Bridgeline Digital, Inc. 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.   Not required.    Item 8.    Financial Statements and Supplementary Data.   INDEX TO FINANCIAL STATEMENTS       Page     Report of Independent Registered Public Accounting Firm 29 Consolidated Balance Sheets as of September 30, 2022 and 2021 31 Consolidated Statements of Operations for the years ended September 30, 2022 and 2021 32 Consolidated Statements of Comprehensive Income/(Loss) for the years ended September 30, 2022 and 2021 33 Consolidated Statements of Shareholders’ Equity for the years ended September 30, 2022 and 2021 34 Consolidated Statements of Cash Flows for the years ended September 30, 2022 and 2021 35 Notes to Consolidated Financial Statements 36     28     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, 2022 and 2021, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the two years in the period ended September 30, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended September 30, 2022, 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 audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.   We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the 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 audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the 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 audits provide a reasonable basis for our opinion.   29     Critical Audit Matter   The critical audit matter communicated below is a matter 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.   Warrant Liabilities   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 the Monte Carlo option-pricing model, which takes into consideration the volatilities of the Company and comparable public companies.   Given the determination of the fair value of warrant liabilities requires 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 accounting analysis as to the classification of warrant liabilities.   ● obtaining third party valuation reports to gain an understanding of management’s key assumptions used in determining the fair value of warrant liabilities.   ● with the assistance of our valuation specialists, evaluating the methodologies and key assumptions used by management to assess the Company’s fair value of warrant liabilities, including assessing the reasonableness of the source information underlying the valuation assumptions.   ● performing independent shadow calculations to test the reasonableness of the fair values for warrant liabilities concluded on by the Company’s specialist   ● assess the appropriateness of the disclosures in the consolidated financial statements.   /s/ PKF O'Connor Davies, LLP   New York, New York December 20, 2022   We have served as the Company’s auditor since 2021.   PCAOB ID No. 127   30       BRIDGELINE DIGITAL, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data)       As of September 30,       2022     2021   ASSETS                 Current assets:                 Cash and cash equivalents   $ 2,856     $ 8,852   Accounts receivable, net     1,182       1,370   Prepaid expenses and other current assets     242       196   Total current assets     4,280       10,418   Property and equipment, net     268       252   Operating lease assets     589       481   Intangible assets, net     6,268       7,755   Goodwill     15,985       15,985   Other assets     123       76   Total assets   $ 27,513     $ 34,967                     LIABILITIES AND STOCKHOLDERS ’ EQUITY                 Current liabilities:                 Current portion of long-term debt   $ 429     $ 732   Current portion of operating lease liabilities     199       161   Accounts payable     972       974   Accrued liabilities     995       908   Purchase price and contingent consideration payable, current portion (Note 17)     250       3,463   Deferred revenue     1,943       2,097   Total current liabilities     4,788       8,335                     Long-term debt, net of current portion (Note 10)     588       1,197   Operating lease liabilities, net of current portion     390       320   Purchase price and contingent consideration payable, net of current portion (Note 17)     -       2,360   Warrant liabilities     749       4,404   Other long-term liabilities     646       774   Total liabilities     7,161       17,390                     Commitments and contingencies (Note 14)                                       Stockholders’ equity:                 Preferred stock - $ 0.001 par value; 1,000,000 shares authorized;                 Series C Convertible Preferred stock: 11,000 shares authorized; 350 shares issued and outstanding at September 30, 2022 and 2021     -       -   Series D Convertible Preferred stock: 4,200 shares authorized; no shares issued and outstanding at September 30, 2022 and 2021     -       -   Common stock - $ 0.001 par value; 50,000,000 shares authorized; 10,417,609 shares at September 30, 2022 and 10,187,128 shares at September 30, 2021, issued and outstanding     10       10   Additional paid-in capital     100,704       100,207   Accumulated deficit     ( 80,142 )     ( 82,287 ) Accumulated other comprehensive loss     ( 220 )     ( 353 ) Total stockholders’ equity     20,352       17,577   Total liabilities and stockholders’ equity   $ 27,513     $ 34,967     The accompanying notes are an integral part of these consolidated financial statements.     31        BRIDGELINE DIGITAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data)       Years Ended September 30,       2022     2021   Net revenue:                 Digital engagement services   $ 3,259     $ 3,296   Subscription and perpetual licenses     13,560       9,963   Total net revenue     16,819       13,259                     Cost of revenue:                 Digital engagement services     1,759       1,743   Subscription and perpetual licenses     3,358       2,790   Total cost of revenue     5,117       4,533   Gross profit     11,702       8,726                     Operating expenses:                 Sales and marketing     5,232       2,726   General and administrative     3,387       2,359   Research and development     3,217       2,387   Depreciation and amortization     1,599       1,202   Restructuring and acquisition related expenses     164       1,235   Total operating expenses     13,599       9,909                     Loss from operations     ( 1,897 )     ( 1,183 ) Change in fair value of contingent consideration, interest expense and other, net     417       ( 883 ) Government grant income (Note 10)     -       88   Change in fair value of warrant liabilities     3,655       ( 5,885 ) Income (loss) before income taxes     2,175       ( 7,863 ) Provision for (benefit from) income taxes     30       ( 1,174 )                   Net income (loss)     2,145       ( 6,689 ) Deemed dividend on convertible preferred stock (Note 12)     -       ( 2,015 ) Net loss attributable to common shareholders   $ 2,145     $ ( 8,704 )                   Net income (loss) per share attributable to common shareholders:                 Basic   $ 0.21     $ ( 1.47 ) Diluted   $ 0.20     $ ( 1.47 ) Number of weighted average shares outstanding:                 Basic     10,232,862       5,935,981   Diluted     10,366,907       5,935,981     The accompanying notes are an integral part of these consolidated financial statements.   