Bridgeline Digital, Inc. 10-K

Item 1A. Risk Factors   This report contains forward-looking statements that involve risks and uncertainties, such as statements of our objectives, expectations and intentions. The cautionary statements made in this report are applicable to all forward-looking statements wherever they appear in this report. Our actual results could differ materially from those discussed herein. In addition to the risks discussed in “ Management ’ s Discussion and Analysis of Financial Condition and Results of Operations, ” our business is subject to the risks set forth below.   We operate in a rapidly changing environment that involves certain risks and uncertainties, some of which are beyond our control. The risks described below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition and/or operating results.   Risk Factors   Risk Factors Related to our Business   We have incurred significant net losses since inception and expect to continue to incur operating losses for the foreseeable future. We may never achieve or sustain profitability, which would depress the market price of our common stock and could cause you to lose all or a part of your investment.   We incurred net income of approximately $2.2 million for the year ended September 30, 2022, which includes income related to the change in the fair value of warrant liabilities. Since our inception in 2000 and through fiscal 2019, and in fiscal 2021, we have incurred net losses, and may do so again. As of September 30, 2022, we had an accumulated deficit of approximately $80 million. Our prior losses have had an adverse effect on our stockholders’ equity and working capital. Because of the numerous risks and uncertainties associated with our business, we are unable to predict the extent of any future losses or when we may become profitable. If we do become profitable, we may not be able to sustain or increase our profitability on a quarterly or annual basis.   We may require additional financing to execute our business plan and further expand our operations.   We may require additional funding to further expand our operations. We depend on financing sources, either debt or equity, or a combination thereof, which may not be available to us in a timely basis if at all, or on terms acceptable to us. Further, our ability to obtain financing may be limited by rules of the NASDAQ Capital Market.   In July 2021, the Company received approximately $5.8 million in cash relating the issuance of 1,543,779 shares of its common stock upon exercise of Series A Warrants, originally issued in March 2019, with an exercise price of $4.00 per share.   On May 14, 2021, the Company offered and sold, in a registered direct offering, a total of 1,060,000 shares of its common stock at a price of $2.28 per share. On the same day, the Company entered into securities purchase agreements with certain institutional investors in connection with a private placement of 2,700 shares of newly designated Series D Convertible Preferred Stock at a price of $1,000 per share and warrants to purchase up to an aggregate of 592,105 shares of common stock at an exercise price of $2.51 per share. The aggregate proceeds, net of cash paid for certain fees due to placement agents and transaction related expenses, of these two transactions that occurred on the same day was $4.6 million.   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 aggregate proceeds from this transaction, net of certain fees due to placement agents and transaction expenses, was approximately $2.5 million.   In connection with the acquisition of HawkSearch completed during the third quarter of fiscal year 2021, the Company recognized an obligation for a deferred payment representing a portion of the purchase price of $2.0 million payable on or before December 31, 2021, and contingent earn-out payments of $2.2 million (acquisition date fair value) which are payable, no later than December 31, 2022 (subsequently amended), and may vary in amount in the event of achievement of certain revenue targets and operational goals.   In connection with the acquisition of WooRank completed during the second quarter of fiscal year 2021, the Company (1) assumed the outstanding long-term debt obligations of $2.1 million of the acquiree, (2) issued a seller note of $352 thousand to one of the selling shareholders payable over a five-year period, (3) deferred a portion of the purchase price of $376 thousand, and (4) recognized contingent earn-out payments of $1.3 million (acquisition date fair value) which were payable in the event of achievement of certain revenue targets and operational goals.   9     On August 17, 2020, the Company entered into an arrangement with an investment banking firm to sell up to $4,796,090 of shares of the Company’s common stock, $0.001 par value. There are no obligations for the sale or purchase of the Company’s common stock pursuant to this offering. Accordingly, there can be no assurances that the Company or investment banking firm will be successful in selling any portion of the shares available for sale pursuant to this offering. On December 18, 2020, the Company delivered written notice to Roth Capital Partners that it was suspending all offers and sales under the At the Market Offering Agreement, during which time the Company will not make any sales of Placement Shares. On August 17, 2021, the ATM offering expired unused.   If we fail to obtain acceptable funding when needed, we may not have sufficient resources to fund our operations, and this would have a material adverse effect on our business.   A reduction in our license renewal rate could reduce our revenue.   Our customers have no obligation to renew their subscription licenses, and some customers have elected or may elect not to do so. Our license renewal rates may decline or fluctuate as a result of a number of factors, including customer dissatisfaction with our products and services, our failure to update our products to maintain their attractiveness in the market, or constraints or changes in budget priorities faced by our customers. A decline in license renewal rates could cause our revenue to decline, which would have a material adverse effect on our operations.   We may become dependent upon a concentration of major customers, and a   failure to renew our licenses with such customers could reduce our revenue.   We have previously and may from time to time derive a significant portion of our revenues from a relatively concentrated number of customers. Considering a reduction in our license renewal rate could reduce our revenue, these consequences could be exacerbated if we are dependent upon several major customers and any one of them were to elect not to renew.   The length of our sales cycle can alternate markedly, which could result in significant fluctuations in license revenues being recognized from quarter to quarter.   The decision by a customer to purchase our products often involves the development of a complex implementation plan across a customer’s business. This process often requires a significant commitment of resources both by prospective customers and us. Given the significant investment and commitment of resources required in order to implement our software, it may take several months, or even several quarters, for marketing opportunities to materialize. If a customer’s decision to purchase our products is delayed, or if the installation of our products takes longer than originally anticipated, the date on which we may recognize revenue from these sales would be delayed. Such delays and fluctuations could cause our revenue to be lower than expected in a particular period, and we may not be able to adjust our costs quickly enough to offset such lower revenue, potentially negatively impacting our results of operations.   We depend on a third-party cloud platform provider to host our Bridgeline SaaS environment and managed services business and if we were to experience a disruption or interference in service, our business and reputation could suffer.   We host our SaaS and managed hosting customers via a third-party, Amazon Web Services. If upon renewal date our third-party provider does not provide commercially reasonable terms, we may be required to transfer our services to a new provider, such as a data center facility, and we may incur significant equipment costs and possible service interruption in connection with doing so. Service interruptions might reduce our revenue, cause us to issue credits or refunds to customers, subject us to potential liability, or harm our renewal rates. Interference from unauthorized access to or tampering with these systems, including those resulting from cyber-attacks, could result in a variety of consequences, including devaluation of our intellectual property, goodwill, increased expenditures on data security and litigation, and can have a material adverse effect on our business, revenues, reputation, operating results and financial condition.   10     If our security measures or those of our third-party cloud computing platform provider are breached and unauthorized access is obtained to a customer ’ s data, our services may be perceived as not being secure, and we may incur significant legal and financial exposure and liabilities.   Security breaches could expose us to a risk of loss of our customers’ information, litigation and possible liability. While we have security measures in place, they may be breached as a result of third-party action, including intentional misconduct by computer hackers and cybercriminals, employee error, malfeasance or otherwise and result in someone obtaining unauthorized access to our IT systems, our customers’ data or our data, including our intellectual property and other confidential business information. