusted basis on July 25, 2017.

The reverse stock split reduced the number of shares of the Company’s common stock currently outstanding from approximately 21 million shares to approximately 4.2 million shares. Proportional adjustments have been made to the conversion and exercise prices of the Company’s outstanding convertible preferred stock, warrants, restricted stock awards, and stock options, and to the number of shares issued and issuable under the Company’s Stock Incentive Plans. Upon the effectiveness of the 1-for-5 reverse stock split, each five shares of the Company’s issued and outstanding common stock were automatically combined and converted into one issued and outstanding share of common stock, par value $.001. The Company did not issue any fractional shares in connection with the reverse stock split. Instead, fractional share interests were rounded up to the next largest whole share. The reverse stock split does not modify the rights or preferences of the common stock. The number of authorized shares of the Company’s common stock remains at 50 million shares and the par value remains $0.001. Our consolidated financial statements have been retroactively adjusted to reflect the effects of the 1-for-5 reverse stock split.

Brussels, Belgium.

 

Customer Information

 

We currently have over 3,0002,000 active customers. For the three and six months ended DecemberMarch 31, 2017, two customers represented 11%2023 and 12%2022, no customer exceeded 10% of the Company’s total revenue. For the three months ended December 31, 2016, one customer represented 12% of the Company’s total revenue.

 

Results of Operations for the Three and Six Months Ended DecemberMarch 31, 20120237compared to the Three and Six Months Ended DecemberMarch 31, 20120226

 

Total net revenue for each of the three months ended March 31, 2023 and 2022, was $4.1 million and $4.1 million, respectively. We had net income (loss) of ($0.5) million and $0.3 million for the three months ended DecemberMarch 31, 20172023 and 2022, respectively. Included in the three months ended December 31, 2016 was $4.0 million. We had a net loss of ($430) thousandincome (loss) for the three months ended DecemberMarch 31, 20172023 and 2022, was a gain of $0.2 million and $0.4 million, respectively, as a result of the change in the fair value of certain warrant liabilities. Basic and diluted net loss per share attributable to common shareholders was ($408) thousand0.05) for the three months ended DecemberMarch 31, 2016.  Net2023. Basic and diluted net loss per share applicableattributable to common shareholders was ($0.12)$0.03 for the three months ended DecemberMarch 31, 2017 and2022.

Total net revenue for the threesix months ended DecemberMarch 31, 2016.2023 and 2022, was $8.2 million and $8.4 million, respectively. We had net income (loss) of ($0.6) million and $2.2 million for the six months ended March 31, 2023 and 2022, respectively. Included in the net income (loss) for the six months ended March 31, 2023, was a gain of $0.5 million and $2.9 million, respectively, as a result of the change in the fair value of certain warrant liabilities. Basic and diluted net loss per share attributable to common shareholders was ($0.06) for the six months ended March 31, 2023. Basic net income per share attributable to common shareholders was $0.22 and diluted net income per share attributed to common shareholders was $0.10 for the six months ended March 31, 2022.

(in thousands)

 

Three Months Ended
March 31,

  

Six Months Ended
March 31,

 
                  $  

%

                  $  

%

 

Revenue

 

2023

  

%

  

2022

  

%

  

Change

  

Change

  

2023

  

%

  

2022

  

%

  

Change

  

Change

 

Subscription and perpetual licenses

 $3,273   80% $3,306   80% $(33)  (1%) $6,502   80% $6,723   80%  (221)  (3%)

Digital engagement services

  821   20%  811   20%  10   1%  1,675   20%  1,680   20%  (5)  (0%)

Total net revenue

  4,094       4,117       (23)  (1%)  8,177       8,403       (226)  (3%)
                                                 

Cost of revenue

                                                

Subscription and perpetual licenses

  840   26%  868   26%  (28)  (3%)  1,701   26%  1,697   25%  4   0%

Digital engagement services

  422   51%  466   57%  (44)  (9%)  840   50%  917   55%  (77)  (8%)

Total cost of revenue

  1,262    31%  1,334    32%   (72)  (5%)  2,541    31%   2,614    31%   (73)  (3%)

Gross profit

  2,832    69%   2,783    68%   49   2%  5,636    69%   5,789    69%   (153)  (3%)
                                                 

Operating expenses

                                                

Sales and marketing

  1,386   34%  1,267   31%  119   9%  2,595   32%  2,498   30%  96   4%

General and administrative

  756   18%  775   19%  (19)  (2%)  1,588   19%  1,648   20%  (60)  (4%)

Research and development

  926   23%  865   21%  61   7%  1,673   20%  1,724   21%  (101)  (6%)

Depreciation and amortization

  381   9%  416   10%  (35)  (8%)  759   9%  840   10%  (81)  (10%)

Restructuring and acquisition related expenses

  45   1%  66   2%  (21)  (32%)  45   1%  164   2%  (119)  (73%)

