What changed in this filing

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Item 1A. Risk Factors

2024-12-26 compared with 2023-12-27 · 49 added, 377 removed, 172 unchanged (71% of the section changed)

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Our actual results could differ materially from those discussed herein.

In addition to the risks discussed in “

Management ’

s Discussion and Analysis of Financial Condition and Results of Operations, ”

our business is subject to the risks set forth below.

In addition to the risks discussed in “ Management ’ s Discussion and Analysis of Financial Condition and Results of Operations, ” our business is subject to the risks set forth below.

We operate in a rapidly changing environment that involves certain risks and uncertainties, some of which are beyond our control.

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We may never achieve or sustain profitability, which would depress the market price of our common stock and could cause you to lose all or a part of your investment.

We incurred net loss of approximately $9.4 million for the year ended September 30, 2023, which includes gains related to the change in the fair value of warrant liabilities and a goodwill impairment charge of $7.5 million.

Since our inception in 2000 and through fiscal 2019, and in fiscal 2021 and fiscal 2023, we have incurred net losses, and may do so again.

As of September 30, 2023, we had an accumulated deficit of approximately $90 million.

Our prior losses have had an adverse effect on our stockholders’

equity and working capital.

We incurred net loss of approximately $(2.0) million for the year ended September 30, 2024.

Since our inception in 2000 and through fiscal 2019, in fiscal 2021, fiscal 2023 and fiscal 2024, we have incurred net losses, and may do so again.

As of September 30, 2024, we had an accumulated deficit of approximately $ 92 million.

Our prior losses have had an adverse effect on our stockholders’ equity and working capital.

Because of the numerous risks and uncertainties associated with our business, we are unable to predict the extent of any future losses or when we may become profitable.

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We may require additional financing to execute our business plan and further expand our operations.

We may require additional funding to further expand our operations.

We may require additional funding to further expand our operations.

We depend on financing sources, either debt or equity, or a combination thereof, which may not be available to us in a timely basis if at all, or on terms acceptable to us.

Further, our ability to obtain financing may be limited by rules of the Nasdaq Stock Market.

Further, our ability to obtain financing may be limited by rules of the Nasdaq Capital Market.

If we fail to obtain acceptable funding when needed, we may not have sufficient resources to fund our operations, and this would have a material adverse effect on our business.

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A decline in license renewal rates could cause our revenue to decline, which would have a material adverse effect on our operations.

We may become dependent upon a concentration of major customers, and a  

failure to renew our licenses with such customers could reduce our revenue.

We may become dependent upon a concentration of major customers, and a failure to renew our licenses with such customers could reduce our revenue.

We have previously and may from time to time derive a significant portion of our revenues from a relatively concentrated number of customers.

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The length of our sales cycle can alternate markedly, which could result in significant fluctuations in the recognition of license revenues from quarter to quarter.

The decision by a customer to purchase our products often involves the development of a complex implementation plan across a customer’s business.

This process often requires a significant commitment of resources both by prospective customers and us.

Given the significant investment and commitment of resources required in order to implement our software, it may take several months, or even several quarters, for marketing opportunities to materialize.

If a customer’s decision to purchase our products is delayed, or if the installation of our products takes longer than originally anticipated, the date on which we may recognize revenue from these sales would be delayed.

Such delays and fluctuations could cause our revenue to be lower than expected in a particular period, and we may not be able to adjust our costs quickly enough to offset such lower revenue, potentially negatively impacting our results of operations.

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Interference from unauthorized access to or tampering with these systems, including those resulting from cyber-attacks, could result in a variety of consequences, including devaluation of our intellectual property, goodwill, increased expenditures on data security and litigation, and can have a material adverse effect on our business, revenues, reputation, operating results and financial condition.

If our security measures or those of our third-party cloud computing platform provider are breached and unauthorized access is obtained to a customer ’

s data, our services may be perceived as not being secure, and we may incur significant legal and financial exposure and liabilities.

Security breaches could expose us to a risk of loss of our customers’

information, litigation and possible liability.

While we have security measures in place, they may be breached as a result of third-party action, including intentional misconduct by computer hackers and cybercriminals, employee error, malfeasance or otherwise and result in someone obtaining unauthorized access to our IT systems, our customers’

data or our data, including our intellectual property and other confidential business information.

Artificial Intelligence is an emerging area of technology that has and may further impact various aspects of our business operations and customer interactions, we may not be successful in our artificial intelligence initiatives, which could adversely affect our business, financial condition and/or operating results.

We have made, and expect to continue making investments in the integration of AI into our platforms, products, and services.

However, AI presents various risks, challenges, and potential unintended consequences that could disrupt our ability to effectively integrate and leverage these technologies.

The process of refining and expanding our AI-driven offerings may involve significant costs, and there can be no assurance that our efforts will ultimately succeed.

The complexity of AI systems, coupled with rapidly evolving competition in the AI space, introduces significant uncertainty about our ability to successfully integrate and commercialize these technologies.

Competitors may develop more effective or efficient AI solutions, potentially undermining our competitive position.

Additionally, the regulatory environment surrounding AI is still in development, and new laws or regulations could emerge that require substantial adjustments to our business practices.

These changes could impose unexpected costs or operational disruptions, and the full scope and impact of such regulatory developments remain uncertain.

