Bridgeline Digital, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended March 31, 2013. Financial statements are unaudited and presented under U.S. GAAP. Bridgeline provides the iAPPS web engagement platform, digital services, managed hosting, and subscription and perpetual software licenses. The company reported more than 2,500 customers and had 15,332,968 common shares outstanding as of May 10, 2013.
Financial performance and position
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Total revenue | $6.0 million, down 10% | $12.2 million, down 8% |
| Gross profit | $3.2 million | $6.4 million |
| Gross margin | 53%, versus 56% | 52%, versus 54% |
| Operating loss | $0.6 million, versus $0.05 million | $1.1 million, versus $0.4 million |
| Net loss | $0.7 million, or $0.05 per share | $1.3 million, or $0.09 per share |
| Adjusted EBITDA | $17 thousand, versus $524 thousand | $67 thousand, versus $952 thousand |
| Cash flow from operations | Not separately provided | $1.0 million, versus $40 thousand |
Revenue mix shifted toward subscription and perpetual licenses, which increased 65% to $1.0 million in the quarter and 49% to $1.8 million for the six-month period. Web application development revenue declined 18% to $4.5 million in the quarter and 13% to $9.3 million for six months. Managed hosting revenue declined 20% to $491 thousand in the quarter and 15% to $1.0 million for six months.
At March 31, 2013, cash and cash equivalents were $1.8 million, down from $2.1 million at September 30, 2012. Current assets were $6.4 million versus current liabilities of $7.2 million. Total debt was $4.2 million, including $1.3 million current and $2.9 million long term. Deferred revenue increased to $3.0 million from $1.1 million, principally reflecting annual iAPPS ds subscriptions. Total stockholders’ equity was $21.9 million, compared with $23.0 million at September 30, 2012.
Material changes versus the prior comparable periods
- Total revenue declined primarily because of lower non-iAPPS application development revenue and reduced hosting activity. Management attributed the non-iAPPS decline to a strategic focus on higher-margin iAPPS engagements.
- iAPPS development revenue increased modestly in the quarter and 7% for six months, but larger projects experienced longer-than-expected implementation times.
- License revenue increased because of iAPPS ds, higher iAPPS SaaS sales, MarketNet-related licenses, and maintenance revenue. License cost margins deteriorated as subscription revenue and related infrastructure investments increased.
- Sales and marketing expense increased 17% in the quarter and 12% for six months as the company expanded investment in iAPPS products and absorbed MarketNet costs.
- Research and development expense decreased because $670 thousand of software development costs, including $398 thousand in the quarter, was capitalized. Management expected quarterly research and development expense to increase to approximately $400 thousand to $425 thousand beginning in the third quarter.
- The company recorded no intangible-asset impairment in the current periods; the prior-year six-month period included a $281 thousand impairment charge.
- MarketNet did not achieve its quarterly revenue and operating-income targets for the three months ended March 31, 2013. Estimated contingent earnout liabilities were reduced by $312 thousand during the quarter and totaled $1.0 million at March 31.
Liquidity, outlook, risks, and unusual items
- Operating cash flow of $1.0 million was supported by a $1.8 million increase in deferred revenue. Investing cash outflow was $1.1 million, including $670 thousand of capitalized software development costs and $237 thousand of contingent acquisition payments.
- Management stated that operating cash generation and the bank line of credit should be sufficient for foreseeable working-capital and capital-expenditure needs, while noting that additional financing may be considered for mergers and acquisitions.
- The Silicon Valley Bank facility was amended in February 2013, extending the line-of-credit maturity to March 31, 2015 and revising financial covenants. The company stated that it would have violated a covenant at December 31, 2012 without the amendment but was compliant at March 31, 2013.
- Management expected approximately $90 thousand of additional quarterly software amortization beginning in the third quarter due to recently capitalized platform enhancements. License cost percentages were expected to rise temporarily before improving with greater iAPPS adoption.
- The company remains exposed to revenue volatility, longer implementation cycles, competition, renewal rates, technology and product execution, software security, customer concentration risk, key-person dependence, access to capital, and the ability to manage growth profitably.
- A lawsuit against e.Magination network, LLC and Daniel Roche remained unresolved and was expected to proceed to trial in June 2013. The filing does not provide a clear estimate of potential financial exposure.
- On May 3, 2013, the company increased authorized common shares from 20 million to 30 million. On May 14, 2013, employment agreements for two executives were amended to provide severance equal to three times annual salary following certain qualifying terminations after a change in control.
Important facts for investors to verify
- Whether the shift toward iAPPS subscriptions and licenses can offset declining non-iAPPS services and improve recurring revenue and margins.
- The sustainability and quality of operating cash flow, particularly the reliance on increased deferred revenue rather than earnings.
- Available borrowing capacity, covenant compliance, repayment schedules, and refinancing needs under the bank facility.
- The recoverability of approximately $21.9 million of goodwill and the remaining intangible assets, given continuing operating losses and revenue declines.
- Potential cash and equity dilution from approximately $1.0 million of contingent earnout liabilities, acquisition-related contingent shares, options, and warrants.
- The outcome and possible cost of the e.Magination litigation, as well as the effect of the expanded authorized share count and executive change-in-control provisions.