UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
(Mark One)
For the quarterly period ended
OR
For the transition period from ______________ to ______________
Commission File Number
Bridgeline Digital, Inc.
(Exact name of registrant as specified in its charter)
| | | |
| State or other jurisdiction of incorporation or organization | IRS Employer Identification No. |
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| (Address of Principal Executive Offices) | (Zip Code) |
| ( |
| (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.
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) ☒
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 ☐ | | 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
Securities registered pursuant to Section (12)b of the Act:
| Title of each class | Trading Symbols(s) | Name of each exchange on which registered |
| | | |
The number of shares of common stock par value $0.001 per share, outstanding as of February 8, 2022 was
Bridgeline Digital, Inc.
Quarterly Report on Form 10-Q
For the Quarterly Period ended December 31, 2021
Index
| Page |
||
| Part I |
Financial Information |
|
| Item 1. |
Condensed Consolidated Financial Statements |
|
| Condensed Consolidated Balance Sheets (unaudited) as of December 31, 2021 and September 30, 2021 |
4 |
|
| Condensed Consolidated Statements of Operations (unaudited) for the three months ended December 31, 2021 and 2020 |
5 |
|
| Condensed Consolidated Statements of Comprehensive Income/(Loss) (unaudited) for the three months ended December 31, 2021 and 2020 |
6 |
|
| Condensed Consolidated Statements of Stockholders’ Equity (unaudited) for the three months ended December 31, 2021 and 2020 |
7 |
|
| Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended December 31, 2021 and 2020 |
8 |
|
| Notes to Unaudited Condensed Consolidated Financial Statements |
9 |
|
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
25 |
| 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, 2021
Statements contained in this Report on Form 10-Q, other than statements or characterizations of historical fact, are forward-looking statements. These “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, are based on our current expectations, estimates and projections about our industry, management's beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can often be identified by words such as "anticipates," "expects," "intends," "plans," "predicts," "believes," "seeks," "estimates," "may," "will," "should," "would," "could," "potential," "continue," "ongoing," similar expressions, and variations or negatives of these words. These statements appear in a number of places in this Form 10-Q and include statements regarding the intent, belief or current expectations of Bridgeline Digital, Inc. These forward-looking statements are not guarantees of future results and are subject to risks, uncertainties and assumptions, including, but not limited to, the impact of the 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, 2021, 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, 2021 | September 30, 2021 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease assets | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Current portion of long-term debt | $ | $ | ||||||
| Current portion of operating lease liabilities | ||||||||
| Accounts payable | ||||||||
| Accrued liabilities | ||||||||
| Current portion of purchase price and contingent consideration payable | ||||||||
| Deferred revenue | ||||||||
| Total current liabilities | ||||||||
| Long-term debt, net of current portion (Note 7) | ||||||||
| Operating lease liabilities, net of current portion | ||||||||
| Purchase price and contingent consideration payable, net of current portion | ||||||||
| Warrant liabilities | ||||||||
| Other long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 13) | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock - $ par value; shares authorized; | ||||||||
| Series C Convertible Preferred stock: shares authorized; shares issued and outstanding at December 31, 2021 and September 30, 2021 | ||||||||
| Series D Convertible Preferred stock: shares authorized; shares outstanding at December 31, 2021 and September 30, 2021 | ||||||||
| Common stock - $ par value; shares authorized; shares issued and outstanding at December 31, 2021, and shares at September 30, 2021, issued and outstanding | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
| 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 |
||||||||
| 2021 |
2020 |
|||||||
| Net revenue: |
||||||||
| Digital engagement services |
$ | $ | ||||||
| Subscription and perpetual licenses |
||||||||
| Total net revenue |
||||||||
| Cost of revenue: |
||||||||
| Digital engagement services |
||||||||
| Subscription and perpetual licenses |
||||||||
| Total cost of revenue |
||||||||
| Gross profit |
||||||||
| Operating expenses: |
||||||||
| Sales and marketing |
||||||||
| General and administrative |
||||||||
| Research and development |
||||||||
| Depreciation and amortization |
||||||||
| Restructuring and acquisition related expenses |
||||||||
| Total operating expenses |
||||||||
| Income (loss) from operations |
( |
) | ||||||
| Interest (income) expense and other, net |
( |
) | ||||||
| Change in fair value of warrant liabilities |
( |
) |
||||||
| Income (loss) before income taxes |
( |
) |
||||||
| Provision for (benefit from) income taxes |
( |
) |
||||||
| Net income (loss) |
$ | $ | ( |
) |
||||
| Net income (loss) per share attributable to common shareholders: |
||||||||
| Basic net income (loss) per share |
$ | $ | ( |
) |
||||
| Diluted net income (loss) per share |
$ | $ | ( |
) |
||||
| Number of weighted average shares outstanding: |
||||||||
| Basic |
||||||||
| Diluted |
||||||||
| 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 |
||||||||
| 2021 |
2020 |
|||||||
| Net income (loss) |
$ | $ | ( |
) |
||||
| Other comprehensive income: |
||||||||
| Foreign currency translation adjustment |
||||||||
| Comprehensive income (loss) |
$ | $ | ( |
) |
||||
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, 2021 |
||||||||||||||||||||||||||||||||
| Accumulated |
||||||||||||||||||||||||||||||||
| Preferred Stock |
Common Stock |
Additional |
Other |
Total |
||||||||||||||||||||||||||||
| Paid-in |
Accumulated |
Comprehensive |
Stockholders’ |
|||||||||||||||||||||||||||||
| Shares |
Amount |
Shares |
Amount |
Capital |
Deficit |
Loss |
Equity |
|||||||||||||||||||||||||
| Balance at October 1, 2021 |
$ | $ | $ | $ | ( |
) |
$ | ( |
) |
$ | ||||||||||||||||||||||
| Stock-based compensation expense |
||||||||||||||||||||||||||||||||
| Issuance of common stock –warrants exercised |
||||||||||||||||||||||||||||||||
| Net income |
||||||||||||||||||||||||||||||||
| Foreign currency translation |
||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 |
$ | $ | $ | $ | ( |
) |
$ | ( |
) |
$ | ||||||||||||||||||||||
| 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 |
$ | $ | $ | $ | ( |
) |
$ | ( |
) |
$ | ||||||||||||||||||||||
| Stock-based compensation expense |
||||||||||||||||||||||||||||||||
| Net loss |
( |
) |
( |
) |
||||||||||||||||||||||||||||
| Foreign currency translation |
||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 |
$ | $ | $ | $ | ( |
) |
$ | ( |
) |
$ | ||||||||||||||||||||||
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, |
||||||||
| 2021 |
2020 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net income (loss) |
$ | $ | ( |
) |
||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||
| Amortization of intangible assets |
||||||||
| Depreciation and other amortization |
||||||||
| Change in fair value of contingent consideration |
||||||||
| Change in fair value of warrant liabilities |
( |
) |
||||||
| Stock-based compensation |
||||||||
| Government grant income |
( |
) |
||||||
| Changes in operating assets and liabilities |
||||||||
| Accounts receivable |
( |
) |
||||||
| Prepaid expenses and other current assets |
( |
) |
( |
) |
||||
| Other assets |
( |
) |
( |
) |
||||
| Accounts payable and accrued liabilities |
||||||||
| Deferred revenue |
( |
) | ||||||
| Other liabilities |
( |
) |
||||||
| Total adjustments |
) |
|||||||
| Net cash provided by operating activities |
||||||||
| Cash flows from investing activities: |
||||||||
| Software development capitalization costs |
( |
) |
( |
) |
||||
| Purchase of property and equipment |
( |
) |
( |
) |
||||
| Net cash used in investing activities |
( |
) |
( |
) |
||||
| Cash flows from financing activities: |
||||||||
| Payments of contingent consideration and deferred cash payable |
( |
) | ||||||
| Payments of long-term debt |
( |
) | ||||||
| Net cash used in financing activities |
( |
) | ||||||
| Effect of exchange rate changes on cash and cash equivalents |
( |
) | ||||||
| Net increase (decrease) in cash and cash equivalents |
( |
) | ||||||
| Cash and cash equivalents at beginning of period |
||||||||
| Cash and cash equivalents at end of period |
$ | $ | ||||||
| Supplemental disclosures of cash flow information: |
||||||||
| Cash paid for: |
||||||||
| Interest |
$ | $ | ||||||
| Income taxes |
$ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
1. Description of Business
Overview
Bridgeline Digital is a marketing technology software company that helps companies grow online revenue and share information with customers, partners and employees.