Furthermore, we rely on third-party vendors that incorporate AI in the products and services they provide to us.

As a result, we may not have full visibility or control over the quality, security, performance, or compliance of AI-powered solutions sourced externally.

There is also a risk that the underlying algorithms used by us or our vendors may be flawed, or trained on incomplete or biased datasets, leading to inaccuracies, inefficiencies, or other negative consequences.

AI technologies also carry the risk of generating content that is factually incorrect, offensive, or infringing on third-party intellectual property rights.

Any of these factors, whether related to internal AI development, third-party dependencies, or regulatory changes, could have a material adverse effect on our business, financial performance, and operations.

If our security measures or those of our third-party cloud computing platform provider are breached and unauthorized access is obtained to a customer ’ s data, our services may be perceived as not being secure, and we may incur significant legal and financial exposure and liabilities.

Security breaches could expose us to a risk of loss of our customers’ information, litigation and possible liability.

Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to implement adequate preventative measures.

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Any imposition of liability, particularly liability that is not covered by insurance, or is in excess of insurance coverage, could harm our reputation, business and operating results.

We might be required to expend significant capital and other resources to protect further against security breaches or to rectify problems caused by any security breach, which, in turn, could divert funds available for corporate growth and expansion or future acquisitions.

We might be required to expend significant capital and other resources to protect further against security breaches or to rectify problems caused by any security breach, which, in turn, could divert funds available for corporate growth and expansion or future acquisitions.

Our operating lease commitments may adversely affect our financial condition and cash flows from operations.

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Barriers to entry in such markets are relatively low.

Competitors and partners are investing in artificial intelligence. With the introduction of new technologies and market entrants, we expect competition to intensify in the future.

Competitors and partners are investing in artificial intelligence.

With the introduction of new technologies and market entrants, we expect competition to intensify in the future.

Some of our principal competitors offer their products at a lower price, which may result in pricing pressures.

Such pricing pressures and increased competition generally could result in reduced sales, reduced margins or the failure of our product and service offerings to achieve or maintain more widespread market acceptance.

The marketplace is highly fragmented with a large number of competitors and potential competitors.

The marketplace is highly fragmented with a large number of competitors and potential competitors.

Our competitors include companies such as Algolia, Bloomreach, Coveo, Searchspring, SEMrush, Sitecore and Yext.

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We develop and sell complex web engagement software which may contain undetected errors or bugs.

Such errors can be detected at any point in a product’s life cycle but are frequently found after introduction of new software or enhancements to existing software.

We continually introduce new products and new versions of our products.

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Even when our software does not cause these problems, the existence of these errors might cause us to incur significant costs, divert the attention of our technical personnel from our product development efforts, impact our reputation, or cause significant customer relations problems.

Technology and customer requirements evolve rapidly in our industry, and if we do not continue to develop new products and enhance our existing products in response to these changes, our business could  

We will need to continue to enhance our products in order to maintain our competitive position.

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force us to stop licensing our products that incorporate the challenged intellectual property;

require us to redesign our products;

divert management’s attention and our other resources;

require us to enter into royalty or licensing agreements in order to obtain the right to use necessary technologies, which may not be available on terms acceptable to us, if at all.

divert management’s attention and our other resources;

redesign our products / require us to enter into royalty or licensing agreements in order to obtain the right to use necessary technologies, which may not be available on terms acceptable to us, if at all.

We believe that any successful challenge to our use of a trademark or domain name could substantially diminish our ability to conduct business in a particular market or jurisdiction and thus decrease our revenue and result in possible losses to our business.

Increasing government regulation could affect our business and may adversely affect our financial condition.

We are subject not only to regulations applicable to businesses generally, but also to laws and regulations directly applicable to electronic commerce. In addition, an inability to satisfy the standards of certain voluntary third-party certification bodies that our customers may expect, such as an attestation of compliance with the Payment Card Industry (“PCI”) Data Security Standards, may have an adverse impact on our business and results.

Further, there are various statutes, regulations, and rulings relevant to the direct email marketing and text-messaging industries, including the Telephone Consumer Protection Act (“TCPA”), the CAN-SPAM Act and related Federal Communication Commission (“FCC”) orders.

We are subject not only to regulations applicable to businesses generally, but also to laws and regulations directly applicable to electronic commerce.

In addition, an inability to satisfy the standards of certain voluntary third-party certification bodies that our customers may expect, such as an attestation of compliance with the Payment Card Industry (“PCI”) Data Security Standards, may have an adverse impact on our business and results.

The interpretation of many of these statutes, regulations, and rulings is evolving in the courts and administrative agencies and an inability to comply may have an adverse impact on our business and results.

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We may also expand our business in countries that have more stringent data protection laws than those in the United States, and such laws may be inconsistent across jurisdictions and are subject to evolving and differing interpretations.

In particular, the European Union has passed the General Data Protection Regulation (“GDPR”), which came into force on May 25, 2018.

In particular, the European Union has passed the General Data Protection Regulation (“GDPR”), which came into force on May 25, 2018.

The GDPR includes more stringent operational requirements for entities that receive or process personal data (as compared to U.S.

privacy laws and previous EU laws), along with significant penalties for non-compliance, more robust obligations on data processors and data controllers, greater rights for data subjects, and heavier documentation requirements for data protection compliance programs.

privacy laws and previous EU laws), along with significant penalties for non-compliance, more robust obligations on data processors and data controllers, greater rights for data subjects, and heavier documentation requirements for data protection compliance programs.

