Bridgeline Digital, Inc.: Form 10-Q for the period ended Mar 31, 2024

All statements included in this section, other than statements or characterizations of historical fact, are forward-looking statements. These “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, are based on our current expectations, estimates and projections about our industry, management's beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can often be identified by words such as "anticipates," "expects," "intends," "plans," "predicts," "believes," "seeks," "estimates," "may" "will," "should," "would," "could," "potential," "continue," "ongoing," similar expressions, and variations or negatives of these words. These statements appear in a number of places and include statements regarding the intent, belief or current expectations of Bridgeline Digital, Inc. These forward-looking statements are not guarantees of future results and are subject to risks, uncertainties and assumptions, including, but not limited to, business operations and the business of our customers, suppliers and partners; our ability to retain and upgrade current customers; increasing our recurring revenue; our ability to attract new customers; our revenue growth rate; our history of net loss and our ability to achieve or maintain profitability; instability in the financial markets, including the banking sector; our liability for any unauthorized access to our data or our users’ content, including through privacy and data security breaches; any decline in demand for our platform or products; changes in the interoperability of our platform across devices, operating systems, and third-party applications that we do no control; competition in our markets; our ability to respond to rapid technological changes, extend our platform, develop new features or products, or gain market acceptance for such new features or products, particularly in light of potential disruptions to the productivity of our employees resulting from remote work; our ability to manage our growth or plan for future growth, and our acquisition of other businesses and the potential of such acquisitions to require significant management attention, disrupt our business, or dilute stockholder value; the volatility of the market price of our common stock; the ability to maintain our listing on the NASDAQ Capital Market; or our ability to maintain an effective system of internal controls as well as other risks described in our filings with the Securities and Exchange Commission. Any of such risks could cause our actual results to differ materially and adversely from those expressed in any forward-looking statement. We urge readers to review carefully the risk factors described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023, as well as in the other documents that we file with the Securities and Exchange Commission.

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

Overview

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

All of our software is available through a cloud-based Software as a Service (“SaaS”) model, whose flexible architecture provides customers hosting and support. Additionally, Unbound and HawkSearch have the option to be available via a traditional perpetual licensing business model, in which the software can reside on a dedicated infrastructure either on premise at the customer’s facility, or manage-hosted by us via a cloud-based, dedicated hosted services model.

Our product offerings include:

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

Celebros Search: a commerce-oriented site search product that provides Natural Language Processing with artificial intelligence to present relevant search results based on long-tail keyword searches.

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.

We were incorporated under the laws of the State of Delaware on August 28, 2000.

Locations

Our corporate office is located in Woburn, Massachusetts. We maintain regional field offices serving the following geographical locations: Woodbury, New York; Rosemont, Illinois; Atascadero, California; Ontario, Canada; and Brussels, Belgium.

We have 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.

Customer Information

We currently have over 2,000 active customers. For the three and six months ended March 31, 2024 and 2023, no customer exceeded 10% of our revenue.

Results of Operations for the Three and Six Months Ended March 31, 2024 compared to the Three and Six Months Ended March 31, 2023

Total net revenue for each of the three months ended March 31, 2024 and 2023, was $3.8 million and $4.1 million, respectively. We had net loss of $(0.6) million and $(0.5) million for the three months ended March 31, 2024 and 2023, respectively. Basic and diluted loss per share attributable to common shareholders was $ (0.06) for the three months ended March 31, 2024. Basic and diluted net loss per share attributable to common shareholders was $ (0.05) for the three months ended March 31, 2023.

Total net revenue for each of the six months ended March 31, 2024 and 2023, was $7.6 million and $8.2 million, respectively. We had net loss of $(1.2) million and $(0.6) million for the six months ended March 31, 2024 and 2023, respectively. Included in the net loss for the six months ended March 31, 2023, was a gain of $0.5 million as a result of the change in the fair value of certain warrant liabilities. Basic and diluted loss per share attributable to common shareholders was $ (0.12) for the six months ended March 31, 2024. Basic and diluted net loss per share attributable to common shareholders was $ (0.06) for the six months ended March 31, 2023.

(in thousands)

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Revenue

Our revenue is derived from two sources: (i) subscription and perpetual licenses and (ii) digital engagement services.

