Bridgeline Digital Update Report - 1-29-15

Research Report – Update
Investors should consider this report as only a single factor in making their investment decision.
Bridgeline Digital, Inc.
Rating: Speculative Buy
Howard Halpern
January 29, 2015
BLIN $0.51 — (NasdaqCM)
Fiscal year net sales (in millions)
Earnings per share
2012 A
$26.3
($0.07)
2013 A
$24.5
($0.23)
2014 A
$23.7
($0.32)
2015 E
$26.0
($0.20)
2016 E
$29.5
($0.09)
52-Week range
$1.40 - $0.35 Fiscal year ends:
September
Shares outstanding a/o 12/12/14
22.0 Million Revenue/shares (ttm)
$1.21
Approximate float
19.3 Million Price/Sales (ttm)
0.4X
Market Capitalization
$9 million Price/Sales (2016) E
0.4X
Tangible Book value/shr
($0.28) Price/Earnings (ttm)
NM
Price/Book
NM Price/Earnings (2016) E
NM
Bridgeline Digital Inc., headquartered in Burlington, Massachusetts is a software technology, tools, and service developer. BLIN’s
lead product is iAPPSds, a micro-website integrating content management, e-marketing and analytics.
Key Investment Considerations:
Maintaining Speculative Buy but reducing our 12-month price target to $0.80 from $1.10 per share due to a
diminished sales outlook and price-to-sales-valuation.
The company’s iAPPSds subscription micro-site offering has growth potential. BLIN has deployed over 2,300
in a potential market of 1.5 million sites in North America. We project at least 16,000 active BLIN iAPPSds
sites by September 30, 2017 (FY17).
BLIN commenced deployment of two large iAPPSds contracts for 3,700 sites and 1,200 sites, respectively. We
project $750,000 in quarterly sales when all 4,900 iAPPSds subscription sites are active.
The iAPPSds micro-site platform should have over 10,000 sites booked and ready for deployment by March 31,
2015. We estimate a subscription/perpetual license gross margin in excess of 81.2% in FY15, up from 76.8%
in FY15, driven by a $2.7 million increase in iAPPSds revenue to $7.5 million.
In 4Q14 (reported 12/29/14) sales decreased 14% to $5.8 million due to a decrease of 20% and 6%, respectively, in
digital engagement services and managed service-hosting revenue partly offset by a 6.4% increase in licensing
revenue. BLIN’s loss per share doubled to ($0.08) vs. our forecast of ($0.06) on $6 million in sales.
We are reducing our FY15 sales forecast by $2.2 million to $26 million. Due to lower sales and higher interest
expense, we increased our loss per share projection to ($0.20) from ($0.16). We project gross margin
improvement to 51.9% from 48.6% due to growth in higher-margin iAPPSds sales. We project cash burn
narrowing to $1 million from $3 million in FY14.
In FY16 we project 24.1% sales growth to $29.5 million, reflecting a 36.3% increase in subscription/perpetual
license revenue due to iAPPSds sales. The pace of iAPPSds deployments will determine when positive cash
flow is achieved. We project positive cash flow of $1.6 million in FY16. We project a loss per share of ($0.09).
Please view our Disclosures pages 14 - 16
790 New York Ave, Huntington, New York, N.Y. 11743
(800) 383-8464 • Fax (631) 757-1333
Bridgeline Digital, Inc.
Appreciation Potential
Maintaining Speculative Buy based on revenue-driven growth potential of the company’s technology platform and
recurring subscription revenue from its iAPPSds micro-site platform. We project the number of micro-sites to grow
to 11,000 in FY16 from 2,200 in FY13.
The iAPPSds micro-site platform is a cloud-based software-as-a-service (SaaS) platform allowing franchises and
dealer networks to execute local marketing plans, drive e-commerce initiatives, and measure results with actionable
analytics. The platform enables the corporate offices to control content, personalize the brand, and manage every
facet of the website.
2010 data from the US Census Bureau survey of 295 industries indicated that 453,326 establishments, out of a total
of 4.3 million, were either franchisee or franchisor-owned businesses. Franchise businesses accounted for $1.3
trillion of the $7.7 trillion in total sales for the 295 industries. According to consulting firm IHS, in January 2014
there were 770,000 franchised businesses in the US, up from 757,000 in 2013. Based on our analysis of US census
bureau data, we estimate there are over 500,000 independent network dealerships in the US from automotive,
finance, healthcare, and manufacturing. Also, IHS projects worldwide enterprise cloud computing infrastructure and
services will triple by 2017 to $235 billion from $78 billion in 2011.
We anticipate the company will sign between two to three new iAPPS enterprise customers a quarter. We forecast
3.5% growth in digital engagement services revenue in FY16 driven by new iAPPS enterprise customers and
maintenance revenue from established customers.
