Bridgeline Digital, Inc. 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.   Not required.      30     Item 8.    Financial Statements and Supplementary Data.   Report of Independent Registered Public Accounting Firm   To the Shareholders and Board of Directors Bridgeline Digital, Inc.   Opinion on the Consolidated Financial Statements   We have audited the accompanying consolidated balance sheet of Bridgeline Digital, Inc. and Subsidiaries (the “Company”) as of September 30, 2021, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for the year ended September 30, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2021, and the results of its operations and its cash flows for the year ended September 30, 2021, in conformity with accounting principles generally accepted in the United States of America.   Basis for Opinion   These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.   We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.   Our audit 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 consolidated 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 consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.   31     Critical Audit Matters   The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.   Business Combinations – Acquisitions of Woorank SRL and Hawk Search, Inc.   As described in Note 16 to the consolidated financial statements, the Company completed acquisitions of (1) Woorank SRL on March 1, 2021, for purchase consideration of approximately $2.4 million and (2) Hawk Search, Inc. on May 28, 2021 for purchase consideration of approximately $9.9 million. The purchase price allocations resulted in the Company recording $6.3 million of intangible assets and $3.5 million of contingent consideration payable, estimated at the acquisition date.   The Company accounted for both acquisitions under the acquisition method of accounting for business combinations. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the acquisition date. The fair value of intangible assets was determined based on valuations using a discounted cash flow model, which requires significant estimates and assumptions, including estimating future revenues and costs. Management, with the assistance of an independent valuation expert, estimated the fair value of the intangible assets using the multi-period excess earnings method (customer relationships) and the relief from royalty methodology (tradename and developed technology). The fair value of contingent consideration payable was determined based on the probability of achievement of the revenue targets and operational goals, which requires significant estimates and assumptions, including estimating future revenues. Management, with the assistance of an independent valuation expert, estimated the fair value of the contingent consideration payable using the Monte Carlo simulation model.   Given the fair value determination of the intangible assets and contingent consideration payable requires management to make significant estimates and assumptions related to the forecasts of future cash flows and the selection of the discount rate, performing audit procedures to evaluate the reasonableness of these estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our valuation specialists.   Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included:     ● reviewing the purchase and sale agreements and evaluating the transactions to determine that  both acquisitions met the requirements of a business combination, and our analysis of the initial allocation of the purchase price accounting as well as the determination of the balance sheet classification of each component of the transaction.   ● obtaining  third party valuation reports to gain an understanding of the process and key assumptions for estimating the fair value of intangible assets and contingent consideration payable. We utilized our valuation specialists to evaluate the adequacy and appropriateness of the methodologies and assumptions used in developing the forecast and the discount rates used.   ● agreeing the underlying data used as part of the valuations to  source documents, including the purchase and sale agreements, and assessing the reasonableness of management’s forecasts of future cash flows by comparing the projections to historical results.   ● performing independent shadow calculations to test the reasonableness and mathematical accuracy of the fair values concluded on by the Company.   ● evaluating whether the estimated future cash flows were consistent with projections used by the Company, as well as evidence obtained in other areas of the audit.   Furthermore, we assessed the appropriateness of the disclosures in the consolidated financial statements.   Derivative Instruments   As described in Note 12 to the consolidated financial statements, in May 2021, the Company offered and sold, in a registered direct offering, shares of its common stock and entered into a private placement which consisted of Series D Convertible Preferred Stock and warrants to purchase common stock upon conversion of the Series D Preferred Stock for aggregate gross proceeds of $5.1 million. The Company allocated the proceeds between equity instruments and derivative liabilities using the relative fair value approach. As described in Note 5 to the consolidated financial statements, the Company classifies warrants on its Series A, C and D convertible preferred stock as liabilities that are subject to re-measurement on a quarterly basis. Management, with the assistance of an independent valuation expert, estimates the fair value of the warrant liabilities using Monte Carlo simulation and Black Scholes models, which take into consideration the volatilities of the Company and comparable public companies.   32     Given the determination of the fair values of equity instruments and derivative liabilities require management to make significant estimates and assumptions regarding the relevant valuation calculations, performing audit procedures to evaluate the reasonableness of these estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve professionals in our firm having the expertise in the valuation of financial instruments.   Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included:     ● evaluating management’s assessment and the Company’s accounting analysis as to the classification of equity instruments and derivative liabilities, including the determination of the balance sheet classification of each component of the transaction and identification of any derivatives included in the arrangements.   ● obtaining third party valuation reports to gain an understanding of management’s key assumptions in determining the fair value of warrant liabilities and assessing the source information underlying the valuation assumptions.   ● with the assistance of our valuation specialists, evaluating the methodologies and assumptions used to assess the Company’s fair value of equity instruments and derivative liabilities, including the selection of the valuation methodology and other significant assumptions used by the Company.   ● performing independent shadow calculations to test the reasonableness of the fair values for warrant liabilities concluded on by the Company’s specialist. Such calculations assessed the mathematical accuracy of the valuation model and assessed the source information underlying the valuation assumptions used in the model to determine the fair value for the Series D issuance at inception and liability classified warrants on a quarterly basis.   ● assess the appropriateness of the disclosures in the consolidated financial statements.   /s/ PKF O'Connor Davies, LLP PKF O'Connor Davies, LLP   New York, New York December 20, 2021   We have served as the Company’s auditor since February 27, 2021.   33     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 sheet of Bridgeline Digital, Inc. (the “Company”) as of September 30, 2020, the related consolidated statements of operations, comprehensive income/(loss), stockholders’ equity and cash flows for the year 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 the results of its operations and its cash flows for the year 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 audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.   We conducted our audit in accordance with the standards of the PCAOB .   Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.   Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit 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 audit provides a reasonable basis for our opinion.   /s/ Marcum LLP 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) to 2021.   Boston, MA December 23, 2020     34       BRIDGELINE DIGITAL, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data)       As of September 30,       2021     2020   ASSETS                 Current assets:                 Cash and cash equivalents   $ 8,852     $ 861   Accounts receivable, net     1,370       665   Prepaid expenses     179       268   Other current assets     17       111   Total current assets     10,418       1,905   Property and equipment, net     252       238   Operating lease assets     481       294   Intangible assets, net     7,755       2,617   Goodwill     15,985       5,557   Other assets     76       49   Total assets   $ 34,967     $ 10,660                     LIABILITIES AND STOCKHOLDERS ’ EQUITY                 Current liabilities:                 Current portion of long-term debt   $ 732     $ -   Current portion of operating lease liabilities     161       96   Accounts payable     974       1,311   Accrued liabilities     908       599   Purchase price and contingent consideration payable, current portion (Note 16)     3,463       -   Paycheck Protection Program Liability (Note 10)     -       88   Deferred revenue     2,097       1,511   Total current liabilities     8,335       3,605                     Long-term debt, net of current portion (Note 10)     1,197       -   Operating lease liabilities, net of current portion     320       198   Purchase price and contingent consideration payable, net of current portion (Note 16)     2,360       -   Warrant liabilities     4,404       2,486   Other long-term liabilities     774       15   Total liabilities     17,390       6,304                     Commitments and contingencies (Note 13)                                   Stockholders’ equity:                 Preferred stock - $ 0.001 par value; 1,000,000 shares authorized;                 Series A Convertible Preferred stock: 264,000 shares authorized; no shares issued and outstanding at September 30, 2021 and 2020     -       -   Series C Convertible Preferred stock: 11,000 shares authorized; 350 shares issued and outstanding at September 30, 2021 and 2020     -       -   Series D Convertible Preferred stock: 4,200 shares authorized; no shares issued and outstanding at September 30, 2021 and 2020     -       -   Common stock - $ 0.001 par value; 50,000,000 shares authorized; 10,187,128 shares at September 30, 2021 and 4,420,170 shares at September 30, 2020, issued and outstanding     10       4   Additional paid-in capital     100,207       78,316   Accumulated deficit     ( 82,287 )     ( 73,583 ) Accumulated other comprehensive loss     ( 353 )     ( 381 ) Total stockholders’ equity     17,577       4,356   Total liabilities and stockholders’ equity   $ 34,967     $ 10,660     The accompanying notes are an integral part of these consolidated financial statements.    35       BRIDGELINE DIGITAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data)       Years Ended September 30,       2021     2020   Net revenue:                 Digital engagement services   $ 3,296     $ 3,409   Subscription and perpetual licenses     9,963       7,498   Total net revenue     13,259       10,907                     Cost of revenue:                 Digital engagement services     1,743       1,831   Subscription and perpetual licenses     2,790       2,676   Total cost of revenue     4,533       4,507   Gross profit     8,726       6,400                     Operating expenses:                 Sales and marketing     2,726       2,614   General and administrative     2,359       2,455   Research and development     2,387       1,641   Depreciation and amortization     1,202       968   Restructuring and acquisition related expenses     1,235       366   Total operating expenses     9,909       8,044                     Loss from operations     ( 1,183 )     ( 1,644 ) Interest expense and other, net     ( 883 )     ( 7 ) Government grant income (Note 10)     88       960   Change in fair value of warrant liabilities     ( 5,885 )     1,028   Income (loss) before income taxes     ( 7,863 )     337   Provision for (benefit from) income taxes     ( 1,174 )     11                     Net income (loss)     ( 6,689 )     326   Dividends on Series A convertible preferred stock     -       ( 106 ) Deemed dividend on convertible preferred stock (Notes 12 and 16)     ( 2,015 )     ( 2,314 ) Net loss attributable to common shareholders   $ ( 8,704 )   $ ( 2,094 )                   Net loss per share attributable to common shareholders:                 Basic   $ ( 1.47 )   $ ( 0.59 ) Diluted   $ ( 1.47 )   $ ( 0.59 ) Number of weighted average shares outstanding:                 Basic     5,935,981       3,555,032   Diluted     5,935,981       3,555,032     The accompanying notes are an integral part of these consolidated financial statements.   