Bridgeline Digital, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2014; filed May 15, 2014. The interim financial statements are unaudited. Bridgeline provides the iAPPS digital engagement platform, including web content management, eCommerce, eMarketing, social media and analytics, together with digital services, subscriptions, licenses and hosting. The company reported more than 2,500 customers and operates primarily in the United States with a wholly owned Indian subsidiary.
Financial Overview
| Metric | Three months ended Mar. 31, 2014 | Three months ended Mar. 31, 2013 | Six months ended Mar. 31, 2014 | Six months ended Mar. 31, 2013 |
|---|---|---|---|---|
| Total revenue | $5.302 million | $6.004 million | $11.815 million | $12.197 million |
| Gross profit | $2.113 million | $3.187 million | $5.642 million | $6.386 million |
| Gross margin | 40% | 53% | 48% | 52% |
| Loss from operations | $(2.112) million | $(0.560) million | $(2.701) million | $(1.105) million |
| Net loss | $(2.314) million | $(0.687) million | $(3.091) million | $(1.329) million |
| Net loss per share | $(0.13) | $(0.05) | $(0.17) | $(0.09) |
| Adjusted EBITDA | $(1.294) million | $0.017 million | $(1.274) million | $0.067 million |
Revenue and Margins
- Quarterly revenue declined 12% year over year; six-month revenue declined 3%.
- Digital engagement services decreased 20% to $3.610 million for the quarter and 13% to $8.159 million for the six-month period. Management attributed the quarterly decline primarily to timing of new contract closings and reduced non-iAPPS engagements.
- Subscription and perpetual license revenue increased 28% to $1.307 million for the quarter and 59% to $2.884 million year to date, reflecting iAPPSds growth, ElementsLocal contributions and higher maintenance revenue.
- Managed service hosting revenue declined 22% to $385 thousand for the quarter and 26% to $772 thousand year to date as the company exited smaller hosting engagements.
- Gross margin contracted sharply as revenue declined while delivery costs remained relatively fixed. iAPPS implementation costs, third-party labor, software amortization and ElementsLocal-related costs contributed to the pressure.
Cash Flow, Liquidity and Capitalization
- Cash and cash equivalents were $3.455 million at March 31, 2014, compared with $2.830 million at September 30, 2013.
- Operating activities used $1.659 million during the first six months of fiscal 2014, compared with $0.980 million provided in the prior-year period.
- Investing activities used $614 thousand, including equipment purchases, capitalized software and contingent acquisition payments.
- Financing activities provided $3.023 million, primarily from $2.753 million of net common-stock proceeds, $913 thousand of net convertible-debt proceeds and equity exercises, partly offset by debt repayments.
- Total debt was $6.206 million, consisting principally of $3.223 million drawn on the BridgeBank revolving facility and $3.000 million of subordinated convertible debt. Capital lease obligations totaled $812 thousand.
- The BridgeBank facility permits borrowings of up to $5 million, subject to a borrowing base and covenants, and expires March 31, 2016. The company reported $3.2 million outstanding and no funds available for borrowing at March 31, 2014.
- Management stated that financing proceeds, operating cash and the bank line should be sufficient for working capital and capital expenditures for at least the next twelve months; however, the company was loss-making and consuming operating cash.
Material Changes Versus Prior Comparable Period
- Quarterly net loss increased from $687 thousand to $2.314 million, while six-month net loss increased from $1.329 million to $3.091 million.
- Adjusted EBITDA declined from $17 thousand to a loss of $1.294 million for the quarter and from $67 thousand to a loss of $1.274 million for six months.
- Operating expenses increased 13% for the quarter and 11% year to date. Research and development rose substantially because the company capitalized much less software development cost than in the prior-year periods.
- The company completed the August 2013 acquisition of ElementsLocal in the prior fiscal year; no acquisitions occurred during the first two fiscal quarters of fiscal 2014. The acquisition contributed subscription revenue but also added amortization and operating costs.
- In March 2014, the company sold 3.2 million common shares for gross proceeds of $3.0 million, or approximately $2.7 million net, and issued warrants for 320,000 shares. Shares outstanding increased to 21.826 million at March 31, 2014 from 18.314 million at September 30, 2013.
- Goodwill declined by $636 thousand, primarily because of a purchase-price allocation reclassification related to ElementsLocal; no goodwill impairment was reported.
Outlook, Risks and Unusual Items
- No specific revenue, earnings or margin guidance was provided.
- Management’s near-term liquidity assessment depends on continued access to financing, operating resources and the BridgeBank facility, which had no borrowing availability at quarter-end and is secured by company assets and intellectual property.
- The company had $1.222 million of accrued contingent acquisition consideration, payable through fiscal 2016 if specified revenue and earnings targets are achieved.
- The 10% secured subordinated convertible notes mature in 2016, are convertible at $1.30 per share and include default, change-of-control and early-prepayment provisions.
- Key risks identified by management include continued operating losses and cash use, revenue and quarterly volatility, contract timing, renewal rates, competition, technology changes, software security, dependence on key personnel, limited trading liquidity and the ability to maintain effective internal controls.
- Goodwill and other intangible assets are significant relative to total assets, creating potential impairment risk if operating performance, projections, market conditions or the company’s stock price deteriorate.
- There were no material legal proceedings or material subsequent events reported. Management concluded that disclosure controls were effective and that no material changes occurred in internal control over financial reporting.
Investor Verification Checklist
- Verify whether the company can improve gross margins as subscription revenue grows and lower-margin or discontinued hosting and non-iAPPS services decline.
- Monitor operating cash burn, quarterly contract timing and the company’s ability to fund operations without additional equity or debt financing.
- Review BridgeBank borrowing-base availability, financial covenant compliance, interest costs and the secured status of the facility.
- Assess potential dilution from convertible notes, approximately 1.509 million outstanding warrants, stock options and contingent acquisition shares.
- Evaluate ElementsLocal performance and the remaining cash and equity earnout obligations.
- Track goodwill and intangible-asset impairment indicators, particularly given the substantial accumulated deficit and continued operating losses.