blin20201231

blin20201231_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended December 31, 2020

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

For the transition period from ______________ to ______________

Commission File Number 333-139298

Bridgeline Digital, Inc.

(Exact name of registrant as specified in its charter)

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

100 Sylvan Road, Suite G700
Woburn, Massachusetts		01801
(Address of Principal Executive Offices)		(Zip Code)

(781) 376-5555

(Registrant’s telephone number, including area code)

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

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

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

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

Large accelerated filer ☐	Accelerated filer ☐	Non-accelerated filer ☒	Smaller reporting company ☒
		Emerging growth company ☐

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

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

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

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

The number of shares of Common Stock par value $0.001 per share, outstanding as of February 11, 2021 was 5,313,503.

Bridgeline Digital, Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period ended December 31, 2020

Index

		Page
Part I	Financial Information

Item 1.	Condensed Consolidated Financial Statements

	Condensed Consolidated Balance Sheets (unaudited) as of December 31, 2020 and September 30, 2020	4

	Condensed Consolidated Statements of Operations (unaudited) for the three months ended December 31, 2020 and 2019	5

	Condensed Consolidated Statements of Comprehensive Income/(Loss) (unaudited) for the three months ended December 31, 2020 and 2019	6

	Condensed Consolidated Statements of Stockholders’ Equity (unaudited) for the three months ended December 31, 2020 and 2019	7

	Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended December 31, 2020 and 2019	8

	Notes to Unaudited Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Qualitative and Quantitative Disclosures About Market Risk	33

Item 4.	Controls and Procedures	34

Part II	Other Information

Item 1.	Legal Proceedings	35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35

Item 6.	Exhibits	36

Signatures		37

Bridgeline Digital, Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period ended December 31, 2020

Statements contained in this Report on Form 10-Q, other than statements or characterizations of historical fact, are forward-looking statements. These “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, are based on our current expectations, estimates and projections about our industry, management's beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can often be identified by words such as "anticipates," "expects," "intends," "plans," "predicts," "believes," "seeks," "estimates," "may," "will," "should," "would," "could," "potential," "continue," "ongoing," similar expressions, and variations or negatives of these words. These statements appear in a number of places in this Form 10-Q and include statements regarding the intent, belief or current expectations of Bridgeline Digital, Inc. These forward-looking statements are not guarantees of future results and are subject to risks, uncertainties and assumptions, including, but not limited to, the impact of the 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 profitability, our liability for any unauthorized access to our data or our users’ content, including through privacy and data security breaches; any decline in demand for our platform or products; changes in the interoperability of our platform across devices, operating systems, and third party applications that we do no control; competition in our markets; our ability to respond to rapid technological changes, extend our platform, develop new features or products, or gain market acceptance for such new features or products, particularly in light of potential disruptions to the productivity of our employees resulting from remote work; our ability to manage our growth or plan for future growth, and our acquisition of other businesses and the potential of such acquisitions to require significant management attention, disrupt our business, or dilute stockholder value; the volatility of the market price of our common stock; the ability to maintain our listing on the NASDAQ Capital Market; or our ability to maintain an effective system of internal controls as well as other risks described in our filings with the Securities and Exchange Commission. Any of such risks could cause our actual results to differ materially and adversely from those expressed in any forward-looking statement. Bridgeline Digital, Inc. assumes no obligation to, and does not currently intend to, update any such forward-looking statements, except as required by applicable law. We urge readers to review carefully the risk factors described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020, and in the other documents that we file with the Securities and Exchange Commission. You can read these documents at www.sec.gov.

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

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements.

BRIDGELINE DIGITAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(Unaudited)

	December 31, 2020			September 30, 2020
ASSETS

Current assets:
Cash and cash equivalents	$	1,277		$	861
Accounts receivable, net		863			665
Prepaid expenses		381			268
Other current assets		207			111
Total current assets		2,728			1,905
Property and equipment, net		234			238
Operating lease assets		593			294
Intangible assets, net		2,399			2,617
Goodwill		5,557			5,557
Other assets		92			49
Total assets	$	11,603		$	10,660

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Current portion of operating lease liabilities	$	163		$	96
Accounts payable		1,133			1,311
Accrued liabilities		931			599
Paycheck Protection Program Liability (Note 7)		-			88
Deferred revenue		1,739			1,511
Total current liabilities		3,966			3,605
Operating lease liabilities, net of current portion		430			198
Warrant liabilities		3,927			2,486
Other long-term liabilities		25			15
Total liabilities		8,348			6,304

Commitments and contingencies

Stockholders’ equity:
Preferred stock - $0.001 par value; 1,000,000 shares authorized;
Series C Convertible Preferred stock:
11,000 shares authorized; 350 shares issued and outstanding at December 31, 2020 and September 30, 2020		-			-
Series A Convertible Preferred stock:
264,000 shares authorized; no shares outstanding at December 31, 2020 and September 30, 2020		-			-
Common stock - $0.001 par value; 50,000,000 shares authorized;
4,420,170 shares issued and outstanding at December 31, 2020 and September 30, 2020		4			4
Additional paid-in capital		78,367			78,316
Accumulated deficit		(74,745	)		(73,583	)
Accumulated other comprehensive loss		(371	)		(381	)
Total stockholders’ equity		3,255			4,356
Total liabilities and stockholders’ equity	$	11,603		$	10,660

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)

	Three Months Ended December 31,
	2020			2019
Net revenue:
Digital engagement services	$	837		$	1,096
Subscription and perpetual licenses		1,999			1,736
Total net revenue		2,836			2,832
Cost of revenue:
Digital engagement services		374			568
Subscription and perpetual licenses		583			790
Total cost of revenue		957			1,358
Gross profit		1,879			1,474
Operating expenses:
Sales and marketing		444			1,032
General and administrative		465			751
Research and development		349			390
Depreciation and amortization		232			258
Restructuring and acquisition related expenses		210			5
Total operating expenses		1,700			2,436
Income (loss) from operations		179			(962	)
Interest expense and other, net		6			-
Government grant income (Note 7)		88			-
Change in fair value of warrant liabilities		(1,441	)		1,101
Income (loss) before income taxes		(1,168	)		139
Provision for (benefit from) income taxes		(6	)		3
Net income (loss)		(1,162	)		136
Dividends on convertible preferred stock		-			(79	)
Deemed dividend on amendment of Series A convertible preferred stock		-			(2,314	)
Net loss applicable to common shareholders	$	(1,162	)	$	(2,257	)
Net loss per share attributable to common shareholders:
Basic net loss per share	$	(0.26	)	$	(0.81	)
Diluted net loss per share	$	(0.26	)	$	(0.81	)
Number of weighted average shares outstanding:
Basic		4,420,170			2,798,475
Diluted		4,420,170			2,798,475