36       BRIDGELINE DIGITAL, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) (in thousands)       Years Ended September 30,       2021     2020   Net income (loss)   $ ( 6,689 )   $ 326   Other comprehensive income (loss):                 Net change in foreign currency translation adjustment     28       ( 43 ) Comprehensive income (loss)     ( 6,661 )     283   Dividends on Series A convertible preferred stock     -       ( 106 ) Deemed dividend on convertible preferred stock (Notes 12 and 16)     ( 2,015 )     ( 2,314 ) Comprehensive loss attributable to common shareholders   $ ( 8,676 )   $ ( 2,137 )   The accompanying notes are an integral part of these consolidated financial statements.   37       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, 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   Stock-based compensation expense                                   607                       607   Deemed dividend on beneficial conversion feature (Notes 12 and 16)                                   2,015       ( 2,015 )             -   Issuance of common stock – stock options exercised                   27,333               39                       39   Issuance of common stock – warrants exercised                   1,928,086       3       12,371                       12,374   Issuance of common stock, net of offering costs                   1,940,000       2       4,453                       4,455   Issuance of stock in connection with acquisition of a business                   29,433               99                       99   Issuance of Series D convertible preferred stock, net of offering costs     2,700                             1,377                       1,377   Issuance of Series D convertible preferred in connection with acquisition of business     1,500                             930                       930   Series D convertible preferred stock conversion to common     ( 4,200 )           1,842,106       1                               1   Net loss                                             (6,689 )             (6,689 ) Foreign currency translation                                             28       28   Balance at September 30, 2021     350     $ -       10,187,128     $ 10     $ 100,207     $ ( 82,287 )   $ ( 353 )   $ 17,577     The accompanying notes are an integral part of these consolidated financial statements.   38       BRIDGELINE DIGITAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS   (in thousands)       Years Ended September 30,       2021     2020   Cash flows from operating activities:                 Net income (loss)   $ ( 6,689 )   $ 326   Adjustments to reconcile net income (loss) to net cash used in operating activities:                 Amortization of intangible assets     1,130       891   Depreciation     70       61   Other amortization     2       16   Change in fair value of contingent consideration     170       -   Change in fair value of warrant liabilities     5,885       ( 1,028 ) Stock-based compensation     607       194   Deferred income taxes     ( 1,196 )     -   Government grant income (Note 10)     ( 88 )     ( 960 ) Changes in operating assets and liabilities                 Accounts receivable     36       630   Prepaid expenses     149       89   Other current assets and other assets     99       ( 21 ) Accounts payable and accrued liabilities     ( 920 )     ( 585 ) Deferred revenue     ( 613 )     ( 75 ) Other liabilities     369       ( 36 ) Total adjustments     5,700       ( 824 ) Net cash used in operating activities     (989 )     ( 498 ) Cash flows from investing activities:                 Software development capitalization costs     ( 30 )     -   Purchase of property and equipment     ( 79 )     -   Purchase of business, net of cash acquired     ( 4,408 )     -   Net cash used in investing activities     ( 4,517 )     -   Cash flows from financing activities:                 Proceeds from issuance of common stock, net of issuance costs     4,626       -   Proceeds from issuance of Series D convertible preferred stock, net of issuance costs     2,526       -   Proceeds from stock option and warrant exercises     7,127       -   Proceeds received under Paycheck Protection Program     -       1,048   Payments of contingent consideration and deferred cash payable     ( 203 )     -   Payments of long-term debt     ( 603 )     -   Net cash provided by financing activities     13,473       1,048   Effect of exchange rate changes on cash and cash equivalents     24       15   Net increase in cash and cash equivalents     7,991       565   Cash and cash equivalents at beginning of period     861       296   Cash and cash equivalents at end of period   $ 8,852     $ 861   Supplemental disclosures of cash flow information:                 Cash paid for:                 Interest   $ 7     $ -   Income taxes   $ -     $ 3   Non-cash investing and financing activities:                 Consideration paid in stock in connection with acquisition of businesses   $ 1,029     $ -   Offering costs settled by issuance of liability classified warrants   $ 289     $ -   Dividends accrued or settled in shares on convertible preferred stock   $ -     $ 189   Deemed dividend on convertible preferred stock (Notes 12 and 16)   $ 2,015     $ 2,314     The accompanying notes are an integral part of these consolidated financial statements.   39     BRIDGELINE DIGITAL, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)     1.    Description of Business   Overview   Bridgeline Digital is a marketing technology software company that helps companies grow online revenue and share information with customers, partners and employees.   Bridgeline’s Unbound platform is a Digital Experience Platform that includes Web Content Management, eCommerce, eMarketing, Social Media management, Web Analytics.   Bridgeline’s Unbound platform, combined with its professional services, assists customers in driving lead generation, increasing revenue, improving customer service and loyalty, enhancing employee knowledge, and reducing operational costs.    Our Unbound Franchise product empowers large franchises, brand networks, and other multi-unit organizations to manage a large hierarchy of digital properties at scale.   OrchestraCMS is the only content and digital experience platform built 100% native on Salesforce and helps customers create websites and intranets for their customers, partners, and employees; uniquely combining content with business data, processes and applications across any channel or device, including Salesforce Communities, social media, portals, intranets, websites, applications and services.   Celebros Search is a commerce-oriented site search product that provides for Natural Language Processing with artificial intelligence to present relevant search results based on long-tail keyword searches in seven languages.   Woorank SRL (“Woorank”) is a Search Engine Optimization (“SEO”) audit tool that generates an instant audit of the site’s technical, on-page and off-page SEO.  Woorank’s clear, actionable insights help companies increase their search ranking, website traffic, audience engagement, conversion, and customer retention rates.   Hawk Search, Inc. (“Hawk Search”) is a search, recommendation, and personalization application, built for marketers, merchandisers and developers that enhances, normalizes and enriches a customer's site search and browse experience. Hawk Search leverages advanced artificial intelligence, machine learning and industry leading analyzers to deliver accurate results from federated data sources.   All of Bridgeline’s software is available through a cloud-based software as a service (“ SaaS ”) model, whose flexible architecture provides customers with hosting and support.  Additionally, Unbound and Hawk Search is available via a traditional perpetual licensing business model, in which the software resides on a dedicated infrastructure in either the customer’s facility, or manage-hosted by Bridgeline via a cloud-based hosted services model.   Bridgeline Digital was incorporated under the laws of the State of Delaware on August 28, 2000.   Locations   The Company’s corporate office is located in Woburn, Massachusetts.  The Company maintains regional field offices serving the following geographical locations: Boston, Massachusetts; Woodbury, New York; Chicago, Illinois; Raleigh, North Carolina; Ontario, Canada; and Brussels, Belgium.   The Company has four wholly-owned subsidiaries: Bridgeline Digital Canada, Inc., located in Ontario, Canada; Hawk Search Inc. located in Illinois, United States and Bridgeline Digital Belgium BV, located in Brussels, Belgium.   40     BRIDGELINE DIGITAL, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)     2.    Summary of Significant Accounting Policies   Basis of Presentation and Principles of Consolidation   The Company’s fiscal year end is September 30 th . 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 United States generally accepted accounting principles (“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 consolidated financial statements are the valuation of accounts receivable, including the adequacy of the allowance for doubtful accounts, recognition and measurement of deferred revenues, fair value of contingent consideration and fair value measurements related to the valuation of warrants. The complexity of the estimation process and factors relating to assumptions, risks and uncertainties inherent with the use of the estimates affect the amount of revenue and related expenses reported in the Company’s consolidated financial statements. Internal and external factors can affect the Company’s estimates. Actual results could differ from these estimates under different assumptions or conditions.   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 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.   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.   41     BRIDGELINE DIGITAL, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)   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:     1. Identify the customer contract;   2. Identify performance obligations that are distinct;   3. Determine the transaction price;   4. Allocate the transaction price to the distinct performance obligations; and   5. Recognize revenue as the performance obligations are satisfied.   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 the 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.   42     BRIDGELINE DIGITAL, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (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 is 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 were expensed as incurred.  Once an application had reached the development stage, internal and external costs, if direct and incremental, were capitalized until the software was substantially complete and ready for its intended use. Capitalization ceased upon completion of all substantial testing. The Company also capitalized costs related to specific upgrades and enhancements when it was probable that the expenditures would result in additional functionality.  Capitalized costs were recorded as part of equipment and improvements. Training costs were expensed as incurred.  Internal use software was amortized on a straight-line basis over its estimated useful life, generally three years.   In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018 - 15, which addresses a customer’s accounting for implementation costs incurred in a cloud-computing arrangement that is a service contract. The effective date of this new standard for the Company was October 1, 2020. Under the new standard, customers will apply the same criteria for capitalizing implementation costs as they would for an arrangement that has a software license. As of October 1, 2020, the Company did not have significant implementation costs incurred in a cloud-computing arrangement that is a service contract and therefore upon adoption the impact of the new standard on its consolidated financial statements and related disclosures was not material. All future implementation costs in such arrangements will be capitalized and amortized over the life of the arrangement, which may have a material impact in those future periods if such costs are material.    