Additionally, both laws regulating privacy and third-party products purporting to address privacy concerns could negatively affect the functionality of, and demand for, our products and services, thereby reducing our revenue.

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There may be a limited market for our common stock, which may make it more difficult for you to sell your stock and which may reduce the market price of our common stock.

The average shares traded per day in fiscal 2023 was approximately 56,000 shares per day compared to approximately 286,000 for fiscal 2022, and 2,839,000 for fiscal 2021.

The average shares traded per day in fiscal 2024 was approximately 41,000 shares p er day compared to approximately 56,000 for fiscal 2023, and 286,000 for fiscal 2022.

Our average trading volume of our common stock can be very sporadic and may impair the ability of holders of our common stock to sell their shares at the time they wish to sell them or at a price that they consider reasonable.

A low trading volume may also reduce the fair market value of the shares of our common stock.

A low trading volume may also reduce the fair market value of the shares of our common stock.

Accordingly, there can be no assurance that the price of our common stock will reflect our actual value.

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and general economic and industry conditions.

During fiscal 2023, the closing price of our common stock as reported by the Nasdaq Capital Market fluctuated between $0.82 and $1.42.

During fiscal 2024, the closing price of our common stock as reported by the Nasdaq Capital Market fluctuated between $0.70 and $1.42.

We are required to meet certain financial criteria in order to maintain our listing on the Nasdaq Capital Market.

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Such corrective actions could include a reverse stock split, which may adversely affect the liquidity of our common stock.

Additionally, there is no way to guarantee that such a measure, if implemented, would help us regain compliance with Nasdaq's minimum bid price requirement or maintain compliance with its other listing rules.

Additionally, there is no way to guarantee that such a measure, if implemented, would help us regain compliance with Nasdaq’s minimum bid price requirement or maintain compliance with its other listing rules.

We are dependent upon our management team and the loss of any of these individuals could harm our business.

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If we are unable to hire or retain qualified personnel, or if newly hired personnel fail to develop the necessary skills or reach productivity slower than anticipated, it would be more difficult for us to sell our products and services, and we could experience a shortfall in revenue and fail to achieve our planned growth.

Acquisitions may be difficult to integrate into our existing operations, may disrupt our business, dilute stockholder value, divert management ’

s attention, or negatively affect our operating results.

Acquisitions may be difficult to integrate into our existing operations, may disrupt our business, dilute stockholder value, divert management ’ s attention, or negatively affect our operating results.

We have acquired multiple businesses since our inception in 2000, including two in fiscal 2021.

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Our inability to take advantage of growth opportunities for our business or to address risks associated with acquisitions or investments in businesses may negatively affect our operating results.

Additionally, any impairment of goodwill or other intangible assets acquired in an acquisition or in an investment, or charges to earnings associated with any acquisition or investment activity, may materially reduce our earnings which, in turn, may have a material adverse effect on the price of our common stock.

We have issued preferred stock with rights senior to our common stock, and may issue additional preferred stock in the future, in order to consummate a merger or other transaction necessary to continue as a going concern.

Our Certificate of Incorporation authorizes the issuance of up to 1,000,000 shares of preferred stock, par value $0.001 per share, without stockholder approval and on terms established by our board of directors, of which 264,000 shares have been designated as Series A Preferred, 5,000 shares have been designated as Series B Preferred, 11,000 shares have been designated as Series C Preferred and 4,200 shares have been designated as Series D Preferred. We may issue additional shares of preferred stock in order to consummate a financing or other transaction, in lieu of the issuance of common stock. The rights and preferences of any such class or series of preferred stock would be established by our board of directors in its sole discretion and may have dividend, voting, liquidation and other rights and preferences that are senior to the rights of our common stock.

We may issue additional shares of preferred stock in order to consummate a financing or other transaction, in lieu of the issuance of common stock.

The rights and preferences of any such class or series of preferred stock would be established by our board of directors in its sole discretion and may have dividend, voting, liquidation and other rights and preferences that are senior to the rights of our common stock.

We have never paid dividends on our common stock and we do not anticipate paying dividends in the future.

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Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to the forum provisions in our amended and restated bylaws.

This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, other employees or stockholders, which may discourage lawsuits with respect to such claims.

Alternatively, if a court were to find the choice of forum provision contained in our amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, operating results and financial condition.

Unresolved Staff Comments.

Cybersecurity.

Not applicable.

The following table lists our office locations, all of which are leased:

Geographic Location

Woburn, Massachusetts

100 Sylvan Rd, Suite G-700

Woburn, MA 01801

Professional office space

Woodbury, New York

150 Woodbury Road

Woodbury, NY 11797

Professional office space

Rosemont, Illinois

5600 North River Rd, Suite 100

Rosemont, IL 60018

Professional office space

Atascadero, California

6225 Atascadero Ave

Atascadero, CA 93422

Professional office space

Ontario, Canada

Perth Mews RO

Perth, ON K7H 3A0, Canada

Brussels, Belgium

Cours Saint Michel 30B

1040 Etterbeek

Brussels, Belgium

Professional office space

Professional office space is of varying size, ranging up to approximately 3,600 square feet.