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

BRIDGELINE DIGITAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(in thousands)

(Unaudited)

	Three Months Ended December 31,
	2020			2019
Net income (loss)	$	(1,162	)	$	136
Other comprehensive income:
Net change in foreign currency translation adjustment		10			1
Comprehensive income (loss)	$	(1,152	)	$	137

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

BRIDGELINE DIGITAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)

(Unaudited)

	For the Three Months Ended December 31, 2020
														Accumulated
	Preferred Stock				Common Stock				Additional					Other			Total
									Paid-in		Accumulated			Comprehensive			Stockholders’
	Shares		Amount		Shares		Amount		Capital		Deficit			Loss			Equity
Balance at October 1, 2020		350	$	-		4,420,170	$	4	$	78,316	$	(73,583	)	$	(381	)	$	4,356
Stock-based compensation expense										51								51
Net loss												(1,162	)					(1,162	)
Foreign currency translation															10			10
Balance at December 31, 2020		350	$	-		4,420,170	$	4	$	78,367	$	(74,745	)	$	(371	)	$	3,255

	For the Three Months Ended December 31, 2019
														Accumulated
	Preferred Stock				Common Stock				Additional					Other			Total
									Paid-in		Accumulated			Comprehensive			Stockholders’
	Shares		Amount		Shares		Amount		Capital		Deficit			Loss			Equity
Balance at October 1, 2019		262,751	$	-		2,798,475	$	3	$	75,620	$	(71,489	)	$	(338	)	$	3,796
Stock-based compensation expense										30								30
Dividends on Series A convertible preferred stock												(79	)					(79	)
Deemed dividend on amendment of Series A convertible preferred stock (Note 8)										2,314		(2,314	)					-
Net income												136						136
Foreign currency translation															1			1

Balance at December 31, 2019		262,751	$	-		2,798,475	$	3	$	77,964	$	(73,746	)	$	(337	)	$	3,884

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

BRIDGELINE DIGITAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	Three Months Ended December 31,
	2020			2019
Cash flows from operating activities:
Net income (loss)	$	(1,162	)	$	136
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Amortization of intangible assets		218			237
Depreciation		12			16
Other amortization		2			5
Change in fair value of warrant liabilities		1,441			(1,101	)
Stock-based compensation		51			30
Government grant income (Note 7)		(88	)
Changes in operating assets and liabilities
Accounts receivable		(188	)		(273	)
Prepaid expenses		(111	)		(19	)
Other current assets and other assets		(110	)		28
Accounts payable and accrued liabilities		149			183
Deferred revenue		228			872
Other liabilities		9			(4	)
Total adjustments		1,613			(26	)
Net cash provided by operating activities		451			110
Cash flows from investing activities:
Software development capitalization costs		(30	)		-
Purchase of property and equipment		(11	)		-
Net cash used in investing activities		(41	)		-
Effect of exchange rate changes on cash and cash equivalents		6			2
Net increase in cash and cash equivalents		416			112
Cash and cash equivalents at beginning of period		861			296
Cash and cash equivalents at end of period	$	1,277		$	408

Supplemental disclosures of cash flow information:
Cash paid for:
Income taxes	$	-		$	3

Non cash investing and financing activities:
Dividends accrued on convertible preferred stock	$	-		$	79
Deemed dividend on amendment of Series A convertible preferred stock	$	-		$	2,314

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

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, The Digital Engagement Company (the “Company”), helps customers maximize the performance of their full digital experience from websites and intranets to online stores and campaigns and integrates Web Content Management, eCommerce, Marketing Automation, Site Search, Authenticated Portals, Social Media Management, Translation and Web Analytics to help organizations deliver digital experiences.

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

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

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

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

Locations

The Company’s corporate office is located in Woburn, Massachusetts. The Company maintains regional field offices serving the following geographical locations: Boston, Massachusetts; New York, New York; and Ontario, Canada. The Company has two wholly-owned subsidiaries: Bridgeline Digital Pvt. Ltd. located in Bangalore, India, and Bridgeline Digital Canada, Inc. located in Ontario, Canada.

Liquidity and Management’s Plans

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

In prior years, the Company incurred operating losses and used cash to fund operations, develop new products, and build infrastructure. During its 2020 fiscal year, the Company executed an operating plan that reduced operating expenses and has resulted in three consecutive quarters of operating income. The Company is continuing to maintain tight control over discretionary spending for the 2021 fiscal year. While the Company believes that it has sufficient revenue and working capital to support future growth no assurances can be made that the Company will not need additional financing to ensure its operations are adequately funded.

On August 17, 2020, the Company entered into an arrangement with an investment banking firm to sell up to $4,796,090 of shares of the Company’s common stock, $0.001 par value. Refer to Note 8 under the caption, At the Market Offering, for a detailed description of this capital raising activity. There are no obligations for the sale or purchase of the Company’s common stock pursuant to this offering. Accordingly, there can be no assurances that the Company or investment banking firm will be successful in selling any portion of the shares available for sale pursuant to this offering. On December 18, 2020, the Company delivered written notice to Roth Capital Partners that it was suspending all offers and sales under the At the Market Offering Agreement (the “Suspension Period”), during which time the Company will not make any sales of Placement Shares. No other definitive agreements for additional financing are in place as of the issuance date of this Form 10-Q and there can be no assurances that additional sources of financing could be obtained on terms that are favorable or acceptable to the Company and that revenue growth and improvement in cash flows can be achieved. No adjustments have been made to the accompanying consolidated financial statements as a result of this uncertainty.

2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

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

Unaudited Interim Financial Information

The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), and with the instructions to Form 10-Q and Regulation S-X, and in the opinion of the Company’s management these condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments and accruals, necessary for their fair presentation. The operating results for the three months ended December 31, 2020 are not necessarily indicative of the results to be expected for the year ending September 30, 2021. The accompanying September 30, 2020 Condensed Consolidated Balance Sheet has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended September 30, 2020, filed with the Securities and Exchange Commission on December 23, 2020.

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

Reclassifications

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

Intangibles – Goodwill and Other - Internal-Use Software

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

Fair Value

In August 2018, the FASB issued ASU 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which changes the fair value measurement disclosure requirements of Accounting Standards Codification (“ASC”) 820. The effective date of this new standard for the Company was October 1, 2020. As the adoption of this standard was limited to revised disclosures, the impact of the new standard on its consolidated financial statements was not material.