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 2021 and 2020.   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) Technology   3 - 5 Customer related   3 - 10 Domain and trade names   1 - 15   43     BRIDGELINE DIGITAL, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)   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.   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 goodwill or long-lived assets in fiscal 2021 or 2020.   Business Combinations   The Company allocates the amount it pays for each acquisition to the assets acquired and liabilities assumed based on their fair values at the date of acquisition, including identifiable intangible assets which arise from a contractual or legal right or are separable from goodwill. The Company bases the fair value of identifiable intangible assets acquired in a business combination on detailed valuations that use information and assumptions provided by management, which consider management’s best estimates of inputs and assumptions that a market participant would use. The Company allocates any excess purchase price that exceeds the fair value of the net tangible and identifiable intangible assets acquired to goodwill. The use of alternative valuation assumptions, including estimated growth rates, cash flows and discounts rates and estimated useful lives could result in different purchase price allocations and amortization expense in current and future periods. Transaction costs associated with these acquisitions are expensed as incurred through acquisition related expenses on the consolidated statements of operations. In those circumstances where an acquisition involves a contingent consideration arrangement, the Company recognizes a liability equal to the fair value of the contingent payments expected to be made as of the acquisition date. The Company re-measures this liability each reporting period and records changes in the fair value through income before income taxes within the consolidated statements of operations.   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 2021 and 2020 were $ 28 and $( 43 ), 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.   44     BRIDGELINE DIGITAL, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)   Common Stock Purchase Warrants   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 change in fair value of warrant liabilities in the consolidated statements of operations.    Advertising Costs   Advertising costs are expensed when incurred. Such costs were $ 286 and $ 149 for fiscal 2021 and 2020, 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 2021 or fiscal 2020.   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 (“AMT”).   The Tax 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.   On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was enacted in response to the COVID- 19 pandemic. The CARES Act, among other things, contains modifications on the limitation of business interest for tax years beginning in 2019 and 2020, and permits net operating loss carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows net operating losses incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. These provisions of the CARES Act did not have a material effect on the Company’s estimated effective tax rate.   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 benefit from 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   The Company presents basic and diluted earnings per share information for its common stock. The Series D Preferred Stock was considered participating securities, as the security may participate in undistributed earnings with common stock. The holders of the Series D Preferred Stock are entitled to share in dividends, on an as-converted basis, if the holders of common stock were to receive dividends, other than dividends in the form of common stock. The Company is required to use the two -class method when computing earnings per share. The two -class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. In determining the amount of net earnings to allocate to common stockholders, earnings are allocated to both common and participating securities based on their respective weighted-average shares outstanding for the period. Securities are deemed not to be participating in losses if there is no obligation to fund such losses. The Series D Preferred Stock does not participate in losses, and as a result, the Company does not allocate losses to these securities in periods of loss. Diluted earnings per share for the common stock is computed using the more dilutive of the two -class method or the “if-converted” and treasury stock methods. During the fourth quarter of fiscal 2021, all Series D Preferred Stock were converted to common shares with no remaining Series D Preferred Stock outstanding at September 30, 2021.   45     BRIDGELINE DIGITAL, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)   Basic net loss per share is computed by dividing net loss attributable to common shareholders by the weighted average number of common shares outstanding.  Diluted net income per share attributable to common shareholders is computed using the weighted average number of common shares outstanding during the period plus the dilutive effect of outstanding stock options and warrants using the “treasury stock” method and convertible preferred stock using the as-if-converted method.  The computation of diluted earnings per share does not include the effect of outstanding stock options, warrants and convertible preferred stock that are considered anti-dilutive.   For the years ended September 30, 2021 and 2020, diluted net loss per share was the same as basic net loss per share, as the effects of all the Company’s potential common stock equivalents are anti-dilutive, as the Company reported a net loss attributable 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 Company’s Convertible Preferred Stock, stock options and warrants (See Note 12 ) and conti ngently issuable shares associated with acquired businesses (See Note 16 ).   Recently Issued Accounting Pronouncements Not Yet Effective   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.   Debt with Conversion and Other Options and Derivatives and Hedging   In August 2020, the FASB issued ASU No. 2020 - 06,   Debt - Debt with Conversion and Other Options   (Subtopic 470 - 20 )   and Derivatives and Hedging - Contracts in Entity ’ s Own Equity   (Subtopic 815 - 40 ):   Accounting for Convertible Instruments and Contracts in an Entity ’ s Own Equity . The amendments in ASU No. 2020 - 06 simplify the complexity associated with applying U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. More specifically, the amendments focus on the guidance for convertible instruments and derivative scope exceptions for contracts in an entity’s own equity. ASU 2020 - 06  is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently evaluating the impact of the new standard on its consolidated financial statements and related disclosures.   Business Combinations   In October 2021, the FASB issued ASU No. 2021 - 08, Business Combinations (Topic 606 ): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers , which requires that an entity recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 as if it had originated the contracts. Generally, this should result in an acquirer recognizing and measuring the acquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements, if the acquiree prepared financial statements in accordance with U.S. GAAP. The amendment in this update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The guidance should be applied prospectively to business combinations occurring on or after the effective date of the amendment in this update. The Company is evaluating the potential impact of this adoption on its consolidated financial statements and related disclosures.   All other Accounting Standards Updates issued but not yet effective are not expected to have a material effect on the Company’s future consolidated financial statements or related disclosures.       3. Accounts Receivable   Accounts receivable consist of the following:       As of September 30,       2021     2020   Accounts receivable   $ 1,403     $ 698   Allowance for doubtful accounts     ( 33 )     ( 33 ) Accounts receivable, net   $ 1,370     $ 665       As of and for the year ended September 30, 2021, two customers represented approximately 13 %, and 10 % of accounts receivable and no customers exceeded 10% of the Company’s total revenues. 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.     4.   Property and equipment   Property and equipment consist of the following:       As of September 30,       2021     2020   Furniture and fixtures   $ 98     $ 73   Purchased software     18       18   Computer equipment     150       93   Leasehold improvements     197       195   Total cost     463       379   Less accumulated depreciation and amortization     ( 211 )     ( 141 ) Property and equipment, net   $ 252     $ 238       Depreciation and amortization on the above assets were $ 70 and $ 61 in fiscal 2021 and 2020, respectively.     5. Fair Value Measurement and Fair Value of Financial Instruments   The Company’s financial instruments consist principally of accounts receivable, accounts payable, warrant liabilities, contingent consideration and long-term debt arrangements. The Company measures its financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. Additionally, under U.S. GAAP, companies are required to provide disclosure and categorize assets and liabilities measured at fair value into one of three different levels depending on the assumptions (i.e., inputs) used in the valuation. Level  1 provides the most reliable measure of fair value while Level  3 generally requires significant management judgment. Financial assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. The fair value hierarchy is defined as follows:   Level  1—Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.   Level  2—Valuations are based on quoted prices for similar assets or liabilities in active markets, or quoted prices in markets that are not active for which significant inputs are observable, either directly or indirectly.   Level  3—Valuations are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Inputs reflect management’s best estimate of what market participants would use in valuing the asset or liability at the measurement date.   The carrying value of the Company’s accounts receivable and accounts payable approximate their fair value due to their short-term nature. Debts with an aggregate fair value of $1.7 million have an aggregate carrying value of $ 1.9 million. The fair value is based on interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities. If measured at fair value in the financial statements, the debt would be classified as Level 2 in the fair value hierarchy.   47     BRIDGELINE DIGITAL, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)   The Company’s warrant liabilities are measured at fair value at each reporting period with changes in fair value recognized in earnings during the period. The fair value of the Company’s warrant liabilities are valued utilizing Level 3 inputs. Warrant liabilities are valued using a Monte Carlo option-pricing model, which takes into consideration the volatilities of comparable public companies, due to the relatively low trading volume of the Company’s common stock. The Monte Carlo option-pricing model uses certain assumptions, including expected life and annual volatility. The range and weighted average volatilities of comparable public companies utilized was 28.8 % - 66.2 % and 55.8 %, respectively, as of September 30, 2021, and 26.2 % - 70.7 % and 43.5 %, respectively, as of September 30, 2020. The volatility utilized in the Monte Carlo option-pricing model was determined by weighing 60 % to the Company-specific volatility and 40 % on comparable public companies. The significant inputs and assumptions utilized were as follows:           As of September 30, 2021       As of September 30, 2020     At inception       Montage Capital     Series C Preferred     Series D Preferred     Montage Capital     Series C Preferred     Series D Preferred   Volatility     88.7 %     83.9 %     85.7 %     84.0 %     84.1 %     86.3 % Risk-free rate     0.80 %     0.50 %     1.00 %     0.28 %     0.20 %     0.90 % Stock price   $ 4.11     $ 4.11     $ 4.11     $ 1.86     $ 1.86     $ 2.50       The Company recognized a gain (loss) of ($ 5,885 ) and $ 1,028 for the years ended September 30, 2021 and 2020, 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.   