Legal Proceedings.

From time to time, we are subject to ordinary routine litigation and claims incidental to our business.

We are not currently involved in any legal proceedings that we believe are material.

Mine Safety Disclosures.

Not applicable.

Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

Our common stock is currently traded on the Nasdaq Capital Market under the trading symbol “BLIN”.

Number of Stockholders

As of December 27, 2023, we had approximately 60 stockholders of record.

Since many stockholders choose to hold their shares under the name of their brokerage firm, we estimate that the actual number of stockholders was over 6,000. 

Dividend Policy

We have not declared or paid cash dividends on our common stock and do not plan to pay cash dividends to our common stockholders in the near future.

Recent Sales of Unregistered Securities;

Use of Proceeds From Registered Securities

There were no sales of unregistered or registered equity securities during the fiscal year ended September 30, 2023.

Not applicable.

Management ’

s Discussion and Analysis of Financial Condition and Results of Operations.

This section contains forward-looking statements that involve risks and uncertainties.

Our actual results could differ materially from those anticipated in the forward-looking statements as a result of a variety of factors and risks, including the impact of any weakness in the U.S.

and international economies on our business, our inability to manage our future growth effectively or profitably, fluctuations in our revenue and quarterly results, our license renewal rate, the impact of competition and our ability to maintain margins or market share, the limited market for our common stock, the ability to maintain our listing on the Nasdaq Capital Market, the volatility of the market price of our common stock, the ability to raise capital, the performance of our products, our ability to respond to rapidly evolving technology and customer requirements, our ability to protect our proprietary technology, the security of our software and response to cyber security risks, our ability to meet our financial obligations and commitments, our dependence on our management team and key personnel, our ability to hire and retain future key personnel, our ability to maintain an effective system of internal controls, or our ability to respond to government regulations.

These and other risks are more fully described herein and in our other filings with the Securities and Exchange Commission.

This section should be read in combination with the accompanying audited consolidated financial statements and related notes prepared in accordance with United States generally accepted accounting principles ( “

GAAP ”

Bridgeline Digital is a marketing technology company that offers a suite of products that help companies grow online revenue and share information with customers, partners, and employees.

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's product offerings include: 

a site search, recommendation, and personalization software application, built for marketers, merchandisers, and developers to enhance, normalize, and enrich an online customer's content search and product discovery experience. 

Celebros Search:

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.

a Search Engine Optimization (“SEO”) audit tool that generates an instant performance audit of the site’s technical, on-page, and off-page SEO.

a Digital Experience Platform that includes Web Content Management, eCommerce, Digital Marketing, and Web Analytics. 

a web content management and eCommerce platform that supports the needs of multi-unit organizations and franchises.

OrchestraCMS:

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.

Sales and Marketing

Bridgeline employs a direct sales force, which focuses its efforts on selling to mid-sized and large companies.

These companies are generally categorized in the following vertical markets: 

Associations and Foundations

Banks and Credit Unions

eCommerce Retailers

Franchises & Enterprises

Health Services and Life Sciences

Industrial Distribution and Wholesale

Manufacturers

Each of the Bridgeline companies goes to market through two main types of partnerships.

The first partner category includes platforms such as Adobe, BigCommerce, Optimizely, Sitefinity, Shopify and others.

The Bridgeline software often embeds directly into these platforms through connectors and SDK solutions that Bridgeline develops in concert with each platform.

The second category includes web-development agencies which typically have deep relationships with end-customers and have the technical expertise to implement the Bridgeline software solutions according to client needs, platform requirements, and industry standards.

Goodwill and Intangible Asset Impairment

During the year ended September 30, 2023, the Company recognized a goodwill impairment charge of $7.5 million. 

There were no goodwill impairment charges recognized during the year ended September 30, 2022.

Bridgeline will continue to evaluate expanding its distribution of its suite of products and interactive development capabilities through acquisitions.

We may make additional acquisitions in the foreseeable future.

These potential acquisitions will be consistent with our growth strategy by providing Bridgeline with new geographical distribution opportunities, an expanded customer base, an expanded sales force and an expanded developer force.

In addition, integrating acquired companies into our existing operations allows us to consolidate the finance, human resources, legal, marketing, and research and development of the acquired businesses with our own internal resources.

This integration may reduce the aggregate of such expenses for the combined businesses and similarly improve operating results.

Customer Information

We currently have over 2,000 active customers.

For the years ended September 30, 2023 and 2022, no customers exceeded 10% of the Company’s total revenue.

Summary of Results of Operations

Total revenue for the fiscal year ended September 30, 2023 (“fiscal 2023”) decreased to $15.9 million from $16.8 million for the fiscal year ended September 30, 2022 (“fiscal 2022”). The loss from operations for fiscal 2023 was $9.9 million, compared with a loss from operations of $1.9 million for fiscal 2022.

We had a net loss for fiscal 2023 of $9.4 million, which included income of approximately $0.6 million as a result of the change in fair value of certain warrant liabilities, and a goodwill impairment charge of $7.5 million in fiscal 2023, compared with a net income of $2.1 million, which included income of approximately $3.7 million as a result of the change in fair value of certain warrant liabilities fiscal 2022.