32     BRIDGELINE DIGITAL, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) (in thousands)       Years Ended September 30,       2022     2021   Net income (loss)   $ 2,145     $ ( 6,689 ) Other comprehensive income (loss):                 Net change in foreign currency translation adjustment     133       28   Comprehensive income (loss)     2,278       ( 6,661 ) Deemed dividend on convertible preferred stock (Note 12)     -       ( 2,015 ) Comprehensive loss attributable to common shareholders   $ 2,278     $ ( 8,676 )    The accompanying notes are an integral part of these consolidated financial statements.   33        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 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 (Note 12)   -     -     -     -     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   Stock-based compensation expense   -     -     -     -     478     -     -     478   Issuance of common stock – stock options exercised   -     -     13,333     -     19     -     -     19   Issuance of common stock – warrants exercised   -     -     17,148     -     -     -     -     -   Issuance of restricted common stock   -     -     200,000     -     -     -     -     -   Net income   -     -     -     -     -     2,145     -     2,145   Foreign currency translation   -     -     -     -     -     -     133     133   Balance at September 30, 2022   350   $ -     10,417,609   $ 10   $ 100,704   $ ( 80,142 ) $ ( 220 ) $ 20,352     The accompanying notes are an integral part of these consolidated financial statements.   34        BRIDGELINE DIGITAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS   (in thousands)       Years Ended September 30,       2022     2021   Cash flows from operating activities:                 Net income (loss)   $ 2,145     $ ( 6,689 ) Adjustments to reconcile net income (loss) to net cash used in operating activities:                 Amortization of intangible assets     1,487       1,130   Depreciation and other amortization     121       72   Change in fair value of contingent consideration     ( 631 )     170   Change in fair value of warrant liabilities     ( 3,655 )     5,885   Stock-based compensation     478       607   Deferred income taxes     ( 45 )     ( 1,196 ) Government grant income (Note 10)     -       ( 88 ) Changes in operating assets and liabilities                 Accounts receivable     159       36   Prepaid expenses and other current assets and other assets     ( 20 )     248   Accounts payable and accrued liabilities     87       ( 920 ) Deferred revenue     ( 223 )     ( 613 ) Other liabilities     ( 37 )     369   Total adjustments     (2,279 )     5,700   Net cash used in operating activities     ( 134 )     ( 989 ) Cash flows from investing activities:                 Software development capitalization costs     ( 78 )     ( 30 ) Purchase of property and equipment     ( 117 )     ( 79 ) Purchase of business, net of cash acquired     -       ( 4,408 ) Net cash used in investing activities     ( 195 )     ( 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     19       7,127   Payments of contingent consideration and deferred cash payable     ( 4,891 )     ( 203 ) Payments of long-term debt     ( 611 )     ( 603 ) Net cash (used in) provided by financing activities     ( 5,483 )     13,473   Effect of exchange rate changes on cash and cash equivalents     ( 184 )     24   Net increase (decrease) in cash and cash equivalents     ( 5,996 )     7,991   Cash and cash equivalents at beginning of year     8,852       861   Cash and cash equivalents at end of year   $ 2,856     $ 8,852   Supplemental disclosures of cash flow information:                 Cash paid for:                 Interest   $ 38     $ 7   Income taxes   $ 31     $ -   Non-cash investing and financing activities:                 Right-of-use asset obtained in exchange for new operating lease liability   $ 282     $ -   Consideration paid in stock in connection with acquisition of businesses   $ -     $ 1,029   Offering costs settled by issuance of liability classified warrants   $ -     $ 289   Deemed dividend on convertible preferred stock (Note 12)   $ -     $ 2,015      The accompanying notes are an integral part of these consolidated financial statements.   35     BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)     1.    Description of Business   Overview   Bridgeline Digital is a marketing technology company that offers a suite of products that help companies grow online revenue by driving more traffic to their websites, converting more visitors to purchasers, and increasing average order value.   HawkSearch is a site search, recommendation, and personalization application, built for marketers, merchandisers, and developers to enhance, normalize, and enrich an online customer's content search and product discovery experience. HawkSearch leverages advanced artificial intelligence, machine learning and industry-leading merchandising features to deliver accurate and highly relevant results and recommendations derived from multiple 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 with support for multiple languages.   Woorank is a Search Engine Optimization (“SEO”) audit tool that generates an instant performance audit of the site’s technical, on-page, and off-page SEO.  Woorank’s clear, actionable insights help companies increase their search engine ranking, while boosting website traffic, audience engagement, conversion, and customer retention rates.   Our Unbound platform is a Digital Experience Platform that includes Web Content Management, eCommerce, Digital Marketing, and Web Analytics. The Unbound platform, combined with its professional services, assists customers in powering engaging digital experiences that drive lead generation, increase revenue, improve customer service and loyalty, enhance employee knowledge, and reduce operational costs.    