The Company’s contingent consideration obligations are from arrangements resulting from acquisitions that involve potential future payment of consideration that is contingent upon the achievement of the revenue targets and operational goals. Contingent consideration is recognized at its estimated fair value at the date of acquisition based on the Company’s expected probability of future payment, discounted using a weighted average cost of capital in accordance with accepted valuation methodologies.   The Company reviews and re-assesses the estimated fair value of contingent consideration liabilities at each reporting period and the updated fair value could differ materially from the initial estimates. The Company measures contingent consideration recognized in connection with acquisitions at fair value on a recurring basis using significant unobservable inputs classified as Level 3 inputs. The Company uses a simulation-based model to estimate the fair value of contingent consideration on the acquisition date and at each reporting period. The simulation model uses certain inputs and assumptions, including revenue projections, an estimate of revenue discount and volatility rate based on comparable public companies’ data, and risk-free rate. Significant increases or decreases to either of these inputs in isolation could result in a significantly higher or lower liability with a higher liability limited to the contractual maximum of the contingent consideration liabilities. Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate on the acquisition date and each reporting period and the amount paid will be recorded in earnings. The significant inputs and assumptions utilized were as follows:       At September 30, 2021     At acquisition   Revenue discount rate     3.5 %       5.0 %   Revenue volatility     11.0 %       20.3 %   Discount rate     10.5 %       8.8 %         Assets and liabilities of the Company measured at fair value on a recurring basis as of September 30, 2021 and 2020, are as follows:       As of September 30, 2021               Level 1     Level 2     Level 3     Total                                     Liabilities:                                 Warrant liabilities:                                 Montage   $ -     $ -     $ 13     $ 13   Series A and C     -       -       2,026       2,026   Series D     -       -       2,365       2,365   Total warrant liabilities                 4,404       4,404   Contingent consideration obligations     -       -       3,649       3,649   Total Liabilities   $ -     $ -     $ 8,053     $ 8,053     48     BRIDGELINE DIGITAL, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)       As of September 30, 2020               Level 1     Level 2     Level 3     Total                                     Liabilities:                                 Warrant liabilities - Montage   $ -     $ -     $ 26     $ 26   Warrant liabilities - Series A, B and C     -       -       2,460       2,460   Total Liabilities   $ -     $ -     $ 2,486     $ 2,486     The following table provides a rollforward of the fair value, as determined by Level 3 inputs, as follows:       Contingent Consideration Obligations     Warrant Liabilities   Balance at beginning of period, October 1, 2019   $ -     $ 3,514   Additions     -       -   Exercises     -       -   Adjustment to fair value     -       ( 1,028 ) Balance at end of period, September 30, 2020   $ -     $ 2,486   Additions     3,479       1,319   Exercises or payments     -       ( 5,286 ) Adjustment to fair value     170       5,885   Balance at end of period, September 30, 2021   $ 3,649     $ 4,404       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.     Annual tests were performed at September 30, 2021 and 2020. Management performed a qualitative assessment that did not result in any impairment indictors at September 30, 2021 and 2020. Impairment charges are reflected as a reduction in goodwill in the Company’s consolidated balance sheets and an expense in the Company’s consolidated statements of operations.    Changes in the carrying value of goodwill are as follows:       As of September 30,       2021     2020   Balance at beginning of period   $ 5,557     $ 5,557   Acquisitions     10,428       -   Balance at end of period   $ 15,985     $ 5,557       7.    Intangible Assets     The components of intangible assets, net of accumulated amortization, are as follows:       As of September 30,       2021     2020   Domain and trade names   $ 732     $ 10   Customer related     5,465       1,500   Technology     1,558       1,107   Intangibles, net   $ 7,755     $ 2,617       Total amortization expense related to intangible assets was $ 1,130 and $ 891 for the years ended September 30, 2021 and 2020, respectively, and is reflected in Operating expenses on the consolidated statements of operations. The estimated amortization expense for fiscal years 2022, 2023, 2024, 2025, 2026 and thereafter is $ 1,494 , $ 1,415 , $ 1,032 , $ 738 , $ 673 and $ 2,403 , respectively.     8.    Accrued Liabilities   Accrued liabilities consist of the following:       As of September 30,       2021     2020   Compensation and benefits   $ 541     $ 368   Professional fees     81       29   Taxes     84       46   Other     202       156   Balance at end of period   $ 908     $ 599         9.     Restructuring and Acquisition Related Expenses   Restructuring Activities   In March 2020, the Company recognized $ 366 of expenses 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. There were no restructuring activities during the year ended September 30, 2021.   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, 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   $ -     $ -     $ -     There were no accrued restructuring costs included in Accrued Liabilities as of September 30, 2021 and 2020, respectively.   Acquisition Related Expenses   In connection with the acquisition of businesses completed during the fiscal 2021 second and third quarters (see Note 16 ), the Company incurred acquisition expenses of $ 1,235 during the year ended September 30, 2021, 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.    Long-term Debt   On March 1, 2021, the Company assumed the outstanding long-term debt obligations of an acquired business and issued a seller note to one of the selling shareholders (see Note 16 ). The assumed debt obligations and seller note are denominated in Euros.   At September 30, 2021, long-term debt consisted of the following:   Vendor loan payable (“Vendor loan”), accruing interest at 4.0% per annum. Principal and interest are payable in two lump-sum installments and the loan matures on February 1, 2023.   $ 718   Term loan payable, accruing interest at fixed rates ranging between 0.99% to 1.5% per annum, payable in monthly or quarterly payments of interest and principal and matures on October 10, 2022.     362   Term loan payable, accruing interest at 1.3% per annum, payable in quarterly installments and matures on April 30, 2027.     466   Seller’s note payable (“Seller’s note”), due to one of the selling shareholders, accruing interest at a fixed rate of 4.0% per annum. The Seller’s note is payable over 5 installments and matures on January 1, 2026.     383   Total debt     1,929   Less current portion:     ( 732 ) Long-term debt, net of current portion   $ 1,197     At September 30, 2021, future maturities of long-term debt are as follows:   Fiscal year :         2022   $ 732   2023     540   2024     224   2025     224   2026     85   Thereafter     124   Total debt   $ 1,929     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 $ 1,048 (“PPP Loan”) pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The PPP Loan is evidenced by a promissory note (“Note”). Subject to the terms of the Note, the PPP Loan bears interest at a fixed rate of one percent ( 1% ) per annum, with the first six months of interest deferred, has an initial term of two years, and is unsecured and guaranteed by the U.S. Small Business Administration (“SBA”). Payments are deferred for at least the first six months and payable in 18 equal consecutive monthly installments of principal and interest commencing upon expiration of the deferral period of the PPP Loan date. 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.   51     BRIDGELINE DIGITAL, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)   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. At the time in which the PPP Loan was obtained, U.S. GAAP did not contain authoritative accounting guidance and subsequently, ASU 2021 - 10, Government Assistance (Topic 832 ) , was issued to address disclosure requirements about transactions with a government that are accounted for by applying a grant model, such as IAS 20.   The following provides the balance and activity related to the PPP Loan:       As of September 30,       2021     2020   Balance at beginning of period   $ 88     $ 1,048   Qualified expenses incurred during the period eligible for forgiveness     ( 88 )     ( 960 ) Balance at end of period   $ -     $ 88     The Company applied for full PPP Loan forgiveness on March 29, 2021 and received approval from the SBA in August 2021. The Company classified unexpended loan proceeds on the accompanying consolidated balance sheets as a current or noncurrent liability based on the contractual maturities of the underlying loan agreement. During the first quarter of fiscal 2021, the remaining loan proceeds were expended on qualified expenses and as a result, the Company recognized $ 88 as government grant income. As of September 30, 2020, unexpended loan proceeds of $ 88 were classified as a current liability.     11.    Leases   The Company leases facilities in the United States for its corporate and regional field offices. During the years ended September 30, 2021 and 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 upon modification of a contract and classify each lease as either an operating or finance lease at commencement. The Company reassesses lease classification subsequent to commencement upon a change to the expected lease term or a modification to the contract. Operating leases represent the Company’s right to use an underlying asset as lessee for the lease term and lease obligations represent the Company’s obligation to make lease payments arising from the lease.   A contract contains a lease if the contract conveys the right to control the use of the identified property or equipment, explicitly or implicitly, for a period of time in exchange for consideration. Control of an underlying asset is conveyed if we obtain the rights to direct the use of and obtain substantially all of the economic benefit from the use of the underlying asset. At commencement, contracts containing a lease are further evaluated for classification as an operating lease or finance lease based on their terms.   ROU Model and Determination of Lease Term   The Company uses the Right-of-Use (“ROU”) model to account for leases, which requires an entity to recognize a lease liability and ROU asset on the lease commencement date. A lease liability is measured equal to the present value of the remaining lease payments over the lease term and is discounted using the incremental borrowing rate, as the rates implicit in the Company’s leases are not readily determinable. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. Lease payments include payments made before the commencement date and any residual value guarantees, if applicable. The initial ROU asset consists of the initial measurement of the lease liability, adjusted for any payments made before the commencement date, initial direct costs and lease incentives earned. When determining the lease term, the Company includes option periods when it is reasonably certain that those options will be exercised.   Lease Costs   For operating leases, minimum lease payments, including minimum scheduled rent increases, are recognized as operating lease costs on a straight-line basis over the applicable lease terms. Some operating lease arrangements include variable lease costs, including real estate taxes, insurance, common area maintenance or increases in rental costs related to inflation. Such variable payments, other than those dependent upon a market index or rate, are excluded from the measurement of the lease liability and are expensed when the obligation for those payments is incurred.   