Subscription and Perpetual Licenses

Revenue from subscription (SaaS) and perpetual licenses for the three months ended March 31, 2024 of $3.0 million decreased $(0.3) million from $3.3 million for the three months ended March 31, 2023.

The decrease for the three months ended March 31, 2024 compared to the prior period was a result of reduced subscriptions on legacy products, which offset increases in revenue from HawkSearch.

Revenue from subscription (SaaS) and perpetual licenses for the six months ended March 31, 2024 of $6.1 million decreased $(0.4) million from $6.5 million for the six months ended March 31, 2023.

The decrease for the six months ended March 31, 2024 compared to the prior period partially resulted from a reduction in revenue from a particular customer as well as reduced subscriptions on legacy products, which offset increases in revenue from HawkSearch.

Subscription and perpetual licenses revenue as a percentage of total revenue decreased to 79% from 80% for the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

Subscription and perpetual licenses revenue as a percentage of total revenue increased to 81% for the six months ended March 31, 2024 from 80% for the six months ended March 31, 2023.

Digital Engagement Services

Revenue from digital engagement services of $0.8 million for the three months ended March 31, 2024 remained consistent with the three months ended March 31, 2023.

Revenue from digital engagement services of $1.5 million for the six months ended March 31, 2024 decreased from $1.7 million for the six months ended March 31, 2023 with a majority of the decrease in the three months ended March 31, 2024.

Digital engagement services revenue as a percentage of total revenue increased to 21% for the three months ended March 31, 2024 from 20% for the three months ended March 31, 2023.

Digital engagement services revenue as a percentage of total revenue decreased to 19% for the six months ended March 31, 2024 from 20% for the six months ended March 31, 2023.

Cost of Revenue

Total cost of revenue of $1.3 million for the three months ended March 31, 2024 remained consistent with the three months ended March 31, 2023.

Total cost of revenue of $2.5 million for the six months ended March 31, 2024 remained consistent with the six months ended March 31, 2023.

Cost of Subscription and Perpetual Licenses

Cost of subscription and perpetual licenses increased 2% to $0.9 million for the three months ended March 31, 2024, from $0.8 million for the three months ended March 31, 2023.

The cost of subscription and perpetual licenses as a percentage of subscription and perpetual licenses revenue was 29% and 26% for the three months ended March 31, 2024 and 2023, respectively.

Cost of subscription and perpetual licenses decreased (1)% to $1.7 million for the six months ended March 31, 2024, from $1.7 million for the six months ended March 31, 2023.

The cost of subscription and perpetual licenses as a percentage of subscription and perpetual licenses revenue was 28% and 26% for the six months ended March 31, 2024 and 2023, respectively.

The changes are primarily due to server costs and personnel costs.

Cost of Digital Engagement Services

Cost of digital engagement services of $0.4 million remained consistent for the three months ended March 31, 2024, with the three months ended March 31, 2023.

The cost of total digital engagement services as a percentage of total digital engagement services revenue was 53% and 51% for the three months ended March 31, 2024 and 2023, respectively.

Cost of digital engagement services decreased (5)% to $0.8 million for the six months ended March 31, 2024 from $0.8 million for the six months ended March 31, 2023.

The cost of total digital engagement services as a percentage of total digital engagement services revenue was 54% and 50% for the six months ended March 31, 2024 and 2023, respectively.

The decrease in cost of digital engagement services in the six month period is primarily due to lower total digital engagement services revenue.

Gross Profit

Gross profit of $2.5 million for the three months ended March 31, 2024 decreased $(0.3) million from $2.8 million for the three months ended March 31, 2023.

The gross profit margin was 66% and 69% for the three months ended March 31, 2024 and 2023, respectively.

Gross profit of $5.1 million for the six months ended March 31, 2024 decreased $(0.6) million from $5.6 million for the six months ended March 31, 2023.

The gross profit margin was 67% and 69% for the six months ended March 31, 2024 and 2023, respectively.

Operating Expenses

Sales and Marketing Expenses

Sales and marketing expenses of $0.9 million for the three months ended March 31, 2024 decreased from $1.4 million for the three months ended March 31, 2023.

Sales and marketing expense as a percentage of total revenue was 25% and 34% for the three months ended March 31, 2024 and 2023, respectively.

