What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2020-12-23 compared with 2019-12-27 · 550 added, 540 removed, 510 unchanged (68% of the section changed)

4 unchanged sentences

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Bridgeline Digital, Inc., and subsidiaries (the “Company”) as of September 30, 2019 and 2018, the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the two years in the period ended September 30, 2019, and the related notes (collectively referred to as the “financial statements”).

We have audited the accompanying consolidated balance sheets of Bridgeline Digital, Inc.

(the “Company”) as of September 30, 2020 and 2019, the related consolidated statements of operations, comprehensive income/(loss), stockholders’ equity and cash flows for each of the two years in the period ended September 30, 2020, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended September 30, 2020, in conformity with accounting principles generally accepted in the United States of America.

1 unchanged sentence

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.

As more fully described in Note 1, the Company has a significant working capital deficiency, has incurred significant losses and may need to raise additional funds to meet its obligations and sustain its operations.

As more fully described in Note 1, the Company has a significant working capital deficiency, has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations.

These conditions raise substantial doubt about the Company's ability to continue as a going concern.

3 unchanged sentences

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's financial statements based on our audit s .

Our responsibility is to express an opinion on the Company's financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit s in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit s to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audit s we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.

Accordingly, we express no such opinion.

Our audit s included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audit s also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

/s/ Marcum LLP

We have served as the Company’s auditor since 2006.

We have served as the Company’s auditor since 2006, such date takes into account the acquisition of a portion of UHY LLP by Marcum LLP in April 2010.

December 23, 2020

10 unchanged sentences

Property and equipment, net

Operating lease assets

Intangible assets, net

1 unchanged sentence

Current liabilities:

Current portion of operating lease liabilities

Accounts payable

Accrued liabilities

Debt, current

Paycheck Protection Program Liability (Note 10)

Deferred revenue

Total current liabilities

Debt, net of current portion

Operating lease liabilities, net of current portion

Warrant liabilities

1 unchanged sentence

Total liabilities

Commitments and contingencies (Note 12)

Commitments and contingencies

Stockholders’ equity:

3 unchanged sentences

11,000 shares authorized;

441 shares issued and outstanding at September 30, 2019

350 shares issued and outstanding at September 30, 2020 and 441 shares at September 30, 2019, issued and outstanding

Series A Convertible Preferred stock:

264,000 shares and 262,310 shares at September 30, 2019 and 264,000 shares and 262,364 shares at September 30, 2018, issued and outstanding (liquidation preference $2,623 at September 30, 2019)

264,000 shares authorized;

no shares outstanding at September 30, 2020 and 262,310 shares at September 30, 2019, issued and outstanding

Common stock - $0.001 par value;

13 unchanged sentences

Subscription and perpetual licenses

Managed service hosting

Total net revenue

2 unchanged sentences

Subscription and perpetual licenses

Managed service hosting

Total cost of revenue

8 unchanged sentences

Loss from operations

Interest expense, net

Interest expense and other, net

Government grant income (Note 10)

Amortization of debt discount

Other income, net

Loss before income taxes

Provision for (benefit from) income taxes

Warrant liability expense

Change in fair value of warrant liabilities

Income (loss) before income taxes

Provision for income taxes

Net income (loss)

Dividends on convertible preferred stock

Deemed dividend on amendment of Series A convertible preferred stock

Net loss applicable to common shareholders

Net loss per share attributable to common shareholders:

Basic net loss per share

Diluted net loss per share

Number of weighted average shares outstanding:

1 unchanged sentence

BRIDGELINE DIGITAL, INC.

CONS OLIDATED STATEMENTS OF COMPREHENSIVE LOS S

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME / ( LOSS )

(in thousands)

Years Ended September 30,

Other comprehensive loss:

Net income (loss)

Other comprehensive income (loss):

Net change in foreign currency translation adjustment

Comprehensive loss

Comprehensive income (loss)

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

1 unchanged sentence

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(in thousands, except share data)

Preferred Stock

2 unchanged sentences

Balance at October 1, 2018

Issuance of common stock

Stock-based compensation expense

Issuance of common stock - restricted shares

Stock-dividends issued

Foreign currency translation

Balance at September 30, 2018

Issuance of common and preferred stock, net of issuance costs

Issuance of common stock, net of issuance costs

Stock-based compensation expense

Preferred B stock conversion to common

Series C Convertible Preferred stock and conversion to common

Series C Convertible Preferred and conversion to common

Common stock issued in connection with acquisition of business

3 unchanged sentences

Balance at September 30, 2019

Dividends on Series A convertible preferred stock

Deemed dividend on amendment of Series A convertible preferred stock (Note 12)

Series A convertible preferred stock dividend liabilities settled in shares

Series A convertible preferred stock conversion to common

Series C convertible preferred stock conversion to common

Stock-based compensation expense

Foreign currency translation

Balance at September 30, 2020

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

B RIDGELINE DIGITAL, INC.

BRIDGELINE DIGITAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Years Ended September 30,

September 30,

Cash flows from operating activities:

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

Net income (loss)

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

Loss on disposal of property and equipment

6 unchanged sentences

Stock-based compensation

Government grant income (Note 10)

Changes in operating assets and liabilities

Accounts receivable and unbilled receivables

Accounts receivable

Prepaid expenses

13 unchanged sentences

Proceeds from issuance of preferred stock, net of issuance costs

Proceeds from term notes from Montage Capital, net of issuance costs

Proceeds from promissory term notes

Borrowing on bank line of credit

Proceeds received under Paycheck Protection Program

Payments on bank line of credit

4 unchanged sentences

Effect of exchange rate changes on cash and cash equivalents

Net decrease in cash and cash equivalents

Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

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:

2 unchanged sentences

Consideration paid in common stock in connection with acquisition of business

Dividends on convertible preferred stock

Dividends accrued or settled in shares on convertible preferred stock

Deemed dividend on amendment of Series A convertible preferred stock

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

3 unchanged sentences

Description of Business

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

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

The Bridgeline Unbound platform is delivered through a cloud-based SaaS (“Software as a Service”) multi-tenant business model, providing maintenance, daily technical operation and support;

or via a traditional perpetual licensing business model, in which the software resides on a dedicated server in either the customer’s facility or hosted by Bridgeline via a cloud-based hosted services model.

OrchestraCMS, delivered through a cloud-based SaaS, is the only content and digital experience platform built 100% native on Salesforce and helps customers create compelling digital experiences for their customers, partners, and employees;

uniquely combining content with business data, processes and applications across any channel or device, including Salesforce Communities, social media, portals, intranets, websites, applications and services.

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

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

The Company’s corporate office is located in Burlington, Massachusetts.

The Company’s corporate office is located in Woburn, Massachusetts.

The Company maintains regional field offices serving the following geographical locations:

Boston, Massachusetts;

Chicago, Illinois;

New York, New York;

2 unchanged sentences

Bridgeline Digital Pvt.

located in Bangalore, India, Bridgeline Digital Canada, Inc.

located in Ontario, Canada, and Stantive Technologies Pty.

located in Bangalore, India;

Bridgeline Digital Canada, Inc.

located in Ontario, Canada;

and Stantive Technologies Group Pty.

located in Australia.

Increase in Authorized Shares and Reverse Stock Split

On April 26, 2019, the Company’s Shareholders and the Board of Directors approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to increase the total number of shares of Common Stock, par value $0.001 per share (“ Common Stock ”), authorized for issuance thereunder from 50 million shares to 2.5 billion shares (the “ Increase in Authorized ”).

On the same date the Company’s Shareholders and the Board of Directors also approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to effect a reverse stock split of both its issued and outstanding and authorized shares of Common Stock, par value $0.001 per share, at a ratio of one (1) share of Common Stock for every fifty (50) shares of Common Stock at any time prior to December 31, 2018 (the “Reverse Split”) pursuant to which all classes of the Company’s issued and outstanding shares of Common Stock at the close of business on such date were combined and reconstituted into a smaller number of shares of Common Stock in a ratio of one (1) share of Common Stock for every fifty (50) shares of Common Stock (“1-for-50 reverse stock split”).

The 1-for-50 reverse stock split was effective as of close of business on May 1, 2019 (the “Effective Date”) and the Company’s stock began trading on a split-adjusted basis on May 2, 2019.

The reverse stock split reduced the number of shares of the Company’s Common Stock authorized from 2.5 billion shares to 50 million shares.

Proportional adjustments have been made to the conversion and exercise prices of the Company’s outstanding convertible preferred stock, warrants, restricted stock awards, and stock options, and to the number of shares issued and issuable under the Company’s Stock Incentive Plans.

The Company did not issue any fractional shares in connection with the reverse stock split.

Instead, any stockholder who would otherwise be entitled to receive a fractional share of Common Stock as a result of the reverse stock split is entitled to receive a cash payment in lieu thereof based on the average of the closing sales prices of a share of the Company’s Common Stock on the Nasdaq Capital Market during regular trading hours for the five consecutive trading days immediately preceding the Effective Date.

The reverse stock split does not modify the rights or preferences of the Common Stock.

The number of authorized shares of the Company’s Common Stock is 50 million shares and the par value remain $0.001.

The accompanying consolidated financial statements and footnotes have been retroactively adjusted to reflect the effects of the 1-for-50 reverse stock split.

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Going Concern

The Company has incurred operating losses and used cash in its operating activities for the past several years.

Cash has been used to fund operations, develop new products, and build infrastructure.

Cash was used to fund operations, develop new products, and build infrastructure.

During the prior fiscal years and continuing into the current fiscal year, the Company has executed a restructuring plan that included a reduction of workforce and office space, which significantly reduced operating expenses.

The Company is continuing to maintain tight control over discretionary spending in the current fiscal year.

In the second quarter of fiscal 2019, the Company concluded a private offering that raised net cash proceeds of $9.2 million.

Proceeds were used to pay-off in full the outstanding amounts on our Heritage Bank of Commerce line of credit and Montage Capital II, L.P.

At September 30, 2019, the Company had no debt.

Further, in the second quarter of fiscal 2019, the Company used cash to purchase the assets of Seevolution, Inc.

and Stantive Technologies Group Inc., which assets included technology and customers.

While the Company believes the future revenues and cash flows from these newly acquired customers will supplement its working capital and the Company believes it has an appropriate cost structure to support future revenue growth, based upon its current working capital and projected cash flows in the next twelve months, the Company will need additional sources of financing in place in order to ensure its operations are adequately funded.

No definitive agreements for additional financing are in place as of the date of this annual report and there can be no assurances that that additional sources of financing could be obtained on terms that are favorable or acceptable to us and that revenue growth and improvement in cash flows can be achieved.

Accordingly, management believes that there is substantial doubt about the Company’s ability to continue as a going concern for at least twelve months following the issuance of this annual report.

No adjustments have been made to accompanying consolidated financial statements as a result of this uncertainty.

In March 2020, the Company executed a reduction in workforce plan for its domestic and Canadian operations aimed at improving efficiencies by combining functions, certain responsibilities and eliminating redundancies, which resulted in a reduction of 15 positions.

The reduction in workforce was part of the Company’s continuing and ongoing efforts to maintain a lower cost structure and was not an action taken in response to the coronavirus pandemic described below.

The Company is continuing to maintain tight control over discretionary spending for the 2021 fiscal year.

In March 2020, the World Health Organization declared the outbreak of novel coronavirus disease (“COVID-19”) as a pandemic.

We expect our operations in all locations to be affected as the virus continues to proliferate.

We have adjusted certain aspects of our operations to protect employees and customers while still meeting customers’ needs for vital technology.

We will continue to monitor the situation closely and it is possible that we will implement further measures.

In light of the uncertainty as to the severity and duration of the pandemic, the impact on our revenues, profitability and financial position is uncertain at this time.

On April 17, 2020, the Company entered into a loan with an aggregate principal amount of $1,047,500, pursuant to the Paycheck Protection Program (See Note 10).

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

While the Company believes that future revenues and cash flows will supplement its working capital and that it has an appropriate cost structure to support future revenue growth, based upon its current working capital and projected cash flows in the next twelve months, the Company will need additional sources of financing in place in order to ensure its operations are adequately funded.

On August 17, 2020, the Company entered into an arrangement with an investment banking firm to sell up to $4,796,090 of shares of the Company’s common stock, $0.001 par value.

Refer to Note 12 under the caption, At the Market Offering , for a detailed description of this capital raising activity.

There are no obligations for the sale or purchase of the Company’s common stock pursuant to this offering.