Accounting Pronouncements Pending Adoption

Financial Instruments – Credit Losses

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. ASU 2016-13 is effective for smaller reporting companies for annual reporting periods beginning after December 15, 2022, including interim periods within those annual reporting periods, with early adoption permitted. The Company is currently evaluating the impact of the new standard on its consolidated financial statements and related disclosures.

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

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

3. Accounts Receivable and Unbilled Receivables

Accounts receivable and unbilled receivables consist of the following:

	As of December 31, 2020			As of September 30, 2020
Accounts receivable	$	904		$	698
Allowance for doubtful accounts		(41	)		(33	)
Accounts receivable, net	$	863		$	665

As of December 31, 2020, two customers represented approximately 34%, and 20% of accounts receivable. As of September 30, 2020, three customers represented approximately 15%, 14% and 10% of accounts receivable. For the three months ended December 31, 2020, and 2019, one customer represented approximately 12% of the Company’s total revenue.

4. Fair Value Measurement and Fair Value of Financial Instruments

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

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

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

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

The Company believes the recorded values for accounts receivable and accounts payable and short-term debt approximate current fair values as of December 31, 2020 and September 30, 2020, because of their short-term nature and durations.

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

The Company’s warrant liabilities are measured at fair value at each reporting period with changes in fair value recognized in earnings during the period. The fair value of the Company’s warrant liabilities are valued utilizing Level 3 inputs. Warrant liabilities are valued using a Monte Carlo option-pricing model, which takes into consideration the volatilities of comparable public companies, due to the relatively low trading volume of the Company’s common stock. The Monte Carlo option-pricing model uses certain assumptions, including expected life and annual volatility. The range and weighted average volatilities of comparable public companies utilized was 27.1% - 74.4% and 44.8%, respectively as of December 31, 2020, and 26.2% - 70.7% and 43.5%, respectively as of September 30, 2020. The volatility utilized in the Monte Carlo option-pricing model was determined by weighing 60% to Company-specific volatility and 40% on comparable public companies. The significant inputs and assumptions utilized were as follows:

	As of December 31, 2020						As of September 30, 2020
	Montage Capital			Series C Preferred			Montage Capital			Series C Preferred
Volatility		87.5	%		88.2	%		84	%		84.1	%
Risk-free rate		0.34	%		0.20	%		0.28	%		0.20	%
Stock price	$	2.58		$	2.58		$	1.86		$	1.86

The Company recognized gains/(losses) of ($1,441) and $1,101 for the three months ended December 31, 2020 and 2019, respectively. The changes in fair value of warrant liabilities were due to changes in inputs to the Monte Carlo option-pricing model, primarily an increase in stock price for the three months ended December 31, 2020 and a decrease in stock price for the three months ended December 31, 2019.

Assets and liabilities of the Company measured at fair value on a recurring basis as of December 31, 2020 and September 30, 2020, are as follows:

	As of December 31, 2020
	Level 1		Level 2		Level 3		Total

Liabilities:
Warrant liability - Montage	$	-	$	-	$	27	$	27
Warrant liability - Series A, B and C		-		-		3,900		3,900
Total Liabilities	$	-	$	-	$	3,927	$	3,927

	As of September 30, 2020
	Level 1		Level 2		Level 3		Total

Liabilities:
Warrant liability - Montage	$	-	$	-	$	26	$	26
Warrant liability - Series A, B and C		-		-		2,460		2,460
Total Liabilities	$	-	$	-	$	2,486	$	2,486

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

	Three Months Ended December 31, 2020
Balance at beginning of period, October 1, 2020	$	2,486
Additions		-
Exercises		-
Adjustment to fair value		1,441
Balance at end of period, December 31, 2020	$	3,927

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

5. Intangible Assets

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

	As of December 31, 2020		As of September 30, 2020
Domain and trade names	$	10	$	10
Customer related		1,364		1,500
Technology		1,025		1,107
Balance at end of period	$	2,399	$	2,617

Total amortization expense was $218 and $237 related to intangible assets for the three months ended December 31, 2020 and 2019, respectively, and is reflected in operating expenses on the Condensed Consolidated Statements of Operations. The estimated amortization expense for fiscal year 2021 (remaining), 2022, 2023, 2024, and 2025 is $645, $764, $684, $297, and $9, respectively.

6. Accrued Liabilities

Accrued liabilities consist of the following:

	As of December 31, 2020		As of September 30, 2020
Compensation and benefits	$	313	$	368
Professional fees		28		29
Taxes		261		46
Insurance		126		-
Other		203		156
Balance at end of period	$	931	$	599

7. Paycheck Protection Program

On April 17, 2020, Bridgeline Digital, Inc. entered into a loan with BNB Bank as the lender in an aggregate principal amount of $1,048 (“PPP Loan”) pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The PPP Loan is evidenced by a promissory note (“Note”). Subject to the terms of the Note, the PPP Loan bears interest at a fixed rate of one percent (1%) per annum, with the first six months of interest deferred, has an initial term of two years, and is unsecured and guaranteed by the U.S. Small Business Administration (“SBA”). Payments are deferred for at least the first six months and payable in 18 equal consecutive monthly installments of principal and interest commencing upon expiration of the deferral period of the PPP Loan Date. During the three months ended December 31, 2020, interest expense was approximately $1 related to the PPP Loan. The Company may apply to the lender for forgiveness of the PPP Loan, with the amount which may be forgiven equal to the sum of payroll costs, covered rent obligations, and covered utility payments incurred by the Company during the twenty-four week period beginning on April 21, 2020, calculated in accordance with the terms of the CARES Act. The Note provides for prepayment and customary events of default, including, among other things, cross-defaults on any other loan with the lender. The PPP Loan may be accelerated upon the occurrence of an event of default.

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

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

The Company has performed initial calculations for the PPP Loan forgiveness according to the terms and conditions of the SBA’s Loan Forgiveness Application (Revised January 8, 2021) and, based on such calculations, expects that the PPP Loan will be forgiven in full, based on usage of related proceeds, over a period less than 24 weeks. In addition, the Company has determined it is probable the Company will meet all the conditions of the PPP Loan forgiveness. However, there can be no assurances that the Company will ultimately meet the conditions for forgiveness of the loan or that the Company will not take actions that could cause the Company to be ineligible for forgiveness of the loan, in whole or in part.