Bridgeline’s Unbound platform is a Digital Experience Platform that includes Web Content Management, eCommerce, eMarketing, Social Media management, and Web Analytics.
Bridgeline’s Unbound platform, combined with its professional services, assists customers in driving lead generation, increasing revenue, improving customer service and loyalty, enhancing employee knowledge, and reducing operational costs.
Our Unbound Franchise product empowers large franchises, brand networks, and other multi-unit organizations to manage a large hierarchy of digital properties at scale.
OrchestraCMS is the only content and digital experience platform built 100% native on Salesforce and helps customers create websites and intranets for their customers, partners, and employees; 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 is a commerce-oriented site search product that provides for Natural Language Processing with artificial intelligence to present relevant search results based on long-tail keyword searches in seven languages.
Woorank SRL (“Woorank”) is a Search Engine Optimization (“SEO”) audit tool that generates an instant audit of the site’s technical, on-page and off-page SEO. Woorank’s clear, actionable insights help companies increase their search ranking, website traffic, audience engagement, conversion, and customer retention rates.
Hawk Search, Inc. (“Hawk Search”) is a search, recommendation, and personalization application built for marketers, merchandisers and developers that enhances, normalizes and enriches a customer's site search and browse experience. Hawk Search leverages advanced artificial intelligence, machine learning and industry-leading analyzers to deliver accurate results from federated data sources.
All of Bridgeline’s software is available through a cloud-based software as a service (“SaaS”) model, whose flexible architecture provides customers with hosting and support. Additionally, Unbound and Hawk Search are available via a traditional perpetual licensing business model, in which the software resides on a dedicated infrastructure in either the customer’s facility, or manage-hosted by Bridgeline via a cloud-based hosted services model.
Bridgeline Digital was incorporated under the laws of the State of Delaware on August 28, 2000.
Locations
The Company’s corporate office is located in Woburn, Massachusetts. The Company maintains regional field offices serving the following geographical locations: Boston, Massachusetts; Woodbury, New York; Chicago, Illinois; Raleigh, North Carolina; Ontario, Canada; and Brussels, Belgium.
The Company has four wholly-owned subsidiaries: Bridgeline Digital Pvt. Ltd., located in Bangalore, India; Bridgeline Digital Canada, Inc., located in Ontario, Canada; Hawk Search Inc. located in Illinois, United States; and Bridgeline Digital Belgium BV, located in Brussels, Belgium.
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, 2021 are not necessarily indicative of the results to be expected for the year ending September 30, 2022. The accompanying September 30, 2021 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, 2021, filed with the Securities and Exchange Commission (“SEC”) on December 20, 2021.
Reclassifications
Certain amounts in the prior period financial statements have been reclassified to conform to the presentation in the current period financial statements. These reclassifications had no effect on the previously reported net loss.
Accounting Pronouncements Pending Adoption
Financial Instruments – Credit Losses
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“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 No. 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.
Debt with Conversion and Other Options and Derivatives and Hedging
In August 2020, the FASB issued ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The amendments in ASU No. 2020-06 simplify the complexity associated with applying U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. More specifically, the amendments focus on the guidance for convertible instruments and derivative scope exceptions for contracts in an entity’s own equity. ASU No. 2020-06 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently evaluating the impact of the new standard on its consolidated financial statements and related disclosures.
Business Combinations
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 606): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires that an entity recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 as if it had originated the contracts. Generally, this should result in an acquirer recognizing and measuring the acquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements, if the acquiree prepared financial statements in accordance with U.S. GAAP. The amendment in this update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The guidance should be applied prospectively to business combinations occurring on or after the effective date of the amendment in this update. The Company is evaluating the potential impact of this adoption on its consolidated financial statements and related disclosures.
All other Accounting Standards Updates issued but not yet effective are not expected to have a material effect on the Company’s future consolidated financial statements.
3. Accounts Receivable
Accounts receivable consist of the following:
| As of 2021 |
As of 2021 |
|||||||
| Accounts receivable |
$ | $ | ||||||
| Allowance for doubtful accounts |
( |
) | ( |
) |
||||
| Accounts receivable, net |
$ | $ | ||||||
As of December 31, 2021,
4. Fair Value Measurement and Fair Value of Financial Instruments
The Company’s financial instruments consist principally of accounts receivable, accounts payable, warrant liabilities, contingent consideration and long-term debt arrangements. The Company measures its financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. Additionally, under U.S. GAAP, companies are required to provide disclosure and categorize assets and liabilities measured at fair value into one of three different levels depending on the assumptions (i.e., inputs) used in the valuation. Level 1 provides the most reliable measure of fair value while Level 3 generally requires significant management judgment. Financial assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. The fair value hierarchy is defined as follows:
Level 1—Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2—Valuations are based on quoted prices for similar assets or liabilities in active markets, or quoted prices in markets that are not active for which significant inputs are observable, either directly or indirectly.
Level 3—Valuations are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Inputs reflect management’s best estimate of what market participants would use in valuing the asset or liability at the measurement date.
The carrying value of the Company’s accounts receivable and accounts payable approximates fair value due to their short-term nature.
The Company’s warrant liabilities are measured at fair value at each reporting period with changes in fair value recognized in earnings during the period. The fair value of the Company’s warrant liabilities are valued utilizing Level 3 inputs. Warrant liabilities are valued using a Monte Carlo option-pricing model, which takes into consideration the volatilities of comparable public companies, due to the relatively low trading volume of the Company’s common stock. The Monte Carlo option-pricing model uses certain assumptions, including expected life and annual volatility. The range and weighted average volatilities of comparable public companies utilized was
The significant inputs and assumptions utilized were as follows:
| As of December 31, 2021 |
As of September 30, 2021 |
|||||||||||||||||||||||
| Montage |
Series C Preferred |
Series D Preferred |
Montage Capital |
Series C Preferred |
Series D Preferred |
|||||||||||||||||||
| Volatility |
% |
% |
% |
% |
% |
% |
||||||||||||||||||
| Risk-free rate |
% |
% |
% |
% |
% |
% |
||||||||||||||||||
| Stock price |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
The Company recognized gains/(losses) of $
The Company’s contingent consideration obligations are from arrangements resulting from acquisitions that involve potential future payment of consideration that is contingent upon the achievement of revenue targets and operational goals. Contingent consideration is recognized at its estimated fair value at the date of acquisition based on the Company’s expected probability of future payment, discounted using a weighted-average cost of capital in accordance with accepted valuation methodologies.
