Bridgeline Digital, Inc. 10-K

Item 8. Financial Statements and Supplementary Data. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of Bridgeline Digital, Inc. Opinion on 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. Explanatory Paragraph – Going Concern 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 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. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion 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 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 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 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 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 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. Marcum LLP 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. Boston, MA December 23, 2020 29 BRIDGELINE DIGITAL, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) As of September 30, 2020 2019 ASSETS Current assets: Cash and cash equivalents $ 861 $ 296 Accounts receivable, net 665 979 Prepaid expenses 268 351 Other current assets 111 49 Total current assets 1,905 1,675 Property and equipment, net 238 299 Operating lease assets 294 - Intangible assets, net 2,617 3,509 Goodwill 5,557 5,557 Other assets 49 115 Total assets $ 10,660 $ 11,155 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Current portion of operating lease liabilities $ 96 $ - Accounts payable 1,311 1,740 Accrued liabilities 599 835 Paycheck Protection Program Liability (Note 10) 88 - Deferred revenue 1,511 1,262 Total current liabilities 3,605 3,837 Operating lease liabilities, net of current portion 198 - Warrant liabilities 2,486 3,514 Other long-term liabilities 15 8 Total liabilities 6,304 7,359 Commitments and contingencies Stockholders’ equity: Preferred stock - $0.001 par value; 1,000,000 shares authorized; Series C Convertible Preferred stock: 11,000 shares authorized; 350 shares issued and outstanding at September 30, 2020 and 441 shares at September 30, 2019, issued and outstanding - - Series A Convertible Preferred stock: 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; 50,000,000 shares authorized; 4,420,170 shares at September 30, 2020 and 2,798,475 shares at September 30, 2019, issued and outstanding 4 3 Additional paid-in capital 78,316 75,620 Accumulated deficit (73,583 ) (71,489 ) Accumulated other comprehensive loss (381 ) (338 ) Total stockholders’ equity 4,356 3,796 Total liabilities and stockholders’ equity $ 10,660 $ 11,155 The accompanying notes are an integral part of these consolidated financial statements. 30 BRIDGELINE DIGITAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data) Years Ended September 30, 2020 2019 Net revenue: Digital engagement services $ 3,409 $ 4,117 Subscription and perpetual licenses 7,498 5,835 Total net revenue 10,907 9,952 Cost of revenue: Digital engagement services 1,831 2,070 Subscription and perpetual licenses 2,676 3,290 Total cost of revenue 4,507 5,360 Gross profit 6,400 4,592 Operating expenses: Sales and marketing 2,614 4,824 General and administrative 2,455 3,246 Research and development 1,641 2,185 Depreciation and amortization 968 620 Goodwill impairment - 3,732 Restructuring and acquisition related expenses 366 1,053 Total operating expenses 8,044 15,660 Loss from operations (1,644 ) (11,068 ) Interest expense and other, net (7 ) (303 ) Government grant income (Note 10) 960 - Amortization of debt discount - (231 ) Warrant liability expense - (11,272 ) Change in fair value of warrant liabilities 1,028 13,404 Income (loss) before income taxes 337 (9,470 ) Provision for income taxes 11 4 Net income (loss) 326 (9,474 ) Dividends on convertible preferred stock (106 ) (315 ) Deemed dividend on amendment of Series A convertible preferred stock (2,314 ) - Net loss applicable to common shareholders $ (2,094 ) $ (9,789 ) Net loss per share attributable to common shareholders: Basic $ (0.59 ) $ (8.16 ) Diluted $ (0.59 ) $ (8.16 ) Number of weighted average shares outstanding: Basic 3,555,032 1,199,322 Diluted 3,555,032 1,199,322 The accompanying notes are an integral part of these consolidated financial statements. 31 BRIDGELINE DIGITAL, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME / ( LOSS ) (in thousands) Years Ended September 30, 2020 2019 Net income (loss) $ 326 $ (9,474 ) Other comprehensive income (loss): Net change in foreign currency translation adjustment (43 ) 13 Comprehensive income (loss) $ 283 $ (9,461 ) The accompanying notes are an integral part of these consolidated financial statements. 32 BRIDGELINE DIGITAL, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except share data) Accumulated Preferred Stock Common Stock Additional Other Total Paid-in Accumulated Comprehensive Stockholders’ Shares Amount Shares Amount Capital Deficit Loss Equity Balance at October 1, 2018 262,751 $ - 84,005 $ - $ 66,553 $ (61,778 ) $ (351 ) $ 4,424 Issuance of common stock, net of issuance costs 14 1,415,507 3 8,338 8,341 Stock-based compensation expense 249 249 Preferred B stock conversion to common (4 ) 171,520 - Series C Convertible Preferred and conversion to common (10 ) 1,087,443 - Common stock issued in connection with acquisition of business 40,000 480 480 Dividends on Series A convertible preferred stock (315 ) (315 ) Net loss (9,474 ) (9,474 ) Cumulative effect of the adoption of ASC 606 78 78 Foreign currency translation 13 13 Balance at September 30, 2019 262,751 $ - 2,798,475 $ 3 $ 75,620 $ (71,489 ) $ (338 ) $ 3,796 Dividends on Series A convertible preferred stock (106 ) (106 ) Deemed dividend on amendment of Series A convertible preferred stock (Note 12) 2,314 (2,314 ) - Series A convertible preferred stock dividend liabilities settled in shares 112,960 1 188 189 Series A convertible preferred stock conversion to common (262,310 ) 1,498,623 - Series C convertible preferred stock conversion to common (91 ) 10,112 - Stock-based compensation expense 194 194 Net income 326 326 Foreign currency translation (43 ) (43 ) Balance at September 30, 2020 350 $ - 4,420,170 $ 4 $ 78,316 $ (73,583 ) $ (381 ) $ 4,356 The accompanying notes are an integral part of these consolidated financial statements. 