Accordingly, there can be no assurances that the Company or investment banking firm will be successful in selling any portion of the shares available for sale pursuant to this offering.

No other definitive agreements for additional financing are in place as of the issuance date of this Form 10-K and there can be no assurances that additional sources of financing could be obtained on terms that are favorable or acceptable to us and that revenue growth and improvement in cash flows can be achieved.

Accordingly, management believes that there is substantial doubt about the Company’s ability to continue as a going concern for at least twelve months following the issuance date of this Form 10-K.

No adjustments have been made to the accompanying consolidated financial statements as a result of this uncertainty.

Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The Company’s fiscal year end is September 30.

The Company’s fiscal year end is September 30th.

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.

All significant inter-company accounts and transactions have been eliminated in consolidation.

All significant inter-company balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with U.S.

GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods.

The most significant estimates included in these consolidated financial statements are the valuation of accounts receivable, including the adequacy of the allowance for doubtful accounts, and fair value measurements related to the valuation of warrants.

The complexity of the estimation process and factors relating to assumptions, risks and uncertainties inherent with the use of the estimates affect the amount of revenue and related expenses reported in the Company’s consolidated financial statements.

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S.

GAAP”) requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported periods.

The most significant estimates included in these financial statements are the valuation of accounts receivable, including the adequacy of the allowance for doubtful accounts, recognition and measurement of deferred revenues and fair value measurements related to the valuation of warrants.

Internal and external factors can affect the Company’s estimates.

3 unchanged sentences

These reclassifications had no effect on the previously reported net loss.

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Cash and Cash Equivalents

The Company considers all highly liquid instruments with original maturity of three months or less from the date of purchase to be cash equivalents.

The Company’s cash is maintained with what management believes to be a high-credit quality financial institution.

At times, deposits held at this bank may exceed the federally insured limits.

The Company’s cash is maintained with what management believes to be high-credit quality financial institutions.

At times, deposits held at these banks may exceed the federally insured limits.

Management believes that the financial institutions that hold the Company’s deposits are financially sound and have minimal credit risk.

10 unchanged sentences

If the financial condition of the Company’s customers were to deteriorate, resulting in impairment of their ability to make payments, additional allowances may be required.

Revenue Recognition

Adoption of New Revenue Recognition Accounting Principles

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2014-09, Revenue from Contracts with Customers:

Topic 606 (ASU 2014-09 or ASC 606), to supersede nearly all existing revenue recognition guidance under U.S.

GAAP, which became effective for the Company on October 1, 2018.

The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services.

ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under the previous revenue recognition accounting principles, including identifying performance obligation in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.

Under ASC 606, revenue is recognized when a customer obtains control of a promised good or service and is recognized in an amount that reflects the consideration that the entity expects to receive in exchange for the good or service.

In addition, ASC 606 also includes subtopic ASC 340-40, Other Assets and Deferred Costs – Contracts with Customers , referred to herein as ASC 340-40, which provides guidance on accounting for certain revenue related costs including costs associated with obtaining and fulfilling a contract, discussed further below.

BRIDGELINE DIGITAL, INC.

1 unchanged sentence

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

The Company adopted the new revenue guidance using the modified retrospective method applied to those contracts which were not completed as of October 1, 2018.

Results for reporting periods beginning after September 30, 2018 are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with historic revenue guidance.

The Company applied the new standard using certain allowable practical expedients where:

the measurement of the transaction price excludes all taxes assessed by governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer;

the new revenue guidance has been applied to portfolios of contracts with similar characteristics;

the modified retrospective approach has been applied only to contracts that are not completed contracts at the date of initial adoption;

the value of unsatisfied performance obligations for contracts with an original expected length of one year or less has not been disclosed.

Revenue recognition from the Company’s primary revenue streams remained substantially unchanged following adoption of ASC 606 and therefore did not have a material impact on its revenues.

The impact of applying the new guidance in fiscal 2019 versus the prior guidance resulted in a change to the period over which sales commissions are amortized to incorporate an estimated customer life.

This resulted in a longer amortization period for deferred commission expense, which reduces expense compared to the application of the prior guidance.

Upon adoption, Other current assets increased by $59 due to the capitalization of the current portion of sales commissions and Other assets increased by $27 due to the capitalization of the noncurrent portion of sales commissions.

Accumulated deficit decreased by $78 as a net result of these adjustments.

The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

The following tables summarize the impact of adopting ASC 606 on the Company’s consolidated financial statements as of and for the year ended September 30, 2019:

As of September 30, 2019

As If Presented Under

Consolidated Balance Sheet

Other current assets

Accumulated deficit

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Year Ended September 30, 2019

As If Presented Under

Consolidated Statement of Operations

Sales and Marketing

Net income/(loss)

Net income/(loss) per share

Year Ended September 30, 2019

As If Presented Under

Consolidated Statement of Cash Flows

Cash flows from operating activities

Other current assets and other assets

The Company derives its revenue from three sources:

(i) Software Licenses, which are comprised of subscription fees (“SaaS”), perpetual software licenses, and maintenance for post-customer support (“PCS”) on perpetual licenses, (ii) Digital Engagement Services, which are professional services to implement our products such as web development, digital strategy, information architecture and usability engineering and (iii) hosting perpetual licenses.

Revenue Recognition

The Company derives its revenue from two sources:

(i) Software Licenses, which are comprised of subscription fees (“SaaS”), perpetual software licenses, and maintenance for post-customer support (“PCS”) on perpetual licenses and (ii) Digital Engagement Services, which are professional services to implement our products such as web development, digital strategy, information architecture and usability engineering search.

Customers who license the software on a subscription basis, which can be described as “Software as a Service” or “SaaS,” do not take possession of the software.

11 unchanged sentences

A customer contract is generally identified when there is approval and commitment from both the Company and its customer, the rights have been identified, payment terms are identified, the contract has commercial substance and collectability and consideration is probable.

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Identify performance obligations that are distinct

5 unchanged sentences

The transaction price is allocated to each performance obligation based on the relative standalone selling prices (“SSP”) of the goods or services being provided to the customer.

The Company determines the SSP of its goods and services based upon the historical average sales prices for each types of software license and professional services sold.

The Company determines the SSP of its goods and services based upon the historical average sales prices for each type of software license and professional services sold.

Recognize revenue as the performance obligations are satisfied

Revenues are recognized when or as control of the promised goods or services is transferred to customers.

Revenue is recognized when or as control of the promised goods or services is transferred to customers.

Revenue from SaaS licenses is recognized ratably over the subscription period beginning on the date the license is made available to customers.

6 unchanged sentences

Disaggregation of Revenue

The Company provides disaggregation of revenue based on geography and product groupings (Note 14) 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 provides disaggregation of revenue based on geography and product groupings (see Note 14) as it believes this best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Customer Payment Terms

2 unchanged sentences

Invoicing for digital engagement services are either monthly or upon achievement of milestones and payment terms for such billings are within the standard terms described above.

Invoicing for subscriptions and hosting are typically issued monthly and are generally due in the month of service.

Invoices for subscriptions and hosting are typically issued monthly and are generally due in the month of service.

Certain arrangements include a warranty period, which is generally 30 days from the completion of work.

3 unchanged sentences

Warranty claims to date have been immaterial.

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Deferred Revenue

Amounts that have been invoiced are recognized in accounts receivable, 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 be recognized.

Deferred revenue that will be recognized during the succeeding 12-month period is recognized as current deferred revenue and the remaining portion is recognized as noncurrent deferred included in Other long-term liabilities.

As of September 30, 2019, approximately $8 of revenue is expected be recognized from remaining performance obligations for contracts with original performance obligations that exceed one year.

The Company expects to recognize revenue on approximately 99% of these remaining performance obligations over the next 12 months, with the balance recognized thereafter.

The following table summarizes the classification and net increase (decrease) in deferred revenue as of and for the years ended September 30, 2019 and 2018:

Deferred Revenue

Balance as of October 1, 2017

Increase (decrease)

Balance as of September 30, 2018

Increase (decrease)

Balance as of September 30, 2019

Deferred Capitalized Commissions Costs

The incremental direct costs of obtaining a contract, which primarily consist of sales commissions paid for new subscription contracts are deferred and amortized on a straight-line basis over a period of approximately three years.

The Company evaluated both qualitative and quantitative factors, including the estimated life cycles of its offerings, renewal rates, and its customer attrition to determine the amortization periods for the capitalized costs.

The initial amortization period will general be the customer contract term, which is typically thirty-six (36) months, with some exceptions.

Deferred capitalized commission expense that will be recognized as expense during the succeeding 12-month period is recognized as current deferred capitalized commission costs, and the remaining portion is recognized as long-term deferred capitalized commission costs.

Total deferred capitalized commissions were $70 and $77 as of September 30, 2019 and 2018, respectively.

Current deferred capitalized commission costs are included in Other current assets in the Consolidated Balance Sheets and noncurrent deferred capitalized commission costs are included in Other assets in the Consolidated Balance Sheets.

Amortization expense was $39 for the year ended September 30, 2019.

Property and Equipment

3 unchanged sentences

Repairs and maintenance costs are expensed as incurred.

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Internal Use Software

10 unchanged sentences

Based on the Company’s software product development process, technological feasibility is established upon completion of a working model.

Software development costs that are capitalized and are amortized to cost of sales over the estimated useful life of the software, typically three years.

Software development costs that are capitalized are amortized to cost of sales over the estimated useful life of the software, typically three years.

Capitalization ceases when a product is available for general release to customers.

Capitalization costs are included in other assets in the consolidated financial statements.

The Company capitalized $11 and $15 of costs in fiscal 2019 and fiscal 2018, respectively.

The Company did not incur development costs during fiscal 2020 and capitalized $11 of costs in fiscal 2019.

Intangible Assets

6 unchanged sentences

Trademarks and trade names

The carrying value of goodwill is not amortized, but it tested for impairment annually as of September 30, as well as on an interim basis whenever events or changes in circumstances indicate that the carrying amount of a reporting unity may not be recoverable.

The carrying value of goodwill is not amortized, but is tested for impairment annually as of September 30, as well as on an interim basis whenever events or changes in circumstances indicate that the carrying amount of a reporting unity may not be recoverable.

An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value.

1 unchanged sentence

Goodwill is assessed at the consolidated level as one reporting unit.

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Valuation of Long-Lived Assets

6 unchanged sentences

There were no impairments of long-lived assets in fiscal 2020 or 2019.

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Foreign Currency

The Company determines the appropriate method of measuring assets and liabilities as to whether the method should be based on the functional currency of the entity in the environment it operates or the reporting currency of the Company, the U.S.

The Company determines the appropriate method of measuring assets and liabilities as to whether the method should be based on the functional currency of the entity in the environment in which it operates or the reporting currency of the Company, the U.S.

The Company has determined that the functional currency of its foreign subsidiaries are the local currencies of their respective jurisdictions.

5 unchanged sentences

The adjustments are recorded as a separate component of stockholders’ equity and are included in accumulated other comprehensive income (loss).

The Company’s foreign currency translation net gains and losses for fiscal 2019 and 2018 were $13 and ($1), respectively.

The Company’s foreign currency translation net gains (losses) for fiscal 2020 and 2019 were ($43) and $13, respectively.

Transaction gains and losses related to monetary assets and liabilities denominated in a currency different from a subsidiary’s functional currency are included in the consolidated statements of operations.

2 unchanged sentences

Stock-Based Compensation

The Company accounts for stock-based compensation in the Consolidated Statements of Operations based on their fair values of the awards on the date of grant on a straight-line basis over their vesting term.

The Company accounts for stock-based compensation in the consolidated statements of operations based on the fair values of the awards on the date of grant on a straight-line basis over their vesting term.

Compensation expense is recognized only for share-based payments expected to vest.

5 unchanged sentences

The Company evaluates common stock warrants as they are issued to determine whether they should be classified as an equity instrument or a liability.

Those warrants that are classified as a liability are carried at fair value at each reporting date, with changes in their fair value recorded in other income (expense) in the Consolidated Statements of Operations.

Those warrants that are classified as a liability are carried at fair value at each reporting date, with changes in their fair value recorded in other income (expense) in the consolidated statements of operation.

Advertising Costs

13 unchanged sentences

federal corporate tax rate.

For taxable years beginning after December 31, 2017, the Tax Act reduces the federal corporate tax rate to 21 percent and as such impacted the Company’s fiscal 2018 tax calculations.