The Company reviews and re-assesses the estimated fair value of contingent consideration liabilities at each reporting period and the updated fair value could differ materially from the initial estimates. The Company measures contingent consideration recognized in connection with acquisitions at fair value on a recurring basis using significant unobservable inputs classified as Level 3 inputs. The Company uses a simulation-based model to estimate the fair value of contingent consideration on the acquisition date and at each reporting period. The simulation model uses certain inputs and assumptions, including revenue projections, an estimate of revenue discount and volatility rate based on comparable public companies’ data, and risk-free rate. Significant increases or decreases to either of these inputs in isolation could result in a significantly higher or lower liability with a higher liability limited to the contractual maximum of the contingent consideration liabilities. Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate on the acquisition date and each reporting period and the amount paid will be recorded in earnings. The significant inputs and assumptions utilized were as follow as of:
| December 31, 2021 |
September 30, 2021 |
|||||||
| Revenue discount rate |
% | % | ||||||
| Revenue volatility |
% | % | ||||||
| Discount rate |
% | % | ||||||
Assets and liabilities of the Company measured at fair value on a recurring basis as of December 31, 2021 and September 30, 2021, are as follows:
| As of December 31, 2021 |
||||||||||||||||
| Level 1 |
Level 2 |
Level 3 |
Total |
|||||||||||||
| Liabilities: |
||||||||||||||||
| Warrant liabilities: |
||||||||||||||||
| Montage |
$ | $ | $ | $ | ||||||||||||
| Series A and C |
||||||||||||||||
| Series D |
||||||||||||||||
| Total warrant liabilities |
||||||||||||||||
| Contingent consideration obligations |
||||||||||||||||
| Total Liabilities |
$ | $ | $ | $ | ||||||||||||
| As of September 30, 2021 |
||||||||||||||||
| Level 1 |
Level 2 |
Level 3 |
Total |
|||||||||||||
| Liabilities: |
||||||||||||||||
| Warrant liabilities: |
||||||||||||||||
| Montage |
$ | $ | $ | $ | ||||||||||||
| Series A and C |
||||||||||||||||
| Series D |
||||||||||||||||
| Total warrant liabilities |
||||||||||||||||
| Contingent consideration obligations |
||||||||||||||||
| Total Liabilities |
$ | $ | $ | $ | ||||||||||||
The following table provides a rollforward of the fair value, as determined by Level 3 inputs, as follows:
| Contingent Consideration Obligations |
Warrant Liabilities |
|||||||
| Balance at beginning of period, October 1, 2021 |
$ | $ | ||||||
| Additions |
||||||||
| Payments or exercises |
( |
) |
||||||
| Adjustment to fair value |
( |
) |
||||||
| Balance at end of period, December 31, 2021 |
$ | $ | ||||||
5. Intangible Assets
The components of intangible assets, net of accumulated amortization, are as follows:
| As of 2021 |
As of 2021 |
|||||||
| Domain and trade names |
$ | $ | ||||||
| Customer related |
||||||||
| Technology |
||||||||
| Balance at end of period |
$ | $ | ||||||
Total amortization expense was $
6. Accrued Liabilities
Accrued liabilities consist of the following:
| As of 2021 |
As of 2021 |
|||||||
| Compensation and benefits |
$ | $ | ||||||
| Professional fees |
||||||||
| Taxes |
||||||||
| Insurance |
||||||||
| Other |
||||||||
| Balance at end of period |
$ | $ | ||||||
7. Long-term debt
On March 1, 2021, the Company assumed the outstanding long-term debt obligations of an acquired business and issued a seller note to one of the selling shareholders (see Note 14). The assumed debt obligations and seller note are denominated in Euros.
Long-term debt consisted of the following:
| As of 2021 | As of 2021 | |||||||
| Vendor loan payable (“Vendor loan”), accruing interest at % per annum. Principal and interest are payable in two lump-sum installments and the loan matures on . | $ | $ | ||||||
| Term loan payable, accruing interest at fixed rates ranging between % to % per annum, payable in monthly or quarterly payments of interest and principal and matures on . | ||||||||
| Term loan payable, accruing interest at % per annum, payable in quarterly installments and matures on . | ||||||||
| Seller’s note payable (“Seller’s note”), due to one of the selling shareholders, accruing interest at a fixed rate of % per annum. The Seller’s note is payable over five installments and matures on . | ||||||||
| Total debt | ||||||||
| Less: current portion | ( | ) | ( | ) | ||||
| Long-term debt, net of current portion | $ | $ | ||||||
At December 31, 2021, future maturities of long-term debt are as follows:
| Fiscal year: |
||||
| 2022 (remaining) |
$ | |||
| 2023 |
||||
| 2024 |
||||
| 2025 |
||||
| 2026 |
||||
| Thereafter |
||||
| Total debt |
$ |
8. Stockholders’ Equity
Series A Convertible Preferred Stock
The Company has designated
Series C Convertible Preferred Stock
The Company has designated
Registered Offering of Common Stock and Private Placement of Series D Convertible Preferred Stock (the “ May 2021 Offerings”)
On May 14, 2021, the Company offered and sold a total of
Additionally, on May 14, 2021, the Company entered into securities purchase agreements with certain institutional investors pursuant to which the Company offered and sold a total of
Joseph Gunnar & Company, LLC acted as lead placement agent for both the RD Offering and the Private Placement (collectively, the “May 2021 Offerings”) and Taglich Brothers, Inc. acted as co-placement agent for the May 2021 Offerings (the "Placement Agents"). As compensation for their services, the Company paid to the Placement Agents a fee equal to
In connection with the Private Placement, the Company has designated
The Company’s common stock is listed on the NASDAQ Capital Market, and, as such, it is subject to the applicable rules of the Nasdaq Stock Market LLC, including Nasdaq Listing Rule 5635(a), which requires stockholder approval in connection with the acquisition of another company (see Note 13) if the Nasdaq-listed company will issue 20% or more of its common stock. For purposes of Nasdaq Listing Rule 5635(a), the issuance of any common stock in the Acquisition (see Note 13) and the May 2021 Offerings would be aggregated together. Thus, to permit the issuance of common stock upon conversion of the Series D Preferred Stock and upon exercise of the warrants issued in the Private Placement, the Company had to obtain stockholder approval of these issuances. Upon issuance, the Company had determined that such prohibition did not represent an inability for the Company to satisfy its obligation to deliver shares upon conversion, as the holders’ conversion option itself was contingent upon Stockholder Approval. On September 16, 2021, the Company obtained Stockholder Approval. The Company determined that the Series D Preferred Stock should be classified as permanent equity.
The Series D Preferred Stock contained an embedded conversion feature that could affect the ultimate settlement of the Series D Preferred Stock. The Company determined that the embedded conversion feature’s economic characteristics and risks were clearly and closely related to the economic characteristics and risks of the Series D Preferred Stock. As a result, the embedded conversion feature was not required to be bifurcated from the Series D Preferred Stock.
The Series D Preferred Stock issued contained a beneficial conversion feature, which arises when a debt or equity security is issued with an embedded conversion option that is deemed beneficial to the investor, that is, in-the-money, at inception, as the conversion option has an effective conversion price that is less than the market price of the underlying stock at the commitment date. An embedded beneficial conversion feature is required to be recognized separately by allocating a portion of the proceeds equal to the intrinsic value, at the commitment date, of the feature to additional paid-in capital. As discussed below, the May 2021 Offerings cash proceeds allocated to the Series D Preferred Stock based on its relative fair value resulted in an effective conversion price of $
During the fourth quarter of fiscal 2021, the Company recognized the impact of the beneficial conversion feature upon Stockholder Approval, as the beneficial conversion feature became immediately exercisable, at the option of the holder. The Company recognized full accretion of the beneficial conversion feature as a deemed dividend of $
As noted above, in connection with the May 2021 Offerings, the Company issued Series D Preferred Warrants and Placement Agents Warrants to purchase up to 592,106 and 179,536 shares of common stock, respectively. The Series D Preferred and Placement Agents Warrants (hereinafter referred to collectively as the “Series D Warrants”) are puttable at the option of the holder in the event of a Fundamental Transaction, as defined in the respective warrant agreements. The put feature requires the Company to pay holders an amount of cash equal to the Black-Scholes Value, as defined in the respective warrant agreements, of the remaining unexercised portion of the Series D Warrants on the date of consummation of such Fundamental Transaction. The Company determined that the Series D Warrants are required to be classified as liabilities measured at fair value at their issuance date and to be subsequently remeasured at fair value each reporting period, with changes in fair value recognized in period earnings (see Note 4).
As the common stock in the RD Offering was sold concurrently with the Units sold in the Private Placement, for any common purchasers, inclusive of purchaser affiliated entities, the aggregate proceeds from the May 2021 Offerings were allocated, on an investor-by-investor basis, to the Series D Preferred Warrants based on their fair value and the residual proceeds to the common stock and Series D Preferred Stock based on their relative fair values. Accordingly, the May 2021 Offerings proceeds, net of certain fees due to placement agents, inclusive of the fair value of warrants issued to placement agents, and transaction-related expenses, of approximately $
The issuance-date fair value of the Series D Warrants issued to placement agents was determined to be incremental cost directly attributable to the May 2021 Offerings and was charged by the Company against proceeds along with other fees paid to the Placement Agents.
Registered Offering and Sale of Common Stock
On February 4, 2021, the Company offered and sold a total of
Joseph Gunnar & Company, LLC acted as lead placement agent for the Offering, and Taglich Brothers, Inc. acted as co-placement agent for the Offering. As compensation for their services, the Company paid to the Placement Agents a fee equal to
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
Compensation Expense
Compensation expense is generally recognized on a graded accelerated basis over the vesting period of grants. Compensation expense is recorded in the consolidated statements of operations with a portion charged to Cost of revenue and a portion to Operating expenses, depending on the employee’s department.