52     BRIDGELINE DIGITAL, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)   Significant Assumptions and Judgments   Management makes certain estimates and assumptions regarding each new lease and sublease agreement, renewal and amendment, including, but not limited to, property values, market rents, useful life of the underlying property, discount rate and probable term, all of which can impact ( 1 ) the classification as either an operating or finance lease, ( 2 ) measurement of lease liabilities and ROU assets and ( 3 ) the term over which the ROU asset and leasehold improvements are amortized. The amount of depreciation and amortization, interest and rent expense would vary if different estimates and assumptions were used.   The components of net lease costs were as follows:       As of September 30,       2021     2020   Condensed Consolidated Statements of Operations:                 Operating lease cost   $ 115     $ 273   Variable lease cost     55       84   Less: Sublease income, net     ( 101 )     ( 73 ) Total   $ 69     $ 284     Cash paid for amounts included in the measurement of lease liabilities was $ 225 for the year ended September 30, 2021, all of which represents operating cash flows from operating leases. As of September 30, 2021, the weighted average remaining lease term was 3.3 years and the weighted average discount rate was 7.0 %.   At September 30, 2021, future minimum rental commitments under non-cancelable leases with initial or remaining terms in excess of one year, which have commenced, were as follows:       Payments Operating Leases     Receipts Subleases     Net Leases   Fiscal year:                         2022   $ 185     $ 101     $ 84   2023     173       101       72   2024     116       34       82   2025     69       -       69   2026     7       -       7   Total lease commitments     550     $ 236     $ 314   Less: Amount representing interest     ( 69 )                 Present value of lease liabilities     481                   Less: Current portion     ( 161 )                 Operating lease liabilities, net of current portion   $ 320                     As of September 30, 2021, the Company had no lease commitments that extend past 2026.   53     BRIDGELINE DIGITAL, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (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 were 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         12.     Stockholders ’ Equity   Series A Convertible Preferred Stock   The Company has designated 264,000 shares of its preferred stock as Series A Convertible Preferred Stock (“Series A Preferred Stock”). The shares of Series A Preferred Stock may be converted, at the option of the holder at any time, into such number of shares of common stock (“Conversion Shares”) equal to (i) the number of shares of Series A Preferred Stock to be converted, multiplied by the stated value of $ 10.00 (the “Stated Value”) and (ii) divided by the conversion price in effect at the time of conversion.   On December 31, 2019 ( the “Amendment Date”), the Company filed a First Amended and Restated Certificate of Designations of the Series A Convertible Preferred Stock (the “Series A Amendment”) with the Secretary of State for the State of Delaware, which amended and restated the Series A Preferred Stock, as more particularly set forth below:   Conversion Price: Reduces the conversion price from $ 812.50 per share to $ 1.75 per share, subject to adjustment in the event of stock splits or stock dividends.   Mandatory Conversion: The Company has the right, in its sole discretion, to require the holders to convert shares of the Series A Preferred Stock into Conversion Shares if (i) the Company’s common stock has closed at or above $ 2.28 ($ 32.50 prior to the Series A Amendment) for fifteen ( ten prior to the Series A Amendment) consecutive trading days and (ii) the Conversion Shares are (a) registered for resale on an effective registration statement or (b) may be resold pursuant to Rule 144.   Company ’ s Redemption Option: The Company may redeem all or a portion of the outstanding shares of Series A Preferred Stock, at its option, provided that the Company 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 Series A 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 represented an extinguishment for accounting purposes. In making this determination, the Company considered the significance of the contractual terms added and revisions to existing contractual terms, including, but not limited to, the significant change in the conversion price and the addition of the Company’s redemption option. These additions and revisions to existing contractual terms were considered to be qualitatively significant. The extinguishment of equity-classified convertible preferred stock is recognized as a deemed dividend measured as the difference between ( 1 ) the fair value of the consideration transferred; that is, the Series A Preferred Stock, as amended, and ( 2 ) the carrying value of the Series A Preferred Stock. At the Amendment Date, the fair value of the Series A Preferred Stock, as amended, was approximately $ 2,629 and its carrying value was approximately $ 315 , resulting in a deemed dividend of $ 2,314 recognized as an increase to accumulated deficit and an increase to additional paid-in capital, which was included as a component of net loss attributable to common shareholders during fiscal 2020. 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.   54     BRIDGELINE DIGITAL, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)   As of September 30, 2020, all previously outstanding shares of Series A Convertible Preferred Stock were converted into common stock.   Series C Convertible Preferred Stock   The Company has designated 11,000 shares of its preferred stock as Series C Convertible Preferred Stock (“Series C Preferred Stock”). The Company may not effect, and a holder will not be entitled to, convert the Series C Preferred Stock or exercise any Series C Preferred Warrants, which, upon giving effect to such conversion or exercise, would cause (i) the aggregate number of shares of common stock beneficially owned by the Purchaser (together with its affiliates) to exceed 4.99% (or, at the election of the holder, 9.99% ) of the number of shares of common stock outstanding immediately after giving effect to the exercise. As of September 30, 2021, the Company had 350 shares of Series C Preferred Stock outstanding which were convertible into an aggregate of 38,889 shares of the Company’s common stock.   Registered Offering of Common Stock and Private Placement of Series D Convertible Preferred Stock (the “ May 2021 Offerings ” )   On May 14, 2021, the Company offered and sold a total of 1,060,000 shares of its common stock, to certain institutional investors at a public offering price of $ 2.28 per share in a registered direct offering (“RD Offering”). The RD Offering was registered under the Securities Act of 1933, as amended, pursuant to a prospectus supplement to the Company's currently effective registration statement on Form S- 3.   Additionally, on May 14, 2021, the Company entered into securities purchase agreements with certain institutional investors pursuant to which the Company offered and sold a total of 2,700 units (“Units”) at a purchase price of $ 1,000 per Unit (“Private Placement”). Each Unit consisted of (i) one share of the Company’s newly designated Series D Convertible Preferred Stock (“Series D Preferred Stock”) and (ii) warrants to purchase common stock up to one -half of the shares issuable upon conversion of the Series D Preferred Stock as a part of the Units. In total, the Company issued 2,700 shares of Series D Preferred Stock and warrants to purchase up to 592,106 shares of common stock.   Joseph Gunnar & Company, LLC acted as lead placement agent for both the RD Offering and the Private Placement (collectively, the “May 2021 Offerings”) and Taglich Brothers, Inc. acted as co-placement agent for the May 2021 Offerings (the "Placement Agents"). As compensation for their services, the Company paid to the Placement Agents a fee equal to 8 % of the aggregate purchase price paid and reimbursed the Placement Agents for certain expenses incurred in connection with the May 2021 Offerings. In addition, the Company issued to the Placement Agents warrants, in substantially the same form as the Series D Preferred Warrants, to purchase an aggregate of 179,536 shares of common stock.   In connection with the Private Placement, the Company filed the Certificate of Designation of Preferences, Rights and Limitations of the Series D Convertible Preferred Stock, with the Secretary of State for the State of Delaware, designating 4,200 shares of the Company’s preferred stock as Series D Preferred. The terms and conditions set forth in the Certificate of Designation are summarized below:   Stated Value: Each share of Series D Preferred Stock has a stated value of $ 1,000 per share.   Dividends: Commencing six months after the issuance date and terminating upon receipt of Stockholder Approval, as discussed below, Series D Preferred holders are entitled to receive cumulative dividends at a rate of 9 % per annum of the stated value per share. The Company will pay dividends, if accrued, on the last day of each calendar quarter with respect to the Series D Preferred Stock held by a holder during such calendar quarter.   Voting: Shares of Series D Preferred Stock have no general voting rights. However, as long as any shares of Series D Preferred Stock are outstanding, the Company may not, without the affirmative vote of the holders of a majority of the then outstanding shares of Series D Preferred Stock, (i) alter or change adversely the powers, preferences or rights given to the Series D Preferred Stock or alter or amend the Certificate of Designation, (ii) amend its certificate of incorporation or other charter documents in any manner that adversely affects any rights of the holders of Series D Preferred Stock, (iii) increase the number of authorized shares of Series D Preferred, or (iv) enter into any agreement with respect to any of the foregoing.   Liquidation Preference: Prior to Stockholder Approval, upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the holders of Series D Preferred Stock will be entitled to receive out of the Company’s assets an amount equal to the Stated Value, plus any accrued and unpaid dividends thereon and any other fees or liquidated damages then due and owing thereon under the Certificate of Designation, before any distribution or payment is made to the holders of any other securities and if the Company’s assets will be insufficient to pay in full such amounts, then the entire assets to be distributed to the holders of Series D Preferred Stock will be ratably distributed among such holders in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full.   55     BRIDGELINE DIGITAL, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)   After Stockholder Approval, the Series D Preferred Stock has no liquidation preference.   Conversion: Each share of Series D Preferred Stock is convertible, at any time after the issuance date at the option of the holder thereof, into that number of shares of common stock determined by dividing the Stated Value by the conversion price which is $ 2.28 (subject to adjustment for the effect of stock dividends, stock splits, recapitalizations and the like); provided, however, that holders of the Series D Preferred Stock may not convert any of their Series D Preferred Stock into conversion shares unless and until the Stockholder Approval Date. In addition, holders of Series D Preferred Stock are prohibited from converting Series D Preferred Stock into conversion shares if, as a result of such conversion, the holder, together with its affiliates, would own more than 4.99 % (or 9.99 % upon the election of the holder prior to the issuance of the Series D Preferred Stock) of the total number of shares of common stock then issued and outstanding. Series D Preferred Stock issued in Private Placement, subject to Stockholder Approval, is convertible into an aggregate of 1,184,211 shares of common stock.   Stockholder Approval: The Company’s common stock is listed on the NASDAQ Capital Market, and, as such, it is subject to the applicable rules of the Nasdaq Stock Market LLC, including Nasdaq Listing Rule  5635 (a), which requires stockholder approval in connection with the acquisition of another company (see Note 16 ) if the Nasdaq-listed company will issue 20% or more of its common stock. For purposes of Nasdaq Listing Rule  5635 (a), the issuance of any common stock in the Acquisition (see Note 16 ) and the May 2021 Offerings would be aggregated together. Thus, to permit the issuance of common stock upon conversion of the Series D Preferred Stock and upon exercise of the warrants issued in the Private Placement, the Company had to obtain stockholder approval of these issuances. Upon issuance, the Company had determined that such prohibition did not represent an inability for the Company to satisfy its obligation to deliver shares upon conversion, as the holders’ conversion option itself is contingent upon Stockholder Approval. On September 16, 2021, the Company obtained Stockholder Approval. The Company determined that the Series D Preferred Stock should be classified as permanent equity.   