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to implement adequate preventative measures. In addition, our customers may authorize third-party technology providers to access their customer data, and some of our customers may not have adequate security measures in place to protect their data that is stored on our services. Because we do not control our customers or third-party technology providers, or the processing of such data by third-party technology providers, we cannot ensure the integrity or security of such transmissions or processing. Malicious third parties may also conduct cyber-attacks designed to temporarily deny customers access to our services. Any security breach could result in a loss of confidence in the security of our services, damage our reputation, negatively impact our future sales, disrupt our business and lead to legal liability.   We rely on encryption and authentication technology from third parties to provide the security and authentication to effectively secure transmission of confidential information, including consumer payment card numbers. Such technology may not be sufficient to protect the transmission of such confidential information or these technologies may have material defects that may compromise the confidentiality or integrity of the transmitted data. Any imposition of liability, particularly liability that is not covered by insurance, or is in excess of insurance coverage, could harm our reputation, business and operating results. We might be required to expend significant capital and other resources to protect further against security breaches or to rectify problems caused by any security breach, which, in turn, could divert funds available for corporate growth and expansion or future acquisitions.   Our operating lease commitments may adversely affect our financial condition and cash flows from operations.   We have contractual commitments in operating lease arrangements. Our ability to meet our expenses and contractual commitments will depend on our future performance, which will be affected by financial, business, economic, regulatory and other factors. We will not be able to control many of these factors, such as economic conditions and governmental regulations. Further, our operations may not generate sufficient cash to enable us to service our working capital needs or contractual obligations resulting from our leases. If we are at any time unable to generate sufficient cash flows from operations, we may be required to obtain additional sources of financing. There can be no assurance that we would be able to successfully renegotiate such terms, or that additional financing could be obtained on terms that are favorable or acceptable to us. Refer to the Risk Factor - We may require additional financing to execute our business plan and further expand our operations, for a description of capital raising activities.   We face intense and growing competition, which could result in price reductions, reduced operating margins and loss of market share.   We operate in a highly competitive marketplace and generally encounter intense competition to create and maintain demand for our services and to obtain service contracts. If we are unable to successfully compete for new business and license renewals, our revenue growth and operating margins may decline. The market for our platforms and web development services are competitive and rapidly changing. Barriers to entry in such markets are relatively low. With the introduction of new technologies and market entrants, we expect competition to intensify in the future. Some of our principal competitors offer their products at a lower price, which may result in pricing pressures. Such pricing pressures and increased competition generally could result in reduced sales, reduced margins or the failure of our product and service offerings to achieve or maintain more widespread market acceptance.   The marketplace is highly fragmented with a large number of competitors and potential competitors. Our prominent public company competitors include companies such as Coveo, Elastic, Semrush and WeCommerce. We face competition from customers and potential customers who develop their own applications internally. We also face competition from potential competitors that are substantially larger than we are and who have significantly greater financial, technical and marketing resources, and established direct and indirect channels of distribution. As a result, they are able to devote greater resources to the development, promotion and sale of their products than we can.   11     If our products fail to perform properly due to undetected errors or similar problems, our business could suffer, and we could face product liability exposure.   We develop and sell complex web engagement software which may contain undetected errors or bugs. Such errors can be detected at any point in a product’s life cycle but are frequently found after introduction of new software or enhancements to existing software. We continually introduce new products and new versions of our products. Despite internal testing and testing by current and potential customers, our current and future products may contain serious defects. If we detect any errors before we ship a product, we might have to delay product shipment for an extended period of time while we address the problem. We might not discover software errors that affect our new or current products or enhancements until after they are deployed, and we may need to provide enhancements to correct such errors. Therefore, it is possible that, despite our testing, errors may occur in our software. These errors could result in the following:     ● harm to our reputation;   ● lost sales;   ● delays in commercial release;   ● product liability claims;   ● contractual disputes;   ● negative publicity;   ● delays in or loss of market acceptance of our products;   ● license terminations or renegotiations; or   ● unexpected expenses and diversion of resources to remedy errors.   Furthermore, our customers may use our software together with products from other companies. As a result, when problems occur, it might be difficult to identify the source of the problem. Even when our software does not cause these problems, the existence of these errors might cause us to incur significant costs, divert the attention of our technical personnel from our product development efforts, impact our reputation, or cause significant customer relations problems.   Technology and customer requirements evolve rapidly in our industry, and if we do not continue to develop new products and enhance our existing products in response to these changes, our business could   suffer.   We will need to continue to enhance our products in order to maintain our competitive position. We may not be successful in developing and marketing enhancements to our products on a timely basis, and any enhancements we develop may not adequately address the changing needs of the marketplace. Overlaying the risks associated with our existing products and enhancements are ongoing technological developments and rapid changes in customer requirements. Our future success will depend upon our ability to develop and introduce, in a timely manner, new products that take advantage of technological advances and respond to new customer requirements. The development of new products is increasingly complex and uncertain, which increases the risk of delays. We may not be successful in developing new products and incorporating new technology on a timely basis, and any new products may not adequately address the changing needs of the marketplace. Failure to develop new products and product enhancements that meet market needs in a timely manner could have a material adverse effect on our business, financial condition and operating results.   If we are unable to protect our proprietary technology and other intellectual property rights, our ability to compete in the marketplace may be substantially reduced.   If we are unable to protect our intellectual property, our competitors could use our intellectual property to market products similar to our products, which could decrease demand for such products, thus decreasing our revenue. We rely on a combination of copyright, trademark and trade secret laws, as well as licensing agreements, third-party non-disclosure agreements and other contractual measures to protect our intellectual property rights. These protections may not be adequate to prevent our competitors from copying or reverse engineering our products. Our competitors may independently develop technologies that are substantially similar or superior to our technology. To protect our trade secrets and other proprietary information, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements. These agreements may not provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. The protective mechanisms we include in our products may not be sufficient to prevent unauthorized copying. Existing copyright laws afford only limited protection for our intellectual property rights and may not protect such rights in the event competitors independently develop similar products. In addition, the laws of some countries in which our products are or may be licensed do not protect our products and intellectual property rights to the same extent as do the laws of the United States.   