Bridgeline Digital, Inc. 10-K

Item 8. Financial Statements and Supplementary Data. INDEX TO FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm 24 Consolidated Balance Sheets as of September 30, 2024 and 2023 25 Consolidated Statements of Operations for the years ended September 30, 2024 and 2023 26 Consolidated Statements of Comprehensive Income/(Loss) for the years ended September 30, 2024 and 2023 27 Consolidated Statements of Stockholders’ Equity for the years ended September 30, 2024 and 2023 28 Consolidated Statements of Cash Flows for the years ended September 30, 2024 and 2023 29 Notes to Consolidated Financial Statements 30 23 Table of Contents 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, 2024 and 2023, 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, 2024, 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, 2024 and 2023, and the results of its operations and its cash flows for each of the two years in the period ended September 30, 2024, 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. 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. Going Concern Assessment As described in Note 1 to the consolidated financial statements, the Company has incurred net losses from operations for each of the two years in the period ended September 30, 2024, and net cash used in operating activities was $765,000 for the year ended September 30, 2024. The Company determined these, and other factors which include (1) current assets exceed current liabilities at September 30, 2024, when adjusted for deferred revenue and (2) the Company may offer and sell, from time to time, in one or more offerings, up to $50 million of their debt or equity securities, or any combination thereof, did not raise substantial doubt as to the Company's ability to continue as a going concern one year from the issuance date of the consolidated financial statements. In making this determination, management prepared a cash flow projection through December 2025. Management used significant assumptions in preparing the cash flow projection, which included expected revenue and cash receipts, operating costs and other obligations. The principal considerations for our determination that the evaluation of management's going concern assessment was a critical audit matter are the significant judgment and subjectivity inherent in the Company's future cash flow estimate and a high degree of auditor judgment in evaluating management's forecasts for at least the next twelve months. 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: ● assessed the overall reasonableness of the Company's future cash flow projections, including significant assumptions utilized by the Company and comparison to historical trends and other information obtained during the audit. ● compared October 2024 and November 2024 actual operating results to forecasted amounts, as well as the Company’s fiscal year 2024 operating budget to actual results, to determine overall accuracy of future operating cash flow projections. ● evaluated the adequacy of the Company's financial statement disclosures. /s/ PKF O'Connor Davies, LLP New York, New York December 23, 2024 We have served as the Company’s auditor since 2021. PCAOB ID No. 127 24 Table of Contents BRIDGELINE DIGITAL, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) As of September 30, 2024 2023 ASSETS Current assets: Cash and cash equivalents $ 1,390 $ 2,377 Accounts receivable, net 1,288 1,004 Prepaid expenses and other current assets 269 278 Total current assets 2,947 3,659 Property and equipment, net 74 151 Operating lease assets 163 390 Intangible assets, net 3,908 4,890 Goodwill, net 8,468 8,468 Other assets 42 73 Total assets $ 15,602 $ 17,631 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Current portion of long-term debt $ 282 $ 267 Current portion of operating lease liabilities 157 148 Accounts payable 1,112 1,255 Accrued liabilities 988 995 Deferred revenue 2,189 2,084 Total current liabilities 4,728 4,749 Long-term debt, net of current portion 244 435 Operating lease liabilities, net of current portion 6 241 Warrant liabilities 98 174 Other long-term liabilities 520 572 Total liabilities 5,596 6,171 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, 2024 and 2023 - - Series D Convertible Preferred stock: 4,200 shares authorized; no shares issued and outstanding at September 30, 2024 and 2023 - - Common stock - $ 0.001 par value; 50,000,000 shares authorized; 10,417,609 shares issued and outstanding at September 30, 2024 and September 30, 2023 10 10 Additional paid-in capital 101,833 101,275 Accumulated deficit ( 91,538 ) ( 89,577 ) Accumulated other comprehensive loss ( 299 ) ( 248 ) Total stockholders’ equity 10,006 11,460 Total liabilities and stockholders’ equity $ 15,602 $ 17,631 The accompanying notes are an integral part of these consolidated financial statements. 25 Table of Contents BRIDGELINE DIGITAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data) Years Ended September 30, 2024 2023 Net revenue: Subscription and perpetual licenses $ 12,134 $ 12,742 Digital engagement services 3,224 3,143 Total net revenue 15,358 15,885 Cost of revenue: Subscription and perpetual licenses 3,392 3,364 Digital engagement services 1,532 1,650 Total cost of revenue 4,924 5,014 Gross profit 10,434 10,871 Operating expenses: Sales and marketing 3,715 4,757 General and administrative 3,282 3,173 Research and development 4,160 3,679 Depreciation and amortization 1,086 1,528 Goodwill impairment - 7,517 Restructuring and acquisition related expenses 210 132 Total operating expenses 12,453 20,786 Loss from operations ( 2,019 ) ( 9,915 ) Interest expense and other, net ( 61 ) ( 189 ) Change in fair value of warrant liabilities 76 575 Loss before income taxes ( 2,004 ) ( 9,529 ) Provision for (benefit from) income taxes ( 43 ) ( 94 ) Net loss $ ( 1,961 ) $ ( 9,435 ) Net loss per share attributable to common stockholders: Basic $ ( 0.19 ) $ ( 0.91 ) Diluted $ ( 0.19 ) $ ( 0.91 ) Number of weighted average shares outstanding: Basic 10,417,609 10,417,609 Diluted 10,417,609 10,424,187 The accompanying notes are an integral part of these consolidated financial statements. 