The Series D Preferred Stock contains an embedded conversion feature that could affect the ultimate settlement of the Series D Preferred Stock. The Company determined that the embedded conversion feature’s economic characteristics and risks were clearly and closely related to the economic characteristics and risks of the Series D Preferred Stock. As a result, the embedded conversion feature was not required to be bifurcated from the Series D Preferred Stock.   The Series D Preferred Stock issued contains a beneficial conversion feature, which arises when a debt or equity security is issued with an embedded conversion option that is deemed beneficial to the investor, that is, in-the-money, at inception, as the conversion option has an effective conversion price that is less than the market price of the underlying stock at the commitment date. An embedded beneficial conversion feature is required to be recognized separately by allocating a portion of the proceeds equal to the intrinsic value, at the commitment date, of the feature to additional paid-in capital. As discussed below, the May 2021 Offerings cash proceeds allocated to the Series D Preferred Stock based on its relative fair value resulted in an effective conversion price of $ 1.41 , which was below the commitment date fair value of the underlying shares of common stock of $ 2.50 , resulting in a beneficial conversion feature measured at $ 1.3 million. As discussed in Note 16, upon the acquisition of Hawk Search during the third quarter of fiscal 2021, Series D Preferred Stock was issued as part of consideration transferred in which the intrinsic value of the embedded conversion feature was calculated at $ 724 as of the acquisition date. As of September 30, 2021, the Company recognized the impact of the beneficial conversion feature upon Stockholder Approval, as the beneficial conversion feature became immediately exercisable, at the option of the holder. The Company recognized full accretion of the beneficial conversion feature as a deemed dividend of $ 2.0 million to the Series D Preferred Stock. Such deemed dividend is recognized as an increase to accumulated deficit and an increase to additional paid-in capital and is included as a component of net loss attributable to common stockholders. During the fourth quarter of fiscal 2021, all Series D Preferred Stock were converted to common shares with no remaining Series D Preferred Stock outstanding at September 30, 2021.   As noted above, in connection with the May 2021 Offerings, the Company issued Series D Preferred Warrants and Placement Agents Warrants to purchase up to 592,106 and 179,536 shares of common stock, respectively. The Series D Preferred and Placement Agents Warrants (hereinafter referred to collectively as the “Series D Warrants”) are puttable at the option of the holder in the event of a Fundamental Transaction, as defined in the respective warrant agreements. The put feature requires the Company to pay holders an amount of cash equal to the Black-Scholes Value, as defined in the respective warrant agreements, of the remaining unexercised portion of the Series D Warrants on the date of consummation of such Fundamental Transaction. The Company determined that the Series D Warrants are required to be classified as liabilities measured at fair value at their issuance date and to be subsequently remeasured at fair value each reporting period with changes in fair value recognized in period earnings (see Note 5 ).   As the common stock in the RD Offering was sold concurrently with the Units sold in the Private Placement, for any common purchasers, inclusive of purchaser affiliated entities, the aggregate proceeds from the May 2021 Offerings were allocated, on an investor-by-investor basis, to the Series D Preferred Warrants based on their fair value and the residual proceeds to the common stock and Series D Preferred Stock based on their relative fair values. Accordingly, the May 2021 Offerings proceeds, net of certain fees due to placement agents, inclusive of the fair value of warrants issued to placement agents, and transaction-related expenses, of $ 4.3 million were allocated $ 1.0 million to the Series D Preferred Warrants based on their issuance-date fair value, $ 1.9 million to common stock and $ 1.3 million to Series D Preferred Stock based on their respective relative fair values.   56     BRIDGELINE DIGITAL, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)   The issuance date fair value of the Series D Warrants issued to placement agents was determined to be incremental cost directly attributable to the May 2021 Offerings and was charged by the Company against proceeds along with other fees paid to the Placement Agents.   Registration Rights   The registration rights agreement, entered into in connection with the Series D Preferred Stock Units Private Placement, requires the Company to file with the SEC a registration statement no later than 15 days after the Closing Date (issuance date) registering for resale the maximum number of common shares issuable upon conversion of the Series D Preferred Stocks and the exercise of the Series D Warrants. Such registration rights agreement requires the Company to use commercially reasonable best efforts to have the registration statement declared effective by the SEC, as soon as practicable, but in no event later than the effectiveness deadline of 60 days after the closing date (or in the event of a full review by the SEC the effectiveness deadline will be 90 days after the closing date). If such registration statement is not effective by the contractually agreed upon date, or such registration statement effectiveness is not maintained, then, the Company is required to make payments on account of liquidated damages to the investors of 2 % of their Series D Preferred Stock Units subscription amount on the date of such events, and on each monthly anniversary thereafter until the effectiveness is cured.   Pursuant to the terms of the registration rights agreement, the Company on May 28, 2021, filed a registration statement on Form S- 3 with the SEC to register the common shares issuable upon the conversion of the Series D Preferred Stocks and the exercise of the Series D Warrants. As of August 18, 2021, the registration statement was declared effective by the SEC.   Registered Offering and Sale of Common Stock   On February 4, 2021, the Company offered and sold a total of 880,000 shares of its common stock, par value $ 0.001 per share, to certain institutional and accredited investors at a public offering price of $ 3.10 per share in a registered direct offering (the “Offering”). The Offering was registered under the Securities Act of 1933, as amended, pursuant to a prospectus supplement to the Company’s currently effective registration statement on Form S- 3 (File No. 333 - 239104 ), which was initially filed with the SEC on June 12, 2020, and was declared effective on June 25, 2020. The Company filed the final prospectus supplement for the Offering on or about February 5, 2021. The Offering closed on February 8, 2021, and resulted in proceeds, net of certain fees due to placement agents and transaction expenses, to the Company of approximately $ 2.5 million. The net proceeds received by the Company will be used for general corporate purposes, including general working capital.   Joseph Gunnar & Company, LLC acted as lead placement agent for the Offering, and Taglich Brothers, Inc. acted as co-placement agent for the Offering (the “Placement Agents”). As compensation for their services, the Company paid to the Placement Agents a fee equal to 8 % of the aggregate purchase price paid for shares placed by the Placement Agents at closing and reimbursed the Placement Agents for certain expenses incurred in connection with the Offering. In addition, the Company issued to the Placement Agents warrants to purchase an aggregate of 58,169 shares of common stock (the “Placement Agent Warrants”). The Placement Agent Warrants have a term of five years from the date of issuance and an exercise price of $3.875 per share.   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, 2021, 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, 2021, there were 799,201  options outstanding and 4,045  shares available for future issuance under the 2016 Plan.   57     BRIDGELINE DIGITAL, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)   Compensation Expense   Compensation expense is generally recognized on a graded accelerated basis over the vesting period of grants. Compensation expense is recorded in the 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, 2021 and 2020, compensation expense related to share-based payments was as follows:       Years ended September 30,       2021     2020   Cost of revenue   $ 25     $ 21   Operating expenses     163       173   Interest expense and other, net     419       -       $ 607     $ 194     Interest expense and other, net includes compensation expense related the fair value of fully-vested stock options granted in August 2021.  100,000 shares were granted to directors, as more fully described below under the caption “ Summary of Option and Warrant Activity and Outstanding Shares .”  As of September 30, 2021, the Company had approximately $ 385 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 to the Company. The warrants are typically exercisable six months after the issue date, expire in five years, and contain a cashless exercise provision and piggyback registration rights.   Montage Warrant - As additional consideration for a prior loan arrangement which was paid in full in a prior period not presented, the Company issued to Montage Capital an eight -year warrant (the “Montage Warrant”) to purchase the Company’s common stock at a price equal to $132.50 per share. The Montage Warrant contains an equity buy-out provision upon the earlier of ( 1 ) dissolution or liquidation of the Company, ( 2 ) any sale or distribution of all or substantially all of the assets of the Company, or ( 3 ) a “Change in Control” as defined within the meaning of Sections 13 (d) and 14 (d)( 2 ) of the Securities Exchange Act of 1934. Montage Capital has the right to receive an equity buy-out of $ 250 . If the equity buy-out is exercised, the Montage Warrant will be surrendered to the Company for cancellation. The fair value of the Montage warrant liability at September 30, 2021 and 2020, was $ 13 and $ 26 , respectively.   Series A, B and C Preferred Warrants - In March 2019, in connection with the issuance of the Company’s Series C Preferred Stock, the Company issued warrants to purchase the Company’s common stock. These warrants were designated as (i) Series A Warrants with an initial term of 5.5 years and an exercise price of $4.00; (ii) Series B Warrants with an initial term of 24 months and an exercise price of $4.00; and (iii) Series C Warrants with an initial term of 5.5 years and an exercise price of $ 0.05 (collectively, hereinafter referred to as the “Series C Preferred Warrants”). The Company also issued warrants with an exercise price of $ 4.00 to purchase shares of the Company’s common stock to the Placement Agents. The Company may not effect, and a holder will not be entitled to convert, the Series C Preferred Stock or exercise any Series C Preferred Warrants, which, upon giving effect to such conversion or exercise, would cause (i) the aggregate number of shares of common stock beneficially owned by the Purchaser (together with its affiliates) to exceed 4.99% (or, at the election of the holder, 9.99% ) of the number of shares of common stock outstanding immediately after giving effect to the exercise. During year ended September 30, 2021, 1,684,250 Series A Warrants were exercised, 2,556,875 Series B Warrants expired unexercised, 55,557 Series C Warrants were exercised and 236,580 Placement Agent Warrants were exercised.    As of September 30, 2021, the number of shares issuable upon exercise of the (i) Series A Warrants were 872,625 shares; (ii) Series C Warrants were 13,738 shares; (iii) the Placement Agent Warrants issued in connection with the Series C Preferred Stock were 11,992 shares and (iv) Investor Warrants were 41,141 shares.   