Basic net loss per share attributable to common stockholders for fiscal 2023 was $(0.91) compared with the equivalent basic net income per share attributable to common stockholders of $0.21 for fiscal 2022.

Diluted net loss per share attributable to common stockholders for fiscal 2023 was $(0.91) compared with the equivalent diluted net income per share attributable to common stockholders of $0.20 for fiscal 2022.

(in thousands)

Year Ended September 30,

Subscription and perpetual licenses

Digital engagement services

Total net revenue

Cost of revenue

Subscription and perpetual licenses

Digital engagement services

Total cost of revenue

Operating expenses

Sales and marketing

General and administrative

Research and development

Depreciation and amortization

Goodwill impairment

Restructuring and acquisition related expenses

Total operating expenses

Loss from operations

Change in fair value of contingent consideration, interest expense and other, net

Change in fair value of warrant liabilities

Income (loss) before income taxes

Provision for (benefit from) income taxes

Net (loss) income

Non-GAAP Measure:

Adjusted EBITDA

Our revenue is derived from two sources:

(i) Subscription and Perpetual licenses and (ii) Digital Engagement Services.

Subscription and Perpetual Licenses

Revenue from Subscription and perpetual licenses decreased $0.8 million, or 6%, to $12.7 million in fiscal 2023 from $13.6 million in fiscal 2022.

The decrease compared to the prior period included a reduction in revenue from a particular customer.

Subscription and perpetual license revenue as a percentage of total revenue decreased to 80% in fiscal 2023 from 81% in fiscal 2022. 

Digital Engagement Services

Digital engagement services revenue is comprised of implementation and retainer-related services.

Total revenue from digital engagement services of $3.1 million in fiscal 2023 decreased 4% from $3.3 million in fiscal 2022.

Digital engagement services revenue as a percentage of total revenue increased to 20% in fiscal 2023 from 19% in fiscal 2022. 

Cost of Revenue

Total cost of revenue for fiscal 2023 of $5.0 million decreased $0.1 million, or 2% compared to the prior period. 

Cost of Subscription and Perpetual License

Cost of subscription and perpetual licenses of $3.4 million in fiscal 2023 increased slightly from fiscal 2022.

The increase in cost of subscription and perpetual licenses in fiscal 2023 compared to fiscal 2022 is primarily due to higher costs to operate our cloud-based hosting model with Amazon Web Services, offset by a decrease in personnel costs. The cost of subscription and perpetual licenses as a percentage of subscription and perpetual license revenue increased to 26% in fiscal 2023 from 25% in fiscal 2022. These increases are primarily due to the overall decrease in subscription and perpetual license revenue.

Cost of Digital Engagement Services

Cost of digital engagement services decreased 6%, to $1.7 million in fiscal 2023 from $1.8 million in fiscal 2022.

The cost of total digital engagement services as a percentage of total digital engagement services revenue decreased to 52% in fiscal 2023 from 54% in fiscal 2022.

These decreases are primarily due to the overall decrease in personnel costs. 

Gross profit of $10.9 million decreased $0.8 million, or 7%, in fiscal 2023 compared to $11.7 million for fiscal 2022.

The gross profit margin decreased to 68% for fiscal 2023 compared to 70% for fiscal 2022.

The decrease in the gross profit margin for fiscal 2023 compared to fiscal 2022 is primarily attributable to the decrease in the proportion of subscription and perpetual license revenue, which is generally associated with higher margins, to digital engagement service revenue.

Operating Expenses

Sales and Marketing Expenses

Sales and marketing expenses of $4.8 million in fiscal 2023 decreased $0.5 million, or 9%, from $5.2 million in fiscal 2022.

Sales and marketing expense as a percentage of total revenue decreased to 30% in fiscal 2023 compared to 31% in fiscal 2022.

The decrease compared to the prior period is primarily attributable to lower personnel costs and marketing spend on leads and conferences.

General and Administrative Expenses

General and administrative expenses of $3.2 million in fiscal 2023 decreased $0.2 million, or 6%, from $3.4 million in fiscal 2022.

General and administrative expense as a percentage of revenue was 20% in fiscal 2023 and fiscal 2022.

These decreases are primarily due to lower personnel costs.

Research and Development

Research and development expense of $3.7 million in fiscal 2023 increased $0.5 million, or 14%, from $3.2 million in fiscal 2022.

Research and development expense as a percentage of total revenue increased to 23% in fiscal 2023 compared to 19% for fiscal 2022.

These increases compared to the prior period are primarily attributable to higher personnel costs.

Depreciation and Amortization

Depreciation and amortization expense of $1.5 million in fiscal 2023 decreased by $0.1 million, or 4%, from $1.6 million in fiscal 2022.

Depreciation and amortization as a percentage of total revenue remained consistent at 10% in fiscal 2023 and 2022. 

Goodwill Impairment

During the year ended September 30, 2023, the Company recognized a goodwill impairment charge of $7.5 million. There were no goodwill impairment charges recognized during the year ended September 30, 2022.

Restructuring and Acquisition Related Expenses

Restructuring and acquisition related expenses was $0.1 million in fiscal 2023, compared to $0.2 million in fiscal 2022.

During fiscal 2023 expenses incurred were related to severance and merger and acquisition costs and during fiscal 2022 expenses incurred were related to further acquisition integrations.