33 BRIDGELINE DIGITAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Years Ended September 30, 2020 2019 Cash flows from operating activities: Net income (loss) $ 326 $ (9,474 ) Adjustments to reconcile net income (loss) to net cash used in operating activities: Loss on disposal of property and equipment - 9 Amortization of intangible assets 891 544 Depreciation 61 66 Other amortization 16 39 Goodwill impairment - 3,732 Amortization of debt discount - 231 Warrant liability expense - 11,272 Change in fair value of warrant liabilities (1,028 ) (13,404 ) Stock-based compensation 194 249 Government grant income (Note 10) (960 ) - Changes in operating assets and liabilities Accounts receivable 630 1,306 Prepaid expenses 89 127 Other current assets and other assets (21 ) 116 Accounts payable and accrued liabilities (585 ) 448 Deferred revenue (75 ) 478 Other liabilities (36 ) 58 Total adjustments (824 ) 5,271 Net cash used in operating activities (498 ) (4,203 ) Cash flows from investing activities: Software development capitalization costs - (11 ) Purchase of property and equipment - (20 ) Acquisition of businesses - (5,668 ) Net cash used in investing activities - (5,699 ) Cash flows from financing activities: Proceeds from issuance of common stock, net of issuance costs - 4,757 Proceeds from issuance of preferred stock, net of issuance costs - 9,049 Borrowing on bank line of credit - 75 Proceeds received under Paycheck Protection Program 1,048 - Payments on bank line of credit - (2,156 ) Payments on term notes from Montage Capital - (922 ) Payments on promissory term notes - (941 ) Cash dividends paid on Series A convertible preferred stock - (315 ) Net cash provided by financing activities 1,048 9,547 Effect of exchange rate changes on cash and cash equivalents 15 7 Net increase (decrease) in cash and cash equivalents 565 (348 ) Cash and cash equivalents at beginning of period 296 644 Cash and cash equivalents at end of period $ 861 $ 296 Supplemental disclosures of cash flow information: Cash paid for: Interest $ - $ 88 Income taxes $ 3 $ 3 Non-cash investing and financing activities: Consideration paid in common stock in connection with acquisition of business $ - $ 480 Dividends accrued or settled in shares on convertible preferred stock $ 189 $ - Deemed dividend on amendment of Series A convertible preferred stock $ 2,314 $ - The accompanying notes are an integral part of these consolidated financial statements. 34 BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) 1. Description of Business Overview Bridgeline Digital, The Digital Engagement Company (the “Company”), helps customers maximize the performance of their full digital experience from websites and intranets to online stores and campaigns and integrates Web Content Management, eCommerce, Marketing Automation, Site Search, Authenticated Portals, Social Media Management, Translation and Web Analytics to help organizations deliver digital experiences. The Bridgeline Unbound platform is delivered through a cloud-based SaaS (“Software as a Service”) multi-tenant business model, providing maintenance, daily technical operation and support; or via a traditional perpetual licensing business model, in which the software resides on a dedicated server in either the customer’s facility or hosted by Bridgeline via a cloud-based hosted services model. OrchestraCMS, delivered through a cloud-based SaaS, is the only content and digital experience platform built 100% native on Salesforce and helps customers create compelling digital experiences for their customers, partners, and employees; uniquely combining content with business data, processes and applications across any channel or device, including Salesforce Communities, social media, portals, intranets, websites, applications and services. Celebros Search, delivered through a cloud-based SaaS, is a commerce-oriented site search product that provides for Natural Language Processing with artificial intelligence to present very relevant search results based on long-tail keyword searches in seven languages. The Company was incorporated under the laws of the State of Delaware on August 28, 2000. Locations The Company’s corporate office is located in Woburn, Massachusetts. The Company maintains regional field offices serving the following geographical locations: Boston, Massachusetts; New York, New York; and Ontario, Canada. The Company has three wholly-owned subsidiaries: Bridgeline Digital Pvt. Ltd. located in Bangalore, India; Bridgeline Digital Canada, Inc. located in Ontario, Canada; and Stantive Technologies Group Pty. Ltd. located in Australia. Going Concern The Company has incurred operating losses and used cash in its operating activities for the past several years. 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. 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). 35 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. 2. Summary of Significant Accounting Policies Basis of Presentation and Principles of Consolidation 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 balances and transactions have been eliminated in consolidation. Use of Estimates 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. 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 financial statements. Internal and external factors can affect the Company’s estimates. Actual results could differ from these estimates under different assumptions or conditions. Reclassifications Certain amounts in the prior period financial statements have been reclassified to conform to the presentation in the current period financial statements. These reclassifications had no effect on the previously reported net loss. 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 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. Risks associated with cash and cash equivalents are mitigated by the Company’s investment policy, which limits the Company’s investing of excess cash into only money market mutual funds. Concentration of Credit Risk, Significant Customers, and Off-Balance Sheet Risk Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents, and accounts receivable. The Company extends credit to customers on an unsecured basis in the normal course of business. Management performs ongoing credit evaluations of its customers’ financial condition and limits the amount of credit when deemed necessary. Accounts receivable are carried at original invoice amount, less an estimate for doubtful accounts based on a review of all outstanding amounts. The Company has no off-balance sheets risks such as foreign exchange contracts, interest rate swaps, option contracts or other foreign hedging agreements. Allowance for Doubtful Accounts The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. For all customers, the Company recognizes allowances for doubtful accounts based on the length of time that the receivables are past due, current business environment and its historical experience. 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. 