For the year ended September 30, 2018, the U.S.

federal statutory rate is a blended rate based upon the number of days in fiscal 2018 that the Company was taxed at the former rate of 34 percent and the number of days that it was taxed at the new rate of 21 percent.

The reduction of the corporate tax rate caused the Company to revalue its deferred tax assets to the lower federal rate and correspondingly adjust the valuation allowance against the deferred tax assets by the same amount.

For the year ended September 30, 2018, the deferred tax asset and related valuation allowance were lowered by $3,839 to account for the lowered rate.

For taxable years after December 31, 2017, the Tax Act reduced the federal corporate tax rate to 21 percent.

The Tax Act repealed the Corporate Alternative Minimum Tax.

The Company has available an AMT credit carryforward in the amount of $22 at September 30, 2019 and 2018.

This has been recognized as a deferred tax asset not subject to a valuation allowance.

On March 27, 2020 the CARES Act was signed into law to provide significant economic relief to individuals and businesses impacted by the COVID-19 pandemic.

The act provides for a five-year carryback of NOL’s arising in tax years beginning in 2018, 2019 and 2020 and modifies the AMT credits to be 100% refundable for tax years beginning after December 31, 2018.

The Company has available $23 in AMT carryforwards which it has recorded as prepaid taxes at September 30, 2020.

The Act required the Company to pay a one-time transition tax on earnings of the Company's foreign subsidiaries that were previously tax deferred for U.S.

income taxes and created new taxes on the Company's foreign-sourced earnings.

The Company determined that the repatriation tax was zero as the foreign subsidiaries had no positive retained earnings and no current income.

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the Company’s financial statements and tax returns.

The Company determined that the repatriation tax was zero because the foreign subsidiary had no positive retained earnings, and no current income.

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the Company’s consolidated financial statements and tax returns.

Deferred income taxes are recognized based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the temporary differences are expected to reverse.

5 unchanged sentences

income taxes on the undistributed earnings of its foreign subsidiaries, which the Company considers to be permanent investments.

Net Los s Per Share

Net Loss Per Share

Basic net loss per share is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding.

Diluted net income per share applicable 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.

Diluted net loss per share applicable to common shareholders is computed using the weighted average number of common shares outstanding during the period plus the dilutive effect of outstanding stock options, and warrants using the “treasury stock” method and convertible preferred stock using the as-if-converted method.

The computation of diluted earnings per share does not include the effect of outstanding stock options, warrants and convertible preferred stock that are considered anti-dilutive.

For the years ended September 30, 2019 and 2018, 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 were also anti-dilutive.

Potential common stock equivalents excluded include the Series A Convertible Preferred Stock, Series C Convertible Preferred Stock, stock options and warrants (See Note 13).

For the years ended September 30, 2020 and 2019, diluted net loss per share was the same as basic net loss per share, as the effects of all the Company’s potential common stock equivalents are anti-dilutive as the Company reported a net loss applicable to common shareholders for the periods and the impact of in-the-money warrants was also anti-dilutive.

Potential common stock equivalents excluded were the Series A Convertible Preferred Stock, Series C Convertible Preferred Stock, stock options and warrants (See Note 12).

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2016-02, Leases:

Topic 842 (“ASU 2016-02” or “ASC 842”), which outlines principles for the recognition, measurement, presentation and disclosure of leases applicable to both lessors and lessees.

The new standard requires lessees to recognize most leases on their balance sheets for the rights and obligations created by those leases.

The Company adopted the new lease standard during the fiscal 2020 first quarter using the effective date of October 1, 2019 as the date of initial application;

therefore, the comparative prior periods presented have not been adjusted and continue to be reported under the previous lease standard.

The Company applied the new standard using certain practical expedients, including:

the package of practical expedients, which permits the Company not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs;

the short-term lease recognition exemption, which does not require the recognition of a right-of-use (“ROU”) asset or lease liability for those leases that qualify;

accounting for lease components and non-lease components as a single lease component for all underlying classes of assets.

As a result of adopting the new standard, substantially all of the Company’s operating lease commitments were recognized as operating lease assets and liabilities, initially measured as the present value of future lease payments for the remaining lease term discounted using an incremental borrowing rate of 7.0%.

At October 1, 2019, the adoption date, the Company recognized operating lease assets and liabilities of approximately $545.

BRIDGELINE DIGITAL, INC.

1 unchanged sentence

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

The adoption of the new standard is non-cash in nature and had no impact on net cash flows from operating, investing or financing activities.

See Note 11 for additional information regarding the Company’s lease arrangements and updated summary of significant accounting policies related to our leases.

Recently Issued Accounting Pronouncements Not Yet Effective

In February 2016, the FASB issued ASU No.

2016-02, which is guidance on accounting for leases.

2016-02 requires lessees to recognize most leases on their balance sheets for the rights and obligations created by those leases.

The guidance requires enhanced disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases and will be effective for annual periods beginning after December 15, 2018, including interim reporting periods within those annual reporting periods.

Early adoption is permitted.

The new guidance will take effect at the beginning of the Company’s first quarter (October 1) of our fiscal year ending September 30, 2020.

The guidance requires either a modified retrospective transition approach with application in all comparative periods presented, or an alternative transition method, which permits the Company to use its effective date as the date of initial application without restating the comparative period financial statements and recognizing any cumulative effect adjustment to the opening balance sheet of accumulated deficit at October 1, 2019.

The Company is finalizing the review of information for completeness of its lease portfolio, analyzing the financial statement impact of adopting the standards, and evaluating the impact of adoption on our existing accounting policies and disclosures.

Upon adoption, we expect to recognize lease liabilities and right-to-use assets of the related lease arrangements, however, our contractual lease arrangements and commitments at September 30, 2019 are not material to the consolidated financial statements, as a whole.

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Intangibles – Goodwill and Other - Internal-Use Software

In August 2018, the FASB issued ASU 2018-15, which addresses a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract.

Under the new guidance, customers will apply the same criteria for capitalizing implementation costs as they would for an arrangement that has a software license.

ASC 2018-15 is effective for annual reporting periods beginning after December 15, 2019, including interim reporting periods within those annual reporting periods.

Early adoption is permitted.

The Company is currently evaluating the impact of the new guidance on its consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-13, which is guidance that changes the fair value measurement disclosure requirements of ASC 820.

ASU 2018-13 is effective for annual reporting periods beginning after December 15, 2019, including interim reporting periods within those annual reporting periods.

Early adoption is permitted for any eliminated or modified disclosures upon issuance of this ASU.

The Company is currently evaluating the impact of the new guidance on its consolidated financial statements and related disclosures.

In August 2018, the FASB issued No.

ASU 2018-15, which addresses a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract.

Under the new standard, customers will apply the same criteria for capitalizing implementation costs as they would for an arrangement that has a software license.

ASU 2018-15 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those annual reporting periods, with early adoption permitted.

As of September 30, 2020, the Company does not have significant implementation costs incurred in a cloud computing arrangement that is a service contract and therefore upon adoption the impact of the new standard on its consolidated financial statements and related disclosures is not expected to be material.

All future implementation costs in such arrangements will be capitalized and amortized over the life of the arrangement, which may have a material impact in those future periods if such costs are material.

In August 2018, the FASB issued ASU No.

2018-13, which changes the fair value measurement disclosure requirements of ASC 820.

ASU 2018-13 will be effective for annual reporting periods beginning after December 15, 2019, including interim periods within those annual reporting periods, with early adoption permitted for any eliminated or modified disclosures upon issuance of this ASU.

Upon adoption, the new standard will eliminate certain disclosure requirements in the Company’s consolidated financial statements.

Financial Instruments – Credit Losses

In June 2016, the FASB issued ASU 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.

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments-Credit Losses (Topic 326) , which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.

This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost.

ASC 2016-16 is effective for annual reporting periods beginning after December 15, 2019, including interim reporting periods within those annual reporting periods.

Early adoption is permitted.

The Company is currently evaluating the impact of the new guidance 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.

Accounts Receivable and Unbilled Receivables

Accounts receivable and unbilled receivables consists of the following:

ASU 2016-13 is effective for smaller reporting companies for annual reporting periods beginning after December 15, 2022, including interim periods within those annual reporting periods, with early adoption permitted.

The Company is currently evaluating the impact of the new standard on its consolidated financial statements and related disclosures.

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

Accounts Receivable

Accounts receivable consist of the following:

As of September 30,

2 unchanged sentences

Accounts receivable, net

As of and for the year ended September 30, 2020, three customers represented approximately 15%, 14% and 10% of accounts receivable and one customer represented approximately 12% of total revenues.

As of and for the year ended September 30, 2019, three customers represented approximately 16%, 14% and 12% of accounts receivable and two customers represented approximately 11% and 15% of total revenues.

As of and for the year ended September 30, 2018, two customers represented approximately 19% and 12% of accounts receivable and three customers represented approximately 11%, 12% and 14% of total revenues.

Unbilled receivables represent amounts recognized as revenue for which invoices have not yet been sent.

On February 13, 2019, the Company entered into an Asset Purchase Agreement with Seevolution Inc., a Delaware corporation, Celebros, Inc., a Delaware corporation, and Elisha Gilboa, an individual and shareholder of Seevolution (the “Seevolution Asset Purchase Agreement”).

The Seevolution Asset Purchase Agreement sets forth the terms and conditions pursuant to which the Company acquired certain assets in exchange for consideration paid consisting of (i) $418 in cash at the time of purchase, (ii) the payment of $100 of additional cash to be paid out $10 per month for ten months starting April 30, 2019 and (iii) 40,000 shares of Bridgeline Digital common stock.

Costs to complete the transaction were approximately $18.

The Company accounted for the Seevolution transaction as an asset acquisition as there were no substantive processes acquired.

Goodwill is not recognized in an asset acquisition.

BRIDGELINE DIGITAL, INC.

1 unchanged sentence

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

On March 13, 2019, the Company entered into an Asset Purchase Agreement with Stantive Technologies Group Inc.

(“Stantive”), a corporation organized under the laws of Ontario, Canada to purchase substantially all of the assets of Stantive and assume certain liabilities.

The Company also acquired all of the outstanding stock of Stantive Technologies Group, Pty, a company incorporated in Australia, which was a subsidiary of Stantive.

The total purchase price, including cure costs, for Stantive and its Australian subsidiary was approximately $5.2 million in cash.

The Company accounted for the Stantive transaction as a business combination in accordance with ASC Topic 805, Business Combinations .

The Company assessed the fair market value of the acquired assets and liabilities as of the respective purchase dates, as follows:

Net assets acquired:

Accounts receivable, net

Fixed assets, net

Intangible assets

Current liabilities

Net assets acquired:

Purchase Price:

Cash Paid (including acquisition costs)

Future deferred payments (present value)

Common stock ( fair value)

Total consideration paid

As part of the Seevolution acquisition, of the $1,024 allocated to intangible assets, $602 was allocated to customer relationships, $401 was allocated to technology with an average useful life of five years, and $21 was allocated to trademarks with an average useful life of one year.

Amortization expense of intangible assets was approximately $138 for the year ended September 30, 2019.

As part of the Stantive acquisition, of the $3,007 allocated to intangible assets, $1.7 million was allocated to customer relationships, $1.2 million was allocated to technology with an average useful life of five years, and $75 was allocated to trademarks with an average useful life of one year.

Amortization expense of intangible assets was approximately $397 for the year ended September 30, 2019.

Total revenue from the Seevolution and Stantive acquisitions totaled approximately $2,145.

Total earnings from the two acquisitions is impracticable to disclose as the acquisitions were asset purchases and the operations were merged with existing operations and not accounted for separately.

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Pro Forma Information (Unaudited)

The following is the unaudited pro forma information assuming the Stantive acquisition occurred on October 1, 2017:

Years Ended September 30,

(In thousands, except per share data)

Net loss applicable to common shareholders

Net loss per share attributable to common shareholders:

Weighted average common shares outstanding - basic

Weighted average common shares outstanding - diluted

Property and e quipment

Property and equipment

Property and equipment consist of the following:

2 unchanged sentences

Purchased software

Property and equipment

Computer equipment

Leasehold improvements

Less accumulated depreciation

Less accumulated depreciation and amortization

Property and equipment, net

Depreciation and amortization on the above assets were $61 and $66 in fiscal 2020 and 2019, respectively.

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Fair Value Measurement and Fair Value of Financial Instruments

The Company’s other financial instruments consist principally of accounts receivable, accounts payable and warrant liabilities.

The Company measures its financial assets and liabilities at fair value.