Loss from Operations

The loss from operations was $9.9 million for fiscal 2023 compared to a loss from operations of $1.9 million for fiscal 2022, a decrease of $8.0 million or 423%.

Change in fair value of contingent consideration, interest expense and other, net

The change in fair value of contingent consideration, interest expense and other, net, was $0.2 million of expense in fiscal 2023, which primarily consisted of non-recurring non-operating costs, compared to $0.4 million of income in fiscal 2022, which primarily consisted of the change in fair value of contingent consideration. 

Change in fair value of warrant 

The Company recognized a gain related to the change in fair value of warrant liabilities of $0.6 million for fiscal 2023, and a gain related to the change in fair value of warrant liabilities of $3.7 million for fiscal 2022. 

Provision for Income Taxes 

The provision for (benefit from) income taxes was ($94) thousand for fiscal 2023 and $30 thousand for fiscal 2022.

Income tax expense consists of estimated liability for federal and state income taxes owed by the Company. Net operating loss (“NOL”) carryforwards are estimated to be sufficient to offset any potential taxable income for all periods presented.

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

The Company maintains a valuation allowance against its net deferred tax assets.

As of September 30, 2023 and 2022, the Company had a valuation allowance on its net deferred tax assets of $10.8 million and $10.5 million, respectively.

The Federal NOL carryforward is approximately $37.3 million as of September 30, 2023 of which $29.6 million is subject to the 20-year carryforward and expire on various dates through 2038. The remaining federal NOL carryforward of $7.7 million is indefinite.

Net operating losses incurred after December 31, 2017 carry forward indefinitely.

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

Generally, after a change in control, a loss corporation cannot deduct NOL carryforwards in excess of the Section 382 limitation.

Due to these “change of ownership”

provisions, utilization of NOL carryforwards may be subject to an annual limitation on utilization against taxable income in future periods.

The Company has not performed a Section 382 analysis.

However, if performed, Section 382 may be found to limit potential future utilization of our NOL carryforwards.

The Company also has approximately $45.4 million in state NOLs which expire on various dates through 2041.

The acquisition of HawkSearch during the third quarter of fiscal 2021 resulted in the recognition of deferred tax liabilities of approximately $1.2 million related to intangible assets.

Prior to the business combination, the Company had a full valuation allowance on its net deferred tax assets.

The deferred tax liabilities generated from the business combination netted against the Company’s pre-existing deferred tax assets.

Consequently, the impact of such resulted in the release of $1.2 million of the pre-existing valuation allowance against the deferred tax assets and corresponding deferred tax benefit recognized during fiscal 2021.

We recognize deferred tax assets for stock-based awards that result in deductions on our income tax returns, based on the amount of stock-based compensation recognized and the statutory tax rate in the jurisdiction in which we will receive a tax deduction.

Adjusted EBITDA

We also measure our performance based on a non-GAAP (“Generally Accepted Accounting Principles”) measurement of earnings before interest, taxes, depreciation, amortization, stock-based compensation expense, impairment of goodwill and intangible assets, non-cash warrant related income/expense, other income and expenses, change in fair value of derivative instruments, change in fair value of contingent consideration, and restructuring and acquisition related charges (“Adjusted EBITDA”).

We believe this non-GAAP financial measure of Adjusted EBITDA is useful to management and investors in evaluating our operating performance for the periods presented and provides a tool for evaluating our ongoing operations.

Adjusted EBITDA, however, is not a measure of operating performance under accounting principles generally accepted in the United States of America (“U.S.

GAAP”) and should not be considered as an alternative or substitute for U.S.

GAAP profitability measures such as (i) income from operations and net income, or (ii) cash flows from operating, investing and financing activities, both as determined in accordance with U.S.

Adjusted EBITDA as an operating performance measure has material limitations because it excludes the financial statement impact of income taxes, net interest expense, amortization of intangibles, depreciation, goodwill impairment, restructuring charges, acquisition related expenses, loss on disposal of assets, other amortization, changes in fair value of warrant liabilities, changes in fair value of contingent consideration and stock-based compensation, and therefore does not represent an accurate measure of profitability.

As a result, Adjusted EBITDA should be evaluated in conjunction with net income (loss) for a complete analysis of our profitability, as net income (loss) includes the financial statement impact of these items and is the most directly comparable U.S.

GAAP operating performance measure to Adjusted EBITDA.

Our definition of Adjusted EBITDA may also differ from and therefore may not be comparable with similarly titled measures used by other companies, thereby limiting its usefulness as a comparative measure.

Because of the limitations that Adjusted EBITDA has as an analytical tool, investors should not consider it in isolation, or as a substitute for analysis of our operating results as reported under U.S.

The following table reconciles net income (loss) (which is the most directly comparable U.S.

GAAP operating performance measure) to Adjusted EBITDA:

Year Ended September 30,

Net income (loss)

Provision for income tax

Change in fair value of contingent consideration, interest expense and other, net

Change in fair value of warrants

Amortization of intangible assets

Depreciation and other amortization

Goodwill impairment

Restructuring and acquisition related charges

Stock-based compensation

Adjusted EBITDA

Liquidity and Capital Resources

Operating Activities

Cash provided by operating activities was $0.3 million during fiscal 2023 compared to cash used in operating activities of $0.1 million during fiscal 2022. The change in cash used in operating activities compared to the prior period was primarily due to a decrease in net earnings and changes in non-cash items, including changes in fair value of warrant liabilities and goodwill impairment, and changes to accounts payable and accrued liabilities as well as deferred revenue.