During the three months ended December 31, 2021 and 2020, compensation expense related to share-based payments was as follows:
| Three Months Ended | ||||||||
| 2021 | 2020 | |||||||
| Cost of revenue | $ | $ | ||||||
| Operating expenses | ||||||||
| $ | $ | |||||||
As of December 31, 2021, the Company had approximately $
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 to the Company. The warrants are typically exercisable months after the issue date, expire in 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 -year warrant (the “Montage Warrant”) to purchase the Company’s common stock at a price equal to per share. The Montage Warrant contains an equity buy-out provision upon the earlier of (1) dissolution or liquidation of the Company, (2) any sale or distribution of all or substantially all of the assets of the Company, or (3) a “Change in Control” as defined within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934. Montage Capital has the right to receive an equity buy-out of $
Series A 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 years and an exercise price of (ii) Series B Warrants, which expired unexercised during the Company’s 2021 fiscal year, with an initial term of
As of December 31, 2021, the number of shares issuable upon exercise of the (i) Series A Warrants were
Series D Preferred Warrants - The Units sold in Private Placement on May 14, 2021 also consisted of Series D Warrants to purchase up to
In addition, pursuant to the May 2021 Offerings, the Company issued to the Placement Agents warrants to purchase an aggregate of
The Company may not effect, and a holder will not be entitled to convert, the Series D Preferred Stock or exercise any May 2021 Offering Warrants, which, upon giving effect to such conversion or exercise, would cause (i) the aggregate number of shares of common stock beneficially owned by the Purchaser (together with its affiliates) to exceed 4.99% (or, at the election of the holder, 9.99%) of the number of shares of common stock outstanding immediately after giving effect to the exercise. As of December 31, 2021, Series D Warrants have been exercised and the aggregate number of shares issuable upon exercise was
The Montage Warrants, Series C Preferred Warrants, the Placement Agent Warrants issued in connection with the Series C Preferred Stock, and the Series D Warrants were all determined to be derivative liabilities and are subject to remeasurement each reporting period (see Note 4).
Total warrants outstanding as December 31, 2021, were as follows:
| Type | Issue Date | Shares | Price | Expiration | |||||||
| Investors |
| $ |
| ||||||||
| Financing (Montage) |
| $ |
| ||||||||
| Investors |
| $ |
| ||||||||
| Placement Agent |
| $ |
| ||||||||
| Investors |
| $ |
| ||||||||
| Investors |
| $ |
| ||||||||
| Investors |
| $ |
| ||||||||
| Placement Agent |
| $ |
| ||||||||
| Placement Agent |
| $ |
| ||||||||
| Investors |
| $ |
| ||||||||
| Placement Agent |
| $ |
| ||||||||
| Total | |||||||||||
Summary of Option and Warrant Activity and Outstanding Shares
During the months ended December 31, 2021, the Company granted options to purchase
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 months ended December 31, 2021 are as follows:
| Weighted-average fair value per share option | $ | |||
| Expected life (in years) | ||||
| Volatility | % | |||
| Risk-free interest rate | % | |||
| Dividend yield | % |
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 since the Company does not currently pay cash dividends on its common stock and does not anticipate doing so in the foreseeable future.
A summary of combined stock option and warrant activity for the three months ended December 31, 2021, is as follows:
| Stock Options | Stock Warrants | |||||||||||||||
| Weighted - | Weighted - | |||||||||||||||
| Average | Average | |||||||||||||||
| Exercise | Exercise | |||||||||||||||
| Options | Price | Warrants | Price | |||||||||||||
| Outstanding, October 1, 2021 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Forfeited/Exchanged | ( | ) | ||||||||||||||
| Expired | ( | ) | ( | ) | ||||||||||||
| Outstanding, December 31, 2021 | $ | $ | ||||||||||||||
| Options vested and exercisable, December 31, 2021 | $ | |||||||||||||||
As of December 31, 2021, the aggregate intrinsic value of options outstanding and exercisable was $
9. Net Income (Loss) Per Share Attributable to Common Shareholders
Basic net income (loss) per share is computed by dividing net income (loss) applicable to common shareholders by the weighted average number of common shares outstanding. Diluted net loss per share attributable to common shareholders is computed using the weighted average number of common shares outstanding during the period plus the dilutive effect of outstanding stock options and warrants using the “treasury stock” method and convertible preferred stock using the “as-if-converted” method. The computation of diluted earnings per share does not include the effect of outstanding stock options, warrants and convertible preferred stock that are considered anti-dilutive.
Basic and diluted net income (loss) per share is computed as follows:
| Three Months Ended December 31, |
||||||||
| (in thousands, except per share data) |
2021 |
2020 |
||||||
| Numerator: |
||||||||
| Net income (loss) - basic earnings per share |
$ | $ | ( |
) |
||||
| Effect on dilutive securities: |
||||||||
| Change in fair value of in-the-money warrant derivative liabilities |
( |
) |
||||||
| Net income (loss) applicable to common shareholders – diluted earnings per share |
$ | $ | ( |
) | ||||
| Denominator: |
||||||||
| Weighted-average shares outstanding for basic earnings per share |
||||||||
| Effect on dilutive securities: |
||||||||
| Options |
||||||||
| Warrants |
||||||||
| Preferred Stock |
||||||||
| Weighted-average shares outstanding for diluted earnings per share |
||||||||
| Basic net income (loss) per share |
$ | $ | ( |
) |
||||
| Diluted net income (loss) per share |
$ | $ | ( |
) |
||||
For the three months ended December 31, 2021, potential common stock equivalents excluded from the computation of diluted net income per share because their inclusion would have been anti-dilutive included stock options and warrants to purchase common stock totaling
For the three months ended December 31, 2020, diluted net loss per share was the same as basic net loss per share, as the effects of all the Company’s potential common stock equivalents 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 Company’s 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 |
||||||||
| Revenues: |
2021 |
2020 |
||||||
| United States |
$ | $ | ||||||
| International |
||||||||
| $ | $ | |||||||
The largest concentration within the Company’s international revenue geography is within Canada.
Long-lived assets located in foreign jurisdictions aggregated approximately $
The Company’s revenue by type is as follows:
| Three Months Ended |
||||||||
| Revenues: |
2021 |
2020 |
||||||
| Digital Engagement Services |
$ | $ | ||||||
| Subscription |
||||||||
| Maintenance |
||||||||
| Hosting |
||||||||
| $ | $ | |||||||
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.
The following table summarizes the classification and net change in deferred revenue as of and for the three months ended December 31, 2021:
| Deferred Revenue |
||||||||
| Current |
Long-Term |
|||||||
| Balance as of October 1, 2021 |
$ | $ | ||||||
| Increase (decrease) |
( |
) |
( |
) | ||||
| Balance as of December 31, 2021 |
$ | $ | ||||||
11. Income Taxes
Income tax benefit/expense was $
12. Leases
The Company leases facilities in the United States for its corporate and regional field offices. During the three months ended December 31, 2021, the Company was also a lessee/sublessor for certain office locations relating to its restructuring plans commenced in fiscal 2015.
Determination of Whether a Contract Contains a Lease
We determine if an arrangement is a lease at inception, or upon 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 Judgments
Management makes certain estimates and assumptions regarding each new lease and sublease agreement, renewal and amendment, including, but not limited to, property values, market rents, useful life of the underlying property, discount rate and probable term, all of which can impact (1) the classification as either an operating or finance lease, (2) measurement of lease liabilities and ROU assets and (3) the term over which the ROU asset and leasehold improvements are amortized. The amount of depreciation and amortization, interest and rent expense would vary if different estimates and assumptions were used.
The components of net lease costs were as follows:
| Three months Ended December 31, |
||||||||
| 2021 |
2020 |
|||||||
| Condensed Consolidated Statement of Operations: |
||||||||
| Operating lease cost |
$ | $ | ||||||
| Variable lease cost |
||||||||
| Less: Sublease income, net |
( |
) |
( |
) |
||||
| Total |
$ | $ | ||||||
Cash paid for amounts included in the measurement of lease liabilities was $
At December 31, 2021, future minimum rental commitments under non-cancelable leases with initial or remaining terms in excess of one year were as follows:
| Operating Leases |
Receipts |
Net Leases |
||||||||||
| Fiscal year: |
||||||||||||
| 2022 (remaining) |
$ | $ | $ | |||||||||
| 2023 |
||||||||||||
| 2024 |
||||||||||||
| 2025 |
||||||||||||
| 2026 |
||||||||||||
| Total lease commitments |
$ | $ | ||||||||||
| Less: Amount representing interest |
( |
) |
||||||||||
| Present value of lease liabilities |
||||||||||||
| Less: current portion |
( |
) |
||||||||||
| Operating lease liabilities, net of current portion |
$ | |||||||||||
As of December 31, 2021, the Company had no lease commitments that extend past 2026.