26 Table of Contents BRIDGELINE DIGITAL, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) (in thousands) Year Ended September 30, 2024 2023 Net loss $ ( 1,961 ) $ ( 9,435 ) Other comprehensive income (loss): Net change in foreign currency translation adjustment ( 51 ) ( 28 ) Comprehensive loss $ ( 2,012 ) $ ( 9,463 ) The accompanying notes are an integral part of these consolidated financial statements. 27 Table of Contents 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, 2022 350 $ - 10,417,609 $ 10 $ 100,704 $ ( 80,142 ) $ ( 220 ) $ 20,352 Stock-based compensation expense - - - - 571 - - 571 Net loss - - - - - ( 9,435 ) - ( 9,435 ) Foreign currency translation - - - - - - ( 28 ) ( 28 ) Balance at September 30, 2023 350 $ - 10,417,609 $ 10 $ 101,275 $ ( 89,577 ) $ ( 248 ) $ 11,460 Stock-based compensation expense - - - - 558 - - 558 Net loss - - - - - ( 1,961 ) - ( 1,961 ) Foreign currency translation - - - - - - ( 51 ) ( 51 ) Balance at September 30, 2024 350 $ - 10,417,609 $ 10 $ 101,833 $ ( 91,538 ) $ ( 299 ) $ 10,006 The accompanying notes are an integral part of these consolidated financial statements. 28 Table of Contents BRIDGELINE DIGITAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended September 30, 2024 2023 Cash flows from operating activities: Net loss $ ( 1,961 ) $ ( 9,435 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Amortization of intangible assets 982 1,378 Depreciation and other amortization 130 177 Change in fair value of warrant liabilities ( 76 ) ( 575 ) Stock-based compensation 558 571 Deferred income taxes ( 65 ) ( 63 ) Goodwill impairment - 7,517 Changes in operating assets and liabilities Accounts receivable ( 280 ) 184 Prepaid expenses and other current assets 7 ( 39 ) Other assets 3 33 Accounts payable and accrued liabilities ( 160 ) 264 Deferred revenue 95 194 Other liabilities 2 71 Total adjustments 1,196 9,712 Net cash (used in) provided by operating activities ( 765 ) 277 Cash flows used in investing activities: Purchase of property and equipment ( 29 ) ( 25 ) Cash flows from financing activities: Payments of long-term debt ( 209 ) ( 399 ) Payments of contingent consideration and deferred cash payable - ( 250 ) Net cash used in financing activities ( 209 ) ( 649 ) Effect of exchange rate changes on cash and cash equivalents 16 ( 82 ) Net decrease in cash and cash equivalents ( 987 ) ( 479 ) Cash and cash equivalents at beginning of year 2,377 2,856 Cash and cash equivalents at end of year $ 1,390 $ 2,377 Supplemental disclosures of cash flow information: Cash paid for: Interest $ 29 $ 51 Income taxes $ 21 $ 50 The accompanying notes are an integral part of these consolidated financial statements. 29 Table of Contents BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 1. Description of Business Overview Bridgeline Digital is an AI-powered marketing technology company that offers a suite of products that help companies grow online revenue by driving more visitors to their websites, converting more visitors to purchasers, and increasing average order value per purchaser. Bridgeline’s software is available through a cloud-based Software as a Service (“SaaS”) model. Additionally, Bridgeline’s software is available via a perpetual licensing business model, in which the software can reside on premise at the customer’s facility, or manage-hosted by Bridgeline. Bridgeline’s product offerings include: ● HawkSearch: a site search, recommendation, and personalization software application, built for marketers 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. ● Woorank: a Search Engine Optimization (“SEO”) audit tool that generates an instant performance audit of the site’s technical, on-page, and off-page SEO. ● Unbound: a Digital Experience Platform that includes Web Content Management, eCommerce, Digital Marketing, and Web Analytics. ● TruPresence: 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. Bridgeline Digital was incorporated under the laws of the State of Delaware on August 28, 2000. 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. The Company’s corporate headquarters 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. Liquidity and Management ’ s Plans 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 is continuing to maintain tight control over discretionary spending for the 2025 fiscal year. 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 Statement”). A complete description of the types of securities that the Company may sell is described in the Preliminary Prospectus contained in the Shelf Registration Statement. As of the date of the filing of this Annual Report, there are no active offerings for the sale or obligations to purchase any of the Company’s securities pursuant to the Shelf Registration Statement. There can be no assurances that the Company will offer any securities for sale or that if the Company does offer any securities that it will be successful in selling any portion of the securities offered on a timely basis if at all, or on terms acceptable to us. Further, our ability to offer or sell such securities may be limited by rules of the NASDAQ Capital Market. We are currently evaluating our future financing options, including the filing of a new shelf registration statement to replace our existing Shelf Registration Statement, which is set to expire on March 4, 2025. A new registration statement would provide us with continued flexibility to access capital and support our business objectives. The decision to file a new registration statement and the timing of any such filing will depend on several factors, including market conditions, our capital requirements, and our eligibility to utilize Form S- 3 at the time of filing. There can be no assurance that we will proceed with filing a new registration statement or that, if filed, it will be declared effective by the SEC. 