Bridgeline Digital, Inc. — Q3 FY2022 Form 10-Q Summary
Business context and reporting period
Bridgeline Digital is a marketing technology software company offering the Unbound digital experience platform, SaaS and perpetual software licenses, search, personalization, SEO and digital engagement services. Products include Unbound, OrchestraCMS, Celebros Search, Woorank and Hawk Search. The company operates primarily in the United States, Canada, Belgium and India.
This unaudited Form 10-Q covers the three and nine months ended June 30, 2022, compared with the corresponding 2021 periods. Dollar amounts are in thousands except per-share and share data.
Financial performance and key metrics
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Nine months ended June 30, 2022 | Nine months ended June 30, 2021 |
|---|---|---|---|---|
| Total revenue | $4,206 | $3,445 | $12,609 | $9,155 |
| Gross profit | $2,935 | $2,252 | $8,724 | $5,939 |
| Gross margin | 70% | 65% | 69% | 65% |
| Loss from operations | $(403) | $(615) | $(1,488) | $(563) |
| Net income (loss) | $403 | $(3,609) | $2,620 | $(5,327) |
| Adjusted EBITDA | $63 | $302 | $97 | $1,209 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $(998) | $338 |
- Subscription and perpetual-license revenue increased 29% year over year to $3,394 for the quarter and 53% to $10,117 for the nine-month period. Digital engagement services revenue declined 1% for the quarter and 2% year to date.
- Sales and marketing expense increased 82% for the quarter and 124% year to date, while research and development expense increased 23% and 72%, respectively. These increases primarily reflected personnel and other costs associated with the 2021 acquisitions.
- Reported net income was materially affected by non-cash warrant-liability remeasurement gains of $818 for the quarter and $3,693 year to date. Basic and diluted earnings per share were $0.04 for the quarter and $0.26 and $0.25, respectively, year to date.
- Cash and cash equivalents were $3,893 at June 30, 2022, down from $8,852 at September 30, 2021. Accounts receivable, net, was $1,755, and deferred revenue was $1,803 current plus $411 long term.
- Total debt was $1,163, including $448 current and $715 long term. Debt maturities include approximately $462 in fiscal 2023 and $202 in each of fiscal 2024 and 2025.
- Total liabilities were $8,712 and stockholders’ equity was $20,688 at June 30, 2022. The company had $2,029 of current contingent consideration payable and $711 of warrant liabilities.
Material changes versus the prior comparable period
- Revenue increased 22% in the quarter and 38% for the first nine months, driven primarily by subscription and perpetual-license revenue and the inclusion of Woorank and Hawk Search results.
- Gross margin improved from 65% to 70% for the quarter and from 65% to 69% year to date, principally because license revenue represented a larger share of sales and generally carries higher margins.
- Despite higher revenue and gross profit, operating losses widened year to date because operating expenses increased 57%, including substantially higher sales and marketing, general and administrative, research and development, and amortization costs.
- Adjusted EBITDA declined to $63 for the quarter and $97 year to date from $302 and $1,209, respectively, reflecting acquisition-related costs and increased sales and marketing spending.
- Operating cash flow changed from $338 of cash provided in the first nine months of 2021 to $998 of cash used in 2022. Financing cash use was $3,675, primarily for acquisition-related payments and debt repayment.
- Warrant liabilities declined from $4,404 at September 30, 2021 to $711 at June 30, 2022, producing substantial non-cash fair-value gains. These gains, rather than operating profitability, were a major driver of reported net income.
Guidance, outlook, commentary, risks and unusual items
- The filing does not provide formal revenue, earnings or cash-flow guidance. Management stated that it expects future revenue and cash flows to supplement working capital and believes its cost structure supports future revenue growth.
- Management intends to continue evaluating strategic acquisitions. Integration of acquired businesses is expected to create cross-selling and cost-consolidation opportunities but may require significant management attention and disrupt operations.
- The Hawk Search acquisition generated contingent consideration of $2,029 at June 30, 2022. A $1,779 payment was made on July 1, 2022, and an additional $250 payment is due on or before October 3, 2022.
- The company historically incurred operating losses and used cash on hand and financing activities to fund operations. It has an effective shelf registration permitting up to $50 million of debt or equity securities, but no active offering was in progress at the filing date and there is no assurance that financing will be available on acceptable terms.
- Key risks include customer retention and upgrades, recurring-revenue growth, demand and competition, rapid technology change, data-security and privacy breaches, integration of acquisitions, volatility in the common stock, maintenance of Nasdaq listing, and internal-control effectiveness. The filing reported no material changes to the risk factors in the 2021 Form 10-K.
- Goodwill was $15,985 and intangible assets were $6,612 at June 30, 2022. Future impairment could result from lower projected revenue, deteriorating performance, adverse competitive or economic conditions, additional acquisitions or a sustained decline in the stock price.
- The company reported no material legal proceedings, no material warranty or indemnification reserves, no off-balance-sheet arrangements and no material subsequent events requiring adjustment or disclosure. Disclosure controls were evaluated as effective.
Important facts for investors to verify
- Assess the sustainability of reported profitability excluding the $818 quarterly and $3,693 year-to-date warrant-liability gains.
- Monitor cash consumption, the $3,893 cash balance, acquisition-related payments and debt maturities, particularly the remaining Hawk Search earn-out.
- Determine whether subscription growth and improved gross margins can offset substantially higher sales, marketing, research and development and acquisition-integration costs.
- Review dilution exposure from 1,757,629 outstanding warrants, 1,178,065 outstanding options and 38,889 common shares issuable upon conversion of Series C preferred stock.
- Evaluate goodwill and acquired-intangible carrying values and the sensitivity of impairment tests to revenue, cash-flow, discount-rate and market-value assumptions.
- Confirm post-quarter-end payments and any financing activity after the August 11, 2022 filing date, as the filing’s liquidity discussion does not provide a detailed forward cash-flow forecast.