The TruPresence product empowers large franchises, brand networks, and other multi-unit organizations to manage a large hierarchy of digital properties at scale. TruPresence provides centralized and distributed management of content and products from parent sites down to multiple child sites for consistency in branding and messaging, while also enabling regional / local site owners to manage the local messaging, products and promotions specific to their local market.   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. The software uniquely combines 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 Bridgeline’s software is available through a cloud-based Software as a Service (“ SaaS ”) model, whose flexible architecture provides customers hosting and support. Additionally, Unbound and HawkSearch have the option to be available via a traditional perpetual licensing business model, in which the software can reside on a dedicated infrastructure either on premise at the customer’s facility, or manage-hosted by Bridgeline via a cloud-based, dedicated 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: Woodbury, New York; Rosemont, Illinois; Atascadero, California; Ontario, Canada; and Brussels, Belgium.   The Company has four wholly-owned subsidiaries: Bridgeline Digital Pvt. Ltd., located in Bangalore, India; Bridgeline Digital Canada, Inc., located in Ontario, Canada; Hawk Search Inc. located in Rosemont, Illinois and Bridgeline Digital Belgium BV, located in Brussels, Belgium.    36     BRIDGELINE DIGITAL, INC. NOTES TO 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 30th. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.   Use of Estimates   The preparation of consolidated financial statements in conformity with 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.   37     BRIDGELINE DIGITAL, INC. NOTES TO 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.   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.   Disaggregation of Revenue   The Company provides disaggregation of revenue based on geography and product groupings (see Note 15 ) as it believes this best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.   38     BRIDGELINE DIGITAL, INC. NOTES TO 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 and amortization. Depreciation and amortization are 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 recognized 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.   Implementation costs incurred in cloud-computing arrangements that are a service contract are capitalized and amortized over the life of the arrangement.   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 incurred development costs of $ 0.1  million during fiscal 2022 and none in fiscal 2021.   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   39     BRIDGELINE DIGITAL, INC. NOTES TO 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 2022 or 2021.   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 recognizes changes in the fair value through income (loss) 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 recognized 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 2022 and 2021 were $ 133 and $ 28 , 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.   40     BRIDGELINE DIGITAL, INC. NOTES TO 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 a 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 period, with changes in their fair value recognized 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 $ 459 and $ 286 for fiscal 2022 and 2021, 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 2022 or fiscal 2021.   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 Income (Loss) Per Share   The Company presents basic and diluted income (loss) 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, 2022 or 2021.   41     BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)   Basic net income (loss) per share is computed by dividing net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding.  Diluted net income (loss) per share attributable to common shareholders is computed using the weighted average number of common shares outstanding during the period plus the dilutive effect of outstanding stock options and warrants using the “treasury stock” method and convertible preferred stock using the as-if-converted method.  The computation of diluted earnings per share does not include the effect of outstanding stock options, warrants and convertible preferred stock that are considered anti-dilutive.   Recently Issued Accounting Pronouncements Not Yet Effective   Debt — Debt with Conversion and Other Options   In August 2020, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 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 ) (“ASU 2020 - 06” ). The ASU 2020 - 06 simplifies the accounting for convertible instruments and application of the equity classification guidance and made certain disclosure amendments. In addition, this ASU also amends certain aspects of the earnings per share (“EPS”) guidance. ASU 2020 - 06 is effective for financial reporting periods beginning after December 15, 2021, except smaller reporting companies for which this ASU is effective for financial reporting periods beginning after December 15, 2023. Early adoption is permitted, and an entity should adopt this ASU as of the beginning of its annual fiscal year. The Company elected to early adopt ASU 2020 - 06 as of the first day of the fiscal year ending September 30, 2023, using the modified retrospective approach. Based on an evaluation performed, the Company determined that the adoption of ASU 2020 - 06 will not have any impact on its accumulated deficit as of October 1, 2022 or any other components of the balance sheet. The Company does not expect that the adoption of ASU 2020 - 06 to have a material impact on its earnings per share.   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.   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.   42      BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)       3. Accounts Receivable   Accounts receivable consist of the following:       As of September 30,       2022     2021   Accounts receivable   $ 1,332     $ 1,403   Allowance for doubtful accounts     ( 150 )     ( 33 ) Accounts receivable, net   $ 1,182     $ 1,370     As of and for the year ended September 30, 2022, no customers exceeded 10% of accounts receivable and no customers exceeded 10% of the Company’s total revenues. 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.      4.   