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 credit losses, valuation of long-lived assets, recognition and measurement of deferred revenues, fair value of contingent consideration, fair value measurements related to the valuation of warrants and deferred tax valuation allowance. 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. 30 Table of Contents BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 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 credit losses 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. Accounts Receivable The allowance for credit losses is determined based upon a variety of judgments and factors. Factors considered in determining the allowance include historical collection, write-off experience, and management's assessment of collectability from customers, including current conditions, reasonable forecasts, and expectations of future collectability and collection efforts. Management continuously assesses the collectability of receivables and adjusts estimates based on actual experience and future expectations based on economic indicators. Management also monitors the aging analysis of receivables to determine if there are changes in the collections of accounts receivable. Receivable balances are written-off against the allowance for credit losses when such balances are deemed to be uncollectible. 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 as described below: 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. 31 Table of Contents BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 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. 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 did not incur any development costs during fiscal 2024 and fiscal 2023 . 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 Goodwill Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in each business combination. Goodwill is not amortized, but it is subject to an annual assessment for impairment, which the Company performs during the fourth quarter, or more frequently if events occur or circumstances change such that it is more likely than not that an impairment may exist. Goodwill is assessed at the consolidated level as one reporting unit. In applying the goodwill impairment test, the Company has the option to perform a qualitative test (also known as “Step 0” ) or a quantitative test (“Step 1” ). Under the Step 0 test, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. Qualitative factors may include, but are not limited to, economic conditions, industry and market considerations, cost factors, overall financial performance of the reporting unit and other entity and reporting unit specific events. If after assessing these qualitative factors, the Company determines it is “more-likely-than- not” that the fair value of the reporting unit is less than the carrying value, then performing the Step 1 quantitative test is necessary. Step 1 of the quantitative test requires comparison of the fair value of the reporting unit to the respective carrying value. If the carrying value of the reporting unit is less than the fair value, no impairment exists. Otherwise, the Company would recognize an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value up to the amount of goodwill. 32 Table of Contents BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) The Company generally estimates the fair value using a weighting of the income and market approaches. The Company uses industry accepted valuation models. Under the income approach, the Company uses a discounted cash flow methodology which requires management to make significant estimates and assumptions related to forecasted revenues, gross profit margins, operating income margins, working capital cash flow, perpetual growth rates, and long-term discount rates, among others. For the market approach, the Company uses the guideline public company method. Under this method, the Company utilizes information from comparable publicly traded companies with similar operating and investment characteristics as the reporting unit, to create valuation multiples that are applied to the operating performance of the reporting unit being tested, in order to obtain their respective fair values. The Company also reconciles the aggregate fair values of its reporting unit to its current market capitalization, allowing for a reasonable control premium. See Note 6. Valuation of Long-Lived Assets The Company periodically reviews its long-lived assets, which consist primarily of property and equipment and intangible assets with finite lives, for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may exceed their fair value. Recoverability of these assets is assessed using a number of factors, including operating results, business plans, budgets, economic projections and undiscounted cash flows. In addition, the Company’s evaluation considers non-financial data such as market trends, product development cycles and changes in management’s market emphasis. For the definite-lived intangible asset impairment review, the carrying value of the intangible assets is compared against the estimated undiscounted cash flows to be generated over the remaining life of the intangible assets. To the extent that the undiscounted future cash flows are less than the carrying value, the fair value of the asset is determined. If such fair value is less than the current carrying value, the asset is written down to the estimated fair value. There were no impairments of long-lived assets, other than impairment of goodwill, in fiscal 2024 or 2023 . 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 losses for fiscal 2024 and 2023 were ($ 51 ) 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. Common Stock Purchase Warrants The Company estimates 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 $ 74 thousand and $ 112 thousand for fiscal 2024 and 2023 , 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 2024 or fiscal 2023 . 