Policing unauthorized use of our products is difficult and litigation could become necessary in the future to enforce our intellectual property rights. Any litigation could be time consuming and expensive to prosecute or resolve, result in substantial diversion of management attention and resources, and materially harm our business or financial condition.   12     If a third party asserts that we infringe upon its proprietary rights, we could be required to redesign our products, pay significant royalties or enter into license agreements.   Claims of infringement are becoming increasingly common as the software industry continues to develop and as related legal protections, including but not limited to patents, are applied to software products. Although we do not believe that our products infringe on the rights of third parties, a third party may assert that our technology or technologies of entities we acquire violates its intellectual property rights. As the number of software products in our markets increases, and the functionality of these products further overlap, we believe that infringement claims will become more common. Any claims against us, regardless of their merit, could:     ● be expensive and time consuming to defend;   ● result in negative publicity;   ● force us to stop licensing our products that incorporate the challenged intellectual property;   ● require us to redesign our products;   ● divert management’s attention and our other resources; and/or   ● require us to enter into royalty or licensing agreements in order to obtain the right to use necessary technologies, which may not be available on terms acceptable to us, if at all.   We believe that any successful challenge to our use of a trademark or domain name could substantially diminish our ability to conduct business in a particular market or jurisdiction and thus decrease our revenue and result in possible losses to our business.   Increasing government regulation could affect our business and may adversely affect our financial condition.   We are subject not only to regulations applicable to businesses generally, but also to laws and regulations directly applicable to electronic commerce. In addition, an inability to satisfy the standards of certain voluntary third-party certification bodies that our customers may expect, such as an attestation of compliance with the Payment Card Industry (“PCI”) Data Security Standards, may have an adverse impact on our business and results. Further, there are various statutes, regulations, and rulings relevant to the direct email marketing and text-messaging industries, including the Telephone Consumer Protection Act (“TCPA”), the CAN-SPAM Act and related Federal Communication Commission (“FCC”) orders. The interpretation of many of these statutes, regulations, and rulings is evolving in the courts and administrative agencies and an inability to comply may have an adverse impact on our business and results. If in the future we are unable to achieve or maintain industry-specific certifications or other requirements or standards relevant to our customers, it may harm our business and adversely affect our results.   We may also expand our business in countries that have more stringent data protection laws than those in the United States, and such laws may be inconsistent across jurisdictions and are subject to evolving and differing interpretations. In particular, the European Union has passed the General Data Protection Regulation (“GDPR”), which came into force on May 25, 2018. The GDPR includes more stringent operational requirements for entities that receive or process personal data (as compared to U.S. privacy laws and previous EU laws), along with significant penalties for non-compliance, more robust obligations on data processors and data controllers, greater rights for data subjects, and heavier documentation requirements for data protection compliance programs. Additionally, both laws regulating privacy and third-party products purporting to address privacy concerns could negatively affect the functionality of, and demand for, our products and services, thereby reducing our revenue.   General Risk Factors   Our revenue and quarterly results may fluctuate, which could adversely affect our stock price.   We have experienced, and may in the future experience, significant fluctuations in our quarterly operating results that may be caused by many factors. These factors include, among others:     ● changes in demand for our products;   ● introduction, enhancement or announcement of products by us or our competitors;   ● market acceptance of our new products;   ● the growth rates of certain market segments in which we compete;   ● size and timing of significant orders;   ● budgeting cycles of customers;   ● mix of products and services sold;   ● changes in the level of operating expenses;   ● completion or announcement of acquisitions; and   ● general economic conditions in regions in which we conduct business.   13     If we are unable to manage our future growth efficiently, our business, liquidity, revenues and profitability may suffer.   We anticipate that continued expansion of our core business will require us to address potential market opportunities. For example, we may need to expand the size of our research and development, sales, corporate finance or operations staff. There can be no assurance that our infrastructure will be sufficiently flexible and adaptable to manage our projected growth or that we will have sufficient resources, human or otherwise, to sustain such growth. If we are unable to adequately address these additional demands on our resources, our profitability and growth might suffer. Also, if we continue to expand our operations, management might not be effective in expanding our physical facilities and our systems, and our procedures or controls might not be adequate to support such expansion. Our inability to manage our growth could harm our business and decrease our revenues.   There may be a limited market for our common stock, which may make it more difficult for you to sell your stock and which may reduce the market price of our common stock.   The average shares traded per day in fiscal 2022 was approximately 286,000 shares per day compared to approximately 2,839,000 for fiscal 2021, and 484,000 for fiscal 2020. Our average trading volume of our common stock can be very sporadic and may impair the ability of holders of our common stock to sell their shares at the time they wish to sell them or at a price that they consider reasonable. A low trading volume may also reduce the fair market value of the shares of our common stock. Accordingly, there can be no assurance that the price of our common stock will reflect our actual value. There can be no assurance that the daily trading volume of our common stock will increase or improve.   The market price of our common stock is volatile, which could adversely affect your investment in our common stock.   The market price of our common stock is volatile and could fluctuate significantly for many reasons, including, without limitation: as a result of the risk factors listed in this Annual Report on Form 10-K; actual or anticipated fluctuations in our operating results; and general economic and industry conditions. During fiscal 2022, the closing price of our common stock as reported by NASDAQ fluctuated between $1.10 and $4.12. We are required to meet certain financial criteria in order to maintain our listing on the NASDAQ Capital Market. One such requirement is that we maintain a minimum closing bid price of at least $1.00 per share for our common stock. If we fail this requirement then NASDAQ will issue a notice that we are not in compliance and we will need to take corrective actions in order to not be delisted. Such corrective actions could include a reverse stock split, which may adversely affect the liquidity of our common stock. Additionally, there is no way to guarantee that such a measure, if implemented, would help us regain compliance with the minimum bid price requirement or maintain compliance with other NASDAQ listing rules.   We are dependent upon our management team and the loss of any of these individuals could harm our business.   We are dependent on the efforts of our key management personnel. The loss of any of our key management personnel, or our inability to recruit and train additional key management and other personnel in a timely manner, could materially and adversely affect our business, operations and future prospects. We maintain a key man insurance policy covering our Chief Executive Officer.   Because competition for highly qualified personnel is intense, we might not be able to attract and retain the employees we need to support our planned growth.   We will need to increase the size and maintain the quality of our sales force, software development staff and professional services organization to execute our growth plans. To meet our objectives, we must attract and retain highly qualified personnel with specialized skill sets. Competition for qualified personnel can be intense, and we might not be successful in attracting and retaining them. Our ability to maintain and expand our sales, product development and professional services teams will depend on our ability to recruit, train and retain top quality people with advanced skills who understand sales to, and the specific needs of, our target customers. For these reasons, we have experienced, and we expect to again experience in the future, challenges in hiring and retaining highly skilled employees with appropriate qualifications for our business. In addition to hiring services personnel to meet our needs, we may also engage additional third-party consultants as contractors, which could have a negative impact on our financial results. If we are unable to hire or retain qualified personnel, or if newly hired personnel fail to develop the necessary skills or reach productivity slower than anticipated, it would be more difficult for us to sell our products and services, and we could experience a shortfall in revenue and fail to achieve our planned growth.   