At September 30, 2021, 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 - |
Net Leases |
||||||||||
| Fiscal year: |
||||||||||||
| 2022 |
$ | $ | $ | |||||||||
| 2023 |
||||||||||||
| 2024 |
||||||||||||
| 2025 |
||||||||||||
| 2026 |
||||||||||||
| Total lease commitments |
$ | $ | ||||||||||
13. Commitments and Contingencies
The Company leases certain of its buildings under noncancelable lease agreements. Refer to the Leases footnote (Note 12) of the Notes to the Condensed Financial Statements for additional information.
The Company frequently warrants that the technology solutions it develops for its clients will operate in accordance with the project specifications without defects for a specified warranty period, subject to certain limitations that the Company believes are standard in the industry. In the event that defects are discovered during the warranty period, and none of the limitations apply, the Company is obligated to remedy the defects until the solution that the Company provided operates within the project specifications. The Company is not typically obligated by contract to provide its clients with any refunds of the fees they have paid, although a small number of its contracts provide for the payment of liquidated damages upon default. The Company has purchased insurance policies covering professional errors and omissions, property damage and general liability that reduce its monetary exposure for warranty-related claims and enable it to recover a portion of any future amounts paid.
The Company’s contracts typically provide for testing and client acceptance procedures that are designed to mitigate the likelihood of warranty-related claims, although there can be no assurance that such procedures will be effective for each project. The Company has not paid any material amounts related to warranties for its solutions. The Company sometimes commits unanticipated levels of effort to projects to remedy defects covered by its warranties. The Company’s estimate of its exposure to warranties on contracts is immaterial as of December 31, 2021 and September 30, 2021.
The Company’s agreements with customers generally require the Company to indemnify the customer against claims in which the Company’s products infringe third-party patents, copyrights, or trademarks and indemnify against product liability matters. As of December 31, 2021 and September 30, 2021, the Company has not experienced any losses related to the indemnification obligations and no significant claims with respect thereto were outstanding. The Company does not expect significant claims related to the indemnification obligations and, consequently, concluded that the fair value of these obligations is negligible, and no related reserves were established.
Litigation
The Company is subject to ordinary routine litigation and claims incidental to its business. As of December 31, 2021, the Company was not engaged with any material legal proceedings.
14. Acquisitions
Woorank Acquisition
On March 1, 2021, the Company, pursuant to a Share Purchase Agreement (the “Woorank Purchase Agreement”), acquired all of the issued and outstanding shares of Woorank, an entity located in Belgium. The Company accounted for the Woorank transaction as a business combination in accordance with the Accounting Standard Codification (“ASC”) Topic 805, Business Combinations. The purchase price consisted of (1) cash paid at closing, (2) deferred cash payable in installments post-closing, (3) a seller note issued to one of the selling shareholders, and (4) amounts payable to one selling shareholder as consideration for assistance with certain matters related to the acquisition for a period of one year from the closing date of the acquisition. The Woorank Purchase Agreement also provides for additional consideration, in the event of achievement of certain revenue targets and operational goals, to the selling shareholders pursuant to three separate earn-out provisions. On the closing date, the Company issued
The Company accounted for the Woorank transaction as a business combination. The Company determined that the fair value of the gross assets acquired was not concentrated in a single identifiable asset or a group of similar assets. Assets acquired and liabilities assumed have been recognized at their estimated fair values as of the acquisition date. The fair value of common stock issued as part of consideration transferred was determined based on the acquisition date closing market price of the Company’s common stock. The estimated fair value of the contingent consideration was determined based on the Company’s expected probability of future payment, discounted using a weighted average cost of capital. The fair value of the contingent consideration is included within Purchase price and contingent consideration payable on the consolidated balance sheets. The fair value of intangible assets was based on valuations using a discounted cash flow model (Level 3 inputs) which requires significant estimates and assumptions, including estimating future revenues and costs. The fair value of debt obligations assumed was based on the interest rates underlying these instruments in relation to the market rates available for similar instruments. The excess of the purchase price over the assets acquired and liabilities assumed was recognized as goodwill. The goodwill is attributable to expected synergies and customer cross-selling opportunities between the Company and Woorank.
Hawk Search Acquisition
On May 28, 2021, the Company, pursuant to a Share Purchase Agreement (the “Hawk Purchase Agreement”), acquired all of the issued and outstanding shares of Hawk Search, an Illinois corporation. The purchase price consisted of (1) an initial cash payment at closing, (2) issuance of
The Company accounted for the Hawk Search transaction as a business combination. The Company determined that the fair value of the gross assets acquired was not concentrated in a single identifiable asset of a group of similar assets. Assets acquired and liabilities assumed have been recognized at their estimated fair values as of the acquisition date. The fair value of Series D Preferred Stock issued as part of consideration transferred was determined based on the price paid by third-party investors in the Private Placement (see Note 8) which occurred in close proximity to the acquisition date. As more fully described in Note 8, the Series D Preferred Stock contains an embedded beneficial conversion feature. The intrinsic value of $
The acquisition date fair value of consideration transferred was as follows:
| Woorank |
Hawk Search |
Total |
||||||||||
| Cash paid at or in close proximity to closing |
$ | $ | $ | |||||||||
| Future deferred payments |
||||||||||||
| Common stock (29,433 shares at $3.38 per share) |
||||||||||||
| Series D Convertible Preferred Stock (1,500 shares at $618 per share) |
||||||||||||
| Seller’s note |
||||||||||||
| Contingent consideration (earn-outs) |
||||||||||||
| Total consideration paid |
$ | $ | $ | |||||||||
The preliminary acquisition date fair value of assets acquired, and liabilities assumed was as follows:
| Woorank |
Hawk Search |
Total |
||||||||||
| Assets acquired: |
||||||||||||
| Cash |
$ | $ | $ | |||||||||
| Non-cash current assets |
||||||||||||
| Property and equipment |
||||||||||||
| Intangible assets: |
||||||||||||
| Acquired software |
||||||||||||
| Customer relationships |
||||||||||||
| Domain and trade names |
||||||||||||
| Goodwill |
||||||||||||
| Total assets acquired |
||||||||||||
| Liabilities assumed: |
||||||||||||
| Current liabilities |
||||||||||||
| Assumed debt obligations |
||||||||||||
| Deferred tax liabilities |
||||||||||||
| Total liabilities assumed |
||||||||||||
| Total consideration paid |
$ | $ | $ | |||||||||
The average useful lives of the identifiable intangible assets acquired were as follows:
| Woorank |
Hawk Search |
|||||||
| (in years) |
||||||||
| Acquired software |
||||||||
| Customer relationships |
||||||||
| Domain and trade names |
||||||||
Total earnings from the acquisitions are impracticable to disclose as the operations were merged with existing operations and certain costs were not accounted for separately.
Pro Forma Information (Unaudited)
The following is the unaudited pro forma information assuming the acquisitions occurred on October 1, 2020:
| Three months ended December 31, 2020 |
||||
| (in thousands, except share and per share data) |
||||
| Revenue |
$ | |||
| Net income (loss) attributable to common shareholders - basic |
$ | ( |
) |
|
| Net income (loss) attributable to common shareholders - diluted |
$ | ( |
) |
|
| Net income (loss) per share attributable to common shareholders: |
||||
| Basic |
$ | ( |
) |
|
| Diluted |
$ | ( |
) |
|
| Weighted average common shares outstanding - basic |
||||
| Weighted average common shares outstanding - diluted |
||||
Pro forma information for the three months ended December 31, 2021, is not presented as the amounts reported in the Condense Consolidated Statements of Operations include the activities of these acquisitions for the period then ended.
15. Related Party Transactions
In October 2013, Mr. Michael Taglich joined the Board of Directors. Michael Taglich is the Chairman and President of Taglich Brothers, Inc. (“Taglich Brothers”), a New York based securities firm.
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 is a director and shareholder of the Company. Taglich Brothers Inc. could also earn a success fee ranging from $
In connection with the February and May 2021 Offerings (see Note 8), Taglich Brothers, Inc. received warrants to purchase
16. 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.