36 BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) Revenue Recognition The Company derives its revenue from two sources: (i) Software Licenses, which are comprised of subscription fees (“SaaS”), perpetual software licenses, and maintenance for post-customer support (“PCS”) on perpetual licenses and (ii) Digital Engagement Services, which are professional services to implement our products such as web development, digital strategy, information architecture and usability engineering search. Customers who license the software on a subscription basis, which can be described as “Software as a Service” or “SaaS,” do not take possession of the software. Revenue is recognized when control of these services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. If the consideration promised in a contract includes a variable amount, for example, overage fees, contingent fees or service level penalties, the Company includes an estimate of the amount it expects to receive for the total transaction price if it is probable that a significant reversal of cumulative revenue recognized will not occur. The Company’s subscription service arrangements are non-cancelable and do not contain refund-type provisions. Revenue is reported net of applicable sales and use tax. The Company recognizes revenue from contracts with customers using a five-step model, which is described below: ● Identify the customer contract; ● Identify performance obligations that are distinct; ● Determine the transaction price; ● Allocate the transaction price to the distinct performance obligations; and ● Recognize revenue as the performance obligations are satisfied. Identify the customer contract 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. Identify performance obligations that are distinct A performance obligation is a promise to provide a distinct good or service or a series of distinct goods or services. A good or service that is promised to a customer is distinct if the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and a company’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. Determine the transaction price The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer, excluding sales taxes that are collected on behalf of government agencies. Allocate the transaction price to distinct performance obligations 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 type of software license and professional services sold. Recognize revenue as the performance obligations are satisfied 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. Most subscription contracts are three-year terms. Customers who license the software on a perpetual basis receive rights to use the software for an indefinite time period and an option to purchase post-customer support (“PCS”). PCS revenue is recognized ratably on a straight-line basis over the period of performance and the perpetual license is recognized upon delivery. The Company also offers hosting services for those customers who purchase a perpetual license and do not want to run the software in their environment. Revenue from hosting is recognized ratably over the service period, ranging from one to three-year terms. The Company recognizes revenue from professional services as the services are provided. Disaggregation of Revenue 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. 37 BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) Customer Payment Terms Payment terms with customers typically require payment 30 days from invoice date. Payment terms may vary by customer but generally do not exceed 45 days from invoice date. Invoicing for digital engagement services are either monthly or upon achievement of milestones and payment terms for such billings are within the standard terms described above. Invoices for subscriptions and hosting are typically issued monthly and are generally due in the month of service. Warranty Certain arrangements include a warranty period, which is generally 30 days from the completion of work. In hosting arrangements, the Company provides warranties of up-time reliability. The Company continues to monitor the conditions that are subject to the warranties to identify if a warranty claim may arise. If it is determined that a warranty claim is probable, then any related cost to satisfy the warranty obligation is estimated and accrued. Warranty claims to date have been immaterial. Property and Equipment The components of property and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets (three to five years). Leasehold improvements are amortized using the straight-line method over the lesser of the estimated useful life of the asset or the lease term. Repairs and maintenance costs are expensed as incurred. Internal Use Software Costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable that the expenditures will result in additional functionality. Capitalized costs are recorded as part of equipment and improvements. Training costs are expensed as incurred. Internal use software is amortized on a straight-line basis over its estimated useful life, generally three years. Research and Development and Software Development Costs Costs for research and development of a software product to sell, lease or otherwise market are charged to operations as incurred until technological feasibility has been established. Once technological feasibility has been established, certain software development costs incurred during the application development stage are eligible for capitalization. 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 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 did not incur development costs during fiscal 2020 and capitalized $11 of costs in fiscal 2019. Intangible Assets All intangible assets have finite lives and are stated at cost, net of amortization. Amortization is computed over the estimated useful life of the related assets on a straight-line method as follows: Description Estimated Useful Life (in years) Developed and core technology 3 Non-compete agreements 3 - 6 Customer relationships 5 - 6 Trademarks and trade names 1 - 10 Goodwill 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. However, the impairment loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Goodwill is assessed at the consolidated level as one reporting unit. 38 BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) Valuation of Long-Lived Assets The Company periodically reviews its long-lived assets, which consist primarily of property and equipment and intangible assets with finite lives, for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may exceed their fair value. Recoverability of these assets is assessed using a number of factors, including operating results, business plans, budgets, economic projections and undiscounted cash flows. In addition, the Company’s evaluation considers non-financial data such as market trends, product development cycles and changes in management’s market emphasis. For the definite-lived intangible asset impairment review, the carrying value of the intangible assets is compared against the estimated undiscounted cash flows to be generated over the remaining life of the intangible assets. To the extent that the undiscounted future cash flows are less than the carrying value, the fair value of the asset is determined. If such fair value is less than the current carrying value, the asset is written down to the estimated fair value. There were no impairments of long-lived assets in fiscal 2020 or 2019. 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 in which it operates or the reporting currency of the Company, the U.S. dollar. The Company has determined that the functional currency of its foreign subsidiaries are the local currencies of their respective jurisdictions. Assets and liabilities are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Equity accounts are translated at historical rates, except for the change in retained earnings as a result of the income statement translation process. Revenue and expense items are translated into U.S. dollars at average exchange rates for the period. 