Acquisitions may be difficult to integrate into our existing operations, may disrupt our business, dilute stockholder value, divert management ’ s attention, or negatively affect our operating results.   We have acquired multiple businesses since our inception in 2000, including two in fiscal 2021. Acquisitions could involve substantial investment of funds or financings by issuance of debt or equity securities and could result in one-time charges and expenses and have the potential to either dilute the interests of existing shareholders or result in the issuance or assumption of debt. Any such acquisition may not be successful in generating revenues, income or other returns to us, and the resources committed to such activities will not be available to us for other purposes. Moreover, if we are unable to access capital markets on acceptable terms or at all, we may not be able to consummate acquisitions, or may have to do so based upon less than optimal capital structure. Our inability to take advantage of growth opportunities for our business or to address risks associated with acquisitions or investments in businesses may negatively affect our operating results. Additionally, any impairment of goodwill or other intangible assets acquired in an acquisition or in an investment, or charges to earnings associated with any acquisition or investment activity, may materially reduce our earnings which, in turn, may have a material adverse effect on the price of our common stock.   14     We have issued preferred stock with rights senior to our common stock, and may issue additional preferred stock in the future, in order to consummate a merger or other transaction necessary to continue as a going concern.   Our Certificate of Incorporation authorizes the issuance of up to 1,000,000 shares of preferred stock, par value $0.001 per share, without shareholder approval and on terms established by our board of directors, of which 264,000 shares have been designated as Series A Preferred, 5,000 shares have been designated as Series B Preferred, 11,000 shares have been designated as Series C Preferred and 4,200 shares have been designated as Series D Preferred. We may issue additional shares of preferred stock in order to consummate a financing or other transaction, in lieu of the issuance of common stock. The rights and preferences of any such class or series of preferred stock would be established by our board of directors in its sole discretion and may have dividend, voting, liquidation and other rights and preferences that are senior to the rights of our common stock.   We have never paid dividends on our common stock and we do not anticipate paying dividends in the future.   We have never paid cash dividends and do not believe that we will pay any cash dividends on our common stock in the future. Since we have no plan to pay cash dividends, an investor would only realize income from their investment in our shares if there is an increase in the market price of our common stock, which is uncertain and unpredictable.   We are also subject to anti-takeover provisions under Delaware law, which could delay or prevent a change of control. Together these provisions may make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities. Provisions in our amended and restated bylaws and Delaware law may have the effect of discouraging lawsuits against our directors and officers.   Our amended and restated bylaws require that derivative actions brought in our name, actions against our directors, officers, other employees or stockholders for breach of fiduciary duty and other similar actions may be brought only in the Court of Chancery in the State of Delaware. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to the forum provisions in our amended and restated bylaws.   This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, other employees or stockholders, which may discourage lawsuits with respect to such claims. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, operating results and financial condition.   The COVID-19 pandemic could have a material adverse effect on our ability to operate, results of operations, financial condition, liquidity, and capital investments.   In 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, and the virus continues to spread in areas where we operate and sell our services. The COVID-19 pandemic and similar issues in the future could have a material adverse effect on our ability to operate, results of operations, financial condition, liquidity, and capital investments. Several public health organizations have recommended, and some governments have implemented, certain measures to slow and limit the transmission of the virus, including shelter in place, social distancing ordinances, and business shutdowns. There is considerable uncertainty regarding the extent to which the COVID-19 outbreak will continue to spread, and the extent and duration of governmental and other measures implemented to try to limit the spread of the virus.   The pandemic and such preventive measures, or others required or that we may voluntarily put in place, may have a material adverse effect on our business for an indefinite period of time, such as the potential shut down of certain locations, decreased employee availability, increased claims or other expenses, potential border closures, and others. These disruptions and challenges may continue for an indefinite period of time and may also materially affect our future access to our sources of liquidity, particularly our cash flows from operations, financial condition, capitalization, and capital investments. Additionally, the effects of COVID-19 on the global economy could adversely affect our ability to access the capital and other financial markets, and if so, we may need to consider alternative sources of funding for some of our operations and for working capital, which may increase our cost of, as well as adversely impact our access to, capital. These uncertain economic conditions may also result in the inability of our customers to make payments to us, on a timely basis or at all.   Although these disruptions may continue to occur, the long-term economic impact and near-term financial impacts of the COVID-19 pandemic, including but not limited to, possible impairment, restructuring, and other charges, cannot be reliably quantified or estimated at this time due to the uncertainty of future developments.   15     Item   1B. Unresolved Staff Comments   None.   Item 2.    Properties.   The following table lists our office locations, all of which are leased:   Geographic Location   Address   Description Woburn, Massachusetts   100 Sylvan Rd, Suite G-700 Woburn, MA 01801   Professional office space Woodbury, New York   150 Woodbury Road Woodbury, NY 11797   Professional office space Rosemont, Illinois   5600 North River Rd, Suite 100 Rosemont, IL 60018   Professional office space Atascadero, California   6225 Atascadero Ave Atascadero, CA 93422   Professional office space Ontario, Canada   Perth Mews RO Perth, ON K7H 3A0 Canada   PO Box Brussels, Belgium   Cours Saint Michel 30B 1040 Etterbeek Brussels, Belgium   Professional office space   Professional office space is of varying size, ranging up to approximately 3,600 square feet.   Item 3.    Legal Proceedings.   From time to time, we are subject to ordinary routine litigation and claims incidental to our business. We are not currently involved in any legal proceedings that we believe are material.   Item 4.    Mine Safety Disclosures   Not applicable.   16     PART II   Item 5.    Market for Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities.   Market Information   Our common stock is currently traded on The NASDAQ Stock Market LLC, under the trading symbol “BLIN”.   Number of Shareholders   As of December 10, 2022, we had approximately 60 stockholders of record. Since many stockholders choose to hold their shares under the name of their brokerage firm, we estimate that the actual number of stockholders was over 6,000.    Dividend Policy   We have not declared or paid cash dividends on our common stock and do not plan to pay cash dividends to our common shareholders in the near future.   Recent Sales of Unregistered Securities; Use of Proceeds From Registered Securities   There were no sales of unregistered or registered equity securities during the fiscal year ended September 30, 2022.     Item 6.    Selected Financial Data.   Not required.   Item 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations.   