Sales and marketing expenses of $1.9 million for the six months ended March 31, 2024 decreased from $2.6 million for the six months ended March 31, 2023.

Sales and marketing expense as a percentage of total revenue was 25% and 32% for the six months ended March 31, 2024 and 2023, respectively.

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

General and Administrative Expenses

General and administrative expenses of $0.8 million for the three months ended March 31, 2024 remained consistent with the three months ended March 31, 2023.

General and administrative expense as a percentage of total revenue was 20% for the three months ended March 31, 2024 and 18% for the three months ended March 31, 2023.

General and administrative expenses of $1.5 million for the six months ended March 31, 2024 decreased from $1.6 million for the six months ended March 31, 2023.

General and administrative expense as a percentage of total revenue was 20% for the six months ended March 31, 2024 and 19% for the six months ended March 31, 2023.

The increases changes as a percentage of total revenue in both the three and six month comparable period is primarily due to the decrease in revenue.

Research and Development

Research and development expenses of $1.0 million for the three months ended March 31, 2024 increased $0.1 million, from $0.9 million for the three months ended March 31, 2023.

Research and development expenses as a percentage of total revenue was 27% for the three months ended March 31, 2024 and 23% for the three months ended March 31, 2023.

Research and development expenses of $2.1 million for the six months ended March 31, 2024 increased $0.5 million, from $1.7 million for the six months ended March 31, 2023.

Research and development expenses as a percentage of total revenue was 28% for the six months ended March 31, 2024 and 20% for the six months ended March 31, 2023.

The increases for each of the comparable periods is primarily attributable to additional personnel costs.

Depreciation and Amortization

Depreciation and amortization expense was $0.3 million and $0.4 million for the three months ended March 31, 2024 and 2023, respectively.

Depreciation and amortization as a percentage of total revenue was 8% and 9% for the three months ended March 31, 2024 and 2023, respectively.

Depreciation and amortization expense was $0.7 million and $0.8 million for the six months ended March 31, 2024 and 2023, respectively.

Depreciation and amortization as a percentage of total revenue was 9% for the six months ended March 31, 2024 and 2023.

Loss from Operations

The loss from operations was $(0.5) million and $(0.7) for the three months ended March 31, 2024 and 2023. The loss from operations was $(1.2) million and $(1.0) million for the six months ended March 31, 2024 and 2023.

Interest expense and other, net

During the three months ended March 31, 2024 and 2023, interest expense and other, net, was $(53) and $(10) thousand, respectively.

During the six months ended March 31, 2024 and 2023, interest expense and other, net, was $(53) thousand and $(19) thousand, respectively.

The increase were primarily the result of stock based compensation from options issued to board members.

Change in fair value of warrant liabilities

We recognized a gain/(loss) related to the change in fair value of warrant liabilities of $(25) thousand and $0.2 million, for the three months ended March 31, 2024 and 2023, respectively.

We recognized a gain/(loss) related to the change in fair value of warrant liabilities of $(7) thousand and $0.5 million, for the six months ended March 31, 2024 and 2023, respectively.

Provision for Income Taxes

The provision for income taxes was $5 thousand for the three months ended March 31, 2024 and $10 thousand for the three months ended March 31, 2023. The provision for income taxes was $10 thousand for the six months ended March 31, 2024 and $16 thousand for the six months ended March 31, 2023. The provision for income taxes consists of estimated liability for federal and state income taxes owed by us. Net operating loss (“NOL”) carryforwards are estimated to be sufficient to offset any potential taxable income for all periods presented. A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. We maintain a valuation allowance against its net deferred tax assets.