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 (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. Segment Information The Company has one reportable segment. Stock-Based Compensation 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. The Company estimates forfeitures at the date of grant based on the Company’s historical experience and future expectations. Valuation of Stock Options and Warrants Issued to Non-Employees The Company measures expense for non-employee stock-based compensation and the estimated fair value of options exchanged in business combinations and warrants issued for services using the fair value method for services received or the equity instruments issued, whichever is more readily measured. The Company estimates the fair value of stock options issued to non-employees using the Black-Scholes Merton option valuation model. The Company estimated the fair value of common stock warrants issued to non-employees using the binomial options pricing model. 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 operation. Advertising Costs Advertising costs are expensed when incurred. Such costs were $149 and $425 for fiscal 2020 and 2019, respectively. Employee Benefits The Company sponsors a contributory 401(k) plan allowing all full-time employees who meet prescribed service requirements to participate. The Company is not required to make matching contributions, although the plan provides for discretionary contributions by the Company. The Company made no contributions in either fiscal 2020 or fiscal 2019. 39 BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) Income Taxes On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act made broad and complex changes to the U.S. tax code that affected the Company’s fiscal year ended September 30, 2018, including, but not limited to, reducing the U.S. federal corporate tax 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. 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 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. Valuation allowances are provided if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company provides for reserves for potential payments of taxes to various tax authorities related to uncertain tax positions. Reserves are based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings or positions is “more likely than not” to be realized following resolution of any uncertainty related to the tax benefit, assuming that the matter in question will be raised by the tax authorities. Interest and penalties associated with uncertain tax positions are included in the provision for income taxes. The Company does not provide for U.S. income taxes on the undistributed earnings of its foreign subsidiaries, which the Company considers to be permanent investments. 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 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, 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). Leases 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. 40 BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 Intangibles – Goodwill and Other - Internal-Use Software 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. Fair Value 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 No. 2016-13, Financial Instruments-Credit Losses (Topic 326) , which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. ASU 2016-13 is effective for smaller reporting companies for annual reporting periods beginning after December 15, 2022, including interim periods within those annual reporting periods, with early adoption permitted. The Company is currently evaluating the impact of the new standard on its consolidated financial statements and related disclosures. All other Accounting Standards Updates issued but not yet effective are not expected to have a material effect on the Company’s future consolidated financial statements or related disclosures. 3. Accounts Receivable Accounts receivable consist of the following: As of September 30, 2020 2019 Accounts receivable $ 698 $ 1,067 Allowance for doubtful accounts (33 ) (88 ) Accounts receivable, net $ 665 $ 979 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. 41 BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) 4 . Property and equipment Property and equipment consist of the following: As of September 30, 2020 2019 Furniture and fixtures $ 73 $ 73 Purchased software 18 18 Computer equipment 93 93 Leasehold improvements 195 195 Total cost 379 379 Less accumulated depreciation and amortization (141 ) (80 ) Property and equipment, net $ 238 $ 299 Depreciation and amortization on the above assets were $61 and $66 in fiscal 2020 and 2019, respectively. 5. 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. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. Additionally, companies are required to provide disclosure and categorize assets and liabilities measured at fair value into one of three different levels depending on the assumptions (i.e., inputs) used in the valuation. Level 1 provides the most reliable measure of fair value while Level 3 generally requires significant management judgment. Financial assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. The fair value hierarchy is defined as follows: Level 1—Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities. Level 2—Valuations are based on quoted prices for similar assets or liabilities in active markets, or quoted prices in markets that are not active for which significant inputs are observable, either directly or indirectly. Level 3—Valuations are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Inputs reflect management’s best estimate of what market participants would use in valuing the asset or liability at the measurement date. The Company believes the recorded values for accounts receivable and accounts payable 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 2020 2019 valuation date Montage Capital Series C Preferred Montage Capital Series C Preferred Series C Preferred Volatility 84 % 84.1 % 71 % 80.9 % 76.8 % Risk-free rate 0.28 % 0.20 % 1.59 % 1.59 % 2.40 % Stock price $ 1.86 $ 1.86 $ 1.91 $ 1.91 $ 12.50 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. 