This section contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of a variety of factors and risks, including the impact of any weakness in the U.S. and international economies on our business, our inability to manage our future growth effectively or profitably, fluctuations in our revenue and quarterly results, our license renewal rate, the impact of competition and our ability to maintain margins or market share, the limited market for our common stock, the ability to maintain our listing on the NASDAQ Capital Market, the volatility of the market price of our common stock, the ability to raise capital, the performance of our products, our ability to respond to rapidly evolving technology and customer requirements, our ability to protect our proprietary technology, the security of our software and response to cyber security risks, our ability to meet our financial obligations and commitments, our dependence on our management team and key personnel, our ability to hire and retain future key personnel, our ability to maintain an effective system of internal controls, or our ability to respond to government regulations. These and other risks are more fully described herein and in our other filings with the Securities and Exchange Commission.   This section should be read in combination with the accompanying audited consolidated financial statements and related notes prepared in accordance with United States generally accepted accounting principles ( “ GAAP ” ).   Overview   Bridgeline Digital is a marketing technology company that offers a suite of products that help companies grow online revenue and share information with customers, partners, and employees.   HawkSearch 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. HawkSearch leverages advanced artificial intelligence, machine learning and industry-leading analyzers to deliver accurate results from federated data sources.   Celebros Search is a commerce-oriented site search product that provides Natural Language Processing with artificial intelligence to present relevant search results based on long-tail keyword searches in seven languages.   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.   17     Our Unbound platform is a Digital Experience Platform that includes Web Content Management, eCommerce, eMarketing, Social Media management, and Web Analytics. The 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 TruPresence 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.   All of our software is available through a cloud-based software as a service (“ SaaS ”) model. Additionally, Unbound and HawkSearch are available via a traditional perpetual licensing business model, in which the software resides on a dedicated infrastructure in either the customer’s facility, or manage-hosted by Bridgeline via a cloud-based hosted services model.   Sales and Marketing   Bridgeline employs a direct sales force, which focuses its efforts on selling to mid-sized and large companies. These companies are generally categorized in the following vertical markets:      ● Distributors and Wholesalers   ● Multi-Unit Franchises & Enterprises   ● Manufacturers   ● eCommerce Retailers   ● Industrial Distribution (Electrical, Plumbing, Building, Cleaning, Restaurant, Furniture Suppliers)   ● Health Services and Life Sciences   ● High Technology (software and hardware)   ● Credit Unions and Regional Banks   ● Associations and Foundations   Each of the Bridgeline companies goes to market through two main types of partnerships. The first partner category includes platforms such as Optimizely, BigCommerce, Adobe, Sitefinity and others. The Bridgeline software often embeds directly into these platforms through connectors and SDK solutions that Bridgeline develops in concert with each platform. The second category includes web-development agencies which typically have deep relationships with end-customers and have the technical expertise to implement the Bridgeline software solutions according to client needs, platform requirements, and industry standards.   Acquisitions   Bridgeline will continue to evaluate expanding its distribution of its suite of products and interactive development capabilities through acquisitions. We may make additional acquisitions in the foreseeable future. These potential acquisitions will be consistent with our growth strategy by providing Bridgeline with new geographical distribution opportunities, an expanded customer base, an expanded sales force and an expanded developer force. In addition, integrating acquired companies into our existing operations allows us to consolidate the finance, human resources, legal, marketing, and research and development of the acquired businesses with our own internal resources. This integration may reduce the aggregate of such expenses for the combined businesses and similarly improve operating results.   On March 1, 2021, the Company, pursuant to a Share Purchase Agreement (the “WooRank Purchase Agreement”), acquired all of the issued and outstanding shares of WooRank SRL (“WooRank”), an entity located in Belgium. The total purchase price of approximately $2.4 million consisted of (1) $285 thousand in cash paid at closing or in close proximity to closing, (2) $376 thousand of deferred cash payable in installments post-closing, (3) a $352 thousand seller note issued to one of the selling shareholders, and (4) amounts payable to one selling shareholder as consideration for assistance with certain matters related to the acquisition for a period of one year from the closing date of the acquisition. On the closing date, the Company issued 29,433 shares of its common stock, with an aggregate issuance date fair value of $99 thousand for a portion of the purchase price. 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.  The fair value of contingent consideration was $1.3 million on the acquisition date.   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 HawkSearch, Inc., an Illinois corporation (“HawkSearch”). The total purchase price of approximately $9.9 million consisted of (1) $4.8 million initial cash payment at closing, (2) an issuance of 1,500 shares of the Company’s newly designated Series D Preferred Stock with an aggregate issuance date fair value of $930 thousand, and (3) $2.0 million deferred cash (payable on or before December 31, 2021). The Hawk Purchase Agreement also provides for additional consideration, in the event of achievement of certain revenue targets, to the selling shareholders as an additional earn-out, payable in two installments, as amended and as follows: (i) the aggregate sum of $1,779 thousand which was paid on July 1, 2022; and (ii) the aggregate sum of $250 thousand, which was paid on October 3, 2022, as included within the Amendment to the Stock Purchase Agreement, dated June 15, 2022. The fair value of contingent consideration was $250 thousand on September 30, 2022, all of which was paid in October 2022   Customer Information   We currently have over 2,000 active customers. For the years ended September 30, 2022 and 2021, no customers exceeded 10% of the Company’s total revenue.   18     Summary of Results of Operations   Total revenue for the fiscal year ended September 30, 2022 (“fiscal 2022”) increased to $16.8 million from $13.3 million for the fiscal year ended September 30, 2021 (“fiscal 2021”). The loss from operations for fiscal 2022 was $1.9 million, compared with a loss from operations of $1.2 million for fiscal 2021. We had a net income for fiscal 2022 of $2.1 million, which included a gain of approximately $3.7 million as a result of the change in fair value of certain warrant liabilities, compared with a net loss of $6.7 million, which included a loss of approximately $5.9 million as a result of the change in fair value of certain warrant liabilities and a $1.2 million discrete benefit in taxes in fiscal 2021. Basic net income (loss) per share attributable to common shareholders for fiscal 2022 was $0.21 compared with the equivalent basic net loss per share attributable to common shareholders of ($1.47) for fiscal 2021. Diluted net income (loss) per share attributable to common shareholders for fiscal 2022 was $0.20 compared with the equivalent diluted net loss per share attributable to common shareholders of ($1.47) for fiscal 2021.   (in thousands)   Years Ended September 30,                                       $     %       2022     2021     Change     Change   Net Revenue                                 Digital engagement services   $ 3,259     $ 3,296     $ (37 )     (1 )% % of total net revenue     19 %     25 %                 Subscription and perpetual licenses     13,560       9,963       3,597       36 % % of total net revenue     81 %     75 %                 Total net revenue     16,819       13,259       3,560       27 %                                   Cost of revenue                                 Digital engagement services     1,759       1,743       16       1 % % of digital engagement services revenue     54 %     53 %                 Subscription and perpetual licenses     3,358       2,790       568       20 % % of subscription and perpetual revenue     25 %     28 %                 Total cost of revenue     5,117       4,533       584       13 % Gross profit     11,702       8,726       2,976       34 % Gross profit margin     70 %     66 %                                                   Operating expenses                                 Sales and marketing     5,232       2,726       2,506       92 % % of total revenue     31 %     21 %                 General and administrative     3,387       2,359       1,028       44 % % of total revenue     20 %     18 %                 Research and development     3,217       2,387       830       35 % % of total revenue     19 %     18 %                 Depreciation and amortization     1,599       1,202       397       33 % % of total revenue     10 %     9 %                 Restructuring and acquisition related expenses     164       1,235       (1,071 )     (87 )% % of total revenue     1 %     9 %                 Total operating expenses     13,599       9,909       3,690       37 %                                                                     Loss from operations     (1,897 )     (1,183 )     (714 )     (60 )% Change in fair value of contingent consideration, interest expense and other, net     417       (883 )     1,300       147 % Government grant income     -       88       (88 )     (100 )% Change in fair value of warrant liabilities     3,655       (5,885 )     9,540       162 % Income (loss) before income taxes     2,175       (7,863 )     10,038       128 % Provision for (benefit from) income taxes     30       (1,174 )     1,204       103 %                                   Net income/(loss)   $ 2,145     $ (6,689 )   $ 8,834       132 %                                   Non-GAAP Measure:                                 Adjusted EBITDA   $ 196     $ 1,442     $ (1,246 )     (86 )%   19     Revenue   Our revenue is derived from two sources: (i) digital engagement services and (ii) subscription and perpetual licenses.   