Total operating expenses

  3,494       3,389       105   3%  6,660       6,874       (214)  (3%)
                                                 

Loss from operations

  (662)      (606)      (56)  9%  (1,024)      (1,085)      61   (6%)

Change in fair value of contingent consideration, interest expense and other, net

  (10)      523       (533)  (102%)  (19)      435       (454)  (104%)

Change in fair value of warrant liabilities

  171       434       (263)  (61%)  468       2,875       (2,407)  (84%)

Income (loss) before income taxes

  (501)      351       (852)  (243%)  (575)      2,225       (2,800)  (126%)

Provision for income taxes

  10       5       5   100%  16       8       8   100%

Net income (loss)

 $(511)     $346      $(857)  (248%) $(591)     $2,217      $(2,808)  (127%)

Non-GAAP Measure:

                                                

Adjusted EBITDA

 $(144)     $(72)     $(72)  100% $(29)     $34      $(63)  (185%)

 

22

  

Three Months

  

Three Months

         
  

Ended

  

Ended

         
  

December 31,

  

December 31,

  $  

%

 
(in thousands) 

2017

  

2016

  

Change

  

Change

 

Revenue

                

Digital engagement services

 $2,060  $2,026  $34   2%

% of total revenue

  52%  51%        

Subscription and perpetual licenses

  1,606   1,725   (119)  (7%)

% of total revenue

  40%  43%        

Managed service hosting

  303   240   63   26%

% of total revenue

  8%  6%        

Total revenue

  3,969   3,991   (22)  (1%)
                 

Cost of revenue

                
                 

Digital engagement services

  1,397   1,128   269   24%

% of digital engagement revenue

  68%  56%        

Subscription and perpetual licenses

  480   496   (16)  (3%)

% of subscription and perpetual licenses revenue

  30%  29%        

Managed service hosting

  80   71   9   13%

% of managed service hosting

  26%  30%        

Total cost of revenue

  1,957   1,695   262   15%

Gross profit

  2,012   2,296   (284)  (12%)

Gross profit margin

  51%  58%        
                 

Operating expenses

                

Sales and marketing

  1,104   1,294   (190)  (15%)

% of total revenue

  28%  32%        

General and administrative

  736   791   (55)  (7%)

% of total revenue

  19%  20%        

Research and development

  407   360   47   13%

% of total revenue

  10%  9%        

Depreciation and amortization

  108   185   (77)  (42%)

% of total revenue

  3%  5%        

Restructuring expenses

  -   31   (31)  (100%)

% of total revenue

  0%  1%        

Total operating expenses

  2,355   2,661   (306)  (11%)

% of total revenue

  59%  67%        
                 

Loss from operations

  (343)  (365)  22   (6%)

Interest and other expense, net

  (86)  (31)  (55)  177%

Loss before income taxes

  (429)  (396)  (33)  8%

Provision for income taxes

  1   12   (11)  (92%)

Net loss

 $(430) $(408) $(22)  5%
                 

Non-GAAP Measure

                

Adjusted EBITDA

 $(94) $10  $(104)  (1,040%)

 

Revenue

 

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

Digital Engagement Services

Digital engagement services revenue is comprised of iAPPS(ii) digital engagement related services and other digital engagement related services generated from non-iAPPS related engagements. In total, revenue from digital engagement services increased $34 thousand, or 2%, for the three months ended December 31, 2017 compared to three months ended December 31, 2016. Digital engagement services revenue as a percentage of total revenue increased to 52% from 51% for the three months ended December 31, 2017 compared to the prior period.  The increase as a percentage of total revenue is attributable to the decreases in subscription and license revenue for the three months ended December 31, 2017 compared to the prior quarter.services.

Subscription and Perpetual Licenses

 

Revenue from subscription (SaaS) and perpetual licenses for the three months ended March 31, 2023 of $3.3 million decreased $119 thousand, or 7%, to $1.6slightly from $3.3 million for the three months ended DecemberMarch 31, 2017 compared to $1.72022. Revenue from subscription (SaaS) and perpetual licenses for the six months ended March 31, 2023 of $6.5 million decreased $0.2 million or 3%, from $6.7 million for the threesix months ended DecemberMarch 31, 2016.2022. The decrease for the threesix months ended DecemberMarch 31, 20172023 compared to the prior period is a decline inpartially resulted from $0.1 million of perpetual licenses as demand for perpetual licenses can vary and we did not sell any perpetual licenseslicense sales in the three months ended December 31, 2017.prior year period. Subscription and perpetual license revenue as a percentage of total revenue decreased to 40%remained consistent at 80% for the three and six months ended March 31, 2023 and 2022.

Digital Engagement Services

Revenue from digital engagement services of $0.8 million for the three months ended DecemberMarch 31, 20172023 increased slightly from 43% compared to the three months ended December 31, 2016. The decrease as a percentage of revenues is attributable to the decreases in iAPPS subscriptions and perpetual licenses.