Adjusted EBITDA

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

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

Adjusted EBITDA, however, is not a measure of operating performance under accounting principles generally accepted in the United States of America (“U.S. GAAP”) and should not be considered as an alternative or substitute for U.S. GAAP profitability measures such as (i) income from operations and net income, or (ii) cash flows from operating, investing and financing activities, both as determined in accordance with U.S. GAAP. Adjusted EBITDA as an operating performance measure has material limitations because it excludes the financial statement impact of net interest expense, income taxes, depreciation, amortization of intangibles, stock-based compensation, goodwill impairment, changes in fair value of warrant liabilities, loss on disposal of assets, other amortization, changes in fair value of contingent consideration and restructuring charges, acquisition related expenses, and therefore does not represent an accurate measure of profitability. As a result, Adjusted EBITDA should be evaluated in conjunction with net income (loss) for a complete analysis of our profitability, as net income (loss) includes the financial statement impact of these items and is the most directly comparable U.S. GAAP operating performance measure to Adjusted EBITDA. Our definition of Adjusted EBITDA may also differ from and therefore may not be comparable with similarly titled measures used by other companies, thereby limiting its usefulness as a comparative measure. Because of the limitations that Adjusted EBITDA has as an analytical tool, investors should not consider it in isolation, or as a substitute for analysis of our operating results as reported under U.S. GAAP.

The following table reconciles net loss (which is the most directly comparable U.S. GAAP operating performance measure) to Adjusted EBITDA (in thousands):

Liquidity and Capital Resources

Cash Flows

Operating Activities

Cash used in operating activities was $(1.0) million for the six months ended March 31, 2024, compared to $0.5 million cash provided by operating activities for the six months ended March 31, 2023. The change in cash used in operating activities, compared to the prior period, was primarily due to a decrease in net earnings and changes in non-cash items, including changes in fair value of warrant liabilities, and changes in accounts receivable, prepaid expenses and other current assets, accounts payable and accrued liabilities and deferred revenue.

Investing Activities

There was $(5) thousand cash used in investing activities for the six months ended March 31, 2024 and $(16) thousand for the six months ended March 31, 2023, related primarily to purchases of property and equipment.

Financing Activities

Cash used in financing activities was $(0.1) million for the six months ended March 31, 2024, related to long-term debt payments related to acquisitions completed during fiscal 2021. Cash used in financing activities was $(0.6) million for the six months ended March 31, 2023, primarily related to payments of long-term debt and deferred purchase price payable and contingent consideration payments related to acquisitions completed during fiscal 2021.

Capital Resources and Liquidity Outlook

We have historically incurred operating losses and used cash on hand and from financing activities to fund operations as well as develop new products. We continue to maintain tight control over discretionary spending for the 2024 fiscal year. We believe that future revenues and cash flows will supplement our working capital and have an appropriate cost structure to support future revenue growth.

We 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 our 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 we may sell is described in the Preliminary Prospectus contained in the Shelf Registration Statement. As of the date of the filing of this Quarterly Report, there are no active offerings for the sale or obligations to purchase any of our securities pursuant to the Shelf Registration Statement. There can be no assurances that we will offer any securities for sale or that if we do offer any securities that we will be successful in selling any portion of the securities offered on a timely basis if at all, or on terms acceptable to us. Further, our ability to offer or sell such securities may be limited by rules of the NASDAQ Capital Market.

Off-Balance Sheet Arrangements

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

Contractual Obligations

We lease all of our office locations. The gross obligations for operating leases is $0.3 million, of which $0.2 million is expected to be paid in the next twelve months. Debt payments on our various debt obligations total $0.6 million of which $0.2 million is expected to be paid in the next twelve months.

Critical Accounting Policies

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

The preparation of financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period. We regularly make estimates and assumptions that affect the reported amounts of assets and liabilities. The most significant estimates included in our financial statements are the valuation of accounts receivable and long-term assets, including intangibles, goodwill and deferred tax assets, stock-based compensation, amounts of revenue to be recognized on service contracts in progress, unbilled receivables, and deferred revenue. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected.

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

• Revenue recognition;
• Allowance for credit losses;
• Accounting for goodwill and other intangible assets;
• Accounting for business combinations;
• Accounting for common stock purchase warrants; and
• Accounting for stock-based compensation.

Revenue Recognition

We derive our revenue from two sources: (i) Software Licenses, which are comprised of subscription fees, 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 our customers, in an amount that reflects the consideration we expect 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, we include an estimate of the amount we expect to receive for the total transaction price if it is probable that a significant reversal of cumulative revenue recognized will not occur. Our subscription service arrangements are non-cancelable and do not contain refund-type provisions. Revenue is reported net of applicable sales and use tax.