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

Pursuant to the Flexibility Act, the Company’s PPP Loan agreement will be amended in the event that no amount or less than all of the PPP Loan is forgiven. In addition, starting in August 2021, the Company will be required to make principal and interest payments, or an adjustment amount based on the loan amendment over the remaining term of the PPP Loan until such time the loan is fully settled. The Company classifies unexpended loan proceeds on the accompanying consolidated balance sheets as a current or noncurrent liability based on the contractual maturities of the underlying loan agreement. During the three months ended December 31, 2020, the remaining loan proceeds were expended on qualified expenses and as a result, the Company recognized $88 as government grant income. As of September 30, 2020, unexpended loan proceeds of $88 were classified as a current liability.

8. Stockholders’ Equity

Series A Convertible Preferred Stock

The Company has designated 264,000 shares of its preferred stock as Series A Convertible Preferred Stock (“Series A Preferred Stock”). The shares of Series A Preferred Stock may be converted, at the option of the holder at any time, into such number of shares of common stock (“Conversion Shares”) equal (i) to the number of shares of Series A Preferred Stock to be converted, multiplied by the stated value of $10.00 (the “Stated Value”) and (ii) divided by the conversion price in effect at the time of conversion.

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

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

Mandatory Conversion: The Company has the right, in its sole discretion, to require the holders to convert shares of the Series A Preferred Stock into Conversion Shares if (i) the Company’s common stock has closed at or above $2.28 ($32.50 prior to the Series A Amendment) for fifteen (ten prior to the Series A Amendment) consecutive trading days and (ii) the Conversion Shares are (a) registered for resale on an effective registration statement or (b) may be resold pursuant to Rule 144.

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

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

In the event of any liquidation, dissolution, or winding up of the Company, the holders of shares of Series A Preferred Stock will be entitled to receive in preference to the holders of common stock, the amount equal to the Stated Value per share of Series A Preferred Stock plus declared and unpaid dividends, if any. After such payment has been made, the remaining assets of the Company will be distributed ratably to the holders of common stock. The Series A Preferred Stock shall vote with the Common Stock on an as-converted basis.

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

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

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

Series C Convertible Preferred Stock

The Company has designated 11,000 shares of its preferred stock as Series C Convertible Preferred Stock (“Series C Preferred Stock”). The Company may not effect, and a Purchaser will not be entitled to, convert the Series C Preferred Stock or exercise any Series C Preferred Warrants, which, upon giving effect to such conversion or exercise, would cause (i) the aggregate number of shares of common stock beneficially owned by the Purchaser (together with its affiliates) to exceed 4.99% (or, at the election of the holder, 9.99%) of the number of shares of common stock outstanding immediately after giving effect to the exercise. As of December 31, 2020, the Company had 350 shares of Series C Preferred Stock outstanding.

Common Stock

At the Market Offering

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

The Company currently intends to use the net proceeds from the sale of shares pursuant to the ATM Offering for working capital and general corporate purposes. As of December 31, 2020, there have been no shares of common stock sold under the ATM offering.

Amended and Restated Stock Incentive Plan

The Company has granted common stock, common stock warrants, and common stock option awards (the “Equity Awards”) to employees, consultants, advisors and former debt holders of the Company and to former owners and employees of acquired companies that have become employees of the Company. The Company’s Amended and Restated Stock Incentive Plan (the “Plan”) provided for the issuance of up to 5,000 shares of common stock. This Plan expired in August 2016. As of December 31, 2020, there were 3,246 options outstanding under the Plan. On April 29, 2016, the stockholders approved a new stock incentive plan, The 2016 Stock Incentive Plan (the “2016 Plan”). The 2016 Plan authorizes the award of incentive stock options, non-statutory stock options, restricted stock, unrestricted stock, performance shares, stock appreciation rights and any combination thereof to employees, officers, directors, consultants, independent contractors and advisors of the Company. In November 2019, the Company increased the number of common shares available for issuance under the 2016 Plan from 10,000 shares to 800,000 shares. There were no revisions to exercise prices, terms or any other underlying provisions of existing stock options outstanding. As of December 31, 2020, there were 583,289 options outstanding and 216,711 shares available for future issuance under the 2016 Plan.

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

Compensation Expense

Compensation expense is generally recognized on a graded accelerated basis over the vesting period of grants. Compensation expense is recorded in the Condensed Consolidated Statements of Operations with a portion charged to Cost of revenue and a portion to Operating expenses, depending on the employee’s department. During the three months ended December 31, 2020 and 2019, compensation expense related to share-based payments was as follows:

	Three Months Ended December 31,
	2020		2019
Cost of revenue	$	6	$	2
Operating expenses		45		28
	$	51	$	30

As of December 31, 2020, the Company had approximately $274 of unrecognized compensation costs related to unvested options, which is expected to be recognized over a weighted-average period of 1.9 years.

Common Stock Warrants

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

Montage Warrant - As additional consideration for a prior loan arrangement which was paid in full in a prior period not presented, the Company issued to Montage Capital an eight-year warrant (the “Montage Warrant”) to purchase the Company’s common stock at a price equal to $132.50 per share. The Montage Warrant contains an equity buy-out provision upon the earlier of (1) dissolution or liquidation of the Company, (2) any sale or distribution of all or substantially all of the assets of the Company or (3) a “Change in Control” as defined within the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934. Montage Capital has the right to receive an equity buy-out of $250. If the equity buy-out is exercised, the Montage Warrant will be surrendered to the Company for cancellation. As of December 31, 2020, the number of shares issuable upon exercise of the Montage Warrants were 1,327 shares.

Series A, B and C Preferred Warrants - In March 2019, in connection with the issuance of the Company’s Series C Preferred Stock, the Company issued warrants to purchase the Company’s common stock. These warrants were designated as (i) Series A Warrants with an initial term of 5.5 years and an exercise price of $4; (ii) Series B Warrants with an initial term of 24 months and an exercise price of $4; and (iii) Series C Warrants with an initial term of 5.5 years and an exercise price of $0.05 (collectively, hereinafter referred to as the “Series C Preferred Warrants”). The Company also issued warrants with an exercise price of $4 to purchase shares of the Company’s common stock to the placement agents. The Company may not effect, and a holder will not be entitled to, convert the Series C Preferred Stock or exercise any Series C Preferred Warrants, which, upon giving effect to such conversion or exercise, would cause (i) the aggregate number of shares of common stock beneficially owned by the Purchaser (together with its affiliates) to exceed 4.99% (or, at the election of the holder, 9.99%) of the number of shares of common stock outstanding immediately after giving effect to the exercise.