Managed Service Hosting

Revenue from managed service hosting increased $63 thousand, or 26%, to $303 thousand$0.8 million for the three months ended DecemberMarch 31, 2017 compared to $240 thousand2022. Revenue from digital engagement services for the threesix months ended DecemberMarch 31, 2016. The increase is due to new hosting contracts for iAPPs perpetual licenses sold in fiscal 2017. Managed2023 and 2022 was $1.7 million. Digital engagement services revenue as a percentage of total revenue increased to 8% forremained consistent at 20% during the three and six months ended DecemberMarch 31, 2017 from 6% compared to the three months ended December 31, 2016. The increase as a percentage of revenue is attributable to the increase in iAPPS customer hosting contracts.2023 and 2022.

 

Costs

Cost of Revenue

 

TotalTotal cost of revenue increased $262 thousand to $2.0 million or 15% for the three months ended December 31, 2017 compared to $1.7of $1.3 million for the three months ended DecemberMarch 31, 2016. The gross profit margin declined to 51% for the three months ended December 31, 2017 compared to 58% for the three months ended December 31, 2016. The decline2023 decreased slightly from $1.3 million in the gross profit margin for the three months ended December 31, 2017 compared to the three months ended December 31, 2016 is attributable to an increase inprior comparable period. Total cost of digital engagement services.

Costrevenue of Digital Engagement Services

Cost of digital engagement services increased $269 thousand, or 24%, to $1.4$2.5 million for the threesix months ended DecemberMarch 31, 20172023 decreased $0.1 million, or 3%, compared to $1.1$2.6 million forin the three months ended December 31, 2016. The cost of digital engagement services as a percentage of digital engagement services revenue increased to 68% from 56% compared to the three months ended December 31, 2016.  The increase is due to an increase in both internal costs and third party subcontractors that were incurred at a lower gross margin in order to complete a project for a strategic customer.comparable period.

Cost of Subscription and Perpetual License

 

Cost of subscription and perpetual licenses decreased $16 thousand, or 3%, to $480 thousandof $0.8 million for the three months ended DecemberMarch 31, 2017 compared to $496 thousand2023 decreased 3% from $0.9 million for the three months ended DecemberMarch 31, 2016.2022. The cost of subscription and perpetual licenses as a percentage of subscription and perpetual license revenue remained consistent at 26% for the three months ended March 31, 2023 and 2022. 

Cost of subscription and perpetual licenses of $1.7 million for the six months ended March 31, 2023 remained consistent with the prior comparable period. The cost of subscription and perpetual licenses as a percentage of subscription and perpetual license revenue increased to 30%26% for the six months ended March 31, 2023 from 29% compared25% for the six months ended March 31, 2022. 

The increase as a percentage of revenues is primarily due to the three months ended December 31, 2016. 

overall decrease in subscription and perpetual license revenue.

 

Cost of Managed Service HostingDigital Engagement Services

 

Cost of managed service hosting increased $9 thousand, or 13%, to $80 thousanddigital engagement services of $0.4 million for the three months ended DecemberMarch 31, 2017 compared to $71 thousand2023 decreased 9% from $0.5 million for the three months ended DecemberMarch 31, 2016.2022. The cost of managedtotal digital engagement services as a percentage of managedtotal digital engagement services revenue decreased to 26%51% from 30% compared57%.

Cost of digital engagement services of $0.8 million for the six months ended March 31, 2023 decreased 8% from $0.9 million for the six months ended March 31, 2022. The cost of total digital engagement services as a percentage of total digital engagement services revenue decreased to 50% from 55%.

The decrease in cost of digital engagement services in each of the three and six month periods is primarily due to an overall decrease in personnel costs.

Gross Profit

Gross profit of $2.8 million for the three months ended DecemberMarch 31, 2016.2023 increased 2%, compared to $2.8 million for the three months ended March 31, 2022. The percentage decrease is attributablegross profit margin was 69% and 68% for the three months ended March 31, 2023 and 2022, respectively. Gross profit of $5.6 million decreased $0.2 million, or 3%, for the six months ended March 31, 2023, compared to $5.8 million for the transitionsix months ended March 31, 2022. The gross profit margin was consistent of our network operations center from a co-managed facility at Internap to a cloud-based model with Amazon Web Services.69% for the six months ended March 31, 2023 and 2022.

.

 

Operating Expenses

 

Sales and Marketing Expenses

 

Sales and marketing expenses decreased $190 thousand to $1.1of $1.4 million or 15%, for the three months ended DecemberMarch 31, 2017 compared to2023 increased 9% from $1.3 million for the three months ended DecemberMarch 31, 2016.2022. Sales and marketing expenses represented 28% and 32%expense as a percentage of total revenue was 34% for the three months ended DecemberMarch 31, 20172023 and 2016, respectively. The decreases31% for the three months ended DecemberMarch 31, 20172022.