Property and equipment   Property and equipment consist of the following:       As of September 30,       2022     2021   Furniture and fixtures   $ 166     $ 98   Purchased software     18       18   Computer equipment     195       150   Leasehold improvements     202       197   Total cost     581       463   Less accumulated depreciation and amortization     ( 313 )     ( 211 ) Property and equipment, net   $ 268     $ 252        Depreciation and amortization on the above assets were $ 102 and $ 72 in fiscal 2022 and 2021, 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. As of September 30, 2022 and 2021, the aggregate fair values of long-term debts were $0.9 million and $ 1.7 million, respectively, with an aggregate carrying value of $ 1.0 million and $ 1.9 million, respectively. 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.   43     BRIDGELINE DIGITAL, INC. NOTES TO 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 26.6 % - 64.3 % and 55.3 %, respectively, as of September 30, 2022, and 28.8 % - 66.2 % and 55.8 %, respectively, as of September 30, 2021. 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, 2022     As of September 30, 2021     At Inception       Montage Capital     Series C Preferred     Series D Preferred     Montage Capital     Series C Preferred     Series D Preferred     Series D Preferred   Volatility     82.0 %     83.9 %     84.7 %     88.7 %     83.9 %     85.7 %     86.3 % Risk-free rate     4.20 %     4.20 %     4.10 %     0.80 %     0.50 %     1.00 %     0.90 % Stock price   $ 1.31     $ 1.31     $ 1.31     $ 4.11     $ 4.11     $ 4.11     $ 2.50     The Company recognized a gain of $ 3,655 and a loss of ($ 5,885 ) for the years ended September 30, 2022 and 2021, 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 recognized 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 %   The fair value of contingent consideration was $ 250 thousand on September 30, 2022, all of which was paid in October 2022.   Assets and liabilities of the Company measured at fair value on a recurring basis as of September 30, 2022 and 2021, are as follows:       As of September 30, 2022               Level 1     Level 2     Level 3     Total   Liabilities:                                 Warrant liabilities:                                 Montage   $ -     $ -     $ 12     $ 12   Series A and C     -       -       234       234   Series D     -       -       503       503   Total warrant liabilities     -       -       749       749   Contingent consideration obligations     -       -       250       250   Total Liabilities   $ -     $ -     $ 999     $ 999     44     BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)       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     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, 2020   $ -     $ 2,486   Additions     3,479       1,319   Exercises     -       ( 5,286 ) Adjustment to fair value     170       5,885   Balance at end of period, September 30, 2021   $ 3,649     $ 4,404   Additions     -       -   Exercises or payments     ( 2,768 )     -   Adjustment to fair value     ( 631 )     ( 3,655 ) Balance at end of period, September 30, 2022   $ 250       749         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, 2022 and 2021. Management performed a qualitative assessment that did not result in any impairment indicators at September 30, 2022 and 2021. 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,       2022     2021   Balance at beginning of period   $ 15,985     $ 5,557   Acquisitions     -       10,428   Balance at end of period   $ 15,985     $ 15,985     45      BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)     7.    Intangible Assets   The components of intangible assets, net of accumulated amortization, are as follows:       As of September 30,       2022     2021   Domain and trade names   $ 682     $ 732   Customer related     4,522       5,465   Technology     1,064       1,558   Intangible, assets net   $ 6,268     $ 7,755     Total amortization expense related to intangible assets was $ 1,487 and $ 1,130 for the years ended September 30, 2022 and 2021, respectively, and is reflected in Operating expenses on the consolidated statements of operations. The estimated amortization expense for fiscal years 2023, 2024, 2025, 2026, 2027 and thereafter is $ 1,373 , $ 1,004 , $ 723 , $ 667 , $ 554 and $ 1,947 , respectively.      8.    Accrued Liabilities   Accrued liabilities consist of the following:       As of September 30,       2022     2021   Compensation and benefits   $ 477     $ 541   Professional fees     186       81   Taxes     98       84   Other     234       202   Accrued liabilities   $ 995     $ 908        9.     Restructuring and Acquisition Related Expenses   In connection with the acquisition of businesses completed during fiscal 2021  (see Note 17 ), the Company incurred restructuring and acquisition related expenses of $ 0.2 million and $ 1.2 million during the year ended September 30, 2022 and 2021, which are included in Restructuring and acquisition related expenses in the consolidated statements of operations.   46      BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)     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 17 ). The assumed debt obligations and seller note are denominated in Euros.   Long-term debt consists as follows:       As of September 30,       2022     2021   Vendor loan payable (“Vendor loan”), accruing interest at 3.0 % per annum. Principal and interest are payable in one remaining installment in March 2023.   $ 292     $ 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 in October 2022.     44       362   Term loan payable, accruing interest at 3-Month EURIBOR plus 1.3 % per annum, payable in quarterly installments starting in April 2023 and matures in July 2028.     389       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 in September 2025 .     292       383   Total debt     1,017       1,929   Less current portion:     ( 429 )     ( 732 ) Long-term debt, net of current portion   $ 588     $ 1,197     At September 30, 2022, future maturities of long-term debt are as follows:   Fiscal year :         2023   $ 429   2024     188   2025     188   2026     71   2027     73   Thereafter     68   Total debt   $ 1,017     47      BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)      11.    Leases   The Company leases facilities in the United States for its corporate and regional field offices. During the years ended September 30, 2022 and 2021, the Company was also a lessee/sublessor for certain office locations.   