8 unchanged sentences

Inputs reflect management’s best estimate of what market participants would use in valuing the asset or liability at the measurement date.

The Company believes the carrying values for accounts receivable and accounts payable and short-term debt approximate current fair values as of September 30, 2019 and 2018 because of their short-term nature and durations.

The carrying value of long-term debt also approximates fair value as of September 30, 2019 and 2018 based upon the Company’s ability to acquire similar debt at similar maturities and renew current debt instruments under similar terms as the original debt.

In October 2017, the Company recorded a liability associated with a warrant to purchase common stock issued to Montage Capital II, L.P (“Montage Capital”).

The fair value of the warrant liability will utilize a Level 3 input.

To determine the value of the warrant liability, the Company used a Monte Carlo option-pricing model, which takes into consideration the market values of comparable public companies, considering among other factors, the use of multiples of earnings, and adjusted to reflect the restrictions on the ability of our shares to trade in an active market.

The Monte Carlo option-valuation model also uses certain assumptions to determine the fair value, including expected life and annual volatility.

The initial valuation assumptions included an expected life of eight (8) years, annual volatility of 80%, and a risk-free interest rate of 2.24%.

At September 30, 2019, annual volatility decreased to 71%, the risk-free rate was 1.59% and the Company’s stock price declined to $1.91 per share.

The fair value of the warrant liability was valued at the loan execution date in the amount of $341 and is revalued at the end of each reporting period to fair value.

Changes in fair value are included in Other income (expense), net in the Consolidated Statement of Operations in the period the change occurs.

The Company recognized net gains as a result of the change in fair value of $166 and $161 during the years ended September 30, 2019 and 2018, respectively, and $327 since the original valuation in October 2017.

The fair value of the warrant was $14 and $180 at September 30, 2019 and 2018, respectively.

In connection with the private offering of Series C Convertible Preferred Stock issued on March 12, 2019, the Company issued Series A, Series B and Series C warrants (collectively, the “Series C Preferred Warrants”) to accredited investors and the placement agents.

These Series C Preferred Warrants have been classified as liabilities with the fair value determined using the Monte Carlo option-pricing model.

The initial valuation assumptions included an average expected life of five and one-half (5.5) years, volatility of 76.8% and a risk-free interest rate of 2.4%.

At September 30, 2019, annual volatility increased to 80.9%, the risk-free rate was 1.59% and the Company’s stock price declined to $1.91 per share.

Changes in fair value are included in Other income (expense), net in the Consolidated Statement of Operations in the period the change occurs.

The Company recognized net gains as a result of the change in fair value of $13,404 during the year ended September 30, 2019.

The resulting gain was primarily due to changes in inputs to the valuation model, including a decline in the stock price.

The fair value of the warrants was $3,500 at September 30, 2019.

During the year ended September 30, 2019, there were Series C Preferred Warrant exercises which contributed to the decrease in the associated liability by approximately $4.8 million.

The Company believes the recorded values for accounts receivable and accounts payable approximate current fair values as of September 30, 2020 and 2019 because of 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 market values of comparable public companies, considering among other factors, the use of multiples of earnings, and adjusted to reflect the restrictions on the ability of our shares to trade in an active market.

The Monte Carlo option-pricing model uses certain assumptions, including expected life and annual volatility.

The significant inputs and assumptions utilized were as follows:

As of September 30,

As of initial

valuation date

Montage Capital

Risk-free rate

The Company recognized gains of $1,028 and $13,404 for the years ended September 30, 2020 and 2019, respectively, related to the change in fair value of warrant liabilities.

The changes in fair value of warrant liabilities were due to changes in inputs, primarily a change in the stock price and the risk-free rate, to the Monte Carlo option-pricing model.

BRIDGELINE DIGITAL, INC.

8 unchanged sentences

Warrant liability - Montage

Warrant liability - Series A, B and C

Total Liabilities

5 unchanged sentences

Balance at end of period, September 30, 2020

The carrying value of goodwill is not amortized, but is tested for impairment annually as of September 30, as well as whenever events or changes in circumstances indicate that the carrying amount of a reporting unit may not be recoverable.

The carrying value of goodwill is not amortized, but is tested for impairment annually as of September 30th, as well as whenever events or changes in circumstances indicate that the carrying amount of a reporting unit may not be recoverable.

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.

1 unchanged sentence

however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

Interim tests were performed at June 30, 2018 and December 31, 2018, as a decline in the stock price and other negative qualitative factors led management to conclude that there was a potential impairment, and annual tests were performed at September 30, 2019 and 2018.

An interim test was performed at December 31, 2018, as a decline in the stock price and other negative qualitative factors led management to conclude that there was a potential impairment, and annual tests were performed at September 30, 2020 and 2019.

The fair value was calculated using the Company’s market price.

In performing the interim impairment tests, Management concluded that goodwill was impaired and recorded a charge of $3.7 million and $4.6 million during the three-month periods ended December 31, 2018 and June 30, 2018, respectively.

The annual impairment test at September 30, 2019 did not result in any further impairment.

The annual impairment test at September 30, 2018 resulted in additional impairment of $243.

In total, goodwill impairment charges of $3.7 million and $4.9 million were recognized during the years ended September 30, 2019 and 2018, respectively.

These amounts are reflected as a reduction in goodwill in the Company’s Consolidated Balance Sheets and an expense in the Company’s Consolidated Statements of Operations.

In performing the interim impairment test, management concluded that goodwill was impaired and recorded a charge of $3.7 million during the three-month period ended December 31, 2018.

The annual impairment tests at September 30, 2020 and 2019 did not result in any further impairment.

Impairment charges are reflected as a reduction in goodwill in the Company’s consolidated balance sheet and an expense in the Company’s consolidated statement of operations.

BRIDGELINE DIGITAL, INC.

6 unchanged sentences

Intangible Assets

Intangible assets are comprised as follows:

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

As of September 30,

1 unchanged sentence

Customer related

Non-compete agreements

Balance at end of period

Total amortization expense of $544 and $242 related to intangible assets for the years ended September 30, 2019 and 2018, respectively, is reflected in the Consolidated Statements of Operations in depreciation and amortization .

The estimated amortization expense for fiscal years 2020, 2021, 2022, 2023, 2024 and thereafter is $900, $858, $763, $682, $296 and $10, respectively.

Intangibles, net

Total amortization expense related to intangible assets was $891 and $544 for the years ended September 30, 2020 and 2019, respectively, and is reflected in Operating expenses on the consolidated statements of operations.

The estimated amortization expense for fiscal years 2021, 2022, 2023, 2024, and 2025 is $861, $765, $684, $297, and $10, respectively.

Accrued Liabilities

3 unchanged sentences

Professional fees

Restructuring expenses

The Company had a Line of Credit with Heritage Bank of Commerce (“Heritage Bank”).

During the year ended September 30, 2019, the Company paid off all its debt and has no outstanding debt as of September 30, 2019.

The Company’s debt as of September 30, 2018, consisted of the Line of Credit from Heritage Bank, a term loan with Montage Capital, and Promissory Term Notes.

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Debt at September 30, 2018 consists of the following:

September 30, 2018

Line of credit borrowings

Term loan - Montage Capital

Other promissory notes

Other (debt discount)

Less current portion

Long term debt, net of current portion

Heritage Line of Credit

In June 2016, the Company entered into a new Loan and Security Agreement (“Heritage Agreement”), with Heritage Bank.

The Heritage Agreement had an original a term of 24 months but was further amended in December 2018 and February 2019 to extend the maturity date to January 1, 2020 and February 29, 2020, respectively.

As of September 30, 2019, the Company no longer maintains nor are any future borrowings available under the line.

The Company paid an annual commitment fee of 0.4% of the commitment amount in the first year and 0.2% in the following years.

The facility fee was be $6 on each anniversary thereafter.

Borrowings were secured by all of the Company’s assets and all of the Company’s intellectual property.

The Company was required to comply with certain financial and reporting covenants including an Asset Coverage Ratio and an Adjusted EBITDA metric, as defined.

The Heritage Agreement provided for up to $2.5 million of revolving credit advances which could have been used for acquisitions and working capital purposes.

Borrowings were limited to the lesser of (i) $2.5 million and (ii) 75% of eligible receivables as defined.

The Company was able to borrow up to $1.0 million in out of formula borrowings for specified periods of time.

The borrowings or credit advances could not exceed the monthly borrowing base capacity, which would fluctuate based on monthly accounts receivable balances.

The Company was able to request credit advances if the borrowing capacity was more than the current outstanding loan advance and had to pay down the outstanding loan advance if it exceeded the borrowing capacity.

Borrowings accrued interest at Wall Street Journal Prime Rate plus 1.75%, (6.75% and 7% at September 30, 2019 and 2018, respectively).

Michael Taglich, a director and Shareholder of the Company, signed an unconditional guaranty (the “Guaranty”) and promised to pay Heritage Bank all indebtedness in an amount not to exceed $1.5 million in connection with the out of formula borrowings.

Under the terms of the Guaranty, the Guarantor authorizes Lender, without notice or demand and without affecting its liability hereunder, from time to time to:

(a) renew, compromise, extend, accelerate, or otherwise change the time for payment, or otherwise change the terms, of the Indebtedness or any part thereof, including increase or decrease of the rate of interest thereon, or otherwise change the terms of the Indebtedness;

(b) receive and hold security for the payment of this Guaranty or any Indebtedness and exchange, enforce, waive, release, fail to perfect, sell, or otherwise dispose of any such security;

and (d) release or substitute any Guarantor or any one or more of any endorsers or other guarantors of any of the Indebtedness.

To secure all of Guarantor's obligations hereunder, Guarantor assigned and granted to Lender a security interest in all moneys, securities, and other property of Guarantor now or hereafter in the possession of Lender, all deposit accounts of Guarantor maintained with Lender, and all proceeds thereof.

Upon default or breach of any of Guarantor's obligations to Lender, Lender could apply any deposit account to reduce the Indebtedness and could foreclose any collateral as provided in the Uniform Commercial Code and in any security agreements between Lender and Guarantor.

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Amendments – Heritage Bank

The Company and Heritage had executed numerous amendments since the origination of the Heritage Agreement.

Those amendments that are relevant as of September 30, 2019 are the following:

The first amendment, executed on August 15, 2016, included a decrease in the revolving line of credit from $3.0 million to $2.5 million.

The second amendment, executed on December 14, 2016, included a minimum cash requirement of $250 in the Company’s accounts at Heritage.

On October 6, 2017, a fourth amendment was executed, which included a consent to the Company’s incurrence of additional indebtedness from Montage Capital and the grant of a second position lien to Montage Capital.

In addition, Heritage and Montage Capital entered into an Intercreditor Agreement dated October 10, 2017 and acknowledged by the Company.

On September 21, 2018, the ninth amendment was executed and addressed the minimum unrestricted cash requirements for the Company’s accounts at the Bank upon repayment of Subordinated Debt incurred by the Company pursuant to certain Promissory Term Notes issued by the Company on September 7, 2018 in the principal amount of $941.

On December 27, 2018, the tenth amendment was executed, which extended the maturity date of the Loan Agreement to January 1, 2020, as well as, set new financial covenants for fiscal 2019.

On February 14, 2019, the eleventh amendment was executed, which extended the maturity date of the Loan Agreement to February 29, 2020, as well as, set new financial covenants for fiscal 2019.

On May 15, 2019, the twelfth amendment was executed, which included a waiver for a failed covenant metric.

Montage Capital II, L.P.

Loan Agreement

On October 10, 2017, the Company entered into a Loan and Security Agreement (the “Montage Agreement” or “Montage Loan”) with Montage Capital.

The Montage Agreement had a thirty-six (36) month term would have matured on October 10, 2020.

The Montage Agreement provided for up to $1.5 million of borrowing in the form of a non-revolving term loan which may be used by the Company for working capital purposes.

$1 million of borrowing was advanced on the date of closing and the option to borrow the remainder has lapsed.

Borrowings bore interest at the rate of 12.75% per annum.

The Company paid a fee of $47 to Montage Capital at closing.

Interest only payments were due and payable during the first nine months of the Loan.

On July 1, 2018, the Company commenced payment of principal payments of $26 per month plus accrued interest.

All remaining principal and interest would have been due and payable at maturity.

Borrowings were secured by a second position lien on all of the Company’s assets including intellectual property and general intangibles and is subordinate to the Company’s senior debt facility with Heritage Bank.

Pursuant to the Montage Agreement, the Company was also required to comply with certain financial covenants.