As of December 31, 2020, the number of shares issuable upon exercise of the (i) Series A Warrants were 2,556,875 shares; (ii) Series B Warrants were 2,556,875 shares; (iii) Series C Warrants were 69,295 shares; and (iv) the placement agent warrants issued in connection with the Series C Preferred Stock were 127,848 shares.

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

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

Total warrants outstanding as December 31, 2020, were as follows:

	Issue
Type	Date	Shares		Price		Expiration
Placement Agent	5/17/2016		1,736	$	187.50	5/17/2021
Placement Agent	5/11/2016		1,067	$	187.50	5/11/2021
Placement Agent	7/15/2016		880	$	230.00	7/15/2021
Investors	11/9/2016		4,271	$	175.00	5/9/2022
Director/Shareholder	12/31/2016		120	$	1,000.00	12/31/2021
Financing (Montage)	10/10/2017		1,327	$	132.50	10/10/2025
Director/Shareholder	12/31/2017		120	$	1,000.00	12/31/2021
Investors	10/19/2018		3,120	$	25.00	10/19/2023
Placement Agent	10/16/2018		10,000	$	31.25	10/16/2023
Investors	3/12/2019		159,236	$	4.00	10/19/2023
Investors	3/12/2019		2,556,875	$	4.00	9/12/2024
Investors	3/12/2019		2,556,875	$	4.00	9/12/2021
Investors	3/12/2019		69,295	$	0.05	9/12/2024
Placement Agent	3/12/2019		127,848	$	4.00	9/12/2024
Total			5,492,770

Summary of Option and Warrant Activity and Outstanding Shares

During the three months ended December 31, 2019, the Company granted options to purchase 681,353 shares at an exercise price of $1.40, of which (a) 70,000 shares vest on November 20, 2020 and the remainder vest ratably over a three-year period commencing November 20, 2019 and (b) 1,000 shares at an exercise price of $1.61 which vest ratably over a three-year period commencing on December 2, 2019. All such options granted expire ten years from the date of grant. There were no options granted during the three months ended December 31, 2020.

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 three months ended December 31, 2020, are as follows:

Weighted-average fair value per share option	$	0.96
Expected life (in years)		6.0
Volatility		76.29	%
Risk-free interest rate		1.61	%
Dividend yield		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.

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

A summary of combined stock option and warrant activity for the three months ended December 31, 2020, is as follows:

	Stock Options					Stock Warrants
				Weighted					Weighted
				Average					Average
				Exercise					Exercise
	Options			Price		Warrants			Price

Outstanding, October 1, 2020		613,201		$	4.76		5,492,890		$	4.37
Granted		-			-		-			-
Exercised		-			-		-			-
Forfeited/Exchanged		(26,666	)		1.40		-			-
Expired		-			-		(120	)		1,000
Outstanding, December 31, 2020		586,535		$	4.92		5,492,770		$	4.35
Options vested and exercisable, December 31, 2020		233,699		$	10.11

As of December 31, 2020, the aggregate intrinsic value of options outstanding and exercisable was $674 and $268, respectively, and the weighted average remaining contractual term was 8.8 and 8.7 years, respectively.

9. Net Loss Per Share Attributable to Common Shareholders

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

For the three months ended December 31, 2020 and 2019, diluted net loss per share was the same as basic net loss per share, as the effects of all the Company’s potential common stock equivalents are anti-dilutive as the Company reported a net loss applicable to common shareholders for the periods and the impact of in-the-money warrants was also anti-dilutive. Potential common stock equivalents excluded include the Series A Convertible Preferred Stock, Series C Convertible Preferred Stock, stock options and warrants (see Note 8).

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 affected by economic factors.

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

	Three Months Ended December 31,
Revenues:	2020		2019
United States	$	2,286	$	2,405
International		550		427
	$	2,836	$	2,832

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 December 31,
Revenues:	2020		2019
Digital Engagement Services	$	837	$	1,096
Subscription		331		350
Perpetual Licenses		1,359		1,044
Maintenance		92		85
Hosting		217		257
	$	2,836	$	2,832

Deferred Revenue

Amounts that have been invoiced are recorded in accounts receivable and deferred revenue or revenue, depending on whether the revenue recognition criteria have been met. Deferred revenue represents amounts billed for which revenue has not yet been recognized. Deferred revenue that is expected to be recognized during the succeeding 12-month period is recorded as current deferred revenue, and the remaining portion is recorded as noncurrent deferred revenue included in Other long-term liabilities. As of December 31, 2020, approximately $25 of revenue is expected to be recognized from remaining performance obligations for contracts with original performance obligations that exceed one year. The Company expects to recognize revenue on approximately 99% of these remaining performance obligations over the next 12 months, with the balance recognized thereafter.

The following table summarizes the classification and net change in deferred revenue as of and for the three months ended December 31, 2020:

	Deferred Revenue
	Current		Long Term
Balance as of October 1, 2020	$	1,511	$	15
Increase (decrease)		228		10
Balance as of December 31, 2020	$	1,739	$	25

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

11. Income Taxes

Income tax benefit/expense was ($6) and $3 for the three months ended December 31, 2020 and 2019, respectively. Income tax expense consists of the estimated liability for state income taxes owed by the Company. Net operating loss carryforwards are estimated to be sufficient to offset any potential taxable income for all periods presented.

12. Leases

The Company leases facilities in the United States for its corporate and regional field offices. During the three months ended December 31, 2020, the Company is also a lessee/sublessor for certain office locations.

Determination of whether a Contract Contains a Lease

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

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

ROU Model and Determination of Lease Term

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

Lease Costs

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

Significant Assumptions and Judgements

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

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

The components of net lease costs were as follows:

	Three Months Ended December 31, 2020
Condensed Consolidated Statement of Operations:
Operating lease cost	$	18
Variable lease cost		14
Less: Sublease income, net		(25	)
Total	$	7

Cash paid for amounts included in the measurement of lease liabilities was $58 for the three months ended December 31, 2020, all of which represents operating cash flows from operating leases. As of December 31, 2020, the weighted average remaining lease term was 3.9 years and the weighted average discount rate was 7.0%.