Series D Preferred Warrants - The Units sold in Private Placement on May 14, 2021 also consisted of Series D Warrants to purchase up to 592,106 shares of common stock. The Series D Preferred Warrants issued on May 14, 2021 have an initial exercise date of November 14, 2021, with a term of five and half of years which ends on November 16, 2026. Series D Preferred Warrants have an exercise price of $2.51.   58     BRIDGELINE DIGITAL, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)   In addition, pursuant to the May 2021 Offerings, the Company issued to the Placement Agents Warrants to purchase an aggregate of 179,536 shares of common stock. The Placement Agents Warrants issued on May 14, 2021 have an initial exercise date of November 14, 2021, with a term of five years which ends on May 12, 2026. The Placement Agent Warrants have an exercise price of $2.85.   The Company may not effect, and a holder will not be entitled to convert, the Series D Preferred Stock or exercise any May 2021 Offering Warrants, which, upon giving effect to such conversion or exercise, would cause (i) the aggregate number of shares of common stock beneficially owned by the Purchaser (together with its affiliates) to exceed 4.99% (or, at the election of the holder, 9.99% ) of the number of shares of common stock outstanding immediately after giving effect to the exercise. As of September 30, 2021, no Series D Warrants have been exercised and the aggregate number of shares issuable upon exercise was 592,106 and 179,536 shares for investors and placement agents, respectively.   The Montage Warrants, Series C Preferred Warrants, the Placement Agent Warrants issued in connection with the Series C Preferred Stock, and the Series D Warrants were all determined to be derivative liabilities and are subject to remeasurement each reporting period (see Note 5 ).   Total warrants outstanding as September 30, 2021 were as follows:   Type   Issue Date   Shares     Price   Expiration 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     41,621     $ 4.00   10/19/2023 Investors   3/12/2019     872,625     $ 4.00   9/12/2024 Investors   3/12/2019     13,738     $ 0.05   9/12/2024 Placement Agent   3/12/2019     11,992     $ 4.00   9/12/2024 Placement Agent   2/4/2021     58,169     $ 3.88   2/4/2026 Investors   5/14/2021     592,106     $ 2.51   11/16/2026 Placement Agent   5/14/2021     179,536     $ 2.85   5/12/2026 Total     1,788,745               Warrant Issuances   During the year ended September 30, 2021, the Company issued warrants to purchase common stock as follows:   Issuances   Shares     Exercise Price   Placement Agent - public offering     58,169     $ 3.88   Investors - Series D     592,106     $ 2.51   Placement Agent     179,536     $ 2.85   Total issued in fiscal 2021     829,811             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, 2021, the Company granted options to purchase 240,000  shares of which (a) 95,500 shares were granted at an exercise price of $2.51, which vest ratably over a three -year period commencing on June 1, 2021, ( b) 100,000 shares were granted to directors at an exercise price of $ 5.92 which vested immediately upon the grant date of August 2, 2021, and (c) 44,500 shares were granted at an exercise price of $ 4.11 , which vest ratably over a three -year period commencing on September 30, 2021. All such options granted expire ten years from the date of grant.   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 on 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.   59     BRIDGELINE DIGITAL, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (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 years ended September 30, 2021 and 2020, are as follows:       September 30,       2021     2020   Weighted-average fair value per share option   $ 2.96     $ 0.96   Expected life (in years)     5.6       6.0   Volatility     85.8 %     76.29 % Risk-free interest rate     1.0 %     1.61 % Dividend yield     0.0 %     0.0 %   The expected option term is the number of years the Company estimates the options will be outstanding prior to exercise based on historical trends of employee turnover. Expected volatility is based on historical daily price changes of the Company’s common stock for a period equal to the expected life. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant. The expected dividend yield is zero since the Company does not currently pay cash dividends on its common stock and does not anticipate doing so in the foreseeable future.   A summary of combined 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, 2019     8,048     $ 306.41       5,496,966     $ 4.54   Granted     702,353       1.41       -       -   Exercised     -       -       -       -   Forfeited     ( 97,000 )     3.96       -       -   Expired     -       -       ( 967 )     952.11   Outstanding, September 30, 2020     613,401       4.76       5,495,999       4.37   Granted     240,000       4.35       829,811       2.68   Exercised     (27,333 )   1.40       ( 1,976,387 )     3.89   Forfeited     ( 26,647 )   2.38       -       -   Expired     ( 220 )     470.77       ( 2,560,678 )     4.28   Outstanding, September 30, 2021     799,201     $ 4.66       1,788,745     $ 4.18       There were 339,769  and 5,865 options vested and exercisable as of September 30, 2021 and 2020, respectively. The options outstanding at September 30, 2021 and 2020 had an aggregate intrinsic value of $ 1,640 and $ 275 , respectively.   A summary of the status of unvested shares is as follows:               Weighted               Average               Grant-Date       Shares     Fair Value   Unvested at October 1, 2020     607,336     $ 0.97   Granted     240,000       2.96   Vested     ( 361,257 )   2.20   Forfeited     ( 26,647 )   0.96   Unvested at September 30, 2021     459,432     $ 1.14     60     BRIDGELINE DIGITAL, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)   The following table summarizes information about outstanding stock options at September 30, 2021:   Exercise Price   Number of Options       Weighted Average Remaining Contractual Life (Years)       Weighted Average Exercise Price       Aggregate Intrinsic Value   Options outstanding     799,201       8.6     $ 4.66     $ 1,639,847   Options exercisable     339,769       8.6     $ 8.73     $ 585,794       13.     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, 2021.   The Company’s agreements with customers generally require the Company to indemnify the customer against claims in which the Company’s products infringe third -party patents, copyrights, or trademarks and indemnify against product liability matters. As of September 30, 2021, and 2020, 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, 2021, the Company was not engaged in any material legal proceedings.     14.    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:   2021     2020   United States   $ 10,266     $ 9,013   International     2,993       1,894       $ 13,259     $ 10,907     The largest concentration within the Company’s international revenue geography is within Canada.   Long-lived assets located in foreign jurisdictions aggregated approximately $ 7.5 million and $ 3.5 million as of September 30, 2021 and 2020, respectively.   61     BRIDGELINE DIGITAL, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)   The Company’s revenue by type is as follows:       Years Ended September 30,   Revenues:   2021     2020   Digital Engagement Services   $ 3,296     $ 3,409   Subscription     8,736       6,185   Perpetual Licenses     -       20   Maintenance     380       349   Hosting     847       944       $ 13,259     $ 10,907     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 revenue and is included in Other long-term liabilities.     As of September 30, 2021, approximately $ 418 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, 2021 and 2020:       Deferred Revenue       Current     Long Term   Balance as of October 1, 2019   $ 1,262     $ 8   Increase     249       7   Balance as of September 30, 2020     1,511       15   Increase     586       403   Balance as of September 30, 2021   $ 2,097     $ 418       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 $ 8 and $ 20 as of September 30, 2021 and 2020, 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 $ 2 and $ 16 the years ended September 30, 2021 and 2020, respectively.     15.    Income Taxes   The components of the Company’s tax provision (benefit) as of September 30, 2021 and 2020, is as follows:       Year Ended September 30,       2021     2020   Current:                 Federal   $ ( 11 )   $ -   State     33       11   Foreign     -       -   Total current     22       11   Deferred:                 Federal     ( 953 )     -   State     ( 217 )     -   Foreign     ( 26 )     -   Total deferred     ( 1,196 )     -   Grand total   $ ( 1,174 )   $ 11     The Company’s income tax provision was computed using the federal statutory rate and average state statutory rates, 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,       2021     2020                     Income tax provision/(benefit) at the federal statutory rate of 21%   $ ( 1,695 )   $ 67   Permanent differences, net     1,503       ( 682 ) State income tax provision/(benefit)     26       14   Foreign tax rate differences     340       -   Change in valuation allowance attributable to operations     ( 1,202 )     486   True up to prior year NOL     ( 146 )     110   AMT tax refundable under CARES act     -       23   Other     -       ( 7 ) Total   $ ( 1,174 )   $ 11     As of September 30, 2021, the Company has federal net operating loss (“NOL”) carryforwards of approximately $32 million in which the 20 -year carryforward expires on various dates through 2037 and the remaining NOL carryforward is indefinite. 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 $ 30 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 assets will not be realized. Management believes that it is more likely than not that all deferred tax assets will not be realized. Accordingly, the Company has established a valuation allowance against a portion of its deferred tax assets at September 30, 2021 and 2020. For the years ended September 30, 2021 and 2020, the valuation allowance for deferred tax assets decreased by $ 1.1 million and increased by $ 543 thousand, respectively. The acquisition of Hawk Search, Inc. (see Note 16 ) resulted in the recognition of deferred tax liabilities of approximately $ 1,181 , related to intangible assets. Prior to the business combination, the Company had a full valuation allowance on its net deferred tax assets. The deferred tax liabilities generated from the business combination netted against the Company’s pre-existing deferred tax assets. Consequently, the impact of such resulted in the release of $1,181 of the pre-existing valuation allowance against the deferred tax assets and corresponding deferred tax benefit recognized during the year ended September 30, 2021.   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 2017– 2021 generally remain open to examination by the IRS and state authorities.   63     BRIDGELINE DIGITAL, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)   Significant components of the Company’s deferred tax assets and liabilities are as follows:       September 30,       2021     2020   Deferred tax assets:                 Bad debt reserve   $ 8     $ 8   Deferred revenue     1,392       754   Accrued expenses     86       37   AMT carryforward     -       -   Net operating loss carryforwards     9,016       9,363   Contribution carryforward     1       1   Right of use liability     121       74   Debt forgiveness     -       243   Stock Options     127       -   Other     20       -   Depreciation     -       8   Intangibles     -       408   Total deferred tax assets     10,771       10,896   Valuation allowance     ( 10,083 )     ( 10,577 ) Net deferred tax assets     688       319                     Deferred tax liabilities:                 Right of use asset     121       75   Depreciation     32       -   Intangibles     901       -   Expenses related to debt forgiveness     -       244   Total deferred tax liabilities     1,054       319   Net deferred tax liabilities   $ ( 366 )   $ -     Net deferred tax assets are reflected in Other assets and net deferred tax liabilities are reflected in Other long-term liabilities on the consolidated balance sheets. Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $ 0 and $ 85 at September 30, 2021 and 2020, 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, 2021, the Company reported no GILTI tax expense for the year ended September 30, 2021. 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, 2021 and 2020. The Company does not expect any change to this determination in the next twelve months.       16.    