On May 10, 2018, the first amendment to the Montage Agreement (“First Amendment”) was executed.

The First Amendment included the Adjusted EBITDA metrics for the third quarter of fiscal 2018 and a waiver for not achieving the Adjusted EBITDA metrics for the quarter ended March 31, 2018.

A second Amendment to the Montage Agreement (the “Second Amendment”) was executed on October 22, 2018.

The Second Amendment included modifications to financial covenants and addressed the minimum unrestricted cash requirements for the Company’s accounts at the Bank upon repayment of Subordinated Debt incurred by the Company pursuant to the Promissory Term Notes issued by the Company on September 7, 2018 in the principal amount of $941.

A third amendment to the Montage Agreement (the “Third Amendment”) was executed on December 7, 2018 and included the new financial covenants for fiscal 2019.

The Montage Loan was paid in full and discharged on March 13, 2019.

A loss on early extinguishment of debt of $221 was recognized, related to the remaining unamortized debt discount expense, during the year ended September 30, 2019.

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Promissory Term Notes

On September 7, 2018, the Company sold and issued subordinate promissory notes (the “ Promissory Term Notes ”) to certain accredited investors (each, a “Purchaser”), pursuant to which it issued to the Purchasers (i) Promissory Term Notes, in the aggregate principal amount of approximately $941.

The Promissory Term Notes had an original issue discount of fifteen percent (15%), bore interest at a rate of twelve percent (12%) per annum, and had a maturity date of the earlier to occur of (a) six months from the date of execution of the Purchase Agreement, or (b) the consummation of a debt or equity financing resulting in the gross proceeds to the Company of at least $3.0 million.

After recording $141 of original issue discount and debt issuance costs of $40, the Company received net cash proceeds in the aggregate amount of $760 for the Promissory Term Notes.

The original issue discount and debt issuance costs were recognized as a contra liability and were being amortized over the life of the Promissory Term Notes.

On October 19, 2018, the Company completed an equity financing resulting in gross proceeds of $5.0 million and repaid the Promissory Term Notes including accrued interest of $13 for a total of $954 on October 23, 2018.

The Company’s lenders, Heritage Bank and Montage Capital, approved the issuance of the Promissory Term Notes and the repayment terms and each Purchaser also entered into a Subordination Agreement with the two lenders, pursuant to which the Purchasers agreed to subordinate (i) all of the Company’s indebtedness and obligations to the Purchasers, whether presently existing or arising in the future, to all of the Company’s indebtedness the Lenders and (ii) all of the Purchasers’ security interests, if any, to all of the Lenders’ security interests in property of the Company.

Restructuring fees

Balance at end of period

Restructuring and Acquisition Related Expenses

Restructuring Expenses

Commencing in fiscal 2015 and through fiscal 2019, the Company’s management approved, committed to and initiated plans to restructure and further improve efficiencies by implementing cost reductions in line with expected decreases in revenue.

The Company renegotiated several office leases and relocated to smaller space, while also negotiating sub-leases for the original space.

In addition, the Company executed a general work-force reduction and recognized costs for severance and termination benefits.

These restructuring charges and accruals require estimates and assumptions, including contractual rental commitments or lease buy-outs for vacated office space and related costs, and estimated sub-lease income.

Restructuring Activities

In March 2020, the Company recognized $366 related to a reduction in workforce in its U.S.

and Canada operations aimed at improving efficiencies by combining functions, certain responsibilities and eliminating redundancies which resulted in a reduction of 15 positions.

During the year ended September 30, 2019, the Company had certain expenditures related to restructuring plans, which had commenced in fiscal 2015, to improve efficiencies by implementing cost reductions in line with expected decreases in revenue.

As part of these then on-going restructuring plans, the Company re-negotiated several office leases and relocated to smaller space, executed a general workforce reduction and recognized costs for severance and termination benefits.

These restructuring charges and accruals required estimates and assumptions, including contractual rental commitments or lease buy-outs for vacated office space and related costs, and estimated sub-lease income.

The Company’s sub-lease assumptions include the rates to be charged to a sub-tenant and the timing of the sub-lease arrangement.

All of the vacated lease spaces are currently contractually occupied by new sub-tenants for the remaining life of the lease.

In the second quarter of fiscal 2017, the Company initiated a plan to shut down its operations in India, which is expected to be completed in early fiscal 2020.

All of these estimates and assumptions will be monitored on a quarterly basis for changes in circumstances with the corresponding adjustments reflected in the consolidated statement of operations.

In total, a charge of $849 and $187 was recorded to restructuring expenses for fiscal 2019 and fiscal 2018, respectively.

All of the vacated lease spaces were previously contractually occupied by new sub-tenants over the remaining life of the leases.

In the fiscal 2017 second quarter, the Company initiated a plan to shut down its operations in India, which is expected to be completed in the first half of fiscal 2021.

During fiscal 2019, a charge of $625 was recorded to restructuring expenses.

During the year ended September 30, 2020, expenditures related to these previous restructuring plans were minimal and the Company does not expect to incur significant expenditures in future periods.

All of these estimates and assumptions are monitored on a quarterly basis for changes in circumstances with the corresponding adjustments reflected in the consolidated statement of operations.

BRIDGELINE DIGITAL, INC.

2 unchanged sentences

The following table summarizes the restructuring charges reserve activity:

Employee Severance

Severance and

Facility Closures

11 unchanged sentences

Balance at end of period, September 30, 2020

As of September 30, 2019, $75 was included in Accrued Liabilities.

As of September 30, 2018, $53 and $25 was included in Accrued Liabilities and Other long-term liabilities, respectively.

Accrued restructuring costs included in Accrued Liabilities were $0 and $75 as of September 30, 2020 and 2019, respectively.

Acquisition Related Expenses

In connection with the acquisition of Stantive, the Company incurred legal, accounting and consulting fees of $428 during the year ended September 30, 2019, which is included in Restructuring and acquisition related expenses in the Consolidated Statements of Operations.

Commitments and Contingencies

Operating Lease Commitments

The Company leases facilities in the United States.

Future minimum rental commitments under non-cancelable operating leases with initial or remaining terms in excess of one year at September 30, 2019 were as follows:

Years Ending September 30,

Income Amount

The Company has no lease commitments that extend past fiscal 2021.

Rent expense for fiscal 2019 and 2018 was $367 and $368, respectively, inclusive of sublease income $108 and $119 for fiscal 2019 and 2018, respectively.

Other Commitments, Guarantees, and Indemnification Obligations

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.

In connection with the acquisition of Stantive, the Company incurred legal, accounting and consulting fees of $428 during the year ended September 30, 2019, which are included in Restructuring and acquisition related expenses in the consolidated statements of operations.

There were no acquisition related expenses incurred during the year ended September 30, 2020.

Payroll Protection Program

On April 17, 2020, Bridgeline Digital, Inc.

entered into a loan with BNB Bank as the lender in an aggregate principal amount of $1,047,500 (“PPP Loan”) pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”).

The PPP Loan is evidenced by a promissory note (“Note”).

Subject to the terms of the Note, the PPP Loan bears interest at a fixed rate of one percent (1%) per annum, with the first six months of interest deferred, has an initial term of two years, and is unsecured and guaranteed by the U.S.

Small Business Administration (“SBA”).

Payments are deferred for at least the first six months and payable in 18 equal consecutive monthly installments of principal and interest commencing upon expiration of the deferral period of the PPP Loan Date.

During the year ended September 30, 2020, interest expense was approximately $5 related to the PPP Loan.

The Company may apply to the lender for forgiveness of the PPP Loan, with the amount which may be forgiven equal to the sum of payroll costs, covered rent obligations, and covered utility payments incurred by the Company during the twenty-four week period beginning on April 21, 2020, calculated in accordance with the terms of the CARES Act.

The Note provides for prepayment and customary events of default, including, among other things, cross-defaults on any other loan with the lender.

The PPP Loan may be accelerated upon the occurrence of an event of default.

GAAP does not contain authoritative accounting standards for forgivable loans provided by governmental entities to a for-profit entity.

Absent authoritative accounting standards, interpretative guidance issued and commonly applied by financial statement preparers allows for the selection of accounting policies amongst acceptable alternatives.

Based on facts and circumstances outlined below, the Company determined it most appropriate to account for the PPP Loan proceeds as an in-substance government grant by analogy to International Accounting Standards 20 (“IAS 20”), Accounting for Government Grants and Disclosure of Government Assistance .

Under the provisions of IAS 20, “a forgivable loan from government is treated as a government grant when there is reasonable assurance that the entity will meet the terms for forgiveness of the loan.” IAS 20 does not define “reasonable assurance”;

however, based on certain interpretations, it is analogous to “probable” as defined in FASB ASC 450-20-20 under U.S.

GAAP, which is the definition the Company has applied to its expectations of PPP loan forgiveness.

Under IAS 20, government grants are recognized in earnings on a systematic basis over the periods in which the Company recognizes costs for which the grant is intended to compensate (i.e.

qualified expenses).

Further, IAS 20 permits for the recognition in earnings either separately under a general heading such as other income, or as a reduction of the related expenses.

The Company has elected to recognize government grant income separately within other income to present a clearer distinction in its consolidated financial statements between its operating income and the amount of net income resulting from the PPP loan and subsequent expected forgiveness.

The Company believes this presentation method promotes greater comparability amongst all periods presented.

BRIDGELINE DIGITAL, INC.

1 unchanged sentence

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

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 September 30, 2019.

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 September 30, 2019, and 2018, respectively, 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.

The Company is subject to ordinary routine litigation and claims incidental to its business.

As of September 30, 2019, the Company was not engaged in any material legal proceedings.

Stock holders ’ Equity

The following provides the balance and activity related to the PPP Loan:

Qualified expenses incurred during the period eligible for forgiveness

Unexpended loan proceeds

The Company has performed initial calculations for the PPP loan forgiveness according to the terms and conditions of the SBA’s Loan Forgiveness Application (Revised June 24, 2020) and, based on such calculations, expects that the PPP Loan will be forgiven in full, based on usage of related proceeds, over a period less than 24 weeks.

In addition, the Company has determined it is probable the Company will meet all the conditions of the PPP loan forgiveness.

However, there can be no assurances that the Company will ultimately meet the conditions for forgiveness of the loan or that the Company will not take actions that could cause the Company to be ineligible for forgiveness of the loan, in whole or in part.

The Company plans to submit the PPP loan forgiveness application in the near term.

In accordance with the terms and conditions under the Payroll Protection Program Flexibility Act of 2020 (the “Flexibility Act”), the lender has 60 days from receipt of the completed application to issue a decision to the SBA.

If the lender determines that the borrower is entitled to forgiveness, in whole or in part, of the amount applied for under the statute and applicable regulations, the lender must request payment from the SBA at the time the lender issues its decision to the SBA.

The SBA will, subject to any SBA review of the loan or loan application, remit the appropriate forgiveness amount to the lender, plus any interest accrued through the date of payment, not later than 90 days after the lender issues its decision to the SBA.

The amount the Company borrowed is within the “safe-harbor” limitations of the SBA.

Although the Company believes it is probable that the PPP Loan will be forgiven, the Company cannot provide any objective assurance that it will obtain forgiveness in whole or in part.

Pursuant to the Flexibility Act, the Company’s PPP loan agreement will be amended in the event that no amount or less than all of the PPP Loan is forgiven.

In addition, starting in August 2021, the Company will be required to make principal and interest payments or an adjustment amount based on the loan amendment over the remaining term of the PPP Loan until such time the loan is fully settled.

The Company classifies unexpended loan proceeds on the accompanying consolidated balance sheet as a current or noncurrent liability based on the contractual maturities of the underlying loan agreement.

As of September 30, 2020, all unexpended loan proceeds were classified as a current liability.

Other Credit Facilities

During the year ended September 30, 2019, the Company had a Line of Credit with Heritage Bank of Commerce (the “Line of Credit”) and a term loan with Montage Capital II, L.P.

(the “Montage Loan”).

Borrowings under the Line of Credit accrued interest at the Wall Street Journal Prime Rate plus 1.75% and the Montage Loan bore interest at 12.75% per annum.

During the year ended September 30, 2019, interest expense was approximately $136 related to the Line of Credit and Montage Loan.

As of September 30, 2020, the Company no longer maintains nor are any future borrowings available under the Line of Credit.

As more fully described in Note 12, in the fiscal 2019 second quarter, the Company concluded a private offering of Series C Convertible Preferred Stock, par value $0.001 per share.