Sales and marketing expenses of $2.6 million for the six months ended March 31, 2023 increased 4% from $2.5 million for the six months ended March 31, 2022. Sales and marketing expense as a percentage of total revenue was 32% for the six months ended March 31, 2023 and 30% for the six months ended March 31, 2022.

The increases in expenses compared to the three months ended December 31, 2016prior period is primarily attributable to decreases in sales personneladditional marketing spend on leads and marketing expenses.conferences.

24

 

General and Administrative Expenses

 

GeneralGeneral and administrative expenses decreased $55 thousand, or 7%, to $736 thousandof $0.8 million for the three months ended DecemberMarch 31, 2017 compared to $791 thousand2023 decreased 2% from $0.8 million for the three months ended DecemberMarch 31, 2016.2022. General and administrative expenses represented 19% and 20%expense as a percentage of total revenue was 18% for the three months ended DecemberMarch 31, 20172023 and 2016, respectively. 19% for the three months ended March 31, 2022.

General and administrative expenses of $1.6 million for the six months ended March 31, 2023 decreased 4% from $1.6 million for the three months ended March 31, 2022. General and administrative expense as a percentage of total revenue was 19% for the three months ended March 31, 2023 and 20% for the three months ended March 31, 2022.

The decrease in expense wascosts in both the three and six month comparable period is primarily due to decreases in headcount and personnel expenses.lower external professional fees.

 

Research and Development

 

Research and development expense increased $47 thousand, or 13%, to $407 thousandexpenses of $0.9 million for the three months ended DecemberMarch 31, 2017 compared to $360 thousand2023 increased 7%, from $0.9 million for the three months ended DecemberMarch 31, 2016.2022. Research and development expenses represented 10% and 9%as a percentage of total revenue was 23% for the three months ended DecemberMarch 31, 20172023 and 2016, respectively. The increase in research21% for the three months ended March 31, 2022.

Research and development expenseexpenses of $1.7 million for the six months ended March 31, 2023 decreased $0.1 million, or 3%, from $1.7 million for the six months ended March 31, 2022. Research and development expenses as a percentage of total revenue decreased to 20% for the six months ended March 31, 2023 from 21% for the six months ended March 31, 2022.

The changes for each of the comparable periods is dueprimarily attributable to an increase in compensation expenses.personnel costs.

 

Depreciation and Amortization

 

Depreciation and amortization expense decreased $77 thousand, or 42% to $108 thousandof $0.4 million for the three months ended DecemberMarch 31, 2017 compared to $185 thousand2023 was 8% lower than the $0.4 million for the three months ended DecemberMarch 31, 2016.2022. Depreciation and amortization hasas a percentage of total revenue decreased due to asset retirements related to the termination and closing of offices, as well as reductions in capital expenditures.  Depreciation and amortization represented 3% and 5% of revenue9% for the three months ended DecemberMarch 31, 2017 and 2016.   

Restructuring Expenses

Commencing in fiscal 2015, the Company’s management approved, committed2023, compared to and initiated plans to restructure and further improve efficiencies by implementing cost reductions. As part of these restructuring initiatives, we recorded $31 thousand10% for the three months ended DecemberMarch 31, 2016.2022. Depreciation and amortization expense of $0.8 million for the six months ended March 31, 2023 was 10% lower than the $0.8 million for the six months ended March 31, 2022. Depreciation and amortization as a percentage of total revenue decreased to 9% for the six months ended March 31, 2023, compared to 10% for the six months ended March 31, 2022. These decreases are primarily due to completion of amortization of certain intangible assets from prior business acquisitions.

 

Net LossRestructuring and Acquisition-Related Expenses

During the three and six months ended March 31, 2023, the Company incurred acquisition-related expenses of $45 thousand.   During the three and six months ended March 31, 2022, the Company incurred acquisition-related expenses of $66 thousand and $164 thousand, respectively. During the three and six months ended March 31, 2023, expenses incurred were primarily related to legal costs.  During the three and six months ended March 31, 2022, expenses incurred were related to further acquisition integrations.

 

Loss from operationsOperations

The loss from operations was ($343) thousand for three months ended December 31, 2017, compared to a loss of $(365) thousand in the prior period. Operating expenses decreased $306 thousand or 11%$0.7 million and $0.6 million for the three months ended DecemberMarch 31, 20172023 and 2022, an increase of $0.1 million or 9%. The loss from operations was $1.0 million for the six months ended March 31, 2023, compared to Decembera loss from operations of $1.1 million for the six months ended March 31, 2016. We have made concerted efforts to bring our operating expenses in line with projected revenues.2022, a decrease of $0.1 million or 6%.