We recognize revenue from contracts with customers using a five-step model, which is described below:

1. Identify the customer contract;

2. Identify performance obligations that are distinct;

3. Determine the transaction price;

4. Allocate the transaction price to the distinct performance obligations; and

5. Recognize revenue as the performance obligations are satisfied.

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Allowance for Credit Losses

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.

Accounting for Goodwill and Intangible Assets

Goodwill is tested for impairment annually during the fourth quarter of every fiscal year and more frequently if events and circumstances indicate that the asset might be impaired. The purpose of an impairment test is to identify any potential impairment by comparing the carrying value of a reporting unit including goodwill to its fair value. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

Factors that could lead to a future impairment include material uncertainties such as operational, economic and competitive factors specific to the key assumptions underlying the fair value estimate we use in our impairment testing that have a reasonable possibility of changing. This could include a significant reduction in projected revenues, a deterioration of projected financial performance, future acquisitions and/or mergers, and a decline in our market value as a result of a significant decline in our stock price.

Accounting for Business Combinations

We allocate the amount we pay 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. We base 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. We allocate any excess purchase price that exceeds the fair value of the net tangible and identifiable intangible assets acquired to goodwill. The use of alternative valuation assumptions, including estimated growth rates, cash flows and discounts rates and estimated useful lives could result in different purchase price allocations and amortization expense in current and future periods. Transaction costs associated with these acquisitions are expensed as incurred through general and administrative expense on the consolidated statements of operations. In those circumstances where an acquisition involves a contingent consideration arrangement, we recognize a liability equal to the fair value of the contingent payments expected to be made as of the acquisition date. We re-measure this liability each reporting period and recognizes changes in the fair value through income (loss) before income taxes within the consolidated statements of operations.

Accounting for Common Stock Purchase Warrants

We evaluate common stock warrants as they are issued to determine whether they should be classified as an equity instrument or a liability. Those warrants that are classified as a liability are carried at fair value at each reporting period, with changes in their fair value recognized in change in fair value of warrant liabilities in the consolidated statements of operations. The fair value of our 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 our common stock. The Monte Carlo option-pricing model uses certain assumptions, including expected life and annual volatility.

Accounting for Stock-Based Compensation

At March 31, 2024, we maintained two stock-based compensation plans, one of which has expired but still contains vested stock options. The two plans are more fully described in Note 8 of these condensed consolidated financial statements.

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

We recognize stock-based compensation expense for share-based payments issued that are expected to vest on a straight-line basis over the service period of the award, which is generally three years. In determining whether an award is expected to vest, we use an estimated, forward-looking forfeiture rate based upon our historical forfeiture rate and reduce the expense over the recognition period. Estimated forfeiture rates are updated for actual forfeitures quarterly. We also consider, each quarter, whether there have been any significant changes in facts and circumstances that would affect our forfeiture rate. Although we estimate forfeitures based on historical experience, actual forfeitures in the future may differ. In addition, to the extent our actual forfeitures are different than our estimates, we recognize a true-up for the difference in the period that the awards vest, and such true-ups could materially affect our operating results.

We estimate the fair value of stock options using the Black-Scholes-Merton option valuation model. The fair value of an award is affected by our stock price on the date of grant as well as other assumptions, including the estimated volatility of our stock price over the term of the awards and the estimated period of time that we expect employees to hold their stock options. The risk-free interest rate assumption we use is based upon United States Treasury interest rates appropriate for the expected life of the awards. We use the historical volatility of our publicly traded options in order to estimate future stock price trends. In order to determine the estimated period of time that we expect employees to hold their stock options, we use historical trends of employee turnovers. Our expected dividend rate is zero since we do not currently pay cash dividends on our common stock and do not anticipate doing so in the foreseeable future. The aforementioned inputs entered into the option valuation model we use to fair value our stock awards are subjective estimates and changes to these estimates will cause the fair value of our stock awards and related stock-based compensation expense we recognize to vary.

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.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of March 31, 2024.

Changes in Internal Control Over Financial Reporting

There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Controls

Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving the desired control objectives. Our management recognizes that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that its objectives will be met. Similarly, an evaluation of controls cannot provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected.

There have been no material changes to the risk factors described under Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2023, filed with the Securities and Exchange Commission on December 27, 2023.