At December 31, 2020, 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:
2020 (remaining)	$	142		$	76	$	66
2021		169			101		68
2022		173			101		72
2023		115			34		81
2024		84			-		84
Total lease commitments	$	683		$	312	$	371
Less: Amount representing interest		(90	)
Present value of lease liabilities	$	593
Less: current portion		(163	)
Operating lease liabilities, net of current portion	$	430

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

	Payments Operating Leases		Receipts Subleases		Net Leases
Fiscal year:
2021	$	96	$	101	$	(5	)
2022		82		101		(19	)
2023		85		101		(16	)
2025		87		36		51
2025		88		-		88
Total lease commitments	$	438	$	339	$	99

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

13. Related Party Transactions

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

14. Legal Proceedings

The Company is subject to ordinary routine litigation and claims incidental to its business. As of December 31, 2020, the Company was not engaged with any material legal proceedings.

15. Subsequent Events

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

Woorank Acquisition

On February 3, 2021, the Company entered into a Share Purchase Agreement (the “Purchase Agreement”) with Woorank SRL (“Woorank”), an entity located in Belgium, to acquire all of the issued and outstanding shares of Woorank for an unconditional purchase price of approximately €3.3 million (the “Purchase Price”), which consists of (1) approximately €1.4 million paid to the sellers at closing, (2) approximately €1.9 million in assumed debt obligations, and (3) $80,000 payable to one selling shareholder as consideration for assistance with certain matters related to the acquisition for a period of one-year from the closing date of the acquisition. Approximately €1.2 million of the debt to be assumed by the Company will be current debt with payment due within one year and has a weighted average interest rate of approximately 2.25%. The Purchase Agreement also provides for adjustments to the Purchase Price in the event of the achievement of certain revenue targets, as well as an additional earn-out provision for the achievement of certain operational goals. The consummation of the acquisition is conditioned upon certain customary closing conditions, as well as certain lenders of Woorank consenting to the acquisition.

Under certain conditions, up to approximately €0.6 million of the Purchase Price is payable, at the Company’s discretion, in shares of the Company’s common stock, par value $0.001 per share, at a price per share equal to the greater of (i) the closing price of the Company’s common stock on the date of issuance or (ii) $3.38, the Minimum Price (as defined in the Nasdaq Listing Rule 5635(d)) of the Company’s common stock on February 1, 2021.

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

During the three months ended December 31, 2020, the Company incurred $210 of acquisition-related costs.

Registered Offering and Sale of Common Stock

On February 4, 2021, the Company offered and sold a total of 880,000 shares of its common stock, par value $0.001 per share, to certain institutional and accredited investors at a public offering price of $3.10 per share in a registered direct offering (the “Offering”). The Offering was registered under the Securities Act of 1933, as amended, pursuant to a prospectus supplement to the Company's currently effective registration statement on Form S-3 (File No. 333-239104), which was initially filed with the U.S. Securities and Exchange Commission on June 12, 2020, and was declared effective on June 25, 2020. The Company filed the final prospectus supplement for the Offering on or about February 5, 2021. The Offering closed on February 8, 2021, and resulted in proceeds, net of certain fees due to placement agents and transaction expenses, to the Company of approximately $2.4 million. The net proceeds received by the Company will be used for general corporate purposes, including general working capital.

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

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 change. Forward-looking statements can often be identified by words such as "anticipates," "expects," "intends," "plans," "predicts," "believes," "seeks," "estimates," "may" "will," "should," "would," "could," "potential," "continue," "ongoing," similar expressions, and variations or negatives of these words. These statements appear in a number of places and include statements regarding the intent, belief or current expectations of Bridgeline Digital, Inc. These forward-looking statements are not guarantees of future results and are subject to risks, uncertainties and assumptions, including, but not limited to, the impact of the COVID – 19 pandemic and related public health measures on our financial results; business operations and the business of our customers, suppliers and partners; our ability to retain and upgrade current customers; increasing our recurring revenue; our ability to attract new customers; our revenue growth rate; our history of net loss and our ability to achieve or maintain profitability; our liability for any unauthorized access to our data or our users’ content, including through privacy and data security breaches; any decline in demand for our platform or products; changes in the interoperability of our platform across devices, operating systems, and third party applications that we do no control; competition in our markets; our ability to respond to rapid technological changes, extend our platform, develop new features or products, or gain market acceptance for such new features or products, particularly in light of potential disruptions to the productivity of our employees resulting from remote work; our ability to manage our growth or plan for future growth, and our acquisition of other businesses and the potential of such acquisitions to require significant management attention, disrupt our business, or dilute stockholder value; the volatility of the market price of our common stock; the ability to maintain our listing on the NASDAQ Capital Market; or our ability to maintain an effective system of internal controls as well as other risks described in our filings with the Securities and Exchange Commission. Any of such risks could cause our actual results to differ materially and adversely from those expressed in any forward-looking statement. We urge readers to review carefully the risk factors described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020 as well as in the other documents that we file with the Securities and Exchange Commission.

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

Overview

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

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

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

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

Locations

The Company’s corporate office is located in Woburn, Massachusetts. The Company maintains regional field offices serving the following geographical locations: Boston, MA; New York, NY; and Ontario, Canada. The Company has two wholly-owned subsidiaries: Bridgeline Digital Pvt. Ltd. located in Bangalore, India, and Bridgeline Digital Canada Inc. located in Ontario, Canada.

Customer Information

For the three months ended December 31, 2020, and 2019, one customer represented approximately 12% of the Company’s total revenue.

Results of Operations for the Three Months Ended December 31, 2020 compared to the Three Months Ended December 31, 2019

Total revenue for each of the three months ended December 31, 2020 and 2019, was $2.8 million. We had a net loss of $1.2 million for the three months ended December 31, 2020 and net income of $136 thousand for the three months ended December 31, 2019. Included in the net loss for the three months ended December 31, 2020, was a loss of $1.4 million as a result of the change in fair value of certain warrant liabilities and income of $88 thousand related to government grant income related to the Paycheck Protection Program (“PPP”) loan. Included in the net loss for the three months ended December 31, 2019, was a gain of $1.1 million as a result of the change in fair value of certain warrant liabilities. On December 31, 2019, the Company amended its Series A Convertible Preferred Stock resulting in a deemed dividend of $2.3 million charged against net income to arrive at net loss applicable to common shareholders for purposes of calculating earnings per share. Basic and diluted net loss per share attributable to common shareholders was ($0.26) for the three months ended December 31, 2020 and ($0.81) for the three months ended December 31, 2019.

