Bridgeline Digital, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Bridgeline Digital develops the iAPPS Web Experience Management suite, including web content management, eCommerce, eMarketing, analytics, SaaS, hosting, and related web application development services. This unaudited quarterly report covers the three and six months ended March 31, 2012, the company’s fiscal second quarter and first six months of fiscal 2012. Bridgeline had approximately 639 customers at March 31, 2012, including approximately 465 customers paying monthly subscription or managed hosting fees.
Financial Performance and Liquidity
| Metric | Three Months Ended March 31, 2012 | Three Months Ended March 31, 2011 | Six Months Ended March 31, 2012 | Six Months Ended March 31, 2011 |
|---|---|---|---|---|
| Total revenue | $6.672 million | $6.613 million | $13.189 million | $13.142 million |
| Gross profit | $3.716 million | $3.357 million | $7.152 million | $6.544 million |
| Gross margin | 56% | 51% | 54% | 50% |
| Loss from operations | $(46) thousand | $(247) thousand | $(424) thousand | $(331) thousand |
| Net loss | $(166) thousand | $(329) thousand | $(629) thousand | $(485) thousand |
| Net loss per share | $(0.01) | $(0.03) | $(0.05) | $(0.04) |
| Adjusted EBITDA | $524 thousand | $256 thousand | $952 thousand | $741 thousand |
- Revenue was broadly flat year over year: up 1% in the quarter and approximately flat for the six-month period.
- Quarterly revenue mix shifted toward iAPPS application development services, which increased 69% to $3.524 million, while other application development revenue declined 42% to $1.917 million.
- Managed service hosting revenue increased 22% in the quarter and 27% year to date, while subscription and perpetual license revenue declined 15% in the quarter and 3% year to date.
- Gross profit increased 11% in the quarter and 9% year to date, primarily reflecting a higher mix of iAPPS work and the discontinuation of lower-margin engagements.
- Operating losses remained despite improved quarterly gross profit. Six-month operating loss widened because of higher operating expenses, depreciation and amortization, and a $281 thousand intangible-asset impairment charge recorded in the first quarter.
- Adjusted EBITDA is a non-GAAP measure and increased 105% in the quarter and 28% year to date. It excludes, among other items, depreciation, amortization, interest, taxes, stock-based compensation, and impairment charges.
- Net cash provided by operating activities was $40 thousand for the six months ended March 31, 2012, compared with $20 thousand in the prior-year period.
- Investing cash outflows were $888 thousand, including $580 thousand for equipment and improvements, $33 thousand for the Magnetic acquisition, and $261 thousand of contingent acquisition payments.
- Financing cash outflows were $292 thousand. Cash and cash equivalents declined to $1.352 million at March 31, 2012 from $2.528 million at September 30, 2011.
- Total debt was $4.710 million at March 31, 2012, consisting of $2.418 million in line-of-credit borrowings, a $2.000 million bank term loan, and a $292 thousand subordinated promissory note. Current debt was $1.366 million.
- Total current assets were $5.870 million versus current liabilities of $5.223 million. Accounts receivable and unbilled receivables, net, were $3.672 million.
Material Changes Versus the Prior Comparable Period
- The company continued shifting its business toward iAPPS-related services and away from non-iAPPS, lower-margin work. Management stopped servicing certain low-margin opportunities acquired from e.Magination.
- Managed hosting growth was supported by the October 2011 acquisition of Magnetic Corporation and increased hosting by iAPPS customers.
- Cost of revenue declined 9% in both the quarter and six-month period, improving gross margins from 51% to 56% for the quarter and from 50% to 54% year to date.
- Sales and marketing expense increased 4% in both comparison periods, while research and development expense increased 2% in the quarter and 4% year to date.
- Depreciation and amortization increased 31% in the quarter and 25% year to date, reflecting cloud infrastructure investments, leasehold improvements, and acquired intangible assets.
- Quarterly general and administrative expense benefited from a $313 thousand reduction in contingent earnout liabilities related to a prior acquisition. This reduction was recorded in general and administrative expense and was not representative of recurring operating performance.
- The October 3, 2011 Magnetic acquisition added approximately $522 thousand of goodwill and involved contingent consideration of up to $600 thousand in cash and 166,666 common shares, subject to performance targets.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that cash generated from operations and proceeds from the bank line of credit were expected to fund working capital and capital expenditure needs for the foreseeable future. The company could seek additional financing to support its merger and acquisition strategy.
- In May 2012, after the reporting date, the company amended its Silicon Valley Bank loan arrangement, extending the line-of-credit maturity to March 31, 2014 and revising certain financial covenants.
- Management expected a multi-year strategic alliance with a Fortune 500 company to produce no material benefits until the fourth quarter of fiscal 2012 because of iAPPS sales cycles and integration lead times.
- Accrued contingent earnout liabilities were $1.450 million at March 31, 2012, with additional potential contingent acquisition payments of $660 thousand that were not accrued because they had not yet been earned.
- The company recorded a $281 thousand impairment charge on a customer-list intangible asset after discontinuing certain low-margin e.Magination-related services.
- Bridgeline’s lawsuit against e.Magination and its principal owner remained unresolved. The defendants asserted counterclaims.
- On April 26, 2012, the company was informed of a default judgment in a patent infringement action brought by Ingeniador, LLC. Bridgeline was seeking to set aside the judgment, believed the claim was without merit, and intended to defend the matter. The filing does not provide a clear potential monetary exposure.
- Principal risks include continued operating losses and limited cash, dependence on financing and acquisition performance, revenue and renewal-rate fluctuations, competition, technology and cybersecurity risks, reliance on key personnel, potential goodwill or intangible impairments, Nasdaq listing and stock-price volatility, and litigation and government-contract risks.
Investor Verification Checklist
- Verify the company’s ability to generate sustainable operating cash flow, given only $1.352 million of cash and cash equivalents and $4.710 million of total debt at quarter end.
- Assess whether the iAPPS mix shift and cost reductions can offset declining non-iAPPS and perpetual-license revenue without relying on one-time earnout adjustments.
- Review the terms, covenants, borrowing availability, and subsequent effects of the May 2012 Silicon Valley Bank amendment.
- Monitor contingent earnout obligations, including the $1.450 million accrued liability and additional potential payments.
- Evaluate goodwill and intangible-asset impairment risk, particularly following the $281 thousand customer-list impairment and the company’s substantial goodwill balance of $20.809 million.
- Track the outcome and potential financial exposure of the Ingeniador patent litigation and the unresolved e.Magination litigation.
- Reconcile Adjusted EBITDA to GAAP results and avoid treating the non-GAAP measure as a substitute for profitability or operating cash flow.