33 Table of Contents BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) Income Taxes 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. The Company recognizes deferred tax assets for stock-based awards that result in future deductible amounts 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. Net Loss Per Share The Company presents basic and diluted loss per share information for its common stock. Basic net loss per share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding. Diluted net loss per share attributable to common stockholders is computed using the weighted average number of common shares outstanding during the period plus the dilutive effect of the weighted average 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 Adopted Accounting Standards Financial Instruments – Credit Losses Effective October 1, 2023, the Company adopted the requirements of ASU 2016 - 13, Financial Instruments - Credit Losses (Topic 326 ), Measurement of Credit Losses on Financial Instruments (“ASU 2016 - 13” ), along with the subsequently issued guidance amending and clarifying various aspects of ASU 2016 - 13, using the modified retrospective method of adoption. In accordance with that method, the comparative periods’ information continues to be reported under the relevant accounting guidance in effect for that period. For the current period, the standard replaces the existing incurred credit loss model with the current expected credit losses model for financial instruments, including accounts receivable, through a cumulative-effect adjustment to accumulated deficit as of the beginning of the first reporting period in which the guidance is effective. Although the adoption of ASU 2016 - 13 did not have a material impact on the condensed consolidated financial statements it represented a change in the accounting policy with respect to the estimation of allowance for uncollectible accounts. 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 adoption of ASU 2021 - 08 during the Company's fiscal 2024 first quarter did not have a material impact on its consolidated financial statements and related disclosures. 34 Table of Contents BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) Recently Issued Accounting Pronouncements Not Yet Effective Segment Reporting In November 2023, the FASB issued ASU No. 2023 - 07, Segment Reporting (Topic 280 ): Improvements to Reportable Segment Disclosures, which requires that an entity report segment information in accordance with Topic 280, Segment Reporting. The amendment in the ASU is intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. The amendments in this Update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The Company is currently evaluating the impact of the new standard on its consolidated financial statements which is expected to result in enhanced disclosures. Income Taxes In December 2023, the FASB issued ASU No. 2023 - 09, Income Taxes (Topic 740 ): Improvements to Income Tax Disclosures, which requires that an entity, on an annual basis, disclose additional income tax information, primarily related to the rate reconciliation and income taxes paid. The amendment in the ASU is intended to enhance the transparency and decision usefulness of income tax disclosures. The amendments in this Update are effective for annual periods beginning after December 15, 2024. The Company is currently evaluating the impact of the new standard on its consolidated financial statements which is expected to result in enhanced disclosures. Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures In November 2024, the FASB issued ASU No. 2024 - 03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220 - 40 ): Disaggregation of Income Statement Expenses, which requires that an entity disclose, in the notes to financial statements, specified information about certain costs and expenses. The amendment in the ASU is intended to enhance the transparency and decision usefulness to better understand the major components of an entity’s income statement. The amendments in this Update are effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027. The Company is currently evaluating the impact of the new standard on its consolidated financial statements which is expected to result in enhanced disclosures. All other Accounting Standards Updates issued but not yet effective are not expected to have a material effect on the Company’s future consolidated financial statements or related disclosures. 3. Accounts Receivable Accounts receivable consist of the following: As of September 30, 2024 2023 Accounts receivable $ 1,551 $ 1,184 Allowance ( 263 ) ( 180 ) Accounts receivable, net $ 1,288 $ 1,004 As of and for the years ended September 30, 2024 and 2023 no customers exceeded 10% of accounts receivable and no customers exceeded 10% of the Company’s total revenues. Allowance for Credit Losses The following illustrates the activity in our allowance for credit losses on accounts receivable: Balance as of October 1, 2023 $ 180 Credit loss expense 160 Write-off/adjustments ( 77 ) Balance as of September 30, 2024 $ 263 35 Table of Contents BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 4. Property and equipment Property and equipment consist of the following: As of September 30, 2024 2023 Furniture and fixtures $ 166 $ 166 Purchased software 18 18 Computer equipment 243 217 Leasehold improvements 205 206 Total cost 632 607 Less accumulated depreciation and amortization ( 558 ) ( 456 ) Property and equipment, net $ 74 $ 151 Depreciation and amortization on the above assets were $ 102 and $ 144 in fiscal 2024 and 2023 , 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, 2024 and 2023 , the aggregate fair values of long-term debts were $ 0.6 million and $ 0.6 million, respectively, with an aggregate carrying value of $ 0.5 million and $ 0.7 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 consolidated financial statements, the debt would be classified as Level 2 in the fair value hierarchy. 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 21 % - 55 % and 40.3 %, respectively, as of September 30, 2024 , and 27.7 % - 84.5 % and 45.5 %, respectively, as of September 30, 2023 . 