42 BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) Assets and liabilities of the Company measured at fair value on a recurring basis as of September 30, 2020 and 2019, are as follows: As of September 30, 2020 Level 1 Level 2 Level 3 Total Liabilities: Warrant liability - Montage $ - $ - $ 26 $ 26 Warrant liability - Series A, B and C - - 2,460 2,460 Total Liabilities $ - $ - $ 2,486 $ 2,486 As of September 30, 2019 Level 1 Level 2 Level 3 Total Liabilities: Warrant liability - Montage $ - $ - $ 14 $ 14 Warrant liability - Series A, B and C - - 3,500 3,500 Total Liabilities $ - $ - $ 3,514 $ 3,514 The following table provides a rollforward of the fair value, as determined by Level 3 inputs, of the warrant liabilities: Balance at beginning of period, October 1, 2018 $ 180 Additions 21,500 Exercises (4,762 ) Adjustment to fair value (13,404 ) Balance at end of period, September 30, 2019 $ 3,514 Additions - Exercises - Adjustment to fair value (1,028 ) Balance at end of period, September 30, 2020 $ 2,486 6 . Goodwill 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. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. 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 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. 43 BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) Changes in the carrying value of goodwill are as follows: As of September 30, 2020 2019 Balance at beginning of period $ 5,557 $ 7,782 Acquisitions - 1,507 Impairment - (3,732 ) Balance at end of period $ 5,557 $ 5,557 7 . Intangible Assets The components of intangible assets, net of accumulated amortization, are as follows: As of September 30, 2020 2019 Domain and trade names $ 10 $ 52 Customer related 1,500 2,032 Technology 1,107 1,425 Intangibles, net $ 2,617 $ 3,509 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. 8 . Accrued Liabilities Accrued liabilities consist of the following: As of September 30, 2020 2019 Compensation and benefits $ 368 $ 430 Professional fees 29 154 Restructuring fees - 75 Taxes 46 - Other 156 176 Balance at end of period $ 599 $ 835 9 . Restructuring and Acquisition Related Expenses 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 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. 44 BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) The following table summarizes the restructuring charges reserve activity: Employee Severance and Benefits Facility Closures and Other Costs Total Balance at beginning of period, October 1, 2018 $ - $ 78 $ 78 Charges to operations 224 - 224 Cash disbursements (165 ) (54 ) (219 ) Changes in estimates - (8 ) (8 ) Accretion expense - - - Balance at end of period, September 30, 2019 59 16 75 Charges to operations 366 - 366 Cash disbursements (425 ) (16 ) (441 ) Changes in estimates - - - Accretion expense - - - Balance at end of period, September 30, 2020 $ - $ - $ - 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 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. 10 . Debt 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. U.S. GAAP does not contain authoritative accounting standards for forgivable loans provided by governmental entities to a for-profit entity. Absent authoritative accounting standards, interpretative guidance issued and commonly applied by financial statement preparers allows for the selection of accounting policies amongst acceptable alternatives. Based on facts and circumstances outlined below, the Company determined it most appropriate to account for the PPP Loan proceeds as an in-substance government grant by analogy to International Accounting Standards 20 (“IAS 20”), Accounting for Government Grants and Disclosure of Government Assistance . Under the provisions of IAS 20, “a forgivable loan from government is treated as a government grant when there is reasonable assurance that the entity will meet the terms for forgiveness of the loan.” IAS 20 does not define “reasonable assurance”; however, based on certain interpretations, it is analogous to “probable” as defined in FASB ASC 450-20-20 under U.S. GAAP, which is the definition the Company has applied to its expectations of PPP loan forgiveness. Under IAS 20, government grants are recognized in earnings on a systematic basis over the periods in which the Company recognizes costs for which the grant is intended to compensate (i.e. qualified expenses). Further, IAS 20 permits for the recognition in earnings either separately under a general heading such as other income, or as a reduction of the related expenses. The Company has elected to recognize government grant income separately within other income to present a clearer distinction in its consolidated financial statements between its operating income and the amount of net income resulting from the PPP loan and subsequent expected forgiveness. The Company believes this presentation method promotes greater comparability amongst all periods presented. 45 BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) The following provides the balance and activity related to the PPP Loan: PPP Loan $ 1,048 Qualified expenses incurred during the period eligible for forgiveness (960 ) Unexpended loan proceeds $ 88 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. 1 1 . Leases 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. 46 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. Lease Costs For operating leases, minimum lease payments, including minimum scheduled rent increases, are recognized as operating lease costs on a straight-line basis over the applicable lease terms. Some operating lease arrangements include variable lease costs, including real estate taxes, insurance, common area maintenance or increases in rental costs related to inflation. Such variable payments, other than those dependent upon a market index or rate, are excluded from the measurement of the lease liability and are expensed when the obligation for those payments is incurred. Significant Assumptions and Judgments Management makes certain estimates and assumptions regarding each new lease and sublease agreement, renewal and amendment, including, but not limited to, property values, market rents, useful life of the underlying property, discount rate and probable term, all of which can impact (1) the classification as either an operating or finance lease, (2) measurement of lease liabilities and 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: Year ended September 30, 2020 Condensed Consolidated Statement of Operations: Operating lease cost $ 273 Variable lease cost 84 Less: Sublease income, net (73 ) Total $ 284 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%. 47 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 Fiscal year: 2021 $ 114 2022 88 2023 88 2024 33 Total lease commitments 323 Less: Amount representing interest (29 ) Present value of lease liabilities 294 Less: Current portion (96 ) Operating lease liabilities, net of current portion $ 198 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: Payments Operating Leases Receipts Subleases Net Leases Fiscal year: 2021 $ 96 101 (5 ) 2022 82 101 (19 ) 2023 85 101 (16 ) 2024 87 36 51 2025 88 - 88 Total lease commitments $ 438 $ 339 $ 99 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: Payments Operating Leases Receipts Subleases Net Leases Fiscal year: 2020 $ 152 73 79 2021 12 - 12 Total lease commitments $ 164 $ 73 $ 91 12 . S tockholders ’ Equity Series A Convertible Preferred Stock The Company has designated 264,000 shares of its preferred stock as Series A Convertible Preferred Stock (“Series A Preferred Stock”). The shares of Series A Preferred Stock may be converted, at the option of the holder at any time, into such number of shares of common stock (“Conversion Shares”) equal (i) to the number of shares of Series A Preferred Stock to be converted, multiplied by the stated value of $10.00 (the “Stated Value”) and (ii) divided by the conversion price in effect at the time of conversion. On December 31, 2019 (the “Amendment Date”), the Company filed a First Amended and Restated Certificate of Designations of the Series A Convertible Preferred Stock (the “Series A Amendment”) with the Secretary of State for the State of Delaware, which amended and restated the Series A Preferred Stock, as more particularly set forth below: Conversion Price: 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. 