Bridgeline Digital, Inc. — 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 analytics. The platform is delivered through SaaS, subscription, perpetual-license and managed-hosting models. The filing covers the unaudited quarter ended December 31, 2013, the first quarter of fiscal 2014, with comparison to the quarter ended December 31, 2012.
The company reported more than 2,500 customers, with no customer representing 10% or more of quarterly revenue. The August 2013 acquisition of ElementsLocal expanded the company’s franchise-market presence and contributed to current-period results.
Financial Performance and Position
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Total revenue | $6.513 million | $6.193 million | Up 5% |
| Gross profit | $3.529 million | $3.199 million | Up 10% |
| Gross margin | 54.2% | 51.7% | Up approximately 2.5 percentage points |
| Loss from operations | $(589) thousand | $(545) thousand | Loss increased $44 thousand |
| Net loss | $(777) thousand | $(642) thousand | Loss increased 21% |
| Net loss per share | $(0.04) | $(0.04) | Unchanged |
| Adjusted EBITDA | $20 thousand | $50 thousand | Down $30 thousand |
| Cash used in operating activities | $(1.430) million | $386 thousand provided | Adverse change of $1.816 million |
Revenue composition shifted toward licenses and recurring offerings. Digital engagement services revenue was $4.549 million, down 6%; subscription and perpetual-license revenue was $1.577 million, up 100%; and managed-service hosting revenue was $387 thousand, down 30%. Management reported recurring revenue of approximately $1.7 million, up 42%, and core iAPPS and ElementsLocal revenue of approximately $5.6 million, up 33%.
Sales and marketing expense increased 15% to $2.110 million, research and development expense increased 296% to $523 thousand, and general and administrative expense decreased 24% to $1.031 million. Interest expense more than doubled to $167 thousand, contributing to the larger net loss.
At December 31, 2013, cash and cash equivalents were $621 thousand, compared with $2.830 million at September 30, 2013. Accounts receivable and unbilled receivables increased to $4.041 million from $3.194 million. Total assets were $35.384 million and total liabilities were $13.189 million.
Total debt was $5.490 million, consisting primarily of $2.503 million drawn under the revolving credit facility and $2.928 million of subordinated convertible debt. Capital lease obligations totaled $809 thousand. The company had $1.2 million of borrowing availability under the new BridgeBank facility at quarter-end. Current liabilities were $5.277 million versus current assets of $5.629 million.
Material Changes Versus the Prior Comparable Period
- Total revenue increased 5%, but the company remained loss-making and the net loss widened by $135 thousand.
- Gross margin improved to approximately 54% from approximately 52%, primarily reflecting increased iAPPS license and service activity and a shift away from lower-margin non-iAPPS services.
- Subscription and perpetual-license revenue doubled, while non-iAPPS digital engagement services declined 56% and managed hosting revenue declined 30%.
- Operating expenses increased 10%, with higher sales and marketing and research and development spending more than offsetting lower general and administrative expense.
- Operating cash flow deteriorated from $386 thousand of inflow to $1.430 million of outflow, driven principally by the net loss, an $847 thousand increase in receivables and reductions in accounts payable and accrued liabilities.
- Cash declined by $2.209 million during the quarter. Financing sources included $913 thousand of net convertible-debt proceeds, while debt and lease repayments consumed cash.
- The company replaced its prior Silicon Valley Bank facility with a BridgeBank revolving facility in December 2013.
Guidance, Outlook, Risks and Unusual Items
Management stated that cash generated from operations and the bank line of credit were 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 facility provides for up to $5 million of revolving advances, subject to borrowing-base limitations, matures March 31, 2016, bears interest at prime plus 1.00% and is secured by substantially all company assets and intellectual property. The company must comply with financial covenants. The filing notes prior covenant amendments and waivers under the former SVB facility, highlighting financing and covenant-compliance risk.
The company issued an additional $1.0 million of 10% secured subordinated convertible notes in November 2013. The notes mature in 2016, are convertible at $1.30 per share, and are subordinate to BridgeBank’s security interest. Placement-agent fees and warrants were issued in connection with the convertible-debt offerings.
Accrued contingent acquisition earnouts totaled approximately $1.4 million at quarter-end and are scheduled to be paid through fiscal 2016 if specified revenue and earnings targets are achieved. ElementsLocal also has potential contingent consideration of up to $904 thousand in cash and $396 thousand in common stock.
Goodwill totaled $23.835 million, or approximately 67% of total assets. Management performed its annual fiscal 2013 qualitative goodwill assessment and concluded that a quantitative impairment test was not required; however, adverse operating, market or valuation changes could result in future impairment. The company reported no material legal proceedings and no material subsequent events requiring disclosure.
Principal disclosed risks include continuing losses and negative operating cash flow, dependence on external financing, covenant compliance, customer renewals, competition, changing technology and customer requirements, cybersecurity and software performance, protection of intellectual property, retention of key personnel, limited trading liquidity and volatility of the common stock, and the possibility of goodwill or intangible-asset impairment.
Facts an Investor Should Verify
- Whether the shift toward subscription, perpetual-license and recurring revenue is sustainable and produces the expected margins.
- Whether the company can convert its $4.041 million receivable balance into cash and reverse the deterioration in operating cash flow.
- Compliance with BridgeBank financial covenants and the amount of borrowing availability under the receivables-based facility.
- Future cash interest, maturity and potential equity dilution from the $2.928 million of convertible debt and outstanding warrants.
- The probability and timing of contingent earnout payments related to ElementsLocal and prior acquisitions.
- Whether the company can achieve profitability without relying on additional equity or debt financing.
- Potential impairment exposure associated with $23.835 million of goodwill and other acquired intangible assets.