 

Change in fair value of contingent consideration, interest expense and other, net

During the three and six months ended March 31, 2023, the change in fair value of contingent consideration, interest expense and other, net, decreased $0.5 million and $0.4 million, respectively, compared to the prior period. During the three and six months ended March 31, 2022, change in fair value of contingent consideration, interest expense and other, net, was $0.5 million and $0.4 million, respectively, and was primarily the result of changes in fair value of contingent consideration.

Change in fair value of warrant liabilities

The Company recognized a gain related to the change in fair value of warrant liabilities of $0.2 million and $0.4 million, for the three months ended March 31, 2023 and 2022, respectively. The Company recognized a gain related to the change in fair value of warrant liabilities of $0.5 million and $2.9 million, for the six months ended March 31, 2023 and 2022, respectively.

Provision for Income Taxes

 

The provision for income tax expensetaxes was $1 thousand and $12$10 thousand for the three months ended DecemberMarch 31, 20172023 and 2016,$5 thousand for the three months ended March 31, 2022, respectively. The provision for income taxes was $16 thousand for the six months ended March 31, 2023 and $8 thousand for the three months ended March 31, 2022, respectively. Income tax expense represents theconsists of estimated liability for federal and state income taxes owed includingby the alternative minimum tax.  We have netCompany.  Net operating loss (“NOL”) carryforwards and otherare estimated to be sufficient to offset any potential taxable income for all periods presented. A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax benefits that are available to offset future taxable income.asset will not be realized. The Company maintains a valuation allowance against its net deferred tax assets.

 


 

Adjusted EBITDA

 

We also measure our performance based on a non-GAAP (“Generally Accepted Accounting Principles”) measurement of earnings before interest, taxes, depreciation, and amortization, and before stock-based compensation expense, and impairment of goodwill and intangible assets, non-cash warrant related expenses, other income and expenses, change in fair value of derivative instruments, change in fair value of contingent consideration, 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 provideprovides a tool for evaluating our ongoing operations.

 

Adjusted EBITDA, however, is not a measure of operating performance under GAAPaccounting principles generally accepted in the United States of America (“U.S. GAAP”) and should not be considered as an alternative or substitute for U.S. GAAP profitability measures such as (i) income from operations and net income, or (ii) cash flows from operating, investing and financing activities, both as determined in accordance with U.S. GAAP. Adjusted EBITDA as an operating performance measure has material limitations sincebecause it excludes the financial statement impact of income taxes, net interest expense, income taxes, depreciation, amortization of intangibles, depreciation, stock-based compensation, goodwill impairment, changes in fair value of warrant liabilities, loss on disposal of assets, other amortization, changes in fair value of contingent consideration and restructuring charges, other amortization and stock-based compensation,acquisition related expenses, 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) income (which is the most directly comparable U.S. GAAP operating performance measure) to EBITDA, and EBITDA to Adjusted EBITDA (in thousands):

 

  

Three Months Ended

 
  

December 31,

 
  

2017

  

2016

 

Net loss

 $(430) $(408)

Provision for income tax

  1   12 

Interest expense, net

  86   31 

Amortization of intangible assets

  72   71 

Depreciation

  36   89 

Restructuring charges

  -   31 

Other amortization

  16   39 

Stock based compensation

  125   145 

Adjusted EBITDA

 $(94) $10 
  

Three Months Ended
March 31,

  

Six Months Ended
March 31,

 
  

2023

  

2022

  

2023

  

2022

 

Net income (loss)

 $(511

)

 $346  $(591

)

 $2,217 

Provision for income tax

  10   5   16   8 

Change in fair value of contingent consideration, interest expense and other, net

  10   (523)  19   (435

)

Change in fair value of warrants

  (171

)

  (434

)

  (468

)

  (2,875

)

Amortization of intangible assets

  344   396   686   797 

Depreciation and other amortization

  45   20   87   43 

Restructuring and acquisition related charges

  45   66   45   164 

Stock-based compensation

  84   52   177   115 

Adjusted EBITDA

 $(144

)

 $(72) $(29

)

 $34 

 

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

 

Liquidity and Capital Resources

 

Cash Flows

 

Operating Activities

 

Cash used inprovided by operating activities was $575 thousand$0.5 million for the threesix months ended DecemberMarch 31, 20172023, compared to cash used in operating activities of $293 thousand$0.9 million for the threesix months ended DecemberMarch 31, 2016. This increase2022. The change in the use of cash provided by operating activities, compared to the prior period, was primarily due to an increasechanges in accounts receivablepayable and decrease in accounts payable.deferred revenue.

 

Investing Activities

 

Cash used in investing activities was $8$16 thousand for the threesix months ended DecemberMarch 31, 2017 compared2023, related primarily to $21purchases of property and equipment. Cash used in investing activities was $76 thousand for the threesix months ended DecemberMarch 31, 2016.   We do not expect2022, related to expend significant dollars for computer equipment or to capitalize any software in the next twelve months.

capitalization costs and purchases of property and equipment.