48 BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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. Dividends: Each outstanding share of Series A Preferred Stock is entitled to receive cumulative dividends, payable quarterly in arrears, at a rate of 5% per annum for the first eighteen months commencing on January 1, 2020, after which time the dividend rate will increase to 12% per annum (the dividend rate was 12% per annum prior to the Series A Amendment). Dividends are payable in cash or, at the election of the Company, by delivery of additional shares (“PIK Shares”) of Series A Preferred Stock, subject to a cap of 64,000 PIK Shares, in the aggregate. Any accrued but unpaid dividends on the shares of Preferred Stock to be converted shall also be converted into common stock at the conversion price. In the event of any liquidation, dissolution, or winding up of the Company, the holders of shares of Series A Preferred Stock will be entitled to receive in preference to the holders of common stock, the amount equal to the Stated Value per share of Series A Preferred Stock plus declared and unpaid dividends, if any. After such payment has been made, the remaining assets of the Company will be distributed ratably to the holders of common stock. The Series A Preferred Stock shall vote with the common stock on an as-converted basis. 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, 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”); and (iv) warrants to purchase an aggregate of 1,420,486 shares with a term of 5.5 years (“Series C Warrants,” and together with the Series A Warrants and Series B Warrants, the “Series C Preferred Warrants”). 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. 49 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. The Stockholder Approvals were obtained on April 26, 2019 and the Company’s Charter was amended on April 29, 2019. 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 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 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. Common Stock At the Market Offering On August 17, 2020, the Company entered into an arrangement with an investment banking firm (the “Manager”) to sell up to $4,796,090 of shares of the Company’s common stock with a par value of $0.001 (the “ATM Offering”). Pursuant to the ATM Offering, shares may be sold on a daily basis, commencing no earlier than August 17, 2020, at a gross sales price equal to the market price for shares of the Company’s Common Stock on the NASDAQ Capital Market at the time of sale of such shares. The Manager has no obligation to purchase shares of the Company’s Common Stock and is only obligated to use its commercially reasonable efforts consistent with its normal trading and sales practices to sell shares of the Company’s Common Stock. Accordingly, there can be no assurances that the Manager will be successful in selling any portion of the shares available for sale under the ATM Offering. The Company shall pay to the Manager a placement fee of 2.5% of the gross sales price of shares sold. The ATM Offering shall remain in effect until the earlier of August 17, 2021, or upon written notice of termination by either the Company or the Manager. 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. 50 BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) 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. At the time of the Offering, the underwriter partially exercised the Over-allotment Option by electing to purchase from the Company additional warrants to purchase 8,000 shares of common stock. Amended and Restated Stock Incentive Plan The Company has granted common stock, common stock warrants, and common stock option awards (the “Equity Awards”) to employees, consultants, advisors and former debt holders of the Company and to former owners and employees of acquired companies that have become employees of the Company. The Company’s Amended and Restated Stock Incentive Plan (the “Plan”) provided for the issuance of up to 5,000 shares of common stock. This Plan expired in August 2016. As of September 30, 2020, there were 3,246 options outstanding under the Plan. On April 29, 2016, the stockholders approved a new stock incentive plan, The 2016 Stock Incentive Plan (the “2016 Plan”). The 2016 Plan authorizes the award of incentive stock options, non-statutory stock options, restricted stock, unrestricted stock, performance shares, stock appreciation rights and any combination thereof to employees, officers, directors, consultants, independent contractors and advisors of the Company. In November 2019, the Company increased the number of common shares available for issuance under the 2016 Plan from 10,000 shares to 800,000 shares. There were no revisions to exercise prices, terms or any other underlying provisions of existing stock options outstanding. As of September 30, 2020, there were 609,955 options outstanding and 190,045 shares available for future issuance under the 2016 Plan. Compensation E xpense Compensation expense is generally recognized on a graded accelerated basis over the vesting period of grants. Compensation expense is recorded in the consolidated statements of operations with a portion charged to Cost of revenue and a portion to Operating expenses, depending on the employee’s department. During the years ended September 30, 2020 and 2019, compensation expense related to share-based payments was as follows: Years ended September 30, 2020 2019 Cost of revenue $ 21 $ 9 Operating expenses 173 240 $ 194 $ 249 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 public and private placement fund raising activities. Warrants may also be issued to individuals or companies in exchange for services provided for the Company. The warrants are typically exercisable six months after the issue date, expire in five years, and contain a cashless exercise provision and piggyback registration rights. Montage Warrant - As additional consideration for the Montage Loan, the Company issued to Montage Capital an eight-year warrant (the “Montage Warrant”) to purchase 1,326 shares of the Company’s Common Stock at a price equal to $132.50 per share. The Montage Warrant contains an equity buy-out provision upon the earlier of (1) dissolution or liquidation of the Company, (2) any sale or distribution of all or substantially all of the assets of the Company or (3) a “Change in Control” as defined within the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934. Montage Capital has the right to receive an equity buy-out of $250. If the equity buy-out is exercised, the Montage Warrant will be surrendered to the Company for cancellation. The fair value of the Montage warrant liability at September 30, 2020 and 2019, was $26 and $14, respectively. 