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, 2021, 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 is a marketing technology software company that helps companies grow online revenue and share information with customers, partners and employees.
Bridgeline’s Unbound platform is a Digital Experience Platform that includes Web Content Management, eCommerce, eMarketing, Social Media management, and Web Analytics.
Bridgeline’s Unbound platform, combined with its professional services, assists customers in driving lead generation, increasing revenue, improving customer service and loyalty, enhancing employee knowledge, and reducing operational costs.
Our Unbound Franchise product empowers large franchises, brand networks, and other multi-unit organizations to manage a large hierarchy of digital properties at scale.
OrchestraCMS is the only content and digital experience platform built 100% native on Salesforce and helps customers create websites and intranets for their customers, partners, and employees; 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 is a commerce-oriented site search product that provides for Natural Language Processing with artificial intelligence to present relevant search results based on long-tail keyword searches in seven languages.
Woorank SRL (“Woorank”) is a Search Engine Optimization (“SEO”) audit tool that generates an instant audit of a site’s technical, on-page and off-page SEO. Woorank’s clear, actionable insights help companies increase their search ranking, website traffic, audience engagement, conversion, and customer retention rates.
Hawk Search, Inc. (“Hawk Search”) is a search, recommendation, and personalization application built for marketers, merchandisers and developers that enhances, normalizes and enriches a customer's site search and browse experience. Hawk Search leverages advanced artificial intelligence, machine learning and industry-leading analyzers to deliver accurate results from federated data sources.
All of Bridgeline’s software is available through a cloud-based software as a service (“SaaS”) model, whose flexible architecture provides customers hosting and support. Additionally, Unbound and Hawk Search are available via a traditional perpetual licensing business model, in which the software resides on a dedicated infrastructure in either the customer’s facility, or manage-hosted by Bridgeline via a cloud-based hosted services model.
Bridgeline Digital was incorporated under the laws of the State of Delaware on August 28, 2000.
Locations
The Company’s corporate office is located in Woburn, Massachusetts. The Company maintains regional field offices serving the following geographical locations: Boston, Massachusetts; Woodbury, New York; Chicago, Illinois; Raleigh, North Carolina; Ontario, Canada; and Brussels, Belgium.
The Company has four wholly-owned subsidiaries: Bridgeline Digital Pvt. Ltd., located in Bangalore, India; Bridgeline Digital Canada, Inc., located in Ontario, Canada; Hawk Search Inc. located in Illinois, United States; and Bridgeline Digital Belgium BV, located in Brussels, Belgium.
Acquisitions
Bridgeline will continue to evaluate expanding its distribution of Bridgeline Unbound and its interactive development capabilities through acquisitions. We may make additional acquisitions in the foreseeable future. These potential acquisitions will be consistent with our growth strategy by providing Bridgeline with new geographical distribution opportunities, an expanded customer base, an expanded sales force and an expanded developer force. In addition, integrating acquired companies into our existing operations allows us to consolidate the finance, human resources, legal, marketing, and research and development of the acquired businesses with our own internal resources, hence reducing the aggregate of these expenses for the combined businesses and resulting in improved operating results.
On March 1, 2021, the Company, pursuant to a Share Purchase Agreement (the “Woorank Purchase Agreement”), acquired all of the issued and outstanding shares of Woorank SRL (“Woorank”), an entity located in Belgium. The total purchase price of approximately $2.4 million consisted of (1) $285 thousand in cash paid at closing or in close proximity to closing, (2) $376 thousand of deferred cash payable in installments post-closing, (3) a $352 thousand seller note issued to one of the selling shareholders, and (4) amounts payable to one selling shareholder as consideration for assistance with certain matters related to the acquisition for a period of one year from the closing date of the acquisition. The Woorank Purchase Agreement also provides for additional consideration, in the event of achievement of certain revenue targets and operational goals, to the selling shareholders pursuant to three separate earn-out provisions. The acquisition date fair value of contingent consideration was $1.3 million. On the closing date, the Company issued 29,433 shares of its common stock, with an aggregate issuance date fair value of $99 thousand, for a portion of the purchase price.
On May 28, 2021, the Company, pursuant to a Share Purchase Agreement (the “Hawk Purchase Agreement”), acquired all of the issued and outstanding shares of Hawk Search, Inc., an Illinois corporation (“Hawk Search”). The total purchase price of approximately $9.9 million consisted of (1) $4.8 million initial cash payment at closing, (2) issuance of 1,500 shares of the Company’s newly designated Series D Preferred Stock with an aggregate issuance date fair value of $930 thousand, and (3) $2.0 million deferred cash payable on or before December 31, 2021. The Hawk Purchase Agreement also provides for additional consideration, in the event of achievement of certain revenue targets, to the selling shareholders as an additional earn-out, payable no later than January 2023. The acquisition date fair value of contingent consideration was approximately $2.2 million.
Customer Information
For the three months ended December 31, 2021, no customers exceeded 10% of the Company’s total revenues. For the three months ended December 31, 2020, one customer represented approximately 12% of the Company’s total revenue.
Results of Operations for the Three Months Ended December 31, 2021 compared to the Three Months Ended December 31, 2020
Total net revenue for each of the three months ended December 31, 2021 and 2020, was $4.3 million and $2.8 million, respectively. We had net income of $1.9 million and a net loss of $1.2 million for the three months ended December 31, 2021 and 2020, respectively. Included in net income for the three months ended December 31, 2021, was a gain of $2.4 million as a result of the change in the fair value of certain warrant liabilities. 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. Basic net income (loss) per share attributable to common shareholders was $0.18 and ($0.26) for the three months ended December 31, 2021 and 2020, respectively. Diluted net income (loss) per share attributed to common shareholders was $0.06 and ($0.26) for the three months ended December 31, 2021 and 2020, respectively.
| (in thousands) |
Three Months Ended |
|||||||||||||||
| $ |
% |
|||||||||||||||
| 2021 |
2020 |
Change |
Change |
|||||||||||||
| Revenue |
||||||||||||||||
| Digital engagement services |
$ | 869 | $ | 837 | $ | 32 | 4 | % |
||||||||
| % of total revenue |
20 | % |
30 | % |
||||||||||||
| Subscription and perpetual licenses |
3,417 | 1,999 | 1,418 | 71 | % |
|||||||||||
| % of total revenue |
80 | % |
70 | % |
||||||||||||
| Total net revenue |
4,286 | 2,836 | 1,450 | 51 | % |
|||||||||||
| Cost of revenue |
||||||||||||||||
| Digital engagement services |
451 | 374 | 77 | 21 | % |
|||||||||||
| % of digital engagement services revenue |
52 | % |
45 | % |
||||||||||||
| Subscription and perpetual licenses |
829 | 583 | 246 | 42 | % |
|||||||||||
| % of subscription and perpetual revenue |
24 | % |
29 | % |
||||||||||||
| Total cost of revenue |
1,280 | 957 | 323 | 34 | % |
|||||||||||
| Gross profit |
3,006 | 1,879 | 1,127 | 60 | % |
|||||||||||
| Gross profit margin |
70 | % |
66 | % |
||||||||||||
| Operating expenses |
||||||||||||||||
| Sales and marketing |
1,231 | 444 | 787 | 177 | % |
|||||||||||
| % of total revenue |
29 | % |
16 | % |
||||||||||||
| General and administrative |
873 | 465 | 408 | 88 | % |
|||||||||||
| % of total revenue |
20 | % |
16 | % |
||||||||||||
| Research and development |
859 | 349 | 510 | 146 | % |
|||||||||||
| % of total revenue |
20 | % |
12 | % |
||||||||||||
| Depreciation and amortization |
424 | 232 | 192 | 83 | % |
|||||||||||
| % of total revenue |
10 | % |
8 | % |
||||||||||||
| Restructuring and acquisition-related expenses |
98 | 210 | (112 | ) |
(53 | %) |
||||||||||
| % of total revenue |
2 | % |
7 | % |
||||||||||||
| Total operating expenses |
3,485 | 1,700 | 1,785 | 105 | % |
|||||||||||
| Income (Loss) from operations |
(479 | ) |
179 | (655 | ) |
(366 | %) |
|||||||||
| Interest income (expense), net |
(87 | ) |
6 | (93 | ) |
(1,550 | %) |
|||||||||
| Government grant income |
- | 88 | (88 | ) |
(100 | %) |
||||||||||
| Change in fair value of warrant liabilities |
2,441 | (1,441 | ) |
3,882 | 269 | % |
||||||||||
| Income (loss) before income taxes |
1,875 | (1,168 | ) |
3,046 | 261 | % |
||||||||||
| Provision for (benefit from) income taxes |
3 | (6 | ) |
9 | (150 | %) |
||||||||||
| Net income/(loss) |
$ | 1,872 | $ | (1,162 | ) |
$ | 3,034 | 261 | % |
|||||||
| Non-GAAP Measure: |
||||||||||||||||
| Adjusted EBITDA |
$ | 106 | $ | 672 | $ | (566 | ) |
(84 | %) |
|||||||
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 Bridgeline Unbound implementation, Hawk Search Inc. and retainer-related services. In total, revenue from digital engagement services increased $32 thousand, or 4%, to $869 thousand for the three months ended December 31, 2021 compared to $837 thousand for the three months ended December 31, 2020. Digital engagement services revenue as a percentage of total revenue decreased to 20% from 30% for the three months ended December 31, 2021 compared to the three months ended December 31, 2020. The decrease as a percentage of total revenue is attributable to the increase in subscription and perpetual licenses, including additional revenue related to the fiscal 2021 business acquisitions.