Digital Engagement Services   Digital engagement services revenue is comprised of implementation and retainer-related services. Total revenue from digital engagement services of $3.3 million in fiscal 2022 decreased 1% from $3.3 million in fiscal 2021. Digital engagement services revenue as a percentage of total revenue decreased to 19% in fiscal 2022 from 25% in fiscal 2021. The decreases compared to the prior period are attributable to the increase in subscription and perpetual licenses, including additional revenue related to business acquisitions during fiscal 2021.   Subscription and Perpetual Licenses   Revenue from subscription (SaaS) and perpetual licenses increased $3.6 million, or 36%, to $13.6 million in fiscal 2022 from $10.0 million in fiscal 2021. The increase compared to the prior period is primarily due to significant multi-year license renewals across our diverse portfolio of companies and the inclusion of a full year of revenue from the Company’s fiscal 2021 acquisitions compared to fiscal 2021, which only included revenues from the acquisition date to period end. Subscription and perpetual license revenue as a percentage of total revenue increased to 81% in fiscal 2022 from 75% in fiscal 2021. The increase as a percentage of total revenue is attributable to the increase in subscription licenses, including renewals and additional revenue related to the business acquisitions during fiscal 2021.   Cost of Revenue   Total cost of revenue for fiscal 2022 of $5.1 million increased $0.6 million, or 13%, from $4.5 million. The increase for fiscal 2022 compared to fiscal 2021 is primarily attributable to costs incurred related to the business acquisitions during fiscal 2021.    Cost of Digital Engagement Services   Cost of digital engagement services increased 1%, to $1.8 million in fiscal 2022 from $1.7 million in fiscal 2021. The increase in cost of digital engagement services in fiscal 2022 compared to fiscal 2021 is primarily due to personnel costs, including costs incurred related to the business acquisitions during fiscal 2021. The cost of total digital engagement services as a percentage of total digital engagement services revenue increased to 54% in fiscal 2022 from 53% in fiscal 2021. The increase as a percentage of revenues in fiscal 2022 compared to fiscal 2021 is primarily due to the overall decrease in digital engagement services revenue and costs incurred related to business acquisitions during fiscal 2021, as noted above.   Cost of Subscription and Perpetual License   Cost of subscription and perpetual licenses of $3.4 million in fiscal 2022 increased $0.6 million, or 20%, from $2.8 million in fiscal 2021. The increase in cost of subscription and perpetual licenses in fiscal 2022 compared to fiscal 2021 is primarily due to higher costs to operate our cloud-based hosting model with Amazon Web Services and additional personnel costs, including costs incurred related to the business acquisitions during fiscal 2021. The cost of subscription and perpetual licenses as a percentage of subscription and perpetual license revenue decreased to 25% in fiscal 2022 from 28% in fiscal 2021. The decrease as a percentage of revenues is primarily due to the overall increases in subscription and perpetual license revenue.   20     Gross Profit   Gross profit of $11.7 million increased $3.0 million, or 34%, in fiscal 2022 to compared to $8.7 million for fiscal 2021. The gross profit margin increased to 70% for fiscal 2022 compared to 66% for fiscal 2021. The increase in the gross profit margin for fiscal 2022 compared to fiscal 2021 is primarily attributable to the increase in the proportion of license revenue, which is generally associated with higher margins, to digital engagement service revenue.   Operating Expenses   Sales and Marketing Expenses   Sales and marketing expenses of $5.2 million in fiscal 2022 increased $2.5 million, or 92%, from $2.7 million in fiscal 2021. Sales and marketing expense as a percentage of total revenue increased to 31% in fiscal 2022 compared to 21% in fiscal 2021. The increase compared to the prior period is primarily attributable to higher personnel costs and additional sales and marketing costs, including such additional costs related to the business acquisitions during fiscal 2021.   General and Administrative Expenses   General and administrative expenses of $3.4 million in fiscal 2022 increased $1.0 million, or 44%, from $2.4 million in fiscal 2021. General and administrative expense as a percentage of revenue increased to 20% in fiscal 2022 compared to 18% in fiscal 2021. These increases are primarily due to additional costs related to the business acquisitions during fiscal 2021.   Research and Development   Research and development expense of $3.2 million in fiscal 2022 increased $0.8 million, or 35%, from $2.4 million in fiscal 2021. Research and development expense as a percentage of total revenue increased to 19% in fiscal 2022 compared to 18% for fiscal 2021. These increases compared to the prior period are primarily attributable to personnel and other additional costs related to the business acquisitions during fiscal 2021.      21     Depreciation and Amortization   Depreciation and amortization expense of $1.6 million in fiscal 2022 increased by $0.4 million, or 33%, from $1.2 million in fiscal 2021. Depreciation and amortization as a percentage of total revenue increased to 10% in fiscal 2022 compared to 9% in fiscal 2021. These increases are primarily due to amortization of intangible assets resulting from business acquisitions during fiscal 2021.   Loss from Operations   The loss from operations was $1.9 million for fiscal 2022 compared to a loss from operations of $1.2 million for fiscal 2021, an increase of $0.7 million or 60%.   Change in fair value of contingent consideration, interest expense and other, net; Government grant income; Change in fair value of warrant liabilities   The Company recognized a gain related to the change in fair value of warrant liabilities of $3.7 million, for the year ended September 30, 2022 and a loss related to the change in fair value of warrant liabilities of $5.9 million for the year ended September 30, 2021, respectively.   During the year ended September 30, 2021, the Company recognized government grant income of $88 thousand associated with proceeds received under the PPP deemed probable to be forgiven based on the actual expenditures for qualified expenses during the period. As of the first quarter of fiscal 2021, the Company expended all loan proceeds on qualified expenses incurred during the period. The Company applied for full PPP loan forgiveness on March 29, 2021 and received approval from the U.S. Small Business Administration’s (the “SBA”) in August 2021. During the first quarter of fiscal 2021, the remaining loan proceeds were expended on qualified expenses and as a result, the Company recognized $88 thousand of government grant income.   During the years ended September 30, 2022 and 2021, change in fair value of contingent consideration, interest expense and other, net, was $0.4 million of gain in fiscal 2022 compared to a loss of $0.9 million in fiscal 2021, and included non-recurring non-operating costs.   Provision for Income Taxes   The provision for (benefit from) income taxes was $30 thousand for fiscal 2022 and ($1.2) million for fiscal 2021, respectively. Income tax expense consists of estimated liability for federal and state income taxes owed by the Company.  Net operating loss (“NOL”) carryforwards are estimated to be sufficient to offset any potential taxable income for all periods presented. A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. The Company maintains a valuation allowance against its net deferred tax assets. As of September 30, 2022 and 2021, the Company had a valuation allowance on its net deferred tax assets of $10.5 million and $10.1 million, respectively.   The Federal NOL carryforward is approximately $27.8 million as of September 30, 2022 of which $21.9 million is subject to the 20-year carryforward and expire on various dates through 2039. The remaining federal NOL carryforward of $5.9 million is indefinite. Net operating losses incurred after December 31, 2017 carry forward indefinitely. Internal Revenue Code Section 382 places certain limitations on the amount of taxable income that can be offset by NOL carryforwards after a change in control of a loss corporation. Generally, after a change in control, a loss corporation cannot deduct NOL carryforwards in excess of the Section 382 limitation. Due to these “change of ownership” provisions, utilization of NOL carryforwards may be subject to an annual limitation on utilization against taxable income 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 our NOL carryforwards. The Company also has approximately $46.8 million in state NOLs which expire on various dates through 2041.   