 

Financing Activities

 

Cash provided byused in financing activities was $953 thousand for the three months ended December 31, 2017 compared to $1.1$0.6 million for the threesix months ended DecemberMarch 31, 2016.2023, primarily related to contingent consideration and long-term debt payments related to acquisitions completed during fiscal 2021. Cash provided byused in financing activities was $3.2 million for the threesix months ended DecemberMarch 31, 2017 is2022, primarily attributablerelated to a new term loan for gross proceedspayments of $1.0 million with Montage Capital II, L.P.long-term debt and deferred purchase price payable and contingent consideration payments.

 

26

 

Capital Resources and Liquidity Outlook

 

In connection with an acquisition of a business completed during the first quarter2021 fiscal year (WooRank), the Company assumed the outstanding long-term debt obligations of fiscal 2018, we entered into a Loanwhich approximately $0.8 million remains outstanding at March 31, 2023, with $0.2 million payable over the next twelve months.

The Company has historically incurred operating losses and Security Agreement with Montage Capital II, L.P. (“Montage Loan”).used cash on hand and from financing activities to fund operations as well as develop new products. The Montage LoanCompany believes that future revenues and cash flows will supplement its working capital and it has a thirty-six (36) month term which expires on October 10, 2020. an appropriate cost structure to support future revenue growth.

The Montage Loan provides forCompany may offer and sell, from time to time, in one or more offerings, up to $1.5$50 million of borrowingits debt or equity securities, or any combination thereof.  Such securities offerings may be made pursuant to the Company’s currently effective registration statement on Form S-3 (File No. 333-262764), which was initially filed with the Securities and Exchange Commission on February 16, 2022 and declared effective on March 4, 2022 (the “Shelf Registration”).  A complete description of the types of securities that the Company may sell is described in the formPreliminary Prospectus contained in the Shelf Registration.   As of a non-revolving term loan which may be used by the Company for working capital purposes. $1 million of borrowing was advanced on the date of closing. An additional $500 thousandthe filing of borrowing will be available atthis Quarterly Report, there are no active offerings for the sale or obligations to purchase any of the Company’s option insecurities pursuant to the eventShelf Registration.  There can be no assurances that the Company achieves certain financial milestones and is otherwise in compliance with its loan covenants. The Loan is subordinate towill offer any securities for sale or that if the Company’s senior debt facility with Heritage Bank of Commerce (“Heritage Bank”). We also have a borrowing facility with Heritage Bank from which we can borrow, and this line is subject to financial covenantsCompany does offer any securities that must be met.

We believe that the cash balance as of December 31, 2017 of $1.1 million as well as collections from accounts receivableit will be sufficient to meetsuccessful in selling any portion of the Company’s obligations for a minimum of twelve months from the financial statement issuance date. Our borrowing facility with Heritage Bank is subject to financial covenants that must be met. It is not certain that all or part of this line will be available to us in the future; and other sources of financing may not be available to us insecurities offered on a timely basis if at all, or on terms acceptable to us.  If we failFurther, our ability to obtain acceptable funding when needed, weoffer or sell such securities may not have sufficient resources to fund our normal operations, and this would have a material adverse effect on our business.be limited by rules of the NASDAQ Capital Market.

Off-Balance Sheet Arrangements

 

We doThe Company does 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.persons.

Contractual Obligations

 

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 referredlease all of our office locations. The gross obligations for operating leases is $0.6 million, of which $0.2 million is expected in the next twelve months. Debt payments on the Company’s various debt obligations total $0.8 million of which $0.2 million is expected to as structured finance or special purpose entities, which would have been established forbe paid in 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.next twelve months.

Commitments and Contingencies

As of December 31, 2017, we have no material commitments or contingencies.

 

Critical Accounting Policies

Critical Accounting Policies

 

These critical accounting policies and estimates by our management were prepared in accordance with accounting principles generally accepted in the United States of America (“USU.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 21, 2017.2022.

 

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

 

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

 

 

●

Revenue recognition;

 

●

Allowance for doubtful accounts;

●

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

 

●

Accounting for goodwill and other intangible assets; and

 

●

Accounting for business combinations;

●

Accounting for common stock purchase warrants; and

●

Accounting for stock-based compensation.

 

27

 

Revenue Recognition

Overview

 

The Company enters into arrangements to sell digital engagement services (professional services) derives its revenue from two sources: (i) Software Licenses, which are comprised of subscription fees (“SaaS”), perpetual software licenses, or combinations thereof.  Revenue is categorized into (i) digital engagement services; (ii) managed service hosting; and (iii) subscriptions and perpetual licenses.