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.   48     BRIDGELINE DIGITAL, INC. NOTES TO 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,       2022     2021   Operating lease cost   $ 153     $ 115   Variable lease cost     55       55   Less: Sublease income, net     (101 )     ( 101 ) Total   $ 107     $ 69     Cash paid for amounts included in the measurement of lease liabilities was $ 108 and $ 225 for the years ended September 30, 2022 and 2021, respectively, all of which represents operating cash flows from operating leases. As of September 30, 2022 and 2021, the weighted average remaining lease term was 3.4 and 3.3 years, respectively, and the weighted average discount rate was 7.0 % for both periods.   At September 30, 2022, 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:                         2023   $ 233     $ 101     $ 132   2024     177       34       143   2025     151       -       151   2026     72       -       72   2027     61       -       61   Thereafter     11       -       11   Total lease commitments     705     $ 135     $ 570   Less: Amount representing interest     ( 116 )                 Present value of lease liabilities     589                   Less: Current portion     ( 199 )                 Operating lease liabilities, net of current portion   $ 390                     In fiscal 2022 the Company entered into a lease which ends in January 2028 for office space in Rosemont, IL.  Total rental payments over the full term will be $ 0.4 million.  There is an option, at the Company’s election, to terminate the lease early in August 2025. If the early termination option were to be executed, the total rent payments would be $0.2 million, plus a $ 0.1 million termination fee. As of September 30, 2022, the Company had no lease commitments that extend past fiscal 2029.   49     BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)   At September 30, 2021, future minimum rental commitments under non-cancelable leases with initial or remaining terms in excess of one year were as follows:       Payments Operating Leases     Receipts 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                        12.     Stockholders ’ Equity   Under our Certificate of Incorporation, we are authorized, subject to limitations prescribed by Delaware law and our Charter, to issue up to 1,000,000  shares of preferred stock in one or more series, to establish from time to time the number of shares to be included in each series and to fix the designation, powers, preferences and rights of the shares of each series and any of its qualifications, limitations or restrictions. Our Board of Directors can increase or decrease the number of shares of any series, but not below the number of shares of that series then outstanding, without any further vote or action by our stockholders. Our Board of Directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of the common stock.      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 equal to (i) the number of shares of Series A Preferred Stock to be converted, multiplied by the stated value of $ 10 and (ii) divided by the conversion price in effect at the time of conversion. As of September 30, 2022 and 2021, the Company had no shares of Series A Preferred Stock outstanding.   Series B Convertible Preferred Stock   The Company has designated 5,000 shares of its preferred stock as Series B Convertible Preferred Stock (“Series B Preferred Stock”). The shares of Series B Preferred Stock may be converted, at the option of the holder at any time, into such number of shares of common stock equal to (i) the number of shares of Series B Preferred Stock to be converted, multiplied by the stated value of $ 1,000 and (ii) divided by the conversion price in effect at the time of conversion. As of September 30, 2022 and 2021, the Company had no shares of Series B Preferred Stock outstanding.    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 shares of Series C Preferred Stock may be converted, at the option of the holder at any time, into such number of shares of common stock equal to (i) the number of shares of Series C Preferred Stock to be converted, multiplied by the stated value of $ 1,000 and (ii) divided by the conversion price in effect at the time of conversion. Series C Preferred Stock vote on an as-converted basis along with shares of the Company’s common stock, are not entitled to receive dividends, unless specifically declared by our Board of Directors, and in the event of any liquidation, dissolution or winding up of the Company the holders of Series C Preferred Stock are entitled to receive in preference to the holders of common stock, Series A Preferred Stock, Series B Preferred Stock and any other stock, the amount equal to the stated value per share of 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 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, 2022 and 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.    50     BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)   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 has designated 4,200 shares of its preferred stock as Series D Convertible Preferred Stock.  The shares of Series D Preferred Stock may be converted, at the option of the holder at any time, into such number of shares of common stock equal to (i) the number of shares of Series D Preferred Stock to be converted, multiplied by the stated value of $ 1,000 and (ii) divided by the conversion price in effect at the time of conversion.  Holders of Series D Preferred Stock were 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. At the original issuance date, shares of Series D Preferred Stock issued in Private Placement were convertible into an aggregate of 1,184,211 shares of common stock.   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 17 ) 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 17 ) and the May 2021 Offerings would be aggregated together. Thus, to permit the issuance of common stock upon conversion of the Series D Preferred Stock and upon exercise of the warrants issued in the Private Placement, the Company had to obtain stockholder approval of these issuances. Upon issuance, the Company had determined that such prohibition did not represent an inability for the Company to satisfy its obligation to deliver shares upon conversion, as the holders’ conversion option itself was contingent upon Stockholder Approval. On September 16, 2021, the Company obtained Stockholder Approval. The Company determined that the Series D Preferred Stock should be classified as permanent equity.   