Investing Activities

Cash used in investing activities was $25 thousand during fiscal 2023 compared to cash used in investing activities of $0.2 million during fiscal 2022.

Cash used in investing activities during fiscal 2023 related primarily to purchases of property and equipment.

Cash used in investing activities during fiscal 2022 was primarily related to capitalized software development costs and purchases of property and equipment.

Financing Activities

Cash used in financing activities was $0.6 million during fiscal 2023 compared with $5.5 million during fiscal 2022.

Cash used in financing activities during both fiscal 2023 and fiscal 2022 was primarily related to payments of long-term debt and deferred purchase price and contingent consideration payments related to acquisitions completed during fiscal 2021.

Capital Resources and Liquidity Outlook

The Company has historically incurred operating losses and used cash on hand and from financing activities to fund operations as well as develop new products.

The Company believes that future revenues and cash flows will supplement its working capital and it has an appropriate cost structure to support future revenue growth.

The Company may offer and sell, from time to time, in one or more offerings, up to $50 million of its debt or equity securities, or any combination thereof. Such securities offerings may be made pursuant to the Company’s currently effective registration statement on Form S-3 (File No.

333-262764), which was initially filed with the Securities and Exchange Commission on February 16, 2022 and declared effective on March 4, 2022 (the “Shelf Registration”). A complete description of the types of securities that the Company may sell is described in the Preliminary Prospectus contained in the Shelf Registration. As of the date of the filing of this Quarterly Report, there are no active offerings for the sale or obligations to purchase any of the Company’s securities pursuant to the Shelf Registration. There can be no assurances that the Company will offer any securities for sale or that if the Company does offer any securities that it will be successful in selling any portion of the securities offered on a timely basis if at all, or on terms acceptable to us. Further, our ability to offer or sell such securities may be limited by rules of the Nasdaq Stock Market.

Off-Balance Sheet Arrangements

At this time, the Company does not have any off-balance sheet arrangements, financings or other relationships with unconsolidated entities or other persons, other than our operating leases.

Contractual Obligations

We lease all of our office locations.

The gross obligations for operating leases and subleases is $0.4 million of which $0.2 million is expected in the next twelve months.

Debt payments on the Company’s various debt obligations total $0.7 million of which $0.3 million is expected to be paid in the next twelve months.

Critical Accounting Policies and Estimates

These critical accounting policies and estimates by our management should be read in conjunction with Note 2, Summary of Significant Accounting Policies to the Consolidated Financial Statements that were prepared in accordance with U.S.

The preparation of consolidated financial statements in accordance with U.S.

GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting periods.

We regularly make estimates and assumptions that affect the reported amounts of assets and liabilities.

The most significant estimates included in our consolidated financial statements are the valuation of accounts receivable and long-term assets, including intangibles, goodwill and deferred tax assets, stock-based compensation, amounts of revenue to be recognized on service contracts in progress, unbilled receivables, and deferred revenue.

We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources.

The actual results experienced by us may differ materially and adversely from our estimates.

To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected.

We consider the following accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment:

Revenue recognition;

Allowance for doubtful accounts;

Accounting for goodwill and other intangible assets;

Accounting for business combinations;

Accounting for common stock purchase warrants;

Accounting for stock-based compensation.

Revenue Recognition

The Company derives its revenue from two sources:

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

Customers who license the software on a subscription basis, which can be described as “Software as a Service”

or “SaaS”, do not take possession of the software.

Revenue is recognized when control of these services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services.

If the consideration promised in a contract includes a variable amount, for example, overage fees, contingent fees or service level penalties, the Company includes an estimate of the amount it expects to receive for the total transaction price if it is probable that a significant reversal of cumulative revenue recognized will not occur.

The Company’s subscription service arrangements are non-cancelable and do not contain refund-type provisions.

Revenue is reported net of applicable sales and use tax.

The Company recognizes revenue from contracts with customers using a five-step model, which is described below:

Identify the customer contract;

Identify performance obligations that are distinct;

Determine the transaction price;

Allocate the transaction price to the distinct performance obligations;

Recognize revenue as the performance obligations are satisfied.

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

Identify performance obligations that are distinct - A performance obligation is a promise to provide a distinct good or service or a series of distinct goods or services.

A good or service that is promised to a customer is distinct if the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and the Company’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.

Determine the transaction price - The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer, excluding sales taxes that are collected on behalf of government agencies.

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

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

Recognize revenue as the performance obligations are satisfied - Revenue is recognized when or as control of the promised goods or services is transferred to customers.

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

Most subscription contracts are three-year terms.

Customers who license the software on a perpetual basis receive rights to use the software for an indefinite time period and an option to purchase post-customer support (“PCS”).

PCS revenue is recognized ratably on a straight-line basis over the period of performance and the perpetual license is recognized upon delivery.

The Company also offers hosting services for those customers who purchase a perpetual license and do not want to run the software in their environment.

Revenue from hosting is recognized ratably over the service period, ranging from one to three-year terms.

The Company recognizes revenue from professional services as the services are provided.

