Bridgeline Digital, Inc. — Q3 2013 Form 10-Q Summary
Business Context and Reporting Period
Bridgeline Digital provides the iAPPS Web Engagement Management platform and related digital services for websites, intranets, and online stores. Products are delivered through cloud-based SaaS and perpetual-license models, supplemented by web application development and managed hosting services. The filing covers the unaudited quarter and nine months ended June 30, 2013, within the fiscal year ending September 30, 2013. The company had more than 2,500 customers, with no customer representing 10% or more of revenue.
Financial Performance and Position
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenue | $5.6 million | $6.4 million | $17.8 million | $19.6 million |
| Gross profit | $2.9 million | $3.5 million | $9.2 million | $10.7 million |
| Gross margin | 51% | 56% | 52% | 55% |
| Loss from operations | $(1.5) million | $(0.2) million | $(2.6) million | $(0.6) million |
| Net loss | $(1.6) million | $(0.3) million | $(2.9) million | $(0.9) million |
| Net loss per share | $(0.10) | $(0.02) | $(0.19) | $(0.07) |
| Adjusted EBITDA | $(0.9) million | $0.4 million | $(0.8) million | $1.4 million |
Revenue consisted of web application development services of $4.3 million in Q3 and $13.6 million for the first nine months; managed hosting revenue of $0.4 million and $1.5 million, respectively; and subscription and perpetual-license revenue of $0.9 million and $2.7 million, respectively. License revenue increased 33% in the quarter and 44% year to date, while web application development declined 15% and 14%, respectively.
At June 30, 2013, cash and cash equivalents were $1.7 million, compared with $2.1 million at September 30, 2012. Accounts receivable and unbilled receivables were $3.4 million, and deferred revenue was $2.5 million versus $1.1 million at fiscal year-end. Total debt was $4.0 million, including $1.5 million current and $2.5 million long term. Capital lease obligations totaled $1.0 million. Stockholders’ equity was $22.3 million, and accumulated deficit was $20.6 million.
For the nine months, operating activities used $0.5 million of cash, investing activities used $1.6 million, and financing activities provided $1.6 million. Capital expenditures and software development capitalization totaled approximately $1.3 million, including $0.7 million of capitalized software development costs. Cash declined $0.4 million during the period.
Material Changes Versus the Prior Comparable Period
- Revenue declined 12% in Q3 and 9% year to date, primarily because non-iAPPS application development revenue fell 48% in Q3 and 45% year to date.
- iAPPS-related application development revenue increased 1% in Q3 and 5% year to date, reflecting greater emphasis on iAPPS engagements but also longer implementation times.
- Managed hosting revenue declined 35% in Q3 and 22% year to date as the company exited smaller, less strategically aligned hosting engagements.
- License revenue grew, but license cost increased disproportionately. License gross margin declined to 64% in Q3 from 83% and to 72% year to date from 82%, partly due to subscription mix, platform investments, and $90 thousand of software amortization.
- Sales and marketing expense increased 16% in Q3 and 13% year to date, while general and administrative expense increased 24% and 18%, respectively. Operating expenses increased 17% in Q3 and 5% year to date.
- The company’s June 2013 private placement generated $2.1 million of net proceeds from the sale of 2.3 million shares and included warrants to purchase 690,000 shares at $1.25 per share.
- Shares outstanding increased to 17.7 million at August 9, 2013 from 15.2 million at September 30, 2012, increasing potential dilution alongside outstanding options, warrants, and contingent acquisition shares.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide formal quantitative revenue or earnings guidance. Management stated that cash generated from operations and increased borrowing availability were expected to fund working capital and capital expenditures in the foreseeable future, while noting that additional financing might be pursued to support acquisitions.
In July 2013, Silicon Valley Bank amended the credit facility, increased borrowing availability based on accounts receivable, raised interest rates by one percentage point, accelerated term-loan repayment through April 2014, and waived certain covenant defaults. Management stated that the company would not have complied with certain June 30 covenants without the amendment and waiver. The term loan balance was approximately $0.6 million at June 30.
On August 1, 2013, after quarter-end, Bridgeline acquired Elements Local for $0.4 million in cash, $0.6 million in common stock, assumed debt of $0.2 million, and contingent consideration of $1.3 million. The acquisition added a franchise-focused SaaS platform with approximately 35 franchisor customers and 3,200 franchises. Management expects the transaction to strengthen iAPPS ds and expand franchise-market penetration.
The company settled litigation with e.Magination and Daniel Roche. Total payments are $0.3 million, including $0.2 million accrued at June 30, with payments over 18 months beginning August 2013, plus previously earned contingent acquisition consideration.
Prior acquisition earnouts totaled $0.9 million at June 30, 2013 and are scheduled to be paid through fiscal 2015, subject to applicable targets. The company also had approximately $0.8 million of new capital-lease obligations with payments through July 2015.
Key risks include continuing operating losses and negative Adjusted EBITDA, declining non-iAPPS services revenue, reliance on successful iAPPS and SaaS growth, implementation delays, customer retention and renewals, liquidity and covenant compliance, dependence on financing and acquisitions, dilution, competition, technology and software-security risks, protection of intellectual property, dependence on key personnel, and potential goodwill or intangible-asset impairment.
Most Important Facts for Investors to Verify
- Whether iAPPS, iAPPS ds, subscription, and license growth can offset the continuing decline in non-iAPPS services and hosting revenue.
- Whether the company can improve gross margins and return to positive operating cash flow and Adjusted EBITDA.
- The availability, covenants, interest rates, and accelerated repayment requirements under the amended Silicon Valley Bank facility.
- Post-quarter operating results and integration performance of the Elements Local acquisition, including contingent consideration exposure.
- The timing and cash impact of litigation settlement payments, acquisition earnouts, capital leases, and other contractual obligations.
- Potential dilution from the June private placement warrants, outstanding options, and contingent acquisition shares.
- The carrying value and impairment sensitivity of approximately $21.9 million of goodwill and $1.0 million of net intangible assets.