The Series D Preferred Stock contained an embedded conversion feature that could affect the ultimate settlement of the Series D Preferred Stock. The Company determined that the embedded conversion feature’s economic characteristics and risks were clearly and closely related to the economic characteristics and risks of the Series D Preferred Stock. As a result, the embedded conversion feature was not required to be bifurcated from the Series D Preferred Stock.   The Series D Preferred Stock issued contained a beneficial conversion feature, which arises when a debt or equity security is issued with an embedded conversion option that is deemed beneficial to the investor, that is, in-the-money, at inception, as the conversion option has an effective conversion price that is less than the market price of the underlying stock at the commitment date. An embedded beneficial conversion feature is required to be recognized separately by allocating a portion of the proceeds equal to the intrinsic value, at the commitment date, of the feature to additional paid-in capital. As discussed below, the May 2021 Offerings cash proceeds allocated to the Series D Preferred Stock based on its relative fair value resulted in an effective conversion price of $ 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 17, upon the acquisition of HawkSearch 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.   51     BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)   During the fourth quarter of fiscal 2021, the Company recognized the impact of the beneficial conversion feature upon Stockholder Approval, as the beneficial conversion feature became immediately exercisable, at the option of the holder. The Company recognized full accretion of the beneficial conversion feature as a deemed dividend of $ 2.0 million to the Series D Preferred Stock. Such deemed dividend was recognized as an increase to accumulated deficit and an increase to additional paid-in capital and was included as a component of net loss attributable to common stockholders. During the fourth quarter of fiscal 2021, all Series D Preferred Stock was converted to common shares with no remaining Series D Preferred Stock outstanding at September 30, 2022 and 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.   The issuance-date fair value of the Series D Warrants issued to placement agents was determined to be incremental cost directly attributable to the May 2021 Offerings and was charged by the Company against proceeds along with other fees paid to the Placement Agents.   Registered Offering and Sale of Common Stock   On February 4, 2021, the Company offered and sold a total of 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. 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.   52     BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)   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, 2022, there were 1,333 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. At the annual meeting held on March 30, 2022, the Company’s stockholders voted to amend the 2016 Plan to increase the number of shares of the Company’s common stock available for issuance as awards granted under the Stock Incentive Plan to 1,650,000 shares. As of September 30, 2022, there were 1,356,594  options outstanding and 239,074  shares available for future issuance under the 2016 Plan.   Compensation Expense   Compensation expense is generally recognized on a graded accelerated basis over the vesting period of grants. Compensation expense is recognized 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, 2022 and 2021, compensation expense related to share-based payments was as follows:       Years ended September 30,       2022     2021   Cost of revenue   $ 26     $ 25   Operating expenses     295       163   Change in fair value of contingent consideration, interest expense and other, net     157       419   Total   $ 478     $ 607     Change in fair value of contingent consideration, interest expense and other, net includes compensation expense related the fair value of fully-vested stock options granted in August 2021 and April 2022.  During fiscal 2022 and 2021, 120,000 shares and 100,000 shares, respectively, 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, 2022, the Company had approximately $ 0.9  million of unrecognized compensation costs related to unvested options, which is expected to be recognized over a weighted-average period of 2.14  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.   Series A and 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, which expired unexercised during the Company’s 2021 fiscal year, 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.   53     BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)   As of September 30, 2022, 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 41,621 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 a half years which ends on November 16, 2026. Series D Preferred Warrants have an exercise price of $2.51.   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, 2022, 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 A and 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 ).   During year ended September 30, 2022, 26,605 Placement Agent Warrants were exercised.    Total warrants outstanding as September 30, 2022, were as follows:   Type   Issue Date   Shares     Price   Expiration Financing (Montage)   10/10/2017     1,327     $ 132.50   10/10/2025 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     31,564     $ 3.88   2/04/2026 Investors   5/14/2021     592,106     $ 2.51   11/16/2026 Placement Agent   5/14/2021     179,536     $ 2.85   5/12/2026 Total     1,757,629               Warrant Issuances   The Company did not issue warrants to purchase common stock during the year ended September 30, 2022. During the year ended September 30, 2021, the Company issued warrants to purchase common stock as follows:       2021   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             54     BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)   Summary of Option and Warrant Activity and Outstanding Shares   During the year ended September 30, 2022, the Company, (i) issued 5,000 total options at an exercise price of $ 3.99 , which vest ratably over a 3 -year period, (ii) issued 120,000 total options to Board members at an exercise price of $ 1.85 , which vested immediately upon issuance, (iii) issued 362,000 total options to its Chief Executive Officer at an exercise price of $ 1.85 , which vest ratably over a 3 -year period, (iv) issued 48,000 total options to employees at an exercise price of $ 1.27 , which vest ratably over a 3 -year period and (v) issued 200,000 total shares of restricted stock to its Chief Executive Officer at grant-date fair value of $ 1.29 , based upon the closing price of the Company’s common stock on the grant date, which vest quarterly over a 3 -year period. All such options granted expire ten years from date of grant.   