51 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. The Series C Warrants were not exercisable until the applicable Reset Date. At the First Reset Date, which was May 29, 2019, the Reset Price was set to the Floor price of $4.00 per share. Therefore, there will be no future Reset Dates or Reset Prices. 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. The number of shares of Common Stock issuable upon exercise of warrants issued to the placement agents is 127,848 shares. 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: Type Issue Date Shares Price Expiration Director/Shareholder 12/31/2015 120 $ 1,000.00 12/31/2020 Placement Agent 5/17/2016 1,736 $ 187.50 5/17/2021 Placement Agent 5/11/2016 1,067 $ 187.50 5/11/2021 Placement Agent 7/15/2016 880 $ 230.00 7/15/2021 Investors 11/9/2016 4,271 $ 175.00 5/9/2022 Director/Shareholder 12/31/2016 120 $ 1,000.00 12/31/2021 Financing (Montage) 10/10/2017 1,327 $ 132.50 10/10/2025 Director/Shareholder 12/31/2017 120 $ 1,000.00 12/31/2021 Investors 10/19/2018 3,120 $ 25.00 10/19/2023 Placement Agent 10/16/2018 10,000 $ 31.25 10/16/2023 Investors 3/12/2019 159,236 $ 4.00 10/19/2023 Investors 3/12/2019 2,556,875 $ 4.00 9/12/2024 Investors 3/12/2019 2,556,875 $ 4.00 9/12/2021 Investors 3/12/2019 69,295 $ 0.05 9/12/2024 Placement Agent 3/12/2019 127,848 $ 4.00 9/12/2024 Total 5,492,890 Warrant Issuances Issuances Shares Exercise Price Placement agent - public offering 10,000 $ 31.25 Placement agent - series A&B 127,848 $ 4.00 Investors - public offering 208,000 $ 25.00 Investors - series A&B 5,318,630 $ 4.00 Investors - series C 1,420,512 $ 0.05 Total issued in fiscal 2019 7,084,990 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. 52 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 $ 0.96 Expected life (in years) 6.0 Volatility 76.29 % Risk-free interest rate 1.61 % Dividend yield 0.0 % The expected option term is the number of years the Company estimates the options will be outstanding prior to exercise based on historical trends of employee turnover. Expected volatility is based on historical daily price changes of the Company’s common stock for a period equal to the expected life. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant. The expected dividend yield is zero since the Company does not currently pay cash dividends on its common stock and does not anticipate doing so in the foreseeable future. A summary of combined stock option and warrant activity is as follows: Stock Options Stock Warrants Weighted Weighted Average Average Exercise Exercise Options Price Warrants Price Outstanding, October 1, 2018 9,157 $ 341.50 10,926 $ 308.32 Granted - - 7,084,990 3.86 Exercised - - (1,351,217 ) 0.18 Forfeited/Exchanged (1,128 ) 486.00 (250,524 ) 25.00 Expired (181 ) 1,219 (318 ) 1,373.43 Outstanding, September 30, 2019 7,848 306.41 5,493,857 4.54 Granted 702,353 1.41 - - Exercised - - - - Forfeited/Exchanged (98,000 ) 3.96 - - Expired - - (967 ) 952.11 Outstanding, September 30, 2020 613,201 $ 4.76 5,492,890 $ 4.37 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: Weighted Average Grant-Date Shares Fair Value Unvested at October 1, 2019 2,160 $ 136.21 Granted 702,353 1.41 Vested (177 ) 131.48 Forfeited (97,000 ) 3.96 Unvested at September 30, 2020 607,336 $ 1.42 53 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 Remaining Contractual Life (Years) Weighted Average Exercise Price Number of Options Exercisable Weighted Average Exercisable Price $1.40 to $1.61* 606,533 8.96 $ 1.82 - $ - $115 to $600 6,017 2.46 90.29 5,214 66.97 $601 to $900 283 3.24 707.14 283 192.92 $901 to $1,400 80 2.39 1,356.25 80 203.44 $1,401 to $1,975 288 2.11 1,648.71 288 398.44 613,201 9.10 $ 4.76 5,865 $ 310.63 * There are no outstanding or exercisable options with exercise prices between $1.62 and $115. 1 3 . 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 frequently warrants that the technology solutions it develops for its clients will operate in accordance with the project specifications without defects for a specified warranty period, subject to certain limitations that the Company believes are standard in the industry. In the event that defects are discovered during the warranty period, and none of the limitations apply, the Company is obligated to remedy the defects until the solution that the Company provided operates within the project specifications. The Company is not typically obligated by contract to provide its clients with any refunds of the fees they have paid, although a small number of its contracts provide for the payment of liquidated damages upon default. The Company has purchased insurance policies covering professional errors and omissions, property damage and general liability that reduce its monetary exposure for warranty-related claims and enable it to recover a portion of any future amounts paid. The Company’s contracts typically provide for testing and client acceptance procedures that are designed to mitigate the likelihood of warranty-related claims, although there can be no assurance that such procedures will be effective for each project. The Company has not paid any material amounts related to warranties for its solutions. The Company sometimes commits unanticipated levels of effort to projects to remedy defects covered by its warranties. The Company’s estimate of its exposure to warranties on contracts is immaterial as of September 30, 2020. 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, 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 does not expect significant claims related to the indemnification obligations and, consequently, concluded that the fair value of these obligations is negligible, and no related reserves were established. Litigation The Company is subject to ordinary routine litigation and claims incidental to its business. As of September 30, 2020, the Company was not engaged in any material legal proceedings. 1 4 . Revenues and Other Related Items Disaggregated Revenues The Company disaggregates revenue from contracts with customers by geography and product grouping, as it believes this best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The Company’s revenue by geography (based on customer address) is as follows: Years Ended September 30, Revenues: 2020 2019 United States $ 9,013 $ 8,881 International 1,894 1,071 $ 10,907 $ 9,952 54 BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) The Company’s revenue by type is as follows: Years Ended September 30, Revenues: 2020 2019 Digital Engagement Services $ 3,409 $ 4,117 Subscription 6,185 4,287 Perpetual Licenses 20 145 Maintenance 349 405 Hosting 944 998 $ 10,907 $ 9,952 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. 