(in thousands)	Three Months Ended December 31,
							$			%
	2020			2019			Change			Change
Revenue
Digital engagement services	$	837		$	1,096		$	(259	)		(24	%)
% of total net revenue		30	%		39	%
Subscription and perpetual licenses		1,999			1,736			263			15	%
% of total net revenue		70	%		61	%
Total net revenue		2,836			2,832			4			0	%

Cost of revenue
Digital engagement services		374			568			(194	)		(34	%)
% of digital engagement services revenue		45	%		52	%
Subscription and perpetual licenses		583			790			(207	)		(26	%)
% of subscription and perpetual revenue		29	%		46	%
Total cost of revenue		957			1,358			(401	)		(30	%)
Gross profit		1,879			1,474			405			27	%
Gross profit margin		66	%		52	%

Operating expenses
Sales and marketing		444			1,032			(588	)		(57	%)
% of total revenue		16	%		36	%
General and administrative		465			751			(286	)		(38	%)
% of total revenue		16	%		27	%
Research and development		349			390			(41	)		(11	%)
% of total revenue		12	%		14	%
Depreciation and amortization		232			258			(26	)		(10	%)
% of total revenue		8	%		9	%
Restructuring and acquisition-related expenses		210			5			205			4,100	%
% of total revenue		7	%		0	%
Total operating expenses		1,700			2,436			(736	)		(30	%)


Income (Loss) from operations		179			(962	)		1,141			(119	%)
Interest expense, net		6			-			6			100	%
Government grant income		88			-			88			100	%
Change in fair value of warrant liabilities		(1,441	)		1,101			(2,542	)		(231	%)
Income (loss) before income taxes		(1,168	)		139			(1,307	)		(940	%)
Provision for (benefit from) income taxes		(6	)		3			(9	)		(300	%)

Net income/(loss)	$	(1,162	)	$	136		$	(1,298	)		(954	%)

Non-GAAP Measure:
Adjusted EBITDA	$	672		$	(669	)	$	1,341			(200	%)

Revenue

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

Digital Engagement Services

Digital engagement services revenue is comprised of implementation and retainer related services. In total, revenue from digital engagement services decreased $259 thousand, or 24%, to $837 thousand for the three months ended December 31, 2020 compared to $1.1 million for the three months ended December 31, 2019. The decrease compared to the prior period is primarily due to a decrease in new service engagements. Digital engagement services revenue as a percentage of total revenue decreased to 30% from 39% for the three months ended December 31, 2020 compared to the three months ended December 31, 2019. The decrease as a percentage of total revenue is attributable to increases in revenues generated from subscription and perpetual licenses during the three months ended December 31, 2020.

Subscription and Perpetual Licenses

Revenue from subscription (SaaS) and perpetual licenses increased $263 thousand, or 15%, to $2.0 million for the three months ended December 31, 2020 compared to $1.7 million for the three months ended December 31, 2019. The increase compared to the prior period is primarily due to license revenues realized from our two acquisitions completed in the fiscal 2019 second quarter, partially offset by cancelled SaaS subscriptions for legacy customers. Subscription and perpetual license revenue as a percentage of total revenue increased to 70% from 61% for the three months ended December 31, 2020 compared to the three months ended December 31, 2019. The increase as a percentage of total revenue is attributable to the overall decreases in digital engagement services revenue.

Cost of Revenue

Total cost of revenue decreased $401 thousand, or 30%, to $957 thousand for the three months ended December 31, 2020 compared to $1.4 million for the three months ended December 31, 2019. The gross profit margin increased to 66% for the three months ended December 31, 2020 compared to 52% for the three months ended December 31, 2019. The increase in the gross profit margin for the three months ended December 31, 2020 compared to the prior period is primarily attributable to decreases in the use of third-party consultants and increases in the proportion of license revenue, which are generally associated with higher margins, to digital engagement service revenue.

Cost of Digital Engagement Services

Cost of digital engagement services decreased $194 thousand, or 34%, to $374 thousand for the three months ended December 31, 2020 compared to $568 thousand for the three months ended December 31, 2019. The decrease is primarily due to a decrease in headcount. The cost of digital engagement services as a percentage of digital engagement services revenue decreased to 45% for the three months ended December 31, 2020 compared to 52% for the three months ended December 31, 2019. The decrease as a percentage of revenues compared to the prior period is primarily due to the decline in digital engagement services revenue, as more fully described above.

Cost of Subscription and Perpetual License

Cost of subscription and perpetual licenses decreased $207 thousand, or 26%, to $583 thousand for the three months ended December 31, 2020 compared to $790 thousand for the three months ended December 31, 2019. The cost of subscription and perpetual licenses as a percentage of subscription and perpetual license revenue decreased to 29% for the three months ended December 31, 2020 compared to 46% for the three months ended December 31, 2019. These decreases are attributable to a reduction within our fixed costs to operate our cloud-based hosting model with Amazon Web Services and variable internal support costs.

Operating Expenses

Sales and Marketing Expenses

Sales and marketing expenses decreased $588 thousand, or 57%, to $444 thousand for the three months ended December 31, 2020 compared to $1.0 million for the three months ended December 31, 2019. Sales and marketing expenses represented 16% and 36% of total revenue for the three months ended December 31, 2020 and 2019, respectively. The decrease in expense was due to decrease in headcount and travel related expenses.

General and Administrative Expenses

General and administrative expenses decreased $286 thousand, or 38%, to $465 thousand for the three months ended December 31, 2020 compared to $751 thousand for the three months ended December 31, 2019. General and administrative expenses represented 16% and 27% of total revenue for the three months ended December 31, 2020 and 2019, respectively. The decrease in expense was due to decrease in headcount and personnel expenses.

Research and Development

Research and development expense decreased $41 thousand, or 11%, to $349 thousand for the three months ended December 31, 2020 compared to $390 thousand for the three months ended December 31, 2019. Research and development expenses represented 12% and 14% of total revenue for the three months ended December 31, 2020 and 2019, respectively. The decrease as a percentage of revenues compared to the prior period is primarily due to the decline in digital engagement services revenue, as more fully described above.

Depreciation and Amortization

Depreciation and amortization expense decreased $26 thousand, or 10%, to $232 thousand for the three months ended December 31, 2020 compared to $258 thousand for the three months ended December 31, 2019. The decrease is primarily due to amortization of intangible assets resulting from acquisitions. Amortization expense was $220 thousand and $237 thousand for the three months ended December 31, 2020 and 2019, respectively. Depreciation and amortization represented 8% and 9% of total revenue for the three months ended December 31, 2020 and 2019, respectively.