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

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

(ii) Digital Engagement Services,

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

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

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

Subscriptions and Perpetual Licenses

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

Customers may also license the software on a subscription basis, which can be described as “Software as a Service” or “SaaS”.  SaaS is a model of software deployment where an application is hosted as a service provided to customers across the Internet.  Subscription agreements include access to the Company’s software application via an internet connection, the related hosting of the application, and PCS.  Customers receive automatic updates and upgrades, and new releases of the products as soon as they become available. Customers cannot, do not take possession of the software.  Subscription agreements are either annual or month-to-month arrangements that provide for termination for convenience by either party upon 90 days’ notice.  

Revenue is recognized monthly aswhen control of these services is transferred to the services are delivered.  Set up fees paid byCompany’s customers, in connection with subscription services are deferred and recognized ratably overan amount that reflects the longerconsideration 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 life of subscription period or the expected lives of customer relationships. The Company continuesamount it expects to evaluate the length of the amortization period of the set up fees as it gains more experience with customer contract renewals.  

Managed Service Hosting

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

Multiple Element Arrangements

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

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

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

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

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

 

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

 

Payment terms with customers typically require payment 30 days from invoice date. Payment terms may vary by customer but generally do not exceed 45 days from invoice date.  Invoicing for digital engagement services are either monthly or upon achievement of milestones and payment terms for such billings are within the standard terms described above. Invoicing for subscriptions and hosting are typically issued monthly and are generally due in the month of service. The Company’s subscription and hosting agreements provide for refunds when service is interrupted for an extended period of time and are reserved for in the month in which they occur if necessary.

1.

Identify the customer contract;

2.

Identify performance obligations that are distinct;

3.

Determine the transaction price;

4.

Allocate the transaction price to the distinct performance obligations; and

5.

Recognize revenue as the performance obligations are satisfied.

 

Our digital engagement services agreements with customers do not provide for any refunds for services or products and therefore no specific reserve for such is maintained. In the infrequent instances where customers raise a concern over delivered products or services, we have endeavored to remedy the concern and all costs related to such matters have been insignificant in all periods presented.

Warranty

Certain arrangements include a warranty period, which is generally 30 days from the completion of work. In hosting arrangements, we provide warranties of up-time reliability. We continue to monitor the conditions that are subject to the warranties to identify if a warranty claim may arise. If we determine that a warranty claim is probable, then any related cost to satisfy the warranty obligation is estimated and accrued. Warranty claims to date have been immaterial.

Reimbursable Expenses

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

Allowance for Doubtful Accounts

 

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

 

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

 

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

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

Accounting for Goodwill and Intangible Assets

 

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

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

The Company allocates the amount it pays for each acquisition to the assets acquired and liabilities assumed based on their fair values at the date of acquisition, including identifiable intangible assets which arise from a contractual or legal right or are separable from goodwill. The Company bases the fair value of identifiable intangible assets acquired in a business combination on detailed valuations that use information and assumptions provided by management, which consider management’s best estimates of inputs and assumptions that a market participant would use. The Company allocates any excess purchase price that exceeds the fair value of the net tangible and identifiable intangible assets acquired to goodwill. The use of alternative valuation assumptions, including estimated growth rates, cash flows and discounts rates and estimated useful lives could result in different purchase price allocations and amortization expense in current and future periods. Transaction costs associated with these acquisitions are expensed as incurred through general and administrative expense on the consolidated statements of operations. In those circumstances where an acquisition involves a contingent consideration arrangement, the Company recognizes a liability equal to the fair value of the contingent payments expected to be made as of the acquisition date. The Company re-measures this liability each reporting period and recognizes changes in the fair value through income (loss) before income taxes within the consolidated statements of operations.

Accounting for Common Stock Purchase Warrants

The Company evaluates common stock warrants as they are issued to determine whether they should be classified as an equity instrument or a liability. Those warrants that are classified as a liability are carried at fair value at each reporting period, with changes in their fair value recognized in change in fair value of warrant liabilities in the consolidated statements of operations. 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.

28

Accounting for Stock-Based Compensation

 

At DecemberMarch 31, 2017,2023, we maintained two stock-based compensation plans, one of which has expired but still contains vested and unvested stock options andoptions. The two plans are more fully described in Note 11 to the Consolidated Financial Statements8 of our Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 21, 2017.these consolidated financial statements.

 

The Company accounts for stock-based compensation awards in accordance with theASC 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-basedshare-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 recordrecognize 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 treasuryTreasury 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 recordrecognize to vary.

 

We recordrecognize 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.   

 

Item3.

Qualitative and Quantitative Disclosures About Market Risk.

 

Not required.

 

 

Item 4.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our President and Chief Executive Officer (Principal Executive Officer) and our Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer), as appropriate, to allow timely decisions regarding required disclosure.  In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

As of December 31, 2017the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as(as defined in RulesRule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934.1934, as amended (the “Exchange Act”). Based upon thaton this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective in enabling us to record, process, summarize and report information required to be included in our periodic filings with the Securities and Exchange Commission within the required time period.as of March 31, 2023.