The acquisition of HawkSearch during the third quarter of fiscal 2021 resulted in the recognition of deferred tax liabilities of approximately $1.2 million 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 $1.2 million of the pre-existing valuation allowance against the deferred tax assets and corresponding deferred tax benefit recognized during fiscal 2021.   22     Adjusted EBITDA   We also measure our performance based on a non-GAAP (“Generally Accepted Accounting Principles”) measurement of earnings before interest, taxes, depreciation, amortization, stock-based compensation expense, impairment of goodwill and intangible assets, non-cash warrant related income/expense, other income and expenses, change in fair value of derivative instruments, change in fair value of contingent consideration, and restructuring and acquisition related charges (“Adjusted EBITDA”).   We believe this non-GAAP financial measure of Adjusted EBITDA is useful to management and investors in evaluating our operating performance for the periods presented and provides a tool for evaluating our ongoing operations.   Adjusted EBITDA, however, is not a measure of operating performance under accounting principles generally accepted in the United States of America (“U.S. GAAP”) and should not be considered as an alternative or substitute for U.S. GAAP profitability measures such as (i) income from operations and net income, or (ii) cash flows from operating, investing and financing activities, both as determined in accordance with U.S. GAAP. Adjusted EBITDA as an operating performance measure has material limitations because it excludes the financial statement impact of income taxes, net interest expense, amortization of intangibles, depreciation, goodwill impairment, restructuring charges, acquisition related expenses, loss on disposal of assets, other amortization, changes in fair value of warrant liabilities, changes in fair value of contingent consideration and stock-based compensation, and therefore does not represent an accurate measure of profitability. As a result, Adjusted EBITDA should be evaluated in conjunction with net income (loss) for a complete analysis of our profitability, as net income (loss) includes the financial statement impact of these items and is the most directly comparable U.S. GAAP operating performance measure to Adjusted EBITDA. Our definition of Adjusted EBITDA may also differ from and therefore may not be comparable with similarly titled measures used by other companies, thereby limiting its usefulness as a comparative measure. Because of the limitations that Adjusted EBITDA has as an analytical tool, investors should not consider it in isolation, or as a substitute for analysis of our operating results as reported under U.S. GAAP.   The following table reconciles net income (loss) (which is the most directly comparable U.S. GAAP operating performance measure) to Adjusted EBITDA:       Years Ended September 30,       2022     2021   Net income (loss)   $ 2,145     $ (6,689 ) Provision for income tax     30       (1,174 ) Change in fair value of contingent consideration, interest expense and other, net     (417 )     883   Government grant income     -       (88 ) Change in fair value of warrants     (3,655 )     5,885   Amortization of intangible assets     1,487       1,130   Depreciation and other amortization     121       72   Restructuring and acquisition related charges     164       1,235   Stock-based compensation     321       188   Adjusted EBITDA   $ 196     $ 1,442     Adjusted EBITDA decreased year over year, which is primarily attributable to additional costs related to the business acquisitions during fiscal 2021 as well as additional sales and marketing spend.   23     Liquidity and Capital Resources   Cash Flows   Operating Activities   Cash used in operating activities was $0.1 million during fiscal 2022 compared to $1.0 million during fiscal 2021.  The change in cash used in operating activities compared to the prior period was primarily due to an increase in net earnings partially offset by changes in non-cash items, including changes in fair value of warrant liabilities, and changes to accounts payable and accrued liabilities as well as deferred revenue.   Investing Activities   Cash used in investing activities was $0.2 million during fiscal 2022 compared to cash used in investing activities of $4.5 million during fiscal 2021. Cash used in investing activities during fiscal 2022 related primarily to software development capitalized costs and purchases of property and equipment. Cash used in investing activities during fiscal 2021 was primarily related to net cash paid for the purchase of businesses during the second and third fiscal quarters of 2021.   Financing Activities   Cash used in financing activities was $5.5 million during fiscal 2022 compared with cash provided of $13.5 million during fiscal 2021. Cash used in financing activities during fiscal 2022 was primarily related to deferred purchase price and contingent consideration payments related to acquisitions completed during fiscal 2021. Cash provided by financing activities during fiscal 2021, was primarily attributable to cash proceeds of approximately $14.3 million related to the issuance of common stock, Series D Convertible Preferred Stock and stock options and warrant exercises partially offset by re-payments of contingent consideration and long-term debt assumed in connection with the acquisition of a business.   Capital Resources and Liquidity Outlook   In connection with an acquisition of a business completed during the 2021 fiscal year third quarter (HawkSearch), the Company recognized a contingent consideration obligation with a current carrying value of $0.3 million as of September 30, 2022, all of which was paid in October 2022.   In connection with an acquisition of a business completed during the 2021 fiscal year second quarter (WooRank), the Company assumed the outstanding long-term debt obligations of which approximately $1.0 million remains outstanding at September 30, 2022, with $0.4 million payable over the next twelve months.   The Company has historically incurred operating losses and used cash on hand and from financing activities to fund operations as well as develop new products. The Company believes that future revenues and cash flows will supplement its working capital and it has an appropriate cost structure to support future revenue growth.   The Company may offer and sell, from time to time, in one or more offerings, up to $50 million of its debt or equity securities, or any combination thereof.  Such securities offerings may be made pursuant to the Company’s currently effective registration statement on Form S-3 (File No. 333-262764), which was initially filed with the Securities and Exchange Commission on February 16, 2022 and declared effective on March 4, 2022 (the “Shelf Registration”).  A complete description of the types of securities that the Company may sell is described in the Preliminary Prospectus contained in the Shelf Registration.   As of the date of the filing of this Quarterly Report, there are no active offerings for the sale or obligations to purchase any of the Company’s securities pursuant to the Shelf Registration.  There can be no assurances that the Company will offer any securities for sale or that if the Company does offer any securities that it will be successful in selling any portion of the securities offered on a timely basis if at all, or on terms acceptable to us.  Further, our ability to offer or sell such securities may be limited by rules of the NASDAQ Capital Market.   Off-Balance Sheet Arrangements   At this time, the Company does not have any off-balance sheet arrangements, financings or other relationships with unconsolidated entities or other persons, other than our operating leases.   Contractual Obligations   We lease all of our office locations. The gross obligations for operating leases and subleases is $0.6 million of which $0.2 million is expected in the next twelve months. Debt payments on the Company’s various debt obligations total $1.0 million of which $0.4 million is expected to be paid in the next twelve months. In connection with an acquisition of a business completed in the Company’s 2021 fiscal year, contingent consideration obligations total $0.3 million, which was paid in October 2022.   24     Critical Accounting Policies and Estimates   These critical accounting policies and estimates by our management should be read in conjunction with Note 2, Summary of Significant Accounting Policies to the Consolidated Financial Statements that were prepared in accordance with U.S. GAAP.   The preparation of consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting periods. We regularly make estimates and assumptions that affect the reported amounts of assets and liabilities. The most significant estimates included in our consolidated financial statements are the valuation of accounts receivable and long-term assets, including intangibles, goodwill and deferred tax assets, stock-based compensation, amounts of revenue to be recognized on service contracts in progress, unbilled receivables, and deferred revenue. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected.   We consider the following accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment:     ● Revenue recognition;   ● Allowance for doubtful accounts;   ● Accounting for goodwill and other intangible assets;   ● Accounting for business combinations; and   ● Accounting for stock-based compensation.   