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, 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 Current Long Term Balance as of October 1, 2018 $ 594 $ 20 Increase (decrease) 668 (12 ) Balance as of September 30, 2019 1,262 8 Increase 249 7 Balance as of September 30, 2020 $ 1,511 $ 15 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 generally 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 $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. 1 5 . Income Taxes The components of the Company’s tax provision as of September 30, 2020 and 2019 is as follows: Year Ended September 30, 2020 2019 Current: Federal $ - $ - State 11 4 Foreign - - Total current 11 4 Deferred: Federal - - State - - Total deferred - - Grand total $ 11 $ 4 55 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: Year Ended September 30, 2020 2019 Income tax provision/(benefit) at the federal statutory rate of 21% $ 67 $ (1,905 ) Permanent differences, net (682 ) 541 State income tax provision/(benefit) 14 (578 ) Change in valuation allowance attributable to operations 486 1,925 True up to prior year NOL 110 - AMT tax refundable under CARES act 23 - Other (7 ) 21 Total $ 11 $ 4 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. Due to these “change of ownership” provisions, utilization of NOL carryforwards may be subject to an annual limitation in future periods. The Company has not performed a Section 382 analysis. However, if performed, Section 382 may be found to limit potential future utilization of the Company’s NOL carryforwards. The Company also has approximately $28 million in state NOLs which expire on various dates through 2039. 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 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: September 30, 2020 2019 Deferred tax assets: Bad debt reserve $ 8 $ 24 Deferred revenue 754 717 Accrued expenses 37 46 AMT carryforward - 23 Net operating loss carryforwards 9,363 8,895 Contribution carryforward 1 1 Right of use liability 74 - Debt forgiveness 243 - Depreciation 8 8 Intangibles 408 401 Total deferred tax assets 10,896 10,115 Valuation allowance (10,577 ) (10,093 ) Net deferred tax assets 319 22 Deferred tax liabilities: Right of use asset 74 - Expenses related to debt forgiveness 243 - Total deferred tax liabilities 319 - Net deferred tax assets $ - $ 22 56 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. shareholder to tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, provides that an entity may make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years, or provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. Additionally, the 2017 Tax Act provides for a tax benefit to U.S. taxpayers that sell goods or services to foreign customers under the new Foreign Derived Intangible Income Deduction ("FDII") rules. 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. 1 6 . Acquisitions 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 (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: Seevolution Stantive Total Cash $ - $ 8 $ 8 Accounts receivable, net 47 844 891 Other assets - 40 40 Fixed assets, net - 272 272 Intangible assets 1,024 3,007 4,031 Goodwill - 1,507 1,507 Total assets 1,071 5,678 6,749 Current liabilities 76 488 564 Net assets acquired $ 995 $ 5,190 $ 6,185 Purchase Price: Cash Paid (including acquisition costs) $ 418 $ 5,190 $ 5,608 Future deferred payments (present value) 97 - 97 Common stock (fair value) 480 - 480 Total consideration paid $ 995 $ 5,190 $ 6,185 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. 57 BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) 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. Total revenue from the Seevolution and Stantive acquisitions totaled approximately $2,145 for fiscal 2019. 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. Pro Forma Information (Unaudited) The following is the unaudited pro forma information assuming the Stantive acquisition occurred on October 1, 2017: Year ended September 30, 2019 (in thousands, except per share data) Revenue $ 15,622 Net loss applicable to common shareholders (9,046 ) Net loss per share attributable to common shareholders: Basic $ (7.61 ) Diluted $ (7.61 ) Weighted average common shares outstanding - basic 1,199,322 Weighted average common shares outstanding - diluted 1,199,322 1 7 . Related Party Transactions In October 2013, Mr. Michael Taglich joined the Board of Directors. Michael Taglich is the Chairman and President of Taglich Brothers, Inc. (“Taglich Brothers”), a New York based securities firm. Taglich Brothers were the Placement Agents for many of the Company’s private offerings and debt issuances. In connection with previous private offerings and debt issuances which occurred prior to the fiscal year ended September 30, 2018, Taglich Brothers were granted Placement Agent warrants to purchase 10,926 shares of common stock at a weighted average price of $761.61 per share. 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 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). Each warrant share expires five and one-half years from the date of issuance and is exercisable for $175 per share beginning six months from the date of issuance, or May 9, 2017. The warrants expire May 9, 2022. 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. In November 2018, the Company engaged Taglich Brothers Inc, on a non-exclusive basis, to perform advisory and investment banking services to identify possible acquisition target possibilities. Michael Taglich, a director and shareholder of the Company, is the President and Chairman of Taglich Brothers Inc. Fees for the services were $8 per month for three months and $5 thereafter, cancellable at any time. Taglich Brothers Inc. could also earn a success fee ranging from $200 for a revenue target acquisition of under $5 million up to $1 million for an acquisition target over $200 million. In connection with the 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. Mr. Taglich’s purchase was subject to stockholder approval pursuant to Nasdaq Marketplace Rule 5635(c), for which approval by the stockholders of the Company was obtained on April 26, 2019. 1 8 . Subsequent Events The Company evaluated subsequent events through the date of this filing and concluded there were no material subsequent events requiring adjustment to or disclosure in these consolidated financial statements, except as already disclosed in these consolidated financial statements within Note 11. 58 BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) 59 BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share data) Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None