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.   The weighted-average option fair values, as determined using the Black-Scholes option valuation model, and the assumptions used to estimate these values for stock options granted during the year ended September 30, 2022 and 2021 are as follows:       2022     2021       Board     Non-Board     Board     Non-Board   Weighted-average fair value per share option   $ 1.30     $ 1.40     $ 3.99     $ 2.22   Expected life (in years)     5.0       6.0       5.0       6.0   Volatility     89.2 %     95.0 %     86.5 %     85.3 % Risk-free interest rate     2.8 %     2.8 %     0.8 %     1.1 % Dividend yield     0.0 %     0.0 %     0.0 %     0.0 %   The expected option term is the number of years the Company estimates the options will be outstanding prior to exercise. 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 restricted stock, stock option and warrant activity is as follows:       Restricted Stock       Stock Options     Stock Warrants                       Weighted Average             Weighted Average       Awards     Awards     Exercise Price     Warrants     Exercise Price   Outstanding, October 1, 2021     -       611,004     $ 4.75       5,495,999     $ 4.54   Granted     -       240,200       4.35       829,811       -   Exercised     -       ( 40,998 )     1.40       ( 1,976,387 )     -   Forfeited     -       ( 59,754 )     2.56       -       -   Expired     -       ( 220 )     470.77       ( 2,560,678 )     4.28   Outstanding, September 30, 2021     -       750,232     $ 4.84       1,788,745     $ 4.18   Granted     200,000       535,000       1.82       -       -   Exercised     -       ( 13,334 )     1.40       ( 26,605 )     3.88   Forfeited     -       ( 113,838 )     3.69       -       -   Expired     -       ( 133 )     937.88       ( 4,511 )     218.89   Outstanding, September 30, 2022     200,000       1,157,927     $ 3.49       1,757,629     $ 3.64     There were 619,461  and 295,649 options vested and exercisable as of September 30, 2022 and 2021, respectively. The options outstanding at September 30, 2022 and 2021 had an aggregate intrinsic value of $ 2 and $ 1,530 , respectively.   55     BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)   A summary of the status of unvested options is as follows:               Weighted Average               Grant-Date       Shares     Fair Value   Unvested at October 1, 2021     454,583     $ 1.87   Granted     535,000       1.82   Vested     ( 369,615 )     1.74   Forfeited/Cancelled     ( 81,502 )     2.35   Unvested at September 30, 2022     538,466     $ 1.83     The following table summarizes information about outstanding stock options at September 30, 2022:             Weighted Average                         Remaining                   Number of     Contractual Life     Weighted Average     Aggregate   Exercise Price   Options     (Years)     Exercise Price     Intrinsic Value   Options outstanding     1,157,927       8.5     $ 3.49     $ 2   Options exercisable     619,461       8.1     $ 4.93     $ -       13.    Net Income (Loss) Per Share Attributable to Common Shareholders   Basic and diluted net income (loss) per share is computed as follows:   (in thousands, except share and per share data)                     As of September 30,       2022     2021   Numerator:                 Net income (loss) – basic earnings per share   $ 2,145     $ ( 6,689 ) Deemed dividend on amendment of Series A convertible preferred stock     -       ( 2,015 ) Net income (loss) applicable to common shareholders - basic earnings per share     2,145       ( 8,704 ) Effect of dilutive securities:                 Change in fair value of in-the-money warrant derivative liabilities     ( 39 )     -   Net income (loss) applicable to common shareholders - diluted earnings per share   $ 2,106     $ ( 8,704 )                   Denominator:                 Weighted-average shares outstanding for basic earnings per share     10,232,862       5,935,981   Effect of dilutive securities:                 Options     81,765       -   Warrants     13,391       -   Preferred stock     38,889       -   Weighted-average shares outstanding for diluted earnings per share     10,366,907       5,935,981                     Basic net income (loss) per share   $ 0.21     $ ( 1.47 ) Diluted net income (loss) per share   $ 0.20     $ ( 1.47 )   56     Potential common stock equivalents excluded from the computation of diluted net income (loss) per share because their inclusion would have been anti-dilutive were as follows (in shares):       As of September 30,       2022     2021   Stock options     712,907       765,232   Warrants     1,743,891       1,788,745   Convertible preferred stock     -       38,889        14.     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, 2022 and 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, 2022 and 2021, the Company has not experienced any losses related to the indemnification obligations and no significant claims with respect thereto were outstanding.  The Company does not expect significant claims related to the indemnification obligations and, consequently, concluded that the fair value of these obligations is negligible, and no related reserves were established.   Litigation   The Company is subject to ordinary routine litigation and claims incidental to its business. As of September 30, 2022, the Company was not engaged in any material legal proceedings.      15.    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:   2022     2021   United States   $ 13,202     $ 10,266   International     3,617       2,993       $ 16,819     $ 13,259     The largest concentration within the Company’s international revenue geography is within Canada.   Long-lived assets located in foreign jurisdictions aggregated approximately $ 6.7 million and $ 7.5 million as of September 30, 2022 and 2021, respectively.   57     BRIDGELINE DIGITAL, INC. NOTES TO 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:   2022     2021   Digital Engagement Services   $ 3,259     $ 3,296   Subscription     11,995       8,736   Perpetual Licenses     136       -   Maintenance     501       380   Hosting     928       847       $ 16,819     $ 13,259     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.     