Proceeds were used, among other things, to pay-off in full the outstanding amounts on the Line of Credit and Montage Loan.

The Company leases facilities in the United States for its corporate and regional field offices.

During the year ended September 30, 2020, 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 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.

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

ROU Model and Determination of Lease Term

The Company uses the 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.

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 right-of-use assets and (3) the term over which the right-of-use 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:

Condensed Consolidated Statement of Operations:

Operating lease cost

Variable lease cost

Sublease income, net

Cash paid for amounts included in the measurement of lease liabilities was $251 for the year ended September 30, 2020, which all represents operating cash flows from operating leases.

As of September 30, 2020, the weighted average remaining lease term was 3.1 years and the weighted average discount rate was 7.0%.

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

Operating Leases

Total lease commitments

Amount representing interest

Present value of lease liabilities

Current portion

Operating lease liabilities, net of current portion

As of September 30, 2020, the Company had no lease commitments that extend past 2025.

In January 2020, the Company entered into a new lease arrangement for its offices in Woodbury, New York.

As of September 30, 2020, the lease had not yet commenced as the new office space was currently under construction.

The Company had originally expected to move into the new office space on or about May 1, 2020;

however, due to the current state of the COVID-19 pandemic, there were delays in construction, inclusive of obtaining necessary building permits from the local municipality.

In November 2020, construction was completed, and this lease commenced.

In October 2020, the Company also entered into a new lease arrangement for an office in Canada and began to sublease its existing Canada location.

Future minimum rental commitments upon commencement of the new leases are as follows:

Total lease commitments

At September 30, 2019, future minimum rental commitments under non-cancelable leases with initial or remaining terms in excess of one year were as follows:

Total lease commitments

S tockholders ’ Equity

Series A Convertible Preferred Stock

In October 2014, the Company designated 264,000 shares of its Preferred stock (the “Preferred Stock”) as Series A convertible preferred stock and sold 200,000 shares of Series A convertible preferred stock at a purchase price of $10.00 per share for gross proceeds of $2.0 million in a private placement.

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

The current conversion price is $812.50 and is subject to adjustment in the event of stock splits or stock dividends.

As of September 30, 2019, a total of 1,636 preferred shares have been converted to 20 shares of common stock.

Any accrued but unpaid dividends on the shares of Preferred Stock to be converted shall also be converted in common stock at the conversion price.

A mandatory provision also may provide that the Company will have the right to require the holders to convert shares of Preferred Stock into Conversion Shares if (i) the Company’s common stock has closed at or above $1,625 per share for ten consecutive trading days and (ii) the Conversion Shares are (A) registered for resale on an effective registration statement or (B) may be resold pursuant to Rule 144.

In the event of any liquidation, dissolution, or winding up of the Company, the holders of shares of Preferred Stock will be entitled to receive in preference to the holders of common stock, the amount equal to the stated value per share of Series A Preferred Stock plus declared and unpaid dividends, if any.

After such payment has been made, the remaining assets of the Company will be distributed ratably to the holders of common stock.

The Preferred Shares shall vote with the Common Stock on an as converted basis.

Effective January 1, 2017, cumulative dividends are payable at a rate of 12% per year.

The Company has issued 64,000 shares of Preferred Stock as PIK dividends to the preferred shareholders, which is the maximum amount of cumulative PIK dividends authorized.

Therefore, all future dividend payments will be cash dividends.

Preferred shares representing the remaining available PIK dividend shares of 18,828 were issued in fiscal 2018.

Total cash dividend payments were $315 and $195, during fiscal 2019 and 2018, respectively.

At September 30, 2019 and 2018, cash dividend declares during the fiscal year and payable in October of the subsequent fiscal year were $79.

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

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

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

Conversion Price:

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

BRIDGELINE DIGITAL, INC.

1 unchanged sentence

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

Mandatory Conversion:

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

Company’s Redemption Option:

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

Notwithstanding, the holder may convert its Series A Preferred Stock prior to the exercise of the Company’s redemption option.

Each outstanding share of Series A Preferred Stock is entitled to receive cumulative dividends, payable quarterly in arrears, at a rate of 5% per annum for the first eighteen months commencing on January 1, 2020, after which time the dividend rate will increase to 12% per annum (the dividend rate was 12% per annum prior to the Series A Amendment).

Dividends are payable in cash or, at the election of the Company, by delivery of additional shares (“PIK Shares”) of Series A Preferred Stock, subject to a cap of 64,000 PIK Shares, in the aggregate.

Any accrued but unpaid dividends on the shares of Preferred Stock to be converted shall also be converted into common stock at the conversion price.

In the event of any liquidation, dissolution, or winding up of the Company, the holders of shares of Series A Preferred Stock will be entitled to receive in preference to the holders of common stock, the amount equal to the Stated Value per share of Series A Preferred Stock plus declared and unpaid dividends, if any.

After such payment has been made, the remaining assets of the Company will be distributed ratably to the holders of common stock.

The Series A Preferred Stock shall vote with the common stock on an as-converted basis.

Prior to fiscal 2019, the Company had issued 64,000 shares of Series A Preferred Stock as PIK Shares to the Series A preferred shareholders, which is the maximum amount of cumulative PIK Shares authorized.

Therefore, all future dividend payments will be cash dividends.

The Company determined that the Series A Amendment represents an extinguishment for accounting purposes.

In making this determination, the Company considered the significance of the contractual terms added and revisions to existing contractual terms, including, but not limited to, the significant change in the conversion price and the addition of the Company’s redemption option.

These additions and revisions to existing contractual terms were considered to be qualitatively significant.

The extinguishment of equity-classified convertible preferred stock is recognized as a deemed dividend measured as the difference between (1) the fair value of the consideration transferred;

that is, the Series A Preferred Stock, as amended, and (2) the carrying value of the Series A Preferred Stock.

At the Amendment Date, the fair value of the Series A Preferred Stock, as amended, was approximately $2,629 and its carrying value was approximately $315, resulting in a deemed dividend of $2,314 recognized as an increase to accumulated deficit and an increase to additional paid-in capital and is included as a component of net loss applicable to common shareholders.

The estimated Amendment Date fair value of the Series A Preferred Stock was determined using the present value of probability weighted scenario analysis based on the per share publicly traded closing stock price of the Company’s common stock.

As of September 30, 2020, all previously outstanding shares of Series A Convertible Preferred Stock were converted into common stock.

Series B Convertible Preferred Stock

On October 16, 2018, in connection with a public offering, the Company issued 4,288 Series B Convertible Preferred Stock, par value $0.001 per share, with each share of Series B Convertible Preferred Stock convertible into 40 shares of the Company’s common stock at a conversion price of $25.00 per share.

As of September 30, 2019, all of the shares of Series B Convertible Preferred Stock were converted into 171,250 shares of common stock.

Series C Convertible Preferred Stock

On March 12, 2019, the Company entered into Securities Purchase Agreements with certain accredited investors (each, a “ Purchaser ”), pursuant to which the Company offered and sold to the Purchasers an aggregate of 10,227.5 units (“ Units ”) for $1,000 per Unit, with such Units consisting of (1) an aggregate of 10,227.5 shares of the Company’s newly designated Series C Convertible Preferred Stock, par value $0.001 per share (“ Series C Preferred Stock” );

(ii) warrants to purchase an aggregate of 1,136,390 shares of the Company’s common stock, par value $0.001 per share (“ Common Stock” ), subject to adjustment (as set forth below), with a term of 5.5.

years (“ Series A Warrants” );

As of September 30, 2020, and 2019, all of the shares of Series B Convertible Preferred Stock were converted into 171,520 shares of common stock.

Series C Preferred Convertible Stock and Associated Warrants

On March 12, 2019, the Company entered into Securities Purchase Agreements with certain accredited investors (each, a “Purchaser”), pursuant to which the Company offered and sold to the Purchasers an aggregate of 10,227.5 units (“Units”) for $1,000 per Unit, with such Units consisting of (i) an aggregate of 10,227.5 shares of the Company’s newly designated Series C Convertible Preferred Stock, par value $0.001 per share (“Series C Preferred stock”);

(ii) warrants to purchase an aggregate of 1,136,390 shares of Company common stock, par value $0.001 per share (“Common Stock”), subject to adjustment (as set forth below), with a term of 5.5 years (“Series A Warrants”);

(iii) warrants to purchase an aggregate of 1,136,390 shares of Common Stock, subject to adjustment (as set forth below), with a term of 24 months (“Series B Warrants”);

1 unchanged sentence

The Company also issued warrants to purchase an aggregate of 127,848 shares of the Company’s Common Stock to the placement agents that were also subject to the same resets as described below.

At the time of issuance, no shares of Series C Preferred Stock could be converted into Conversion Shares and no Series C Preferred Warrants could be exercised for shares of Common Stock, unless and until such time that the Company had obtained approval from its stockholders, at an annual or special meeting or via written consent, to (i) issue the Conversion Shares and warrants upon the conversion and exercise of the Series C Preferred Stock and associated warrants, respectively, which number of shares in the aggregate exceed 20% of the Company’s shares of Common Stock issued and outstanding immediately prior to the Closing Date, as required by Nasdaq Marketplace Rule 5635(d) (the “ Issuance Approval ”), and (ii) amend its Amended and Restated Certificate of Incorporation, as amended (“ Charter ”) to increase the number of shares of Common Stock available for issuance thereunder (or effect a reverse stock split of its issued and outstanding shares of Common Stock so as to effectively increase the number of shares of Common Stock available for issuance) by a sufficient amount to permit the conversion of all outstanding Series C Preferred Stock into Conversion Shares and all Series C Preferred Warrants into warrant shares (the “ Authorized Share Approval ,” and together with the Issuance Approval, the “ Stockholder Approvals ”).

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

At the time of issuance, no shares of Series C Preferred stock could be converted into Conversion Shares and no Series C Preferred Warrants could be exercised for shares of Common Stock, unless and until such time that the Company had obtained approval from its stockholders, at an annual or special meeting or via written consent, to (i) issue the Conversion Shares and warrants upon the conversion and exercise of the Series C Preferred stock and associated warrants, respectively, which number of shares in the aggregate exceeds 20% of the Company’s shares of Common Stock issued and outstanding immediately prior to the Closing Date, as required by Nasdaq Marketplace Rule 5635(d) (the “Issuance Approval”), and (ii) amend its Amended and Restated Certificate of Incorporation, as amended (“Charter”) to increase the number of shares of Common Stock available for issuance thereunder (or effect a reverse stock split of its issued and outstanding shares of Common Stock so as to effectively increase the number of shares of Common Stock available for issuance) by a sufficient amount to permit the conversion of all outstanding Series C Preferred stock into Conversion Shares and all Series C Preferred Warrants into warrant shares (the “Authorized Share Approval,” and together with the Issuance Approval, the “Stockholder Approvals”).

In addition, the Company may not effect, and a Purchaser will not be entitled to, convert the Series C Preferred stock or exercise any Series C Preferred Warrants, which, upon giving effect to such conversion or exercise, would cause (i) the aggregate number of shares of Common Stock beneficially owned by the Purchaser (together with its affiliates) to exceed 4.99% (or, at the election of the holder, 9.99%) of the number of shares of Common Stock outstanding immediately after giving effect to the exercise.

1 unchanged sentence

As of September 30, 2020, a total of 9,877.5 shares of Series C Preferred stock have been converted to 1,097,509 shares of Common Stock.

The Company determined that the Series C Preferred Stock and the Series C Preferred Warrants are each separate freestanding financial instrument issued in a single transaction (the Private Placement) and that the Series C Preferred Warrants have been determined to be derivative liabilities, which are measured at fair value on a recurring basis.

The Company determined that the Series C Preferred stock and the Series C Preferred Warrants are each separate freestanding financial instruments issued in a single transaction (the “Private Placement”) and that the Series C Warrants have been determined to be derivative liabilities, which are measured at fair value on a recurring basis.

The net proceeds of that single transaction were allocated to each of the freestanding financial instruments based on their fair values.

The purchase price was allocated to the Series C Preferred Warrants first leaving no value for the Series C Preferred Stock, as the Series C Preferred Warrants were fair valued at $21.5 million and the total proceeds were $10.3 million.

The allocation of the proceeds resulted in a charge against income of $11.2 million representing the excess of fair value over the net proceeds, which was recognized during the year ended September 30, 2019 and included in Other income (expense), net in the Consolidated Statements of Operations.

