Bridgeline Digital, Inc. — Q3 Fiscal 2014 Form 10-Q Summary
Business Context and Reporting Period
Bridgeline Digital provides digital engagement software and services through its iAPPS platform, including web content management, eCommerce, eMarketing, social media management and web analytics. Revenue is generated from digital engagement services, subscription and perpetual licenses, and managed service hosting. The company serves more than 3,500 customers and acquired ElementsLocal on August 1, 2013 to expand its franchise-market presence.
This unaudited Form 10-Q covers the three and nine months ended June 30, 2014, compared with the corresponding 2013 periods. The fiscal year ends September 30, 2014. The company is a smaller reporting company.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2014 | Three Months Ended June 30, 2013 | Nine Months Ended June 30, 2014 | Nine Months Ended June 30, 2013 |
|---|---|---|---|---|
| Total revenue | $6.152 million | $5.600 million | $17.967 million | $17.796 million |
| Gross profit | $3.133 million | $2.853 million | $8.775 million | $9.236 million |
| Gross margin | 51% | 51% | 49% | 52% |
| Loss from operations | $(1.092) million | $(1.489) million | $(3.793) million | $(2.589) million |
| Net loss | $(1.306) million | $(1.569) million | $(4.397) million | $(2.893) million |
| Adjusted EBITDA | $(336) thousand | $(899) thousand | $(1.639) million | $(828) thousand |
| Basic and diluted loss per share | $(0.06) | $(0.10) | $(0.23) | $(0.19) |
All dollar amounts are in thousands unless otherwise stated. Adjusted EBITDA is a non-GAAP measure and excludes interest, taxes, depreciation, amortization and stock-based compensation.
- Third-quarter revenue increased 10%, while nine-month revenue increased 1%.
- At June 30, 2014, cash and cash equivalents were $1.547 million, compared with $2.830 million at September 30, 2013.
- Accounts receivable and unbilled receivables increased to $3.827 million from $3.194 million.
- Total assets were $34.961 million and total liabilities were $13.387 million at June 30, 2014.
- Total debt was $5.901 million, compared with $5.890 million at September 30, 2013. Debt consisted primarily of $2.913 million drawn on the BridgeBank line of credit and $3.0 million of subordinated convertible debt.
- Net cash used in operating activities was $2.878 million for the first nine months, compared with $452 thousand in the prior-year period.
- Net cash used in investing activities was $862 thousand, including $264 thousand for equipment and improvements, $134 thousand for software development and other intangible costs, and $464 thousand of contingent acquisition payments.
- Net cash provided by financing activities was $2.600 million, including $2.749 million of net common-stock proceeds and $913 thousand of net convertible-debt proceeds.
Material Changes Versus the Prior Comparable Period
- Subscription and perpetual-license revenue increased 65% in the quarter to $1.510 million and 61% for the nine months to $4.394 million. Management attributed the growth to iAPPSds, ElementsLocal-related SaaS licenses and increased maintenance revenue.
- Digital engagement-services revenue declined 1% in the quarter and 9% for the nine months. iAPPS-related services grew, but non-iAPPS services declined 44% in the quarter and 49% for the nine months as the company focused on higher-margin iAPPS engagements.
- Managed-service-hosting revenue was flat in the quarter and declined 19% for the nine months, reflecting the planned reduction of smaller hosting engagements.
- Gross margin was unchanged at 51% in the quarter but declined to 49% from 52% for the nine months, reflecting the revenue mix and fixed costs supporting the business.
- Third-quarter operating loss improved by $397 thousand, primarily because of higher revenue and lower sales and marketing costs. The nine-month operating loss worsened by $1.204 million.
- Research and development expense increased 19% in the quarter and 92% for the nine months, partly because the company capitalized significantly less software-development cost than in the prior-year periods.
- Adjusted EBITDA improved in the quarter but deteriorated for the nine months, reflecting lower gross margin, fixed operating costs, higher depreciation and amortization, and the absence of certain prior-year benefits.
- Shares outstanding increased materially, with 21.870 million shares outstanding at June 30, 2014 versus 18.314 million at September 30, 2013. The increase included a March 2014 private placement of 3.2 million shares for approximately $2.7 million of net proceeds.
Guidance, Outlook, Risks and Unusual Items
Management stated that cash generated from financing activities and operations, together with the bank line of credit, was expected to be sufficient to fund working-capital and capital-expenditure needs for at least the next twelve months. The filing does not provide formal revenue, earnings or margin guidance.
- The BridgeBank revolving facility expires March 31, 2016, provides for up to $5.0 million of advances subject to borrowing-base limits, and had $2.9 million outstanding and approximately $329 thousand available at June 30, 2014. The company reported compliance with its financial and reporting covenants.
- The $3.0 million subordinated convertible notes bear interest at 10%, mature in 2016, are secured by company assets and are convertible at $1.30 per share, subject to ownership limitations and other conditions.
- Accrued contingent acquisition earnouts totaled $1.047 million at June 30, 2014 and are scheduled to be paid through fiscal 2016 if specified revenue and earnings targets are achieved.
- On May 28, 2014, Nasdaq notified the company that its stock had traded below the $1.00 minimum bid price for 30 consecutive business days. The company had until November 24, 2014 to regain compliance, generally by maintaining a closing bid price of at least $1.00 for 10 consecutive business days. Failure could result in delisting and reduced access to capital markets.
- Key disclosed risks include continued operating losses and negative operating cash flow, dependence on financing, revenue fluctuations and renewal rates, competition, technology and cybersecurity risks, dependence on key personnel, protection of intellectual property, goodwill and intangible-asset impairment, and potential Nasdaq delisting.
- The company reported no material legal proceedings and no material subsequent events requiring adjustment or disclosure.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2014 and reported no material changes in internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Whether the company can reduce recurring operating losses and reverse the $2.878 million nine-month operating cash outflow.
- Whether subscription and license growth can offset declines in non-iAPPS services and hosting revenue without further gross-margin pressure.
- Available borrowing capacity, borrowing-base limitations and compliance with BridgeBank covenants.
- Repayment, conversion or refinancing requirements for the 10% subordinated convertible notes and other debt.
- Progress toward Nasdaq’s minimum bid-price requirement and the potential impact of delisting on liquidity and future capital raises.
- The probability and timing of contingent acquisition earnout payments and the effect of future equity issuance from conversions, warrants and acquisition-related shares.
- The carrying value and future impairment risk of $23.151 million of goodwill and $1.729 million of intangible assets.