Bridgeline Digital, Inc. — Q3 FY2021 Form 10-Q Summary
Business context and reporting period
Bridgeline Digital provides digital experience software and services, including web content management, eCommerce, marketing automation, site search, analytics and related SaaS and perpetual-license products. The company also owns Woorank, an SEO and digital marketing tool, and Hawk Search, a search, recommendation and personalization platform.
The filing covers the three and nine months ended June 30, 2021, within the fiscal year ending September 30, 2021. The financial statements are unaudited and presented in thousands, except per-share and share data.
Key financial metrics
| Metric | Q3 FY2021 | Q3 FY2020 | 9M FY2021 | 9M FY2020 |
|---|---|---|---|---|
| Revenue | $3.445 million | $2.632 million | $9.155 million | $8.202 million |
| Gross profit | $2.252 million | $1.553 million | $5.939 million | $4.580 million |
| Gross margin | 65% | 59% | 65% | 56% |
| Loss from operations | $(615) thousand | $150 thousand | $(563) thousand | $(1.808) million |
| Net loss | $(3.609) million | $(1.701) million | $(5.327) million | $(742) thousand |
| Adjusted EBITDA | $302 thousand | $428 thousand | $1.209 million | $(571) thousand |
| Basic and diluted loss per share | $(0.61) | $(0.44) | $(1.04) | $(0.97) |
Subscription and perpetual-license revenue was $2.624 million in Q3, up 37%, and $6.612 million for the nine-month period, up 20%. Digital engagement services revenue was $821 thousand in Q3, up 15%, but $2.543 million for the nine-month period, down 6%.
At June 30, 2021, cash and cash equivalents were $4.768 million, compared with $861 thousand at September 30, 2020. Total current assets were $7.082 million and total assets were $32.063 million. Total liabilities were $23.729 million and stockholders’ equity was $8.334 million.
Total debt was $2.043 million, including $755 thousand due within 12 months and $1.288 million classified as long-term debt. Warrant liabilities were $8.823 million, compared with $2.486 million at September 30, 2020.
For the nine months, operating activities provided $338 thousand of cash, investing activities used $4.440 million, and financing activities provided $7.966 million. Cash used in investing primarily reflected $4.358 million of cash paid for acquisitions.
Material changes versus the prior comparable period
- Revenue increased 31% in Q3 and 12% for the nine-month period, driven primarily by subscription and license growth, multi-year license renewals and acquired businesses.
- Gross margin improved to 65% from 59% in Q3 and to 65% from 56% for the nine-month period, reflecting a greater mix of higher-margin license revenue, lower headcount and reduced third-party consultant costs.
- Q3 operating results shifted from $150 thousand of operating income to a $615 thousand operating loss, primarily due to higher acquisition-related, sales and marketing, general and administrative, and research and development expenses.
- Nine-month operating loss improved from $1.808 million to $563 thousand, although Q3 operating expenses increased 104% year over year to $2.867 million.
- The change in fair value of warrant liabilities produced a $4.161 million Q3 loss and a $6.020 million nine-month loss, compared with losses of $1.843 million and a gain of $1.078 million, respectively, in the prior periods. These non-cash fair-value changes materially affected reported net loss.
- Adjusted EBITDA was positive for both the quarter and nine-month period, but declined in Q3 from $428 thousand to $302 thousand; the nine-month comparison improved from a $571 thousand loss to $1.209 million of positive Adjusted EBITDA.
- The company completed the Woorank acquisition on March 1, 2021, and the Hawk Search acquisition on May 28, 2021. Total preliminary consideration was $12.699 million, including cash, deferred payments, seller debt, contingent consideration, common stock and Series D preferred stock.
Financing, liquidity, outlook and risks
During the first nine months, the company raised approximately $2.5 million net from a February registered direct offering, approximately $4.6 million net from the May common-stock and Series D preferred-stock offerings, and $1.354 million from stock option and warrant exercises. In July 2021, after quarter-end, it received approximately $7.4 million from the exercise of 1,850,630 Series A warrants.
Management stated that it believes revenue and working capital are sufficient to support future growth and that it continues to control discretionary spending. The filing does not provide formal revenue, earnings or margin guidance.
Liquidity remains dependent on revenue growth, cash-flow improvement and access to financing. The company had a suspended at-the-market offering with no shares sold as of June 30, 2021, and stated that no other definitive financing agreements were in place as of the filing date. Management acknowledged that additional financing may not be available on acceptable terms.
Acquisition-related obligations include $2.0 million of deferred consideration and $2.2 million of contingent earn-outs for Hawk Search, plus approximately $488 thousand of deferred consideration and $1.6 million of contingent earn-outs related to Woorank. The company also assumed approximately $2.1 million of debt in the Woorank acquisition.
Series D preferred stock carries a 9% annual cumulative dividend beginning six months after issuance and has conversion and liquidation terms subject to stockholder approval. The company had not yet recognized an approximately $1.3 million beneficial conversion feature because conversion was restricted pending approval.
The registration statement covering shares issuable upon conversion of Series D preferred stock and exercise of related warrants had not been declared effective as of the financial-statement issuance date. This constituted an event of default under the registration-rights agreement, although holders agreed to waive liquidated damages if effectiveness occurred by August 19, 2021.
Principal risks include continued operating losses, warrant-liability volatility, acquisition integration and earn-out obligations, dilution from equity and warrant issuance, COVID-19 effects, cybersecurity and data-security exposure, competition, customer retention, technological change, Nasdaq listing requirements and the need to obtain additional financing if cash flows do not improve.
The company received approval for full forgiveness of its $1.048 million PPP loan in August 2021, after recognizing $88 thousand of government grant income during the first quarter. No material legal proceedings were reported, and management concluded disclosure controls were effective as of June 30, 2021.
Most important facts for investors to verify
- Whether the July 2021 warrant exercises and approximately $7.4 million of proceeds materially improved post-quarter-end liquidity.
- The effectiveness of the Series D registration statement and the status of any related liquidated damages or waivers.
- Stockholder approval of the Series D conversion and warrant issuances, including the potential dilution from preferred stock, options and approximately 3.382 million outstanding warrants at June 30, 2021.
- Integration progress, standalone revenue contribution and profitability of Woorank and Hawk Search.
- Cash requirements and payment timing for debt, deferred purchase consideration and contingent earn-outs.
- Whether improved gross margins and positive Adjusted EBITDA translate into sustainable positive operating cash flow and GAAP profitability.
- The sensitivity of reported earnings and liabilities to changes in the company’s stock price and other assumptions used to value warrant liabilities.