Restructuring and Acquisition-Related Expenses

During the three months ended December 31, 2020, the Company incurred acquisition-related expenses related to the acquisition of Woorank, which occurred in February 2021 of $210 thousand and represented 7% of total revenue for the three months ended December 31, 2020. No acquisition-related expenses were incurred during the three months ended December 31, 2019.

Net Income/(Loss)

Income/(Loss) from Operations

The income from operations was $179 thousand for the three months ended December 31, 2020 compared to a loss of ($1.0) million for the three months ended December 31, 2019. Operating expenses decreased $783 thousand, or 32%, to $1.7 million for the three months ended December 31, 2020 compared to $2.5 million for the three months ended December 31, 2019. The decreases for the three months ended December 31, 2020 are primarily due to a decrease in headcount and a reduction within our fixed costs to operate our cloud-based hosting model with Amazon Web Services and variable internal support costs.

Other Income (Expense), net

In the three months ended December 31, 2020, we recorded a loss related to the change in fair value of certain warrant liabilities of $1.4 million compared to a gain of $1.1 million thousand for the three months ended December 31, 2019.

During the three months ended December 31, 2020, the Company recognized government grant income of $88 thousand associated with proceeds received under the Paycheck Protection Program deemed probable to be forgiven based on the actual expenditures for qualified expenses during the period. As of December 31, 2020, the Company expended all loan proceeds on qualified expense incurred during the period. The Company plans to submit the PPP loan forgiveness application in the near term. Although the Company believes it is probable that the PPP loan will be forgiven, the Company cannot provide any objective assurance that it will obtain forgiveness in whole or in part.

Income Taxes

The provision for (benefit from) income tax expense was ($6) thousand and $3 thousand for the three months ended December 31, 2020 and 2019, respectively. Income tax expense represents the estimated liability for federal and state income taxes owed. We have net operating loss carryforwards and other deferred tax benefits that are available to offset any potential taxable income.

Adjusted EBITDA

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

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

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

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

	Three Months Ended December 31,
	2020			2019
Net income (loss)	$	(1,162	)	$	136
Provision for (benefit from) income tax		(6	)		3
Interest expense and other, net		(6	)		-
Government grant income		(88	)
Change in fair value of warrants		1,441			(1,101	)
Amortization of intangible assets		218			237
Depreciation		12			16
Restructuring and acquisition related charges		210			5
Other amortization		2			5
Stock-based compensation		51			30
Adjusted EBITDA	$	672		$	(669	)

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

Liquidity and Capital Resources

Cash Flows

Operating Activities

Cash provided by operating activities was $451 thousand for the three months ended December 31, 2020 compared to cash provided by operating activities of $110 thousand for the three months ended December 31, 2019. The change in cash provided by operating activities compared to the prior period was primarily due to a decrease in loss from operations and increases in deferred revenue and accounts payable.

Investing Activities

Cash used in investing activities was $41 thousand for the three months ended December 31, 2020 and we did not have any cash flows from investing activities during the three months ended December 31, 2019.

Financing Activities

We did not have any cash flows from financing activities for the three months ended December 31, 2020 and 2019.

Capital Resources and Liquidity Outlook

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

On April 17, 2020, the Company entered into a loan with an aggregate principal amount of $1,047,500, pursuant to the PPP. The Company has performed initial calculations for PPP loan forgiveness according to the terms and conditions of the U.S. Small Business Administration’s (the “SBA”) Loan Forgiveness Application (Revised January 8, 2021) and, based on such calculations, expects that the PPP loan will be forgiven in full based on usage of related proceeds over a period less than 24 weeks. In addition, the Company determined it is probable the Company will meet all the conditions of the PPP loan forgiveness. However, there can be no assurances that the Company will ultimately meet the conditions for forgiveness of the loan or that the Company will not take actions that could cause the Company to be ineligible for forgiveness of the loan, in whole or in part. As of December 31, 2020, the Company expended all loan proceeds on qualified expenses incurred during the period. The Company plans to submit the PPP loan forgiveness application in the near term.

Off-Balance Sheet Arrangements

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

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

Commitments and Contingencies

The Company leases its facilities in the United States and Canada. We currently have no future commitments that extend past fiscal 2025. The following summarizes our cash contractual obligations and commitments by maturity as of December 31, 2020:

(in thousands)

Payment obligations by year	FY21		FY22		FY23		FY24		FY25		Total
Operating leases	$	142	$	169	$	173	$	115	$	84	$	683

Critical Accounting Policies

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

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

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 implementation costs incurred in a cloud computing arrangement;

	●	Accounting for goodwill and other intangible assets;
	●	Accounting for Paycheck Protection Program; and

	●	Accounting for stock-based compensation.

Revenue Recognition

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

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

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

	•	Identify the customer contract;
	•	Identify performance obligations that are distinct;
	•	Determine the transaction price;
	•	Allocate the transaction price to the distinct performance obligations; and
	•	Recognize revenue as the performance obligations are satisfied.

Allowance for Doubtful Accounts

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

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

Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement

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

Accounting for Goodwill and Intangible Assets

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

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

Accounting for Stock-Based Compensation

At December 31, 2020, we maintained two stock-based compensation plans, one of which has expired but still contains vested and unvested stock options. The two plans are more fully described in Note 12 to the Consolidated Financial Statements of our Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 23, 2020.

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

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

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

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

Accounting for Paycheck Protection Program

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

Item 3. Qualitative and Quantitative Disclosures About Market Risk.

Not required.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of December 31, 2020.

Changes in Internal Control over Financial Reporting

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

Limitations on Controls

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

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

There were no sales of unregistered equity securities in the three months ended December 31, 2020.

Item 6. Exhibits.

Exhibit No.

Description of Document

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

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

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

3.4		Amended and Restated By-laws (incorporated by reference to Exhibit 3.1 to our current Report on Form 10-Q filed on February 17, 2015)

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

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

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

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

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

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

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*		XBRL Taxonomy Extension Schema

101.CAL*		XBRL Taxonomy Extension Calculation

101.DEF*		XBRL Taxonomy Extension Definition

101.LAB*		XBRL Taxonomy Extension Labels

101.PRE*		XBRL Taxonomy Extension Presentation

*Management compensatory plan

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

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 11, 2021		/s/ Roger Kahn
Date		Roger Kahn President and Chief Executive Officer (Principal Executive Officer)

February 11, 2021		/s/ Mark G. Downey
Date		Mark G. Downey Chief Financial Officer (Principal Financial and Accounting Officer)