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, 2024 As of September 30, 2023 Montage Capital Series D Preferred Montage Capital Series C Preferred Series D Preferred Volatility 51.0 % 52.5 % 60.7 % 51.7 % 73.6 % Risk-free rate 4.8 % 3.7 % 5.0 % 5.5 % 4.8 % Stock price $ 1.15 $ 1.15 $ 0.83 $ 0.83 $ 0.83 The Company recognized a gain $ 0.1 million and $ 0.6 million for the years ended September 30, 2024 and 2023 , 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. 36 Table of Contents BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) The Company’s goodwill (see Note 6 ) and contingent consideration obligations were from arrangements resulting from acquisitions, completed in prior periods not presented. The contingent consideration was a result of former potential future payments of consideration that were contingent upon the achievement of 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 fair value of contingent consideration was $ 250 thousand on September 30, 2022, all of which was paid in October 2022. There were no contingent consideration amounts remaining thereafter. Assets and liabilities of the Company measured at fair value as of September 30, 2024 and 2023 , are as follows. Goodwill, net, is a non-recurring fair value measurement. As of September 30, 2024 Level 1 Level 2 Level 3 Total Liabilities: Warrant liabilities: Montage - - 10 10 Series A and C - - - - Series D - - 88 88 Total warrant liabilities $ - $ - $ 98 $ 98 As of September 30, 2023 Level 1 Level 2 Level 3 Total Assets: Goodwill, net $ - $ - $ 8,468 $ 8,468 Liabilities: Warrant liabilities: Montage - - 12 12 Series A and C - - 11 11 Series D - - 151 151 Total warrant liabilities $ - $ - $ 174 $ 174 The following table provides a roll forward of the fair value, as determined by Level 3 inputs, as follows: Contingent Consideration Obligations Warrant Liabilities Balance at beginning of period, October 1, 2022 $ 250 $ 749 Additions - - Payments ( 250 ) - Adjustment to fair value - ( 575 ) Balance at end of period, September 30, 2023 $ - $ 174 Additions - - Exercises or payments - - Adjustment to fair value - ( 76 ) Balance at end of period, September 30, 2024 $ - $ 98 37 Table of Contents BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 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. 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. Annual tests were performed at September 30, 2024 and 2023 . Due to the current inflationary macro-economic conditions and a sustained decline in the Company’s market capitalization, for the 2023 test, the Company elected to forgo the qualitative test and performed a quantitative goodwill impairment test by comparing the fair value of its reporting unit to its respective carrying value. The Company estimated the fair value of the reporting unit using a 75% and 25% weighting to the market approach and income approach, respectively, and a discount rate of 22.9%. The Company used industry accepted valuation models. Under the income approach (level 3 inputs), the Company used a discounted cash flow methodology which required management to make significant estimates and assumptions related to forecasted revenues, gross profit margins, operating income margins, working capital cash flow, perpetual growth rates, and long-term discount rates, among others. For the market approach, the Company used the guideline public company method. Under this method, the Company utilized information from comparable publicly traded companies with similar operating and investment characteristics as the reporting unit, to create valuation multiples that were applied to the operating performance of the reporting unit being tested, in order to obtain their respective fair values. The Company also reconciled the aggregate fair value of its reporting unit to its current market capitalization, allowing for a reasonable control premium. For fiscal 2024, management performed a qualitative assessment that did not result in any impairment indicators at September 30, 2024 . Based on the impairment assessment performed , the Company recognized a goodwill impairment charge of $ 7.5 million, all of which was attributable to goodwill, during fiscal 2023. The Company concluded that the definite-lived and other long-lived assets were not impaired. Changes in the carrying value of goodwill are as follows: As of September 30, 2024 2023 Balance at beginning of period $ 8,468 $ 15,985 Impairments - ( 7,517 ) Balance at end of period $ 8,468 $ 8,468 7. Intangible Assets The components of intangible assets, net of accumulated amortization, are as follows: As of September 30, 2024 2023 Domain and trade names $ 572 $ 629 Customer related 3,048 3,678 Technology 288 583 Intangible, assets net $ 3,908 $ 4,890 Total amortization expense related to intangible assets was $ 982 and $ 1,378 for the years ended September 30, 2024 and 2023 , respectively, and is reflected in Operating expenses on the consolidated statements of operations. The estimated amortization expense for fiscal years 2025, 2026, 2027, 2028 and thereafter is $ 734 , $ 673 , $ 559 , $ 559 and $ 1,383 , respectively. 8. Accrued Liabilities Accrued liabilities consist of the following: As of September 30, 2024 2023 Compensation and benefits $ 405 $ 517 Professional fees 268 260 Other 315 218 Accrued liabilities $ 988 $ 995 38 Table of Contents BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 9. Restructuring and Acquisition Related Expenses The Company incurred restructuring and acquisition related expenses of $ 0.2 million and $ 0.1 million during the years ended September 30, 2024 and 2023 , respectively, which are included in Restructuring and acquisition related expenses in the consolidated statements of operations. 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 stockholders. The assumed debt obligations and seller note are denominated in Euros. Long-term debt consists as follows: As of September 30, 2024 2023 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. $ 325 $ 385 Seller’s note payable (“Seller’s note”), due to one of the selling stockholders, 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. 