We are reducing our 12-month price target to $0.80 from $1.10 per share due to a diminished sales outlook
and price-to-sales-valuation. The company’s fiscal year-ending (September 30) price to sales multiples decreased
from 0.7X in FY13 to 0.5X in FY14. The company’s current trailing-twelve month and FY16 price to sales
multiples are 0.4X.
Our iAPPSds micro-site
platform revenue growth
forecast of 36.3% to $10.3
million in FY16 should
drive positive annual cash
flow for the first time
since FY12. We believe
investors should value the
shares of BLIN at 0.7X
(prior was 9X) our FY16
(ending September 30,
2016) sales per share
forecast
of
$1.24,
discounted by 10% to
account for execution risk, implying stock price potential appreciation in excess of 55%.
Bridgeline Digital’s valuation is likely to remain at a discount from its peers (chart above) due to lack of profits, in
consistent growth in quarterly revenue, and cash burn. Valuation improvement is likely to be gradual as investors
desire consistent quarterly revenue growth, expense leverage, cash earnings, and eventually profitability. We
anticipate quarterly revenue growth in FY15 and achieve some expense leverage by 3Q15. We project cash earnings
by 1Q16 but profitability is unlikely to occur until FY17.
Due to the potential period-to-period variability in iAPPSds and iAPPS enterprise platform deployments, we
believe Bridgeline’s shares are suitable primarily for high-risk tolerant investors.
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Bridgeline Digital, Inc.
Overview
Bridgeline Digital Inc., headquartered in Burlington, Massachusetts is a developer of software technology, tools, and
services that enable organizations to optimize their online business processes.
The company’s two platforms (see table right) are based
on its internally developed iAPPS technology, which
unifies web content management, analytics, e-commerce,
and e-marketing capabilities that enhance both web and
customer experience management capabilities.
Bridgeline’s delivery system is either cloud-based
software as a service (SaaS) or perpetual licensing models.
The company’s enterprise offering targets organizations
that operate mission critical Websites or online stores with
annual revenues of at least $25 million. Companies that
have mission critical websites, intranets, extranets, and
portals are prospects for iAPPS content manager. iAPPS
commerce and content manager are marketed to online stores. The iAPPS suite contains personal modules –
marketier and analytics, which can be activated at any time.
The company’s Web-hosting facility co-managed with Internap Network Services provides fully managed services,
including dedicated in-house production and development servers, and a dedicated 24-hour monitored co-location
facility for customers’ mission critical (sites that enable workflow, data collection, and ability to manage content)
web-based applications. The company generates revenue from shared hosting, dedicated hosting, and SaaS hosting.
Growth Strategy
The company aims to increase the number of iAPPSds subscription micro-sites to 40,000 from over 2,300 at
September 30, 2014. If successful the company could generate revenue from 40,000 iAPPSds subscription sites in
FY18. At a $50 average monthly subscription, revenue could have a quarterly run-rate of $6 million with a gross
margin approaching 80%. At those rates the company would be generating positive cash flow and net income by the
second half of FY17.
Bridgeline is working to expand the number of iAPPSds subscription mirco-sites from existing customers. The
potential incremental increase in subscription sites is substantial (~19,000). The interactive iAPPSds platform is
active in 2,200+ UPS store sites out of approximately 4,300 total UPS stores in the US. The company is working on
upgrading 1,200 Sport Clips stores to the iAPPSds platform from the Elements Local platform (acquired in 3Q14).
Of the 2,000 remaining Elements Local customers, we estimate at least 1,200 are likely to covert to the iAPPSds
platform, doubling monthly subscription revenue for those customers starting in 4Q15.
By September 2015 the company aims to have deployed its largest iAPPSds customer. In March 2014 the
company signed a contract with a large North American healthcare communications technology company for 3,700
iAPPSds subscription sites. The migration plan for this customer is both time consuming and complex since four
different existing platforms will be merged into the iAPPSds platform. A significant portion of the process will be
done manually, which is why the initial time frame to complete the migration is twelve months. If the process is
completed on or before schedule and customer satisfaction is high, iAPPSds deployments could grow to at least
10,000 subscription sites by September 2016, with 20,000 subscription sites by September 2018.
Using this large customer as a reference should provide other franchise organizations and independent network
dealerships confidence in deploying the iAPPSds subscription platform.
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Bridgeline Digital, Inc.