Subscription and Perpetual Licenses
Revenue from subscription (SaaS) and perpetual licenses increased $1.4 million, or 71%, to $3.4 million for the three months ended December 31, 2021 compared to $2.0 million for the three months ended December 31, 2020. The increase compared to the prior period is primarily due to renewals across our diverse portfolio of companies and the inclusion of revenue from the Company’s fiscal 2021 acquisitions. Subscription and perpetual license revenue as a percentage of total revenue increased to 80% from 70% for the three months ended December 31, 2021 compared to the three months ended December 31, 2020. The increase as a percentage of total revenue is attributable to the additional increase in subscription and perpetual licenses, including additional revenue related to the fiscal 2021 business acquisitions.
Cost of Revenue
Total cost of revenue increased $323 thousand, or 34%, to $1.3 million for the three months ended December 31, 2021 compared to $957 thousand for the three months ended December 31, 2020. The gross profit margin increased to 70% for the three months ended December 31, 2021 compared to 66% for the three months ended December 31, 2020. The increase in the gross profit margin for the three months ended December 31, 2021 compared to the prior period is primarily attributable to the increase in the proportion of license revenue, which is generally associated with higher margins, to digital engagement service revenue.
Cost of Digital Engagement Services
Cost of digital engagement services increased $77 thousand, or 21%, to $451 thousand for the three months ended December 31, 2021 compared to $374 thousand for the three months ended December 31, 2020. The increase is primarily due to higher personnel and third party-consultant costs, including additional costs related to the fiscal 2021 business acquisitions. The cost of digital engagement services as a percentage of digital engagement services revenue increased to 52% for the three months ended December 31, 2021 compared to 45% for the three months ended December 31, 2020. The increase as a percentage of revenues compared to the prior period is primarily due to the range of services provided, including additional costs related to the fiscal 2021 business acquisitions.
Cost of Subscription and Perpetual License
Cost of subscription and perpetual licenses increased $246 thousand, or 42%, to $829 thousand for the three months ended December 31, 2021 compared to $583 thousand for the three months ended December 31, 2020. The increase is primarily due to higher personnel and third party-consultant costs, including additional costs related to the fiscal 2021 business acquisitions. The cost of subscription and perpetual licenses as a percentage of subscription and perpetual license revenue decreased to 24% for the three months ended December 31, 2021 compared to 29% for the three months ended December 31, 2020. These decreases are attributable to overall increases in subscription and perpetual license revenue.
Operating Expenses
Sales and Marketing Expenses
Sales and marketing expenses increased $787 thousand, or 177%, to $1.2 million for the three months ended December 31, 2021 compared to $444 thousand for the three months ended December 31, 2020. Sales and marketing expenses represented 29% and 16% of total revenue for the three months ended December 31, 2021 and 2020, respectively. The increase compared to the prior period is primarily attributable to higher personnel costs and additional sales and marketing costs, including such additional costs related to the fiscal 2021 business acquisitions.
General and Administrative Expenses
General and administrative expenses increased $408 thousand, or 88%, to $873 thousand for the three months ended December 31, 2021 compared to $465 thousand for the three months ended December 31, 2020. General and administrative expenses represented 20% and 16% of total revenue for the three months ended December 31, 2021 and 2020, respectively. The increase in expense was due to additional costs related to the fiscal 2021 business acquisitions.
Research and Development
Research and development expense increased $510 thousand, or 146 %, to $859 thousand for the three months ended December 31, 2021 compared to $349 thousand for the three months ended December 31, 2020. Research and development expenses represented 20% and 12% of total revenue for the three months ended December 31, 2021 and 2020, respectively. These increases compared to the prior period are primarily attributable to personnel and other additional costs related to the fiscal 2021 business acquisitions.
Depreciation and Amortization
Depreciation and amortization expense increased $192 thousand, or 83%, to $424 thousand for the three months ended December 31, 2021 compared to $232 thousand for the three months ended December 31, 2020. Depreciation and amortization represented 10% and 8% of total revenue for the three months ended December 31, 2021 and 2020, respectively. These increases are primarily due to amortization of intangible assets resulting from acquisitions completed during fiscal 2021.
Restructuring and Acquisition-Related Expenses
During the three months ended December 31, 2021 and 2020, the Company incurred acquisition-related expenses of $98 thousand and $210 thousand, respectively. During the three months ended December 31, 2021, expenses incurred were related to further acquisition integrations. During the three months ended December 31, 2020, expenses incurred were related to the acquisition of Woorank, which occurred in February 2021. Acquisition-related expenses represented 2% and 7% of total revenue for the three months ended December 31, 2021 and 2020 respectively.
Income/(loss) from Operations
The income/(loss) from operations was ($479) thousand for the three months ended December 31, 2021 compared to $179 thousand for the three months ended December 31, 2020. Operating expenses increased $1.8 million, or 105%, to $3.5 million for the three months ended December 31, 2021 compared to $1.7 million for the three months ended December 31, 2020. The increases for the three months ended December 31, 2021 compared to the prior period were primarily due to additional costs related to the acquisition of businesses in fiscal 2021.
Interest expense and other, net; Government grant income; Change in fair value of warrant liabilities
In the three months ended December 31, 2021 and 2020, we recorded a gain/(loss) related to the change in fair value of certain warrant liabilities of $2.4 million and ($1.4) million, respectively.
During the three months ended December 31, 2021 and 2020, interest expense and other net, was ($87) thousand and $6 thousand, respectively and included non-recurring non-operating costs.
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 applied for full PPP loan forgiveness on March 29, 2021 and received approval from the Small Business Administration in August 2021. 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 thousand as government grant income.
Income Taxes
The provision for (benefit from) income tax expense was $3 thousand and ($6) thousand for the three months ended December 31, 2021 and 2020, 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, other income and expenses, change in fair value of derivative instruments, change in fair value of contingent consideration, and restructuring and acquisition related charges (“Adjusted EBITDA”).
We believe this non-GAAP financial measure of Adjusted EBITDA is useful to management and investors in evaluating our operating performance for the periods presented and provides a tool for evaluating our ongoing operations.
Adjusted EBITDA, however, is not a measure of operating performance under accounting principles generally accepted in the United States of America (“U.S. GAAP”) and should not be considered as an alternative or substitute for U.S. GAAP profitability measures such as (i) income from operations and net income, or (ii) cash flows from operating, investing and financing activities, both as determined in accordance with U.S. GAAP. Adjusted EBITDA as an operating performance measure has material limitations because 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, changes in fair value of contingent consideration and stock-based compensation, and therefore does not represent an accurate measure of profitability. As a result, Adjusted EBITDA should be evaluated in conjunction with net income (loss) for a complete analysis of our profitability, as net income (loss) includes the financial statement impact of these items and is the most directly comparable U.S. GAAP operating performance measure to Adjusted EBITDA. Our definition of Adjusted EBITDA may also differ from and therefore may not be comparable with similarly titled measures used by other companies, thereby limiting its usefulness as a comparative measure. Because of the limitations that Adjusted EBITDA has as an analytical tool, investors should not consider it in isolation, or as a substitute for analysis of our operating results as reported under U.S. GAAP.