The following table summarizes the classification and net change in deferred revenue as of and for the years ended September 30, 2022 and 2021:       Deferred Revenue       Current     Long Term   Balance as of October 1, 2020   $ 1,511     $ 15   Increase     586       403   Balance as of September 30, 2021     2,097       418   Increase (decrease)     ( 154 )     ( 34 ) Balance as of September 30, 2022   $ 1,943     $ 384       58      BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)     16.    Income Taxes   The components of the Company’s tax provision (benefit) as of September 30, 2022 and 2021, is as follows:       Year Ended September 30,       2022     2021   Current:                 Federal   $ ( 11 )   $ ( 11 ) State     49       33   Foreign     37       -   Total current     75       22   Deferred:                 Federal     -       ( 953 ) State     -       ( 217 ) Foreign     ( 45 )     ( 26 ) Total deferred     ( 45 )     ( 1,196 ) Grand total   $ 30     $ ( 1,174 )   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,       2022     2021                     Income tax provision/(benefit) at the federal statutory rate of 21%   $ 457     $ ( 1,695 ) Permanent differences, net     ( 691 )     1,503   State income tax provision/(benefit)     39       26   Foreign income taxed at different rates     ( 55 )     340   Change in valuation allowance on deferred tax assets     407       ( 1,202 ) True up adjustments     ( 127 )     ( 146 ) Total   $ 30     $ ( 1,174 )   As of September 30, 2022, the Company has federal net operating loss (“NOL”) carryforwards of approximately $ 27.8  million 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. 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 $ 46.8  million in state NOLs which expire on various dates through 2041.   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, 2022 and 2021. For the years ended September 30, 2022 and 2021, the valuation allowance for deferred tax assets increased by $ 0.4  million and decreased by $ 1.2  million, respectively.   The acquisition of HawkSearch, Inc. in fiscal 2021 (see Note 17 ) 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 2019 – 2022 generally remain open to examination by the IRS and state authorities.   59     BRIDGELINE DIGITAL, INC. NOTES TO 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,       2022     2021   Deferred tax assets:                 Bad debt reserve   $ 37     $ 8   Deferred revenue     2,399       1,392   Accrued expenses     80       86   Net operating loss carryforwards     8,057       9,016   Right of use liability     146       121   Stock options     309       127   Other     17       21   Total deferred tax assets     11,045       10,771   Valuation allowance     ( 10,542 )     ( 10,083 ) Net deferred tax assets     503       688                     Deferred tax liabilities:                 Right of use asset     146       121   Depreciation     47       32   Intangibles     572       901   Total deferred tax liabilities     765       1,054   Net deferred tax liabilities   $ ( 262 )   $ ( 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 at September 30, 2022 and 2021. 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, 2022, the Company reported GILTI of $ 0.4 million, which resulted in $ 0.1 million of tax expense for the year ended September 30, 2022. 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, 2022 and 2021. The Company does not expect any change to this determination in the next twelve months.       17.    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 at acquisition date) 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.   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.   60     BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data)   HawkSearch 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 HawkSearch, 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 provided 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) on or before July 1, 2022, the aggregate sum of $ 1,799 thousand (which was paid on July 1, 2022); and (ii) on or before October 3, 2022, the aggregate sum of $ 250 thousand (subsequently paid), as included within in the Amendment to the Stock Purchase Agreement, dated June 15, 2022.   The Company accounted for the HawkSearch 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 HawkSearch.   The acquisition date fair value of consideration transferred was as follows:       WooRank     HawkSearch     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 acquisition date fair value of assets acquired, and liabilities assumed was as follows:       WooRank     HawkSearch     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     61     The average useful lives of the identifiable intangible assets acquired were as follows:       WooRank     HawkSearch       (in years)   Acquired software     5       5   Customer relationships     8       10   Domain and trade names     12       15     Total revenue from the WooRank and HawkSearch acquisitions from their respective date of acquisition through September 30, 2021  was $ 1.0 million and $ 1.9 million, respectively. 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 pro forma information assuming the acquisitions occurred on October 1, 2020:   (in thousands, except share and per share data)   Year ended September 30, 2021   Revenue   $ 16,381             Net income (loss) attributable to common shareholders - basic   $ ( 8,773 ) Net income (loss) attributable to common shareholders - diluted   $ ( 8,773 )           Net income (loss) per share attributable to common shareholders:         Basic   $ ( 1.49 ) Diluted   $ ( 1.49 )           Weighted average common shares outstanding - basic     5,935,981   Weighted average common shares outstanding - diluted     5,935,981     Pro forma information for the year ended September 30, 2022, is not presented as the amount reported in the Consolidated Statements of Operations include the activities of these acquisitions for the period then ended.        18.    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, 2022, Michael Taglich beneficially owns approximately 3.6 % 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 expired in May 9, 2022.   62      BRIDGELINE DIGITAL, INC. NOTES TO 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.   19. 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.   63        Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.   None.