Business Context and Reporting Period
Bridgeline Digital, Inc. provides digital engagement software and services, including content management, eCommerce, marketing automation, site search, portals, analytics and related implementation services. Its products are delivered through SaaS, perpetual-license and hosted models. This unaudited Form 10-Q covers the three months ended December 31, 2020, the first quarter of fiscal 2021, with comparisons to the three months ended December 31, 2019.
Financial Performance and Position
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Total revenue | $2.836 million | $2.832 million | Flat |
| Gross profit | $1.879 million | $1.474 million | 27% increase |
| Gross margin | 66% | 52% | Up 14 percentage points |
| Income (loss) from operations | $179 thousand | $(962) thousand | Improved by $1.141 million |
| Net income (loss) | $(1.162) million | $136 thousand | Declined by $1.298 million |
| Adjusted EBITDA | $672 thousand | $(669) thousand | Improved by $1.341 million |
| Operating cash flow | $451 thousand | $110 thousand | Increased by $341 thousand |
- Digital engagement services revenue decreased 24% to $837 thousand, while subscription and perpetual-license revenue increased 15% to $1.999 million. License-related revenue represented 70% of total revenue versus 61% in the prior-year quarter.
- Total cost of revenue declined 30% to $957 thousand, primarily due to lower third-party consultant usage, reduced hosting and support costs, and a greater mix of higher-margin license revenue.
- Operating expenses fell 30% to $1.700 million, reflecting lower sales and marketing, general and administrative, research and development, and amortization costs. Restructuring and acquisition-related expenses increased to $210 thousand from $5 thousand.
- The net loss included a $1.441 million loss from remeasurement of warrant liabilities, compared with a $1.101 million gain in the prior-year quarter. This non-cash fair-value item was the primary reason net income diverged from improved operating results.
- The Company recognized $88 thousand of PPP government grant income. Basic and diluted loss per share was $0.26, compared with $0.81 in the prior-year quarter, which included a $2.314 million deemed dividend related to an amendment of Series A preferred stock.
- Cash and cash equivalents were $1.277 million at December 31, 2020, compared with $861 thousand at September 30, 2020. Accounts receivable was $863 thousand and deferred revenue was $1.739 million.
- Total liabilities were $8.348 million and stockholders’ equity was $3.255 million at December 31, 2020. Warrant liabilities were $3.927 million, up from $2.486 million at September 30, 2020. The filing does not report conventional outstanding term debt at quarter-end; the PPP liability was reduced to zero after recognition of expected forgiveness.
- Investing cash outflows were $41 thousand for software development capitalization and property and equipment. There were no financing cash flows during the quarter.
Material Changes Versus the Prior Comparable Period
- Revenue was essentially unchanged, but the mix shifted toward subscription and perpetual licenses and away from digital engagement services.
- Gross margin improved materially from 52% to 66%, and the Company generated operating income compared with an operating loss in the prior-year quarter.
- Cost reductions included lower headcount, travel, third-party consulting, hosting and internal support costs.
- Adjusted EBITDA improved to $672 thousand from a loss of $669 thousand, although this non-GAAP measure excludes warrant remeasurement, amortization, restructuring and acquisition costs, stock compensation and other items.
- Net results were adversely affected by the reversal of the prior-year warrant valuation gain and a $1.441 million warrant valuation loss in the current quarter.
Guidance, Outlook, Risks and Unusual Items
- No formal revenue, earnings or margin guidance is provided. Management states that it is maintaining tight control over discretionary spending and believes current revenue and working capital are sufficient to support future growth, but acknowledges that additional financing may be required.
- COVID-19 continues to create uncertainty regarding customer demand, operations, profitability and financial position. Other key risks include customer retention and upgrades, recurring-revenue growth, competition, cybersecurity and data privacy, technological change, remote-work disruption, acquisition execution, stock-price volatility, Nasdaq listing compliance and internal controls.
- The ATM equity offering, with capacity of up to approximately $4.8 million, was suspended on December 18, 2020; no shares had been sold under it as of quarter-end.
- On February 3, 2021, the Company agreed to acquire Woorank SRL for approximately €3.3 million, consisting of approximately €1.4 million paid to sellers, approximately €1.9 million of assumed debt and an additional $80 thousand obligation. The transaction includes potential purchase-price adjustments, earn-out provisions and possible share consideration of up to approximately €0.6 million. The acquisition accounting was incomplete when the filing was issued.
- On February 4, 2021, the Company sold 880,000 common shares at $3.10 per share in a registered direct offering, generating approximately $2.4 million of net proceeds. The proceeds are intended for general corporate purposes and working capital. Placement agents also received warrants equal to 8% of shares placed, with a five-year term and a $3.875 exercise price.
- The Company expects full forgiveness of the approximately $1.048 million PPP loan but had not received objective confirmation of forgiveness as of the filing. If forgiveness is denied in whole or in part, repayment obligations would begin in August 2021 under the amended terms.
- Two customers represented approximately 34% and 20% of accounts receivable at December 31, 2020, and one customer represented approximately 12% of quarterly revenue.
- The Company reported no material legal proceedings, no off-balance-sheet arrangements other than operating leases and contingent acquisition payments, and effective disclosure controls as of December 31, 2020.
Important Facts for Investors to Verify
- Whether the PPP loan is ultimately forgiven in full and whether any repayment obligation arises.
- The closing status, financing impact, assumed debt, contingent consideration and operating contribution of the Woorank acquisition.
- Whether the improved gross margin and positive operating cash flow are sustainable as the revenue mix changes.
- The potential dilution and future earnings volatility associated with approximately $3.927 million of warrant liabilities and 5.493 million outstanding warrants.
- The Company’s cash requirements, ability to fund growth and potential need for additional financing after the Woorank transaction.
- Customer concentration, accounts-receivable collectability and the effect of COVID-19 on demand and renewals.