201 317 Total debt 526 702 Less current portion: ( 282 ) ( 267 ) Long-term debt, net of current portion $ 244 $ 435 At September 30, 2024 , future maturities of long-term debt are as follows: Fiscal year: 2025 $ 282 2026 81 2027 81 2028 82 Total debt $ 526 11. Leases The Company leases facilities in the United States for its corporate and regional field offices. During the years ended September 30, 2024 and 2023 , 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. 39 Table of Contents BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) Lease Costs For operating leases, minimum lease payments, including minimum scheduled rent increases, are recognized as operating lease costs on a straight-line basis over the applicable lease terms. Some operating lease arrangements include variable lease costs, including real estate taxes, insurance, common area maintenance or increases in rental costs related to inflation. Such variable payments, other than those dependent upon a market index or rate, are excluded from the measurement of the lease liability and are expensed when the obligation for those payments is incurred. Significant Assumptions and Judgments Management makes certain estimates and assumptions regarding each new lease and sublease agreement, renewal and amendment, including, but not limited to, property values, market rents, useful life of the underlying property, discount rate and probable term, all of which can impact ( 1 ) the classification as either an operating or finance lease, ( 2 ) measurement of lease liabilities and 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, 2024 2023 Operating lease cost $ 220 $ 260 Variable lease cost 81 145 Less: Sublease income, net ( 125 ) ( 156 ) Total $ 176 $ 249 Cash paid for amounts included in the measurement of lease liabilities was $ 177 thousand a nd $ 233 thousand for the years ended September 30, 2024 and 2023 , respectively, all of which represents operating cash flows from operating leases. As of September 30, 2024 and 2023 , the weighted average remaining lease term was 1.0 and 3.1 years, respectively, and the weighted average discount rate was 9.4 % and 7.0 % for the years ended September 30, 2024 and 2023 , respectively. At September 30, 2024 , 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: 2025 $ 185 $ 66 $ 119 2026 7 - 7 Total lease commitments 192 $ 66 $ 126 Less: Amount representing interest ( 29 ) Present value of lease liabilities 163 Less: Current portion ( 157 ) Operating lease liabilities, net of current portion $ 6 As of September 30, 2024 , the Company had no lease commitments that extend past fiscal 2028, assuming the Company does not exercise its termination option in 2025. The Rosemont, Illinois lease contains an early termination clause, which the Company expects to execute, under which the lease can be terminated on August 31, 2025 upon payment of a $ 93 thousand termination fee. Starting October 1, 2023, the Company has subleased its office space in Rosemont, Illinois. The sublease is for $ 6 thousand per month, through August 31, 2025. At September 30, 2023 , 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: 2024 $ 177 $ 25 $ 152 2025 151 - 151 2026 72 - 72 2027 61 - 61 2028 11 - 11 Total lease commitments 472 $ 25 $ 447 Less: Amount representing interest ( 83 ) Present value of lease liabilities 389 Less: Current portion ( 148 ) Operating lease liabilities, net of current portion $ 241 40 Table of Contents BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 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, 2024 and 2023 , 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, 2024 and 2023 , 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, 2024 and 2023 , 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. Series D Convertible Preferred Stock The Company has designated 4,200 shares of its preferred stock as Series D Convertible Preferred Stock (“Series D 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. The Company may not effect, and a holder will not be entitled to convert, the Series D Preferred Stock or exercise any Series D Preferred Warrants, which, upon giving effect to such conversion or exercise, would cause (i) the aggregate number of shares of common stock beneficially owned by the Purchaser (together with its affiliates) to exceed 4.99 % (or, at the election of the holder, 9.99 %) of the number of shares of common stock outstanding immediately after giving effect to the exercise. As of September 30, 2024 and 2023 , the Company had no shares of Series D Preferred Stock outstanding. 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. 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. The 2016 Plan provides for the issuance in the aggregate of up to 2,400,000 shares of common stock associated with awards granted under the Stock Incentive Plan. As of September 30, 2024 , there were 2,107,895 options outstanding and 38,940 shares available for future issuance under the 2016 Plan. 41 Table of Contents BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) Compensation Expense Compensation expense is generally recognized on a graded accelerated basis over the vesting period of grants. Compensation expense is recorded in the consolidated statements of operations with a portion charged to Cost of revenue and a portion to Operating expenses, depending on the employee’s department. During the years ended September 30, 2024 and 2023 , compensation expense related to share-based payments was as follows: Year Ended September 30, 2024 2023 Cost of revenue $ - $ 7 Operating expenses 505 395 Interest expense and other, net 53 169 Total $ 558 $ 571 As of September 30, 2024 , the Company had approximately $ 0.4 million of unrecognized compensation costs related to unvested shared-based payments, which is expected to be recognized over a weighted-average period of 1.4 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. During fiscal 2024, all Series A, Series C, and Placement Agent Warrants issued in connect ion with the Series C Preferred Stock and Investor Warrants expired. Series D Preferred Warrants – In May 