 

Changes in Internal Control over Financial Reporting

 

There have beenwere no changes into our internal controlscontrol over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during theour most recent fiscal quarter ended December 31, 2017 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.

 

33

 

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 for the fiscal year ended September 30, 2022, filed with the Securities and Exchange Commission on December 21, 2017.

2022.

 

Item 2. 1A.

Risk Factors.

There have been no material changes to the risk factors described under Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2022, filed with the Securities and Exchange Commission on December 21, 2022.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

The following summarizes allThere were no sales of our unregistered securities during the quarter ended December 31, 2017. Theequity securities in the below-referenced transactions were (i) issued without registration and (ii) were subject to restrictions under the Securities Act and the securities laws of certain states, in reliance on the private offering exemptions contained in Sections 4(2), 4(6) and/or 3(b) of the Securities Act and on Regulation D promulgated there under, and in reliance on similar exemptions under applicable state laws as transactions not involving a public offering. Unless stated otherwise, no placement or underwriting fees were paid in connection with these transactions.

Stock Options

During the fiscal quartersix months ended DecemberMarch 31, 2017, the Company granted 800 stock options under The 2016 Stock Incentive Plan at a weighted average exercise price of $2.92 per share.2023.

 

Item 3.

Defaults Upon Senior Securities.

The securities were issued exclusively to our directors, executive officers and employees. The issuance of options and the shares of common stock issuable upon the exercise of such options as described above were issued pursuant to written compensatory plans or arrangements with our employees, directors and consultants, in reliance on the exemptions from the registration provisions of the Securities Act set forth in Section 4(2) thereof relative to sales by an issuer not involving any public offering, to the extent an exemption from such registration was required. 

None.

Item 4.

Mine Safety Disclosures.

Not applicable.

Item 5.

Other Information.

None.

 

34

 

Item 6. 6.

Exhibits.

 

Exhibit No.

Description of Document

   

3.1(i)

 

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).

   
3.1(ii)

3.2

 

Certificate of Amendment to Amended and Restated Certificate of Incorporation, dated May 4, 2015By-laws (incorporated by reference to Exhibit 3.1 to our Currentcurrent Report on Form 8-K filed on May 5, 2015)December 14, 2018).

   
3.1(iii)

3.3

 

Amendment to the Amended and Restated By-laws (incorporated by reference to Exhibit 3.1 to our current Report on Form 8-K filed on September 20, 2021).

3.4

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).

   
3.1(iv)

3.5

 

Amended and Restated By-lawsCertificate of Designations of the Series B Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to our currentCurrent Report on Form 8-K filed on July 24, 2017)

4.1(i)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)
4.1 (ii)Registration Rights Agreement, as amended on June 30, 2017 filed with the Securities and Exchange Commission on MayOctober 19, 2017
10.1Loan and Security Agreement between Bridgeline Digital, Inc and Montage Capital II, L.P. dated October 10, 2017 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K Filed on October 13, 2017)
10.2Form of Warrant to Purchase Stock issued to Montage Capital II, L.P. (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K Filed on October 13, 2017)
10.3Intercreditor Agreement between Heritage Bank of Comerce and Montage Capital II, L.P dated October 10, 2017 (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K Filed on October 13, 2017)

10.4

Fifth Amendment to the Loan and Security Amendment between Bridgeline Digital, Inc. and Heritage Bank of Commerce, dated November 27, 2017 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K Filed on November 28, 2017)2018).

   
31.1

31.1*

 

Certification required by Rule 13a-14(a) or Rule 15d-14(a). of Chief Executive Officer, pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

   
31.2

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) andof Chief Financial Officer, pursuant to Section 1350302 of Chapter 63Sarbanes-Oxley Act of Title 18 of the United States Code (18 U.S.C. §1350).2002.

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*XBRL Instance
   
101.SCH* 

32.1*

 XBRL Taxonomy Extension Schema

Certification of Chief Executive Officer, pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

   
101.CAL*

32.2*

 XBRL Taxonomy Extension Calculation

Certification of Chief Financial Officer, pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

   
101.DEF*

101.INS**

 

Inline XBRL Taxonomy Extension DefinitionInstance

   
101.LAB*

101.SCH**

 

Inline XBRL Taxonomy Extension LabelsSchema

   
101.PRE* 

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 Filed herewith.

**XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sectionsSections 11 andor 12 of the Securities Act of 1933, as amended is deemed not filed for purposes of sectionSection 18 of the Securities Exchange Act of 1934, as amended and otherwise is not subject to liability under these sections.

 

35

 

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)

February 14, 2018May 15, 2023

/s/    Roger Kahn

Date

Roger Kahn

President and Chief ExecutiveExecutive Officer

(Principal Executive Officer)

   

May 15, 2023

February 14, 2018

/s/    Michael Prinn    Thomas R. Windhausen

Date

Michael PrinnThomas R. Windhausen

ExecutiveVice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

 

 

36

32