Acquisitions   Woorank Acquisition   On March 1, 2021, the Company, pursuant to a Share Purchase Agreement (the “Woorank Purchase Agreement”), acquired all of the issued and outstanding shares of Woorank, an entity located in Belgium. The Company accounted for the Woorank transaction as a business combination in accordance with ASC Topic 805, Business Combinations . The purchase price consisted of ( 1 ) cash paid at closing, ( 2 ) deferred cash payable in installments post-closing, ( 3 ) a seller note issued to one of the selling shareholders, and ( 4 ) amounts payable to one selling shareholder as consideration for assistance with certain matters related to the acquisition for a period of one year from the closing date of the acquisition. The Woorank Purchase Agreement also provides for additional consideration, in the event of achievement of certain revenue targets and operational goals, to the selling shareholders pursuant to three separate earn-out provisions. Under certain conditions, up to € 600 thousand (approximately $ 723 thousand) of the purchase price is payable, at the Company’s discretion, in shares of the Company’s common stock, par value $ 0.001 per share (“common stock”), at a price per share equal to the greater of (i) the closing price of the Company’s common stock on the date of issuance or (ii) $ 3.38 . On the closing date, the Company issued 29,433 shares of its common stock for a portion of the purchase price. At September 30, 2021, € 550 thousand of the remaining purchase price and related earn-out may be settled, at the Company’s option, in shares of the Company’s common stock.   The Company accounted for the Woorank transaction as a business combination. The Company determined that the fair value of the gross assets acquired was not concentrated in a single identifiable asset of a group of similar assets. Assets acquired and liabilities assumed have been recognized at their estimated fair values as of the acquisition date. The fair value of common stock issued as part of consideration transferred was determined based on the acquisition date closing market price of the Company’s common stock. The estimated fair value of the contingent consideration was determined based on the Company’s expected probability of future payment, discounted using a weighted average cost of capital. The fair value of the contingent consideration is included within Purchase price and contingent consideration payable on the consolidated balance sheets. The fair value of intangible assets was based on valuations using a discounted cash flow model (Level 3 inputs) which requires significant estimates and assumptions, including estimating future revenues and costs. The fair value of debt obligations assumed was based on the interest rates underlying these instruments in relation to the market rates available for similar instruments. The excess of the purchase price over the assets acquired and liabilities assumed was recognized as goodwill. The goodwill is attributable to expected synergies and customer cross selling opportunities between the Company and Woorank.   64     BRIDGELINE DIGITAL, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)   Hawk Search Acquisition   On May 28, 2021, the Company, pursuant to a Share Purchase Agreement (the “Hawk Purchase Agreement”), acquired all of the issued and outstanding shares of Hawk Search, an Illinois corporation. The purchase price consisted of ( 1 ) an initial cash payment at closing, ( 2 ) issuance of 1,500 shares of the Company’s newly designated Series D Preferred Stock, and ( 3 ) deferred cash payable on or before December 31, 2021. The Hawk Purchase Agreement also provides for additional consideration, in the event of achievement of certain revenue targets, to the selling shareholders as an additional earn-out, payable no later than December 31, 2022.     The Company accounted for the Hawk Search transaction as a business combination. The Company determined that the fair value of the gross assets acquired was not concentrated in a single identifiable asset of a group of similar assets. Assets acquired and liabilities assumed have be recognized at their estimated fair values as of the acquisition date. The fair value of Series D Preferred Stock issued as part of consideration transferred was determined based on the price paid by third -party investors in the Private Placement (see Note 12 ) which occurred in close proximity to the acquisition date. As more fully described in Note 12, the Series D Preferred Stock contains an embedded beneficial conversion feature. The intrinsic value of $ 724 was calculated as of the acquisition date. The fair value of contingent consideration was determined based on the probability of achievement of the revenue targets and operational goals, which includes estimating future revenues. The fair value of intangible assets was based on valuations using a discounted cash flow model (Level 3 inputs) which requires significant estimates and assumptions, including estimating future revenues and costs. The excess of the purchase price over the assets acquired and liabilities assumed was recognized as goodwill. The goodwill is attributable to expected synergies and customer cross selling opportunities between the Company and Hawk Search.   The acquisition date fair value of consideration transferred was as follows:       Woorank     Hawk Search     Total   Cash paid at or in close proximity to closing   $ 285     $ 4,800     $ 5,085   Future deferred payments     376       2,000       2,376   Common stock (29,433 shares at $3.38 per share)     99       -       99   Series D Convertible Preferred Stock (1,500 shares at $618 per share)     -       930       930   Seller’s note     352       -       352   Contingent consideration (earn-outs)     1,289       2,190       3,479   Total consideration paid   $ 2,401     $ 9,920     $ 12,321     The preliminary acquisition date fair value of assets acquired, and liabilities assumed was as follows:       Woorank     Hawk Search     Total   Assets acquired:                         Cash   $ 577     $ 100     $ 677   Non-cash current assets     23       780       803   Property and equipment     5       -       5   Intangible assets:                         Acquired software     282       560       842   Customer relationships     1,280       3,410       4,690   Domain and trade names     116       620       736   Goodwill     2,888       7,540       10,428   Total assets acquired     5,171       13,010       18,181   Liabilities assumed:                         Current liabilities     208       1,909       2,117   Assumed debt obligations     2,159       -       2,159   Deferred tax liabilities     403       1,181       1,584   Total liabilities assumed     2,770       3,090       5,860                             Total consideration paid   $ 2,401     $ 9,920     $ 12,321     65     BRIDGELINE DIGITAL, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)   The average useful lives of the identifiable intangible assets acquired were as follows:       Woorank     Hawk Search       (in years)   Acquired software     5       5   Customer relationships     8       10   Domain and trade names     12       15     Total revenue from the Woorank and Hawk Search acquisitions was $ 1.0 million and $ 1.9 million respectively, for the year ended September 30, 2021. Total earnings from the acquisitions are impracticable to disclose as the operations were merged with existing operations and certain costs were not accounted for separately.   Pro Forma Information (Unaudited)   The following is the unaudited pro forma information assuming the acquisitions occurred on October 1, 2019:       Year ended September 30, 2021     Year ended September 30, 2020                     (in thousands, except share and per share data)                                   Revenue   $ 16,381     $ 16,817                     Net income (loss) attributable to common shareholders - basic   $ ( 8,773 )   $ ( 2,971 ) Net income (loss) attributable to common shareholders - diluted   $ ( 8,773 )   $ ( 2,971 )                   Net income (loss) per share attributable to common shareholders:                 Basic   $ ( 1.49 )   $ ( 0.84 ) Diluted   $ ( 1.49 )   $ ( 0.84 )                   Weighted average common shares outstanding - basic     5,935,981       3,555,032   Weighted average common shares outstanding - diluted     5,935,981       3,555,032       17.    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 years presented in these consolidated financial statements, 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, 2021, Michael Taglich beneficially owns approximately 3.4 % 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.   66     BRIDGELINE DIGITAL, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)   In consideration of previous loans made by Michael Taglich to the Company and the personal guaranty 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 per month 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.   Michael Taglich purchased 350 units in the amount of $ 350 of Series C Preferred Stock and associated warrants in the private transaction consummated on March 13, 2019. Mr. Taglich’s purchase was subject to stockholder approval pursuant to Nasdaq Marketplace Rule 5635 (c), for which approval by the stockholders of the Company was obtained on April 26, 2019.   In connection with the February and May 2021 Offerings (see Note 12 ), Taglich Brothers, Inc. received warrants to purchase 82,945 shares of the Company’s common stock with a weighted average exercise price of $ 3.21 and weighted average term of 5.0 years.     18. 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.   67         Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.   (a)      Dismissal of Previous Independent Registered Accounting Firm   On February 26, 2021, the Audit Committee of the Company’s board of directors, informed Marcum LLP (“ Marcum ”) of its decision to dismiss Marcum as the Company's independent registered public accounting firm, effective as of that date.   Marcum’s report on the Company’s consolidated financial statements as of September 30, 2020 and September 30, 2019 did not contain an adverse opinion or a disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles, other than, in each of the years ended September 30, 2020 and September 30, 2019, to include an explanatory paragraph regarding substantial doubt as to the Company’s ability to continue as a going concern.   During the years ended September 30, 2020 and September 30, 2019 and the subsequent interim period through February 26, 2021, there were no “disagreements” (as such term is defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304) with Marcum on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Marcum would have caused Marcum to make reference to the subject matter of the disagreements or reportable events in connection with its reports on the financial statements for such years. During the years ended September 30, 2020 and September 30, 2019 and the subsequent interim period through February 26, 2021, there have been no “reportable events” (as such term is defined in Item 304(a)(1)(v) of Regulation S-K).   In accordance with Item 304(a)(3) of Regulation S-K, the Company provided Marcum with a copy of the disclosure it is making in this Current Report on Form 8-K and requested that Marcum furnish the Company with a copy of its letter addressed to the Securities and Exchange Commission stating whether Marcum agrees with the statements made by the Company in response to Item 304(a) of Regulation S-K.   (b)      Appointment of New Independent Registered Public Accounting Firm   On February 27, 2021, the Company’s Audit Committee approved the engagement of PKF O’Connor Davies (“ PKF ”) as the Company’s new independent registered public accounting firm for the fiscal year ending September 30, 2021, effective immediately. During the fiscal years ended September 30, 2020 and September 30, 2019 and through the subsequent interim period as of February 26, 2021, neither the Company, nor any party on behalf of the Company, consulted with PKF regarding either (a) the application of accounting principles to a specified transaction, either completed or proposed, or the audit opinion that might be rendered regarding the Company’s consolidated financial statements, and no written report or oral advice was provided to the Company that PKF concluded was an important factor considered by the Company in deciding on any accounting, auditing or financial reporting issue, or (b) any matter subject of any “disagreement” (as such term is defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) or a “reportable event” (as such term is defined in Item 304(a)(1)(v) of Regulation S-K).