Customer Payment Terms

Payment terms with customers typically require payment 30 days from invoice date.

Payment terms may vary by customer but generally do not exceed 45 days from invoice date.

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

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

The Company’s subscription and hosting agreements provide for refunds when service is interrupted for an extended period of time and are reserved for in the month in which they occur, if necessary.

Our digital engagement services agreements with customers do not provide for any refunds for services or products and therefore no specific reserve for such is maintained.

In the infrequent instances where customers raise a concern over delivered products or services, we have endeavored to remedy the concern and all costs related to such matters have been insignificant in all periods presented.

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

In hosting arrangements, we provide warranties of up-time reliability.

We continue to monitor the conditions that are subject to the warranties to identify if a warranty claim may arise.

If we determine that a warranty claim is probable, then any related cost to satisfy the warranty obligation is estimated and accrued.

Warranty claims to date have been immaterial.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts which represents estimated losses resulting from the inability, failure or refusal of our clients to make required payments.

We analyze historical percentages of uncollectible accounts and changes in payment history when evaluating the adequacy of the allowance for doubtful accounts.

We use an internal collection effort, which may include our sales and services groups as we deem appropriate.

Although we believe that our allowances are adequate, if the financial condition of our clients deteriorates, resulting in an impairment of their ability to make payments, or if we underestimate the allowances required, additional allowances may be necessary, resulting in increased expense in the period in which such determination is made.

Accounting for Goodwill and Intangible Assets

Goodwill is tested for impairment annually during the fourth quarter of every fiscal year and more frequently if events and circumstances indicate that the asset might be impaired. The purpose of an impairment test is to identify any potential impairment by comparing the carrying value of a reporting unit including goodwill to its fair value.

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

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

Factors that could lead to a future impairment include material uncertainties such as operational, economic and competitive factors specific to the key assumptions underlying the fair value estimate we use in our impairment testing that have a reasonable possibility of changing.

This could include a significant reduction in projected revenues, a deterioration of projected financial performance, future acquisitions and/or mergers, and a decline in our market value as a result of a significant decline in our stock price.

Accounting for Business Combinations

The Company allocates the amount it pays for each acquisition to the assets acquired and liabilities assumed based on their fair values at the date of acquisition, including identifiable intangible assets which arise from a contractual or legal right or are separable from goodwill.

The Company bases the fair value of identifiable intangible assets acquired in a business combination on detailed valuations that use information and assumptions provided by management, which consider management’s best estimates of inputs and assumptions that a market participant would use.

The Company allocates any excess purchase price that exceeds the fair value of the net tangible and identifiable intangible assets acquired to goodwill.

The use of alternative valuation assumptions, including estimated growth rates, cash flows and discounts rates and estimated useful lives could result in different purchase price allocations and amortization expense in current and future periods.

Transaction costs associated with these acquisitions are expensed as incurred through general and administrative expense on the consolidated statements of operations.

In those circumstances where an acquisition involves a contingent consideration arrangement, the Company recognizes a liability equal to the fair value of the contingent payments expected to be made as of the acquisition date.

The Company re-measures this liability each reporting period and recognizes changes in the fair value through income (loss) before income taxes within the consolidated statements of operations.

Accounting for Common Stock Purchase Warrants

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.

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.

Accounting for Stock-Based Compensation

At September 30, 2023, we maintained two stock-based compensation plans, one of which has expired but still contains vested stock options.

The two plans are more fully described in Note 12 –

Stockholders’

Equity of these consolidated financial statements.

The Company accounts for stock-based compensation awards in accordance with ASC 718, Compensation-Stock Compensation . Share-based payments (to the extent they are compensatory) are recognized in our consolidated statements of operations based on their fair values. 

We recognize stock-based compensation expense for share-based payments issued that are expected to vest on a straight-line basis over the service period of the award, which is generally three years. In determining whether an award is expected to vest, we use an estimated, forward-looking forfeiture rate based upon our historical forfeiture rate and reduce the expense over the recognition period.

Estimated forfeiture rates are updated for actual forfeitures quarterly.

We also consider, each quarter, whether there have been any significant changes in facts and circumstances that would affect our forfeiture rate. Although we estimate forfeitures based on historical experience, actual forfeitures in the future may differ.

In addition, to the extent our actual forfeitures are different than our estimates, we recognize a true-up for the difference in the period that the awards vest, and such true-ups could materially affect our operating results.

We estimate the fair value of stock options using the Black-Scholes-Merton option valuation model. The fair value of an award is affected by our stock price on the date of grant as well as other assumptions, including the estimated volatility of our stock price over the term of the awards and the estimated period of time that we expect employees to hold their stock options.

The risk-free interest rate assumption we use is based upon United States Treasury interest rates appropriate for the expected life of the awards. We use the historical volatility of our publicly traded options in order to estimate future stock price trends.

In order to determine the estimated period of time that we expect employees to hold their stock options, we use historical trends of employee turnovers.

Our expected dividend rate is zero since we do not currently pay cash dividends on our common stock and do not anticipate doing so in the foreseeable future.

The aforementioned inputs entered into the option valuation model we use to fair value our stock awards are subjective estimates and changes to these estimates will cause the fair value of our stock awards and related stock-based compensation expense we recognize to vary.

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

What changed 10-K

Item 1A. Risk Factors