The company aims to increase the average revenue per iAPPS enterprise contract. Increasing the value of each
enterprise deal should offset a reduction in enterprise customers. The average value of each iAPPS enterprise deal
reached $500,000 in the 2H14 from $120,000 in 2010. The value has increased due to the growth of mobile
applications. The increased use of mobile devices means the look, feel, and functionality of a Website must be
translated seamlessly onto mobile devices such as tables and smart phones. Due to this transition, the value per
contract has increased and deployment time has lengthened.
Revenue Sources
Bridgeline Digital’s internally developed iAPPSds and iAPPS enterprise technology platforms account for nearly all
the revenue under subscription/perpetual licenses or digital engagement services categories. The platform integrates
content management, e-commerce, e-marketing, social media management, and analytics to centrally manage
websites or online stores to help deliver Website experiences that attract, engage, and convert their customers across
all digital channels.
Subscription/Perpetual Licenses
Most of iAPPSds revenue is generated on recurring monthly subscriptions with only a small portion allocated to
services. Brideline receives a monthly subscription fee either from an individual franchisee or corporate office.
Monthly subscription revenue generates 75+% gross margin for iAPPSds sales.
Digital Engagement Services
iAPPS enterprise deployments generate most of the revenue in this category. The majority of enterprise revenue
takes the form of lower margin services with only a small portion allocated to higher margined licenses. The
revenue accounts for work to complete the deployment of an enterprise platform from prior periods and newly signed
contracts.
Projections
Economic and Industry Factors Influencing Forecast
3Q14 US GDP annual growth was 5% (third estimate) compared to 4.6% in 2Q14. Annual GDP growth in 3Q14
reflects contributions from personal consumption expenditures, nonresidential fixed investment, and federal
government spending, partly offset by lower private inventory investment, a deceleration in exports, and lower state
and local government spending. US GDP in the first half of 2014 increased 1.7% due primarily to the harsh winter
weather conditions that caused a -2.9% contraction in 1Q14.
In January 2015, the International Monetary Fund increased its 2015 and 2016 US GDP forecast by 0.5% and 0.3,
respectively, to 3.6% and 3.3% from its October
2014 forecast. The IMF increased its US forecast
due to increased consumer demand driven by
lower oil prices and an accommodative monetary
Source: IHS
policy.
Consulting firm IHS projects (see chart on right)
worldwide enterprise cloud computing will triple
to $235 billion from $78 billion in 2011. In 2014,
worldwide infrastructure and services spending
for cloud computing is estimated to increased 20%
to $174 billion from 2013.
Basis of Forecast
Our sales forecast consists of revenue earned on digital engagement services, managed service hosting, and
subscription/perpetual licenses.
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Bridgeline Digital, Inc.
We project average annual revenue
growth of 33.3% to FY18, reflecting
iAPPSds subscriptions increasing to
40,000 from 10,970 in FY15. Our
forecast includes 7,500 subscriptions
from existing customers (The UPS
Store,
SidCorp,
a
healthcare
communications technology company,
and Sport Clips).
By FY18 we
anticipate The UPS Store will add
another 500 sites, Sport Clips stores will
add another 200 sites, with the
healthcare communications technology
company adding another 8,500 sites.
Our forecast reflects penetration of approximately 2.5% for BLIN’s iAPPSds platform in 2018.
We project FY16 digital engagement services revenue of $17.3 million, up 3.5% from our FY15 forecast. The
modest growth should be supported by approximately three new iAPPS enterprise deployments starting each quarter.
Managed service hosting revenue should remain fairly consistent at $465,000 a quarter or about $1.8 million to $1.9
million a year.
In 4Q14 Bridgeline's booking backlog increased sequentially by $6 million to $32 million with a large qualified
pipeline ($17 million) of high margin iAPPSds customers.
Our forecasts reflect customer retention rates for maintenance and hosting services of 90%, respectively. We
anticipate FY15 and FY16 gross margin improvement to 51.9% and 57.1%, respectively, from 47.8% in FY14. The
gross margin improvement reflects a revenue shift to higher margin iAPPSds subscriptions and the 2Q15 cost cutting
initiative anticipated to reduce cost of goods by approximately $300,000 per quarter. Also, we included in our
forecast an SG&A cost reduction initiative of approximately $500,000 per quarter beginning in 2Q15. FY16
operating expense margin should decrease to 59.7% from our FY15 forecast of 64.7% reflecting annual sales growth
and cost cutting that will leverage operating expenses.
Operations
For FY15, we project revenue growth of 9.7% to $26 million (prior was $28.3 million). The reduction from our prior
forecast reflects a 30.8% (prior was 41.3%) increase in subscription/perpetual licenses and a 2.1% (prior was 10.7%)
increase in digital engagement services. We project an increase in managed service hosting revenue to $1.8 million
from $1.6 million in FY14. The reduction in our subscription/perpetual license revenue forecast reflects iAPPSds
revenue of $7.5 million or $900,000 less than previously forecast due to few than anticipated active customer
subscription sites.