2021, in connection with the issuance of the Company’s Series D Preferred Stock, the Company issued warrants to purchase the Company’s common stock. These warrants consisted of (i) warrants issued to investors in Series D Preferred Stock to purchase in the aggregate up to 592,106 shares of common stock with an initial term of five and a half years which ends on November 16, 2026 and an initial exercise price of $2.51 and (ii) Placement Agents warrants to purchase an aggregate of 179,536 shares of common stock with an initial term of five years which ends on May 12, 2026 and an initial exercise price of $2.85. Collectively, these warrants are referred to as the “Series D Preferred Warrants.” The Company may not effect, and a holder will not be entitled to convert, the Series D Preferred Stock or exercise any Series D Preferred Warrants, which, upon giving effect to such conversion or exercise, would cause (i) the aggregate number of shares of common stock beneficially owned by the Purchaser (together with its affiliates) to exceed 4.99% (or, at the election of the holder, 9.99% ) of the number of shares of common stock outstanding immediately after giving effect to the exercise. As of September 30, 2024 , 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 years ended September 30, 2024 and 2023 , there were no warrants exercised. 42 Table of Contents BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) Total warrants outstanding as September 30, 2024 , were as follows: Type Issue Date Shares Price Expiration Financing (Montage) 10/10/2017 1,327 $ 132.50 10/10/2025 Placement Agent 2/4/2021 31,564 $ 3.88 2/4/2026 Investors 5/14/2021 592,106 $ 2.51 11/16/2026 Placement Agent 5/14/2021 179,536 $ 2.85 5/12/2026 Total 804,533 Warrant Issuances The Company did not issue warrants to purchase common stock during the years ended September 30, 2024 and 2023 . Summary of Option and Warrant Activity and Outstanding Shares During the year ended September 30, 2024 the Company granted (i) options to purchase 250,000 shares to members of management at an exercise price of $ 0.81 , which vest ratably on a quarterly basis over a three -year period and (ii) options to purchase 80,000 shares to board members at an exercise price of $0.90, which vested immediately. During the year ended September 30, 2023 the Company, (i) issued 300,000 total options to its Chief Executive Officer at an exercise price of $ 1.18 , which vest in 36 equal monthly installments over a three -year period, (ii) issued 50,000 total options to employees at an exercise price of $ 1.34 , which vest ratably over a three -year period in equal quarterly installments, (iii) issued 152,000 total options to employees at an exercise price of $1.18, which vest ratably over a three -year period in equal quarterly installments, and (iv) issued 200,000 total options to the Board of Directors at an exercise price of $1.18, which vested immediately. 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, 2024 and 2023 are as follows: 2024 2023 Board Non-Board Board Non-Board Weighted-average fair value per share option $ 0.67 $ 0.67 $ 0.84 $ 0.90 Expected life (in years) 5.8 5.0 5.0 5.8 Volatility 108.5 % 96.1 % 88.5 % 90.7 % Risk-free interest rate 4.0 % 4.2 % 4.1 % 4.0 % 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. 43 Table of Contents BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 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, 2022 200,000 1,157,927 $ 3.49 1,757,629 $ 3.64 Granted - 702,000 1.19 - - Exercised - - - - - Forfeited - ( 28,348 ) 2.49 - - Expired - ( 64 ) 1,873.44 - - Outstanding, September 30, 2023 200,000 1,831,515 $ 2.56 1,757,629 $ 3.64 Granted - 330,000 0.83 - - Exercised - - - - - Forfeited - ( 53,518 ) 1.50 - - Expired - ( 102 ) 1,413.97 ( 953,096 ) 2.85 Outstanding, September 30, 2024 200,000 2,107,895 $ 2.25 804,533 $ 2.85 There were 1,543,890 and 1,148,097 options vested and exercisable as of September 30, 2024 and 2023 , respectively. The options outstanding at September 30, 2024 and 2023 had an aggregate intrinsic value of $ 105,000 and $ 0 , respectively. A summary of the status of unvested options is as follows: Weighted Average Grant-Date Shares Fair Value Unvested at October 1, 2023 683,418 $ 1.10 Granted 330,000 0.67 Vested ( 436,413 ) 1.06 Forfeited/Cancelled ( 13,000 ) 1.07 Unvested at September 30, 2024 564,005 $ 0.88 The following table summarizes information about outstanding stock options at September 30, 2024 : Exercise Price Number of Options Weighted Average Remaining Contractual Life (Years) Weighted Average Exercise Price Aggregate Intrinsic Value Options outstanding 2,107,895 7.7 $ 2.25 $ 105,000 Options exercisable 1,543,890 7.3 $ 2.66 $ 34,166 44 Table of Contents BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 13. Net Loss Per Share Attributable to Common Stockholders Basic and diluted net loss per share is computed as follows: (in thousands, except share and per share data) Years Ended September 30, 2024 2023 Numerator: Net loss applicable to common stockholders - basic earnings per share $ ( 1,961 ) $ ( 9,435 ) Effect of dilutive securities: Change in fair value of in-the-money warrant derivative liabilities - ( 6 ) Net loss applicable to common stockholders - diluted earnings per share $ ( 1,961 ) $ ( 9,441 ) Denominator: Weighted-average shares outstanding for basic earnings per share 10,417,609 10,417,609 Effect of dilutive securities: Options - - Warrants - 6,578 Preferred stock - - Weighted-average shares outstanding for diluted earnings per share 10,417,609 10,424,187 Basic net income (loss) per share $ ( 0.19 ) $ ( 0.91 ) Diluted net income (loss) per share $ ( 0.19 ) $ ( 0.91 ) 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, 2024 2023 Stock options 2,107,895 1,831,515 Warrants 804,533 1,743,891 Convertible preferred stock 38,889 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, 2024 and 2023 . 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, 2024 and 2023 , 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, 2024 , the Company was not engaged in any material legal proceedings. 45 Table of Contents BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 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: Year Ended September 30, Revenues: 2024 2023 United States $ 12,824 $ 12,828 International 2,534 3,057 $ 15,358 $ 15,885 The largest concentration within the Company’s international revenue geography is within Canada. Long-lived assets located in foreign jurisdictions aggregated approximately $ 1.0 million and $ 1.3 million as of September 30, 2024 and 2023 , respectively. The Company’s revenue by type is as follows: Years Ended September 30, Revenues: 2024 2023 Digital Engagement Services $ 3,224 $ 3,146 Subscription 10,699 11,182 Maintenance 437 541 Hosting 998 1,016 $ 15,358 $ 15,885 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, 2024 and 2023 : Deferred Revenue Current Long Term Balance as of October 1, 2022 $ 1,943 $ 384 Increase (decrease) 141 ( 39 ) Balance as of September 30, 2023 2,084 345 Increase (decrease) 105 - Balance as of September 30, 2024 $ 2,189 $ 345 46 Table of Contents 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, 2024 and 2023 , is as follows: Year Ended September 30, 2024 2023 Current: Federal $ - $ - State 22 6 Foreign - ( 37 ) Total current 22 ( 31 ) Deferred: Federal - - State - - Foreign ( 65 ) ( 63 ) Total deferred ( 65 ) ( 63 ) Grand total $ ( 43 ) $ ( 94 ) 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, 2024 2023 Income tax provision/(benefit) at the federal statutory rate of 21% $ ( 421 ) $ ( 1,995 ) Permanent differences, net 36 1,498 State income tax provision/(benefit) 17 ( 30 ) Foreign income taxed at different rates ( 118 ) 91 Change in valuation allowance on deferred tax assets 534 260 True up adjustments ( 91 ) 82 Total $ ( 43 ) $ ( 94 ) As of September 30, 2024 , the Company has federal net operating loss (“NOL”) carryforwards of approximately $ 36.8 million of which $ 29.0 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. 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 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 the Company’s NOL carryforwards. The Company also has approximately $ 50.2 million in state NOLs which expire on various dates through 2044. 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, 2024 and 2023 . For the years ended September 30, 2024 and 2023 , the valuation allowance for deferred tax assets increased by $ 0.5 million and $ 0.3 million, respectively. 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. We also recognize 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 2021 to 2024 generally remain open to examination by the IRS and state authorities. 47 Table of Contents 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, 2024 2023 Deferred tax assets: Bad debt reserve $ 66 $ 46 Accrued expenses 139 78 Net operating loss carryforwards 10,699 10,627 Right of use liability 97 248 Stock options 498 379 Other 17 17 Total deferred tax assets 11,516 11,395 Valuation allowance ( 11,336 ) ( 10,802 ) Net deferred tax assets 180 593 Deferred tax liabilities: Right of use asset 97 248 Depreciation 7 47 Intangibles 251 525 Total deferred tax liabilities 355 820 Net deferred tax liabilities $ ( 175 ) $ ( 227 ) 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. There were no undistributed earnings of the Company’s foreign subsidiaries at September 30, 2024 and 2023 . The 2017 Tax Act subjects a U.S. stockholder 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, 2024 and September 30, 2023 , the Company did not have GILTI to be reported. 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, 2024 and 2023 . The Company does not expect any change to this determination in the next twelve months. 48 Table of Contents BRIDGELINE DIGITAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share data) 17. Related Party Transactions In October 2013, Mr. Michael Taglich joined the Board of Directors. Michael Taglich is the Chairman and President of Taglich Brothers, Inc. (“Taglich Brothers”), a New York based securities firm. Taglich Brothers acted as 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 4,246 shares of common stock at a weighted average price of $ 321.00 per share and were granted Placement Agent Warrants to purchase 10,926 shares of common stock at a weighted average price of $ 761.61 per share. 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. Fees for the services were $ 8 thousand per month for three months and $ 5 thousand per month thereafter, cancellable at any time. Taglich Brothers Inc. could also earn a success fee ranging from $ 200 thousand for a revenue target acquisition of under $5 million up to $ 1 million for an acquisition target over $200 million. In connection with the asset purchase of Stantive, Taglich Brothers earned a success fee of $ 200,000 . 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 the Nasdaq Stock Market Rule 5635 (c), for which approval by the stockholders of the Company was obtained on April 26, 2019. In connection with the Company’s registered direct offering completed in February 2021, the Company issued Taglich Brothers 29,084 Investors warrants. Each warrant to purchase common stock expires five years from the date of issuance and is non-cash exercisable for $ 3.875 per share beginning six -months from the date of issuance, or February 4, 2021. The warrants expire February 4, 2026. In connection with the Company’s Series D Preferred Stock registered direct offering and PIPE completed in May 2021, the Company issued Taglich Brothers 53,861 Investors warrants. Each warrant to purchase common stock expires five years from the date of issuance and is non-cash exercisable for $ 2.850 per share beginning six -months from the date of issuance, or May 14, 2021. The warrants expire May 12, 2026. 18. Subsequent Events The Company evaluated subsequent events through the date of this filing and concluded there were no material subsequent events requiring adjustment to or disclosure in these consolidated financial statements. 49 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.