The purchase price was allocated to the Series C Preferred Warrants first leaving no value for the Series C Preferred stock, as the Series C Warrants were fair valued at $21.5 million and the total proceeds were only $10.3 million.

The final allocation of the proceeds resulted in a charge against income of $11.2 million for the excess of the fair value over the net proceeds, which was recorded in the fiscal 2019 second quarter.

At the Market Offering

On August 17, 2020, the Company entered into an arrangement with an investment banking firm (the “Manager”) to sell up to $4,796,090 of shares of the Company’s common stock with a par value of $0.001 (the “ATM Offering”).

Pursuant to the ATM Offering, shares may be sold on a daily basis, commencing no earlier than August 17, 2020, at a gross sales price equal to the market price for shares of the Company’s Common Stock on the NASDAQ Capital Market at the time of sale of such shares.

The Manager has no obligation to purchase shares of the Company’s Common Stock and is only obligated to use its commercially reasonable efforts consistent with its normal trading and sales practices to sell shares of the Company’s Common Stock.

Accordingly, there can be no assurances that the Manager will be successful in selling any portion of the shares available for sale under the ATM Offering.

The Company shall pay to the Manager a placement fee of 2.5% of the gross sales price of shares sold.

The ATM Offering shall remain in effect until the earlier of August 17, 2021, or upon written notice of termination by either the Company or the Manager.

The Company currently intends to use the net proceeds from the sale of shares pursuant to the ATM Offering for working capital and general corporate purposes.

As of September 30, 2020, there have been no shares of common stock sold under the ATM offering.

Public Offering

On October 16, 2018, the Company issued and sold in a public offering (the “Offering”) an aggregate of (i) 28,480 Class A Units (the “Class A Units”) at a price of $25.00 per Class A Unit, consisting of (i) one share of the Company’s common stock and one five-year warrant to purchase one share of Company common stock at an exercise price of $25.00 per share and (ii) 4,288 Class B Units, consisting of one share of Series B Convertible Preferred Stock and a warrant to purchase one share of common stock.

The net proceeds to the Company from the Offering, after deducting the underwriter’s fees and expenses, were approximately $4.4 million.

BRIDGELINE DIGITAL, INC.

1 unchanged sentence

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

Common S tock

In February 2018, the Company issued 41,006 shares of restricted common stock at $2.39 to four members of its Board of Directors in lieu of cash payments for their annual services as board members.

The shares vested in equal installments on a monthly basis through the end of the service period of September 30, 2018.

The aggregate fair value of the shares is $98 and was expensed over the service period.

Public Offering

On October 16, 2018, the Company issued and sold in a public offering (the “ Offering ”) an aggregate of (i) 28,480 Class A Units (the “Class A Units”) at a price of $25.00 per Class A Unit, consisting of (i) one share of the Company’s common stock and one five-year warrant to purchase one share of the Company’s common stock at an exercise price of $25.00 per share and (ii) 4,288 Class B Units, consisting of one share of Series B Convertible Preferred Stock and a Warrant to purchase one share of common stock.

The net proceeds to the Company from the Offering, after deducting the underwriter’s fees and expenses, was approximately $4.4 million.

In addition, the Company granted the underwriter of the Offering a 45-day option (the “Over-allotment Option ”) to purchase up to an additional 30,000 shares of common stock and additional warrants to purchase an additional 30,000 shares of common stock.

1 unchanged sentence

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 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 5,000 shares of common stock.

The Company has granted common stock, common stock warrants, and common stock option awards (the “Equity Awards”) to employees, consultants, advisors and former debt holders of the Company and to former owners and employees of acquired companies that have become employees of the Company.

The Company’s Amended and Restated Stock Incentive Plan (the “Plan”) provided for the issuance of up to 5,000 shares of common stock.

This Plan expired in August 2016.

As of September 30, 2020, there were 3,246 options outstanding under the Plan.

On April 29, 2016, the stockholders approved a new plan, The 2016 Stock Incentive Plan (the “2016 Plan”).

On April 29, 2016, the stockholders approved a new stock incentive plan, The 2016 Stock Incentive Plan (the “2016 Plan”).

The 2016 Plan authorizes the award of incentive stock options, non-statutory stock options, restricted stock, unrestricted stock, performance shares, stock appreciation rights and any combination thereof to employees, officers, directors, consultants, independent contractors and advisors of the Company.

Initially, a total of 10,000 shares of the Company’s Common Stock are reserved for issuance under the 2016 Plan.

In November 2019, the Company increased the number of common shares available for issuance under the 2016 Plan from 10,000 shares to 800,000 shares.

There were no revisions to exercise prices, terms or any other underlying provisions of existing stock options outstanding.

As of September 30, 2020, there were 609,955 options outstanding and 190,045 shares available for future issuance under the 2016 Plan.

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Stock Option and Warrant Activity and Outstanding Shares

A summary of combined option and warrant activity follows:

Stock Options

Stock Warrants

Outstanding, October 1, 2017

Forfeited or expired

Outstanding, September 30, 2018

Forfeited/Exchanged

Outstanding, June 30, 2019

There were no options exercised during fiscal 2019 and 2018.

There were 5,688 and 6,443 options vested and exercisable as of September 30, 2019 and September 30, 2018, respectively.

The shares outstanding at September 30, 2019 and 2018 had no intrinsic value.

A summary of the status of unvested shares is as follows:

Unvested at October 1, 2018

Unvested at September 30, 2019

Price ranges of outstanding and exercisable options as of September 30, 2019 are summarized below:

Outstanding Options

Exercisable Options

Compensation Expense

Compensation E xpense

Compensation expense is generally recognized on a graded accelerated basis over the vesting period of grants.

During the years ended September 30, 2019 and 2018, the Company recognized $249 and $394, respectively, as compensation expense related to share based payments related to stock options.

Compensation expense is recorded in the Consolidated Statement of Operations with a portion charged to Cost of Goods Sold and a portion to Operating Expenses depending on the employee’s department.

In fiscal 2019, $9 was charged to Cost of Goods Sold and $240 was charged to Operating Expenses.

In fiscal 2018, $16 was charged to Cost of Goods Sold and $378 was charged to Operating Expenses.

As of September 30, 2019, the Company had approximately $15 of unrecognized compensation costs related to unvested options which the Company expects to recognize through fiscal 2021.

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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 years ended September 30, 2020 and 2019, compensation expense related to share-based payments was as follows:

September 30,

Cost of revenue

Operating expenses

As of September 30, 2020, the Company had approximately $325 of unrecognized compensation costs related to unvested options, which are expected to be recognized over a weighted-average period of 2.1 years.

Common Stock Warrants

The Company typically issues warrants to individual investors and placement agents to purchase shares of the Company’s common stock in connection with private placement fund raising activities.

The Company typically issues warrants to individual investors and placement agents to purchase shares of the Company’s common stock in connection with public and private placement fund raising activities.

Warrants may also be issued to individuals or companies in exchange for services provided for the Company.

2 unchanged sentences

The Montage Warrant contains an equity buy-out provision upon the earlier of (1) dissolution or liquidation of the Company, (2) any sale or distribution of all or substantially all of the assets of the Company or (3) a “Change in Control” as defined within the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934.

Montage Capital shall have the right to receive an equity buy-out of $250.

Montage Capital has the right to receive an equity buy-out of $250.

If the equity buy-out is exercised, the Montage Warrant will be surrendered to the Company for cancellation.

The fair value of the Montage warrant liability was $14 and $180 at September 30, 2019 and 2018, respectively.

Series A, B and C Preferred Warrants – Reset Dates and Res e t Price – The Series A Warrants and Series B Warrants had an initial exercise price of $9.00 per share;

provided, however, that the exercise price of the Series A Warrants and Series B Warrants could be reset up to three times (each, a “ Reset Date ”), as more specifically set forth in the Series C Warrants, to a price equal to the greater of (i) 80% of the average of the two lowest VWAP days out of the 20 consecutive trading days immediately preceding the Reset Date, and (ii) $4.00 (the “ Floor ”) (the “ Reset Price ”).

The fair value of the Montage warrant liability at September 30, 2020 and 2019, was $26 and $14, respectively.

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Series A, B and C Preferred Warrants - Reset Dates and Reset Price - The Series A Warrants and Series B Warrants had an initial exercise price of $9.00 per share;

provided, however, that the exercise price of the Series A Warrants and Series B Warrants could be reset up to three times (each, a “Reset Date”), as more specifically set forth in the Series C Warrants, to a price equal to the greater of (i) 80% of the average of the two lowest VWAP days out of the 20 consecutive trading days immediately preceding the Reset Date, and (ii) $4.00 (the “Floor”) or (the “Reset Price”).

Upon the applicable Reset Date, the number of shares of Common Stock issuable pursuant to the Series A Warrants and Series B Warrants would also be adjusted, as more specifically set forth in the Series C Warrants.

3 unchanged sentences

The shares were fixed to the following at the Reset Date:

the number of shares of Common Stock issuable upon exercise of the Series A Warrants is 2,556,875 shares, Series B Warrants is 2,556,875 shares, and Series C Warrants is 1,420,486 shares.

the number of shares of Common Stock issuable upon exercise of the Series A Warrants is 2,556,875 shares, Series B Warrants is 2,556,875 shares, and Series C Warrants is 1,420,486.

The number of shares of Common Stock issuable upon exercise of warrants issued to the placement agents is 127,848 shares.

During the year ended September 30, 2019, shareholders exercised 1,351,217 shares of the Series C Warrants.

There are no Series A, B or placement agents warrants exercised as of September 30, 2019.

The fair value of the total warrant liability related to the Series A, B and C warrants and the placement agents’ warrants was $3,500 at September 30, 2019.

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Stock warrants outstanding at September 30, 2019 are as follows:

Placement Agent

Director/Shareholder

As of September 30, 2020, a total of 1,351,217 shares of Series C Warrants have been exercised and no Series A, B or placement agent warrants exercised.

The fair value of the total warrant liability related to the Series A, B and C Warrants and the placement agent warrants at September 30, 2020 and 2019, was $2,460 and $3,500, respectively.

Total warrants outstanding as September 30, 2020 were as follows:

Director/Shareholder

9 unchanged sentences

Exercise Price

Director/Shareholder

Total issued in fiscal 2018

Placement agent - public offering

4 unchanged sentences

Total issued in fiscal 2019

Disaggregated Revenue

During the year ended September 30, 2020, there were no warrants issued.

Summary of Option and Warrant Activity and Outstanding Shares

During the year ended September 30, 2020, the Company granted options to purchase 681,353 shares at an exercise price of $1.40, of which (a) 70,000 shares vest on November 20, 2020 and the remainder vest ratably over a three-year period commencing November 20, 2019, (b) 1,000 shares at an exercise price of $1.61 which vest ratably over a three-year period commencing on December 2, 2019 and (c) 20,000 shares at an exercise price of $1.61 which vest ratably over a three-year period commencing on June 15, 2020.

All such options granted expire ten years from the date of grant.

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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 year ended September 30, 2020, are as follows:

Weighted-average fair value per share option

Expected life (in years)

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 zero since the Company does not currently pay cash dividends on its common stock and does not anticipate doing so in the foreseeable future.

A summary of combined stock option and warrant activity is as follows:

Stock Options

Stock Warrants

Outstanding, October 1, 2018

Forfeited/Exchanged

Outstanding, September 30, 2019

Forfeited/Exchanged

Outstanding, September 30, 2020

There were no options exercised during fiscal 2020 and 2019.

There were 5,865 and 5,688 options vested and exercisable as of September 30, 2020 and 2019, respectively.

The shares outstanding at September 30, 2020 had an aggregate intrinsic value of $275 and had no intrinsic value at September 30, 2019.

A summary of the status of unvested shares is as follows:

Unvested at October 1, 2019

Unvested at September 30, 2020

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Price ranges of outstanding and exercisable options as of September 30, 2020, are summarized below:

Outstanding Options

Exercisable Options

Exercise Price

Number of options

Weighted Average

Contractual Life (Years)

Exercise Price

Weighted Average

Exercisable Price

* There are no outstanding or exercisable options with exercise prices between $1.62 and $115.

Commitments and Contingencies

The Company leases certain of its buildings under noncancelable lease agreements.

Refer to the Leases footnote (Note 11) of the Notes to the Consolidated Financial Statements for additional information.

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 September 30, 2020.

As of September 30, 2020 and 2019, the Company has not experienced any losses related to the indemnification obligations and no significant claims with respect thereto were outstanding.

The Company is subject to ordinary routine litigation and claims incidental to its business.