Revenue Recognition   Overview   The Company derives its revenue from two sources: (i) Software Licenses, which are comprised of subscription fees (“SaaS”), perpetual software licenses, and maintenance for post-customer support (“PCS”) on perpetual licenses, and (ii) Digital Engagement Services, which are professional services to implement our products such as web development, digital strategy, information architecture and usability engineering search. Customers who license the software on a subscription basis, which can be described as “Software as a Service” or “SaaS”, do not take possession of the software.   Revenue is recognized when control of these services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. If the consideration promised in a contract includes a variable amount, for example, overage fees, contingent fees or service level penalties, the Company includes an estimate of the amount it expects to receive for the total transaction price if it is probable that a significant reversal of cumulative revenue recognized will not occur. The Company’s subscription service arrangements are non-cancelable and do not contain refund-type provisions. Revenue is reported net of applicable sales and use tax.   The Company recognizes revenue from contracts with customers using a five-step model, which is described below:     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.   25     1. 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.   2. 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.   3. 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.   4. 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.   5. 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.   Customer Payment Terms   Payment terms with customers typically require payment 30 days from invoice date. Payment terms may vary by customer but generally do not exceed 45 days from invoice date.  Invoicing for digital engagement services are either monthly or upon achievement of milestones and payment terms for such billings are within the standard terms described above. Invoices for subscriptions and hosting are typically issued monthly and are generally due in the month of service. The Company’s subscription and hosting agreements provide for refunds when service is interrupted for an extended period of time and are reserved for in the month in which they occur, if necessary.   Our digital engagement services agreements with customers do not provide for any refunds for services or products and therefore no specific reserve for such is maintained. In the infrequent instances where customers raise a concern over delivered products or services, we have endeavored to remedy the concern and all costs related to such matters have been insignificant in all periods presented.   Warranty   Certain arrangements include a warranty period, which is generally 30 days from the completion of work. In hosting arrangements, we provide warranties of up-time reliability. We continue to monitor the conditions that are subject to the warranties to identify if a warranty claim may arise. If we determine 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.   Allowance for Doubtful Accounts   We maintain an allowance for doubtful accounts which represents estimated losses resulting from the inability, failure or refusal of our clients to make required payments.   We analyze historical percentages of uncollectible accounts and changes in payment history when evaluating the adequacy of the allowance for doubtful accounts. We use an internal collection effort, which may include our sales and services groups as we deem appropriate. Although we believe that our allowances are adequate, if the financial condition of our clients deteriorates, resulting in an impairment of their ability to make payments, or if we underestimate the allowances required, additional allowances may be necessary, resulting in increased expense in the period in which such determination is made.   26     Accounting for Goodwill and Intangible Assets   Goodwill is tested for impairment annually during the fourth quarter of every fiscal year and more frequently if events and circumstances indicate that the asset might be impaired. The purpose of an impairment test is to identify any potential impairment by comparing the carrying value of a reporting unit including goodwill to its fair value. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.     Factors that could lead to a future impairment include material uncertainties such as operational, economic and competitive factors specific to the key assumptions underlying the fair value estimate we use in our impairment testing that have a reasonable possibility of changing. This could include a significant reduction in projected revenues, a deterioration of projected financial performance, future acquisitions and/or mergers, and a decline in our market value as a result of a significant decline in our stock price.   Accounting for Business Combinations   The Company allocates the amount it pays for each acquisition to the assets acquired and liabilities assumed based on their fair values at the date of acquisition, including identifiable intangible assets which arise from a contractual or legal right or are separable from goodwill. The Company bases the fair value of identifiable intangible assets acquired in a business combination on detailed valuations that use information and assumptions provided by management, which consider management’s best estimates of inputs and assumptions that a market participant would use. The Company allocates any excess purchase price that exceeds the fair value of the net tangible and identifiable intangible assets acquired to goodwill. The use of alternative valuation assumptions, including estimated growth rates, cash flows and discounts rates and estimated useful lives could result in different purchase price allocations and amortization expense in current and future periods. Transaction costs associated with these acquisitions are expensed as incurred through general and administrative expense on the consolidated statements of operations. In those circumstances where an acquisition involves a contingent consideration arrangement, the Company recognizes a liability equal to the fair value of the contingent payments expected to be made as of the acquisition date. The Company re-measures this liability each reporting period and recognizes changes in the fair value through income (loss) before income taxes within the consolidated statements of operations.   Accounting for Stock-Based Compensation   At September 30, 2022, we maintained two stock-based compensation plans, one of which has expired but still contains vested stock options. The two plans are more fully described in Note 12 of these consolidated financial statements.   The Company accounts for stock-based compensation awards in accordance with ASC 718, Compensation-Stock Topic of the Codification.  Share-based payments (to the extent they are compensatory) are recognized in our consolidated statements of operations based on their fair values.    We recognize stock-based compensation expense for share-based payments issued that are expected to vest on a straight-line basis over the service period of the award, which is generally three years.  In determining whether an award is expected to vest, we use an estimated, forward-looking forfeiture rate based upon our historical forfeiture rate and reduce the expense over the recognition period. Estimated forfeiture rates are updated for actual forfeitures quarterly.  We also consider, each quarter, whether there have been any significant changes in facts and circumstances that would affect our forfeiture rate.  Although we estimate forfeitures based on historical experience, actual forfeitures in the future may differ.  In addition, to the extent our actual forfeitures are different than our estimates, we recognize a true-up for the difference in the period that the awards vest, and such true-ups could materially affect our operating results.   We estimate the fair value of stock options using the Black-Scholes-Merton option valuation model.  The fair value of an award is affected by our stock price on the date of grant as well as other assumptions, including the estimated volatility of our stock price over the term of the awards and the estimated period of time that we expect employees to hold their stock options.  The risk-free interest rate assumption we use is based upon United States Treasury interest rates appropriate for the expected life of the awards.  We use the historical volatility of our publicly traded options in order to estimate future stock price trends.  In order to determine the estimated period of time that we expect employees to hold their stock options, we use historical trends of employee turnovers.  Our expected dividend rate is zero since we do not currently pay cash dividends on our common stock and do not anticipate doing so in the foreseeable future. The aforementioned inputs entered into the option valuation model we use to fair value our stock awards are subjective estimates and changes to these estimates will cause the fair value of our stock awards and related stock-based compensation expense we recognize to vary.   We recognize deferred tax assets for stock-based awards that result in deductions on our income tax returns, based on the amount of stock-based compensation recognized and the statutory tax rate in the jurisdiction in which we will receive a tax deduction.      27