The following table reconciles net income (loss) (which is the most directly comparable U.S. GAAP operating performance measure) to Adjusted EBITDA (in thousands):
| Three Months Ended |
||||||||
| 2021 |
2020 |
|||||||
| Net income (loss) |
$ | 1,872 | $ | (1,162 | ) |
|||
| Provision for (benefit from) income tax |
3 | (6 | ) |
|||||
| Interest expense and other, net |
87 | (6 | ) |
|||||
| Government grant income |
- | (88 | ) |
|||||
| Change in fair value of warrants |
(2,441 | ) |
1,441 | |||||
| Amortization of intangible assets |
401 | 218 | ||||||
| Depreciation and other amortization |
23 | 14 | ||||||
| Restructuring and acquisition related charges |
98 | 210 | ||||||
| Stock-based compensation |
63 | 51 | ||||||
| Adjusted EBITDA |
$ | 106 | $ | 672 | ||||
Adjusted EBITDA decreased year over year, which is primarily attributable to the gain recognized for the change in the fair value of the warrants and additional costs related to the fiscal 2021 business acquisitions.
Liquidity and Capital Resources
Cash Flows
Operating Activities
Cash provided by operating activities was $79 thousand for the three months ended December 31, 2021 compared to cash provided by operating activities of $451 thousand for the three months ended December 31, 2020. The change in cash provided by operating activities compared to the prior period was primarily due to an increase in net income (loss), including the impact of the change in the fair value of the warrant liabilities, and after consideration of other non-cash items, increases in accounts receivables and increases in accounts payable and accrued liabilities.
Investing Activities
Cash used in investing activities was $64 thousand for the three months ended December 31, 2021 compared to cash used in investing activities of $41 thousand for the three months ended December 31, 2020. The change in cash used in investing activities compared to the prior period was primarily due to additional software capitalization costs incurred and additional purchases of property and equipment made in the current quarter.
Financing Activities
Cash used in financing activities was $2.5 million for the three months ended December 31, 2021 related to payments made on liabilities from 2021 acquisitions. We did not have any cash flows from financing activities for the three months ended December 31, 2020.
Capital Resources and Liquidity Outlook
In March 2020, the World Health Organization declared the outbreak of novel coronavirus disease (“COVID-19”) as a pandemic. We expect our operations in all locations to be affected as the virus continues to proliferate. We have adjusted certain aspects of our operations to protect employees and customers while still meeting customers’ needs for vital technology. We will continue to monitor the situation closely and it is possible that we will implement further measures. In light of the uncertainty as to the severity and duration of the pandemic, the impact on our revenue, profitability and financial position is uncertain at this time.
In connection with an acquisition of a business completed during the 2021 fiscal year third quarter (Hawk Search), the Company recognized an obligation for a deferred payment representing a portion of the purchase price of $2.0 million payable, in which $1.9 million was paid during the three months ended December 31, 2021 and the remaining $0.1 million paid during the second fiscal quarter of fiscal 2022, and contingent earn-out payments of $2.4 million which are payable, no later than January 2023, in the event of achievement of certain revenue targets and operational goals.
In connection with an acquisition of a business completed during the 2021 fiscal year second quarter (Woorank), the Company (1) assumed the outstanding long-term debt obligations of which approximately $1.8 million remains outstanding at December 31, 2021 with $0.6 million payable over the next twelve months (2) deferred a portion of the purchase price of which approximately $0.2 million remains outstanding at December 31, 2021, which was paid during the second fiscal quarter of 2022, and (3) recognized contingent earn-out payments which approximately $0.8 million remains outstanding at December 31, 2021, which are payable in the next twelve months based upon the achievement of certain revenue targets and operational goals.
The Company has historically incurred operating losses and used cash to fund operations as well as develop new products. The Company believes that future revenues and cash flows will supplement its working capital and it has an appropriate cost structure to support future revenue growth.
Off-Balance Sheet Arrangements
At this time, the Company does not have any off-balance sheet arrangements, financings or other relationships with unconsolidated entities or other persons.
Contractual Obligations
We lease all of our office locations. The gross obligations for operating leases and subleases is $495 thousand and $211 thousand, respectively, of which $130 thousand and $76 thousand is expected in the next twelve months. Debt payments on the Company’s various debt obligations total $1.8 million of which $638 thousand is expected to be paid in the next twelve months. In connection with acquisitions of businesses completed in the Company’s 2021 fiscal year, contingent consideration obligations and deferred purchase price obligations total $3.2 million and $0.3 million, respectively, which are expected to be paid in the next twelve months.
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 20, 2021.
The preparation of financial statements in accordance with 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; |
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| ● |
Allowance for doubtful accounts; |
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| ● |
Accounting for goodwill and other intangible assets; |
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| ● |
Accounting for business combinations; and |
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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, and 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; |
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| • |
Allocate the transaction price to the distinct performance obligations; and |
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| • |
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 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 Business Combinations
The Company allocates the amount it pays for each acquisition to the assets acquired and liabilities assumed based on their fair values at the date of acquisition, including identifiable intangible assets which arise from a contractual or legal right or are separable from goodwill. The Company bases the fair value of identifiable intangible assets acquired in a business combination on detailed valuations that use information and assumptions provided by management, which consider management’s best estimates of inputs and assumptions that a market participant would use. The Company allocates any excess purchase price that exceeds the fair value of the net tangible and identifiable intangible assets acquired to goodwill. The use of alternative valuation assumptions, including estimated growth rates, cash flows and discounts rates and estimated useful lives could result in different purchase price allocations and amortization expense in current and future periods. Transaction costs associated with these acquisitions are expensed as incurred through general and administrative expense on the consolidated statements of operations. In those circumstances where an acquisition involves a contingent consideration arrangement, the Company recognizes a liability equal to the fair value of the contingent payments expected to be made as of the acquisition date. The Company re-measures this liability each reporting period and records changes in the fair value through income (loss) before income taxes within the consolidated statements of operations.
Accounting for Stock-Based Compensation
At December 31, 2021, we maintained two stock-based compensation plans, one of which has expired but still contains vested and unvested stock options. The two plans are more fully described in Note 12 to the Consolidated Financial Statements of our Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 20, 2021.
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.
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, 2021.
Changes in Internal Control over Financial Reporting
There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Controls
Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving the desired control objectives. Our management recognizes that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that its objectives will be met. Similarly, an evaluation of controls cannot provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected.
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 20, 2021.
Item 1A. Risk Factors.
There have been no material changes to the risk factors described under Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2021.
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, 2021.
| Item 6. |
Exhibits. |
| Exhibit No. |
Description of Document |
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| 3.1 |
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| 3.2 |
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| 3.3 |
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| 3.4 |
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| 3.5 |
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| 3.6 |
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| 10.1 |
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| 31.1* |
Certification of Chief Executive Officer, pursuant to Section 302 of Sarbanes-Oxley Act of 2002. |
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| 31.2* |
Certification of Chief Financial Officer, pursuant to Section 302 of Sarbanes-Oxley Act of 2002. |
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| 32.1* |
Certification of Chief Executive Officer, pursuant to Section 906 of Sarbanes-Oxley Act of 2002. |
|
| 32.2* |
Certification of Chief Financial Officer, pursuant to Section 906 of Sarbanes-Oxley Act of 2002. |
|
| 101.INS** |
Inline XBRL Instance |
|
| 101.SCH** |
Inline XBRL Taxonomy Extension Schema |
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| 101.CAL** |
Inline XBRL Taxonomy Extension Calculation |
|
| 101.DEF** |
Inline XBRL Taxonomy Extension Definition |
|
| 101.LAB** |
Inline XBRL Taxonomy Extension Labels |
|
| 101.PRE** |
Inline XBRL Taxonomy Extension Presentation |
|
| 104 |
Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101) |
* Filed herewith.
** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 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. |
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| (Registrant) |
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| February 10, 2022 |
/s/ Roger Kahn |
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| Date |
Roger Kahn President and Chief Executive Officer (Principal Executive Officer) |
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| February 10, 2022 |
/s/ Thomas R. Windhausen |
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| Date |
Thomas R. Windhausen Chief Financial Officer (Principal Financial and Accounting Officer) |