As of September 30, 2020, the Company was not engaged in any material legal proceedings.

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.

10 unchanged sentences

Perpetual Licenses

The components of the Company’s tax provision for the years ended September 30, 2019 and 2018 are as follows:

Years Ended September 30,

Deferred Revenue

Amounts that have been invoiced are recognized in accounts receivable, 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.

As of September 30, 2020, approximately $15 of revenue is expected to be recognized from remaining performance obligations for contracts with original performance obligations that exceed one year.

The Company expects to recognize revenue on approximately 99% of these remaining performance obligations over the next 12 months, with the balance recognized thereafter.

The following table summarizes the classification and net change in deferred revenue as of and for the years ended September 30, 2020 and 2019:

Deferred Revenue

Balance as of October 1, 2018

Increase (decrease)

Balance as of September 30, 2019

Balance as of September 30, 2020

Deferred Capitalized Commissions Costs

The incremental direct costs of obtaining a contract, which primarily consist of sales commissions paid for new subscription contracts, are deferred and amortized on a straight-line basis over a period of approximately three years.

The initial amortization period will generally be the customer contract term, which is typically thirty-six (36) months, with some exceptions.

Total deferred capitalized commissions were $20 and $70 as of September 30, 2020 and 2019, respectively.

Current deferred capitalized commission costs are included in Other current assets in the consolidated balance sheets and noncurrent deferred capitalized commission costs are included in Other assets in the consolidated balance sheets.

Amortization expense was $16 and $39 for the years ended September 30, 2020 and 2019, respectively.

The components of the Company’s tax provision as of September 30, 2020 and 2019 is as follows:

Year Ended September 30,

Total current

Total deferred

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The Company’s income tax provision was computed using the federal statutory rate (21%) and average state statutory rates (4.3%), net of related federal benefit.

The provision differs from the amount computed by applying the statutory federal income tax rate to pretax income, as follows:

Years Ended September 30,

Income tax benefit at the federal statutory rate

Year Ended September 30,

Income tax provision/(benefit) at the federal statutory rate of 21%

Permanent differences, net

State income tax (benefit)

Change in statutory rate

State income tax provision/(benefit)

Change in valuation allowance attributable to operations

As of September 30, 2019, the Company has federal net operating loss (NOL) carryforwards of approximately $34 million that expires on various dates through 2039.

True up to prior year NOL

AMT tax refundable under CARES act

As of September 30, 2020, the Company has federal net operating loss (NOL) carryforwards of approximately $37 million that expire on various dates through 2040.

Internal Revenue Code Section 382 places a limitation on the amount of taxable income which can be offset by NOL carryforwards after a change in control of a loss corporation.

3 unchanged sentences

The Company also has approximately $28 million in state NOLs which expire on various dates through 2039.

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The Company has deferred tax assets that are available to offset future taxable income.

A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax assets will not be realized.

Management believes that it is more likely than not that all deferred tax assets will not be realized, with the exception of the alternative minimum tax (AMT) carryover which has not been reserved against.

Accordingly, the Company has established a valuation allowance against a portion of its deferred tax assets at September 30, 2019 and 2018.

For the year ended September 30, 2019, the valuation allowance for deferred tax assets increased by $1.9 million, which was mainly due to increases in the net operating losses.

For the year ended September 30, 2018, the valuation allowance for deferred tax assets decreased by $3.5 million, which was mainly due to offsetting increases in the net operating losses and the effect of the change in the federal tax rate to 21%.

A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized.

Management believes that it is more likely than not that all deferred tax assets will not be realized, with the exception of the AMT carryover which has not been reserved against for September 30, 2019.

Accordingly, the Company has established a valuation allowance against a portion of its deferred tax assets at September 30, 2020 and a portion of its net deferred tax asset for 2019.

For the year ended September 30, 2020 and 2019, the valuation allowance for deferred tax assets increased $484,000, and $1.9 million which was mainly due to increases in the net operating losses.

In April of 2020 the Company received a loan pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief and Economic Security Act.

The Company has used the funds in accordance with the requirements of the loan agreement and expects to receive forgiveness for all loan proceeds in the following fiscal year.

The Company has recorded the proceeds for which it has calculated that forgiveness will be achieved as a government grant.

The related expenses that were paid in accordance with the loan are included as expenses on the income statement for the year ended September 30, 2020.

For income tax reporting the IRS has stated that any amount of loan forgiveness shall be excludible from income.

For this reason, the Company has recorded a deferred tax asset in the amount of $243.

The IRS has also determined that the related expenses incurred and paid in accordance with the forgiveness rules of the PPP loan agreement are not deductible.

The Company has reported a deferred tax liability in the amount of $243 to account for this book vs tax adjustment.

The Company recognizes interest accrued related to unrecognized tax benefits in interest expense.

Penalties, if incurred, are recognized as a component of tax expense.

The Company is subject to U.S.

federal income tax as well as income tax of certain state jurisdictions.

The Company has not been audited by the Internal Revenue Service (IRS) or any states in connection with income taxes.

The tax periods from 2016– 2020 generally remain open to examination by the IRS and state authorities.

Significant components of the Company’s deferred tax assets and liabilities are as follows:

As of September 30,

September 30,

Deferred tax assets:

Accrued vacation

Bad debt reserve

Deferred revenue

Accrued expenses

AMT carryforward

Contribution carryforward

Net operating loss carryforwards

Contribution carryforward

Right of use liability

Debt forgiveness

Total deferred tax assets

1 unchanged sentence

Net deferred tax assets

Undistributed losses of the Company’s foreign subsidiaries amounted to approximately ($108) and ($59) at September 30, 2019 and 2018, respectively.

Deferred tax liabilities:

Right of use asset

Expenses related to debt forgiveness

Total deferred tax liabilities

Net deferred tax assets

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Net deferred tax assets are reflected in Other assets on the consolidated balance sheets.

Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $85 and $108 at September 30, 2020 and 2019, respectively.

The 2017 Tax Act subjects a U.S.

4 unchanged sentences

taxpayers that sell goods or services to foreign customers under the new Foreign Derived Intangible Income Deduction ("FDII") rules.

As of September 30, 2019, the Company had net losses in from all foreign derived income and therefore reported zero GILTI tax expense for the year ended September 30, 2019.

The Company recognizes interest accrued related to unrecognized tax benefits in interest expense.

Penalties, if incurred, are recognized as a component of tax expense.

The Company is subject to U.S.

federal income tax as well as income tax in certain state jurisdictions.

The Company has not been audited by the Internal Revenue Service (IRS) or any states in connection with income taxes.

The tax periods from 2015 to 2018 generally remain open to examination by the IRS and state authorities.

When accounting for uncertain income tax positions, the impact of uncertain tax positions is recognized in the financial statements if they are more likely than not of being sustained upon examination, based on the technical merits of the position.

As of September 30, 2020, the Company had net losses from all foreign derived income and therefore reported zero GILTI tax expense for the year ended September 30, 2020.

When accounting for uncertain income tax positions, the impact of uncertain tax positions is recognized in the consolidated financial statements if they are more likely than not of being sustained upon examination, based on the technical merits of the position.

The Company’s management has determined that the Company has no uncertain tax positions requiring recognition as of September 30, 2020 and 2019.

The Company does not expect any change to this determination in the next twelve months.

The Seevolution Asset Purchase Agreement sets forth the terms and conditions pursuant to which the Company acquired certain assets in exchange for consideration paid consisting of (1) $418 in cash at the time of purchase, (ii) the payment of $100 of additional cash to be paid out $10 per month for ten months starting April 30, 2019 and (iii) 40,000 shares of Bridgeline Digital common stock.

Costs to complete the transaction were approximately $18.

The Company accounted for the Seevolution transaction as an asset acquisition as there were no substantive processes acquired.

Goodwill is not recognized in an asset acquisition.

On March 13, 2019, the Company entered into an Asset Purchase Agreement with Stantive Technologies Group Inc.

(“Stantive”), a corporation organized under the laws of Ontario, Canada, to purchase substantially all of the assets of Stantive and assume certain liabilities.

The Company also acquired all of the outstanding stock of Stantive Technologies Group, Pty, a company incorporated in Australia, which was a subsidiary of Stantive.

The total purchase price, including cure costs, for Stantive and its Australian subsidiary was approximately $5.2 million in cash.

The Company accounted for the Stantive transaction as a business combination in accordance with ASC Topic 805, Business Combinations .

The Company assessed the fair market value of the acquired assets and liabilities as of the respective purchase dates, as follows:

Net assets acquired:

Accounts receivable, net

Fixed assets, net

Intangible assets

Current liabilities

Net assets acquired

Purchase Price:

Cash Paid (including acquisition costs)

Future deferred payments (present value)

Common stock (fair value)

Total consideration paid

BRIDGELINE DIGITAL, INC.

1 unchanged sentence

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

Total revenue from the Seevolution and Stantive acquisitions totaled approximately $2,145 for fiscal 2019.

Pro Forma Information (Unaudited)

The following is the unaudited pro forma information assuming the Stantive acquisition occurred on October 1, 2017:

September 30, 2019

(in thousands, except per share data)

Net loss applicable to common shareholders

Net loss per share attributable to common shareholders:

Weighted average common shares outstanding - basic

Weighted average common shares outstanding - diluted

Related Party Transactions

6 unchanged sentences

As of September 30, 2020, Michael Taglich beneficially owns approximately 6.5% of the Company’s stock.

In connection with the November 2016 Private Placement, the Company issued to the Investors warrants to purchase an aggregate total of 4,270 shares common stock.

In connection with the November 2016 Private Placement, the Company issued to the Investors warrants to purchase an aggregate total of 4,270 shares of common stock.

Included were warrant shares issued to Roger Kahn (172 shares), the Company’s President and Chief Executive Officer, and Michael Taglich (308 shares).

1 unchanged sentence

The warrants expire May 9, 2022.

Michael Taglich has also guaranteed $1.5 million in connection with the Company’s out of formula borrowings on its credit facility with Heritage Bank.

In consideration of previous loans made by Michael Taglich to the Company and the personal guaranty for Heritage Bank, Mr.

In consideration of previous loans made by Michael Taglich to the Company and the personal guaranty for on a former third-party credit facility no longer maintained by the Company, Mr.

Taglich has been issued warrants to purchase common stock totaling 1,080 shares at an exercise price of $1,000 per share.

Michael Taglich participated in the Promissory Term Notes in September 2018.

Michael Taglich purchased Promissory Term Notes in the amount of approximately $122.

Taglich Brothers served as placement agent for the above transaction, for which services the Company paid to Taglich Brothers $40 in cash compensation, or five percent (5%) of the net proceeds received by the Company.

In November 2018, the Company engaged Taglich Brothers, on a non-exclusive basis, to perform advisory and investment banking services to identify possible acquisition target possibilities.

In November 2018, the Company engaged Taglich Brothers Inc, on a non-exclusive basis, to perform advisory and investment banking services to identify possible acquisition target possibilities.

Michael Taglich, a director and shareholder of the Company, is the President and Chairman of Taglich Brothers Inc.

Fees for the services were $8 per month for three months and $5 thereafter, cancellable at any time.

Taglich Brothers could also earn a success fee ranging from $200 for a revenue target acquisition of under $5 million up to $1 million for an acquisition target over $200 million.

In connection with the asset purchase of Stantive, Taglich Brothers earned a success fee of $200.

Taglich Brothers Inc.

could also earn a success fee ranging from $200 for a revenue target acquisition of under $5 million up to $1 million for an acquisition target over $200 million.

In connection with the asset purchase of Stantive, during the second quarter of the Company’s 2019 fiscal year, Taglich Brothers Inc earned a success fee of $200.

Michael Taglich purchased 350 units in the amount of $350 of Series C Preferred Stock and associated warrants in the private transaction consummated on March 13, 2019.

Taglich’s purchase was subject to stockholder approval pursuant to Nasdaq Marketplace Rule 5635(c), for which approval by the stockholders of the Company was obtained on April 26, 2019.

Subsequent Event s

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 consolidated financial statements, other than those included below.

Stock Incentive Plan

In November 2019, the Company increased the number of common shares available for issuance under the 2016 Stock Incentive Plan from 10,000 shares to 800,000 shares.

There were no revisions to exercise prices, terms or any other underlying terms of existing stock options outstanding.

Changes in and Disagreements w ith Accountants on Accounting and Financial Disclosure.

Subsequent Events

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

BRIDGELINE DIGITAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data