We project gross margin improvement to 51.9% from 48.6% in FY14 due to a $300,000 2Q15 cost of goods sold
reduction and a 30.8% increase in higher margin iAPPSds revenue to $7.5 million. We project total operating
expense margin of 64.7%, down from 70.6% in FY14. We project operating expenses of $16.8 million or flat with
FY14 due to the planned elimination of $2 million in annual SG&A costs through the implementation in 2Q15 of a
cost reduction program. We forecast a 1% increase in SG&A expenses to $12.5 million with R&D and deprecation
remaining flat at $2.4 million and $1.9 million, respectively. We project operating losses to narrow to $3.3 million
from $5.2 million in FY14 due to total sales growth, an increase in gross margin, and better leveraging of operating
expenses.
For FY15, we project a net loss of $4.5 million or ($0.20) per share. Included in our loss forecast in non-cash income
tax expense of $140,000 and interest expense of $1 million. Interest expense reflects higher debt levels used to
support the acquisition of Elements Local and improve the technology infrastructure to support the iAPPS platform.
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Bridgeline Digital, Inc.
For FY16, we project revenue growth of 24.1% to $29.5 million, reflecting a 36.3% increase in
subscription/perpetual licenses and a 3.5% increase in digital engagement services. We project managed service
hosting revenue to increase by $100,000 to $1.9 million. The increase in subscription/perpetual licenses reflects
iAPPSds customers increasing to 11,300 from 10,970 in FY15.
We project gross margin improvement to 57.1% from 51.9% in FY15 due to a fully year of cost cutting that began in
2Q15, reducing cost of goods sold by approximately $300,000 a quarter. We project total operating expense margin
of 59.7%, down from 64.7% projected for FY15. We project a 4.5% increase in operating expenses to $17.6 million,
reflecting a 5.4% increase in SG&A expenses to $13.2 million in order to support projected iAPPSds deployments.
We project operating losses to narrow to $785,000 from a projected loss of $3.3 million in FY15 due to total sales
growth, an increase in gross margin, and better leveraging of operating expenses.
For FY16, we project a net loss of $2 million or ($0.09) per share. Included in our loss forecast in non-cash income
tax expense of $200,000 and interest expense of $1.1 million. Interest expense reflects higher debt levels.
Finances
For FY15, we project cash burn of $1 million and a decrease in working capital of $1.3 million due to increases in
deferred revenue, accruals, and payables. Capital expenditures, capital lease payments, and repayment of debt
obligations will exceed cash of $272,000 from operations and issuance of convertible preferred stock, decreasing
cash by $90,000 to $1.2 million at the end of FY15.
For FY16, we project cash earnings of $1.6 million and a decrease in working capital of $1.6 million due to increases
in deferred revenue, accruals, and payables. Capital expenditures, capital lease payments, and repayment of debt
obligations will exceed cash of $3.1 million from operations, decreasing cash by $587,000 to $579,000 at the end of
FY16.
Capital Structure
In calendar 2013 and the first 10 months of 2014, Bridgeline raised $9.5 million in new capital. Net proceeds of $2.1
million were raised through a sale of 460,000 units issued at $5.00 per unit. Each unit consisted of five shares of
common stock and a five year warrant to purchase one share of common stock at a price equal to $1.25 per share.
Another $2.8 million in net proceeds was raised through the sale of 10% secured subordinated convertible notes (in
two separate closings).
In March 2014 $2.8 million in net proceeds was raised through the issuance of 3,200,000 shares of BLIN common
stock at $0.95 per share. In addition the placement agent was issued five-year warrants to purchase an aggregate of
320,000 shares of Bridgeline’s common stock at $1.05 per share. There are no plans to register the common stock
issued in this offering, however in the event the company does register other common stock, it agreed to provide
piggyback registration rights.
In October 2014 $1.8 million in net proceeds was raised through the issuance of 200,000 of convertible preferred
stock at a purchase price of $10. Preferred shares are convertible into common stock at $0.65 per share. Cumulative
dividends on the preferred stock will be paid quarterly at an annual rate of 6%. Taglich Brothers, Inc. served as
placement agent for all of the transactions.
In December 2013 the company entered into a loan agreement with BridgeBank for up to $5 million in revolving
credit advances based on eligible receivables at the prime rate plus 1%, which expires March 31, 2016. The
revolving credit facility is secured by all of BLIN’s assets and intellectual property. At September 30, 2014, the
company had an outstanding balance under the facility of $2.9 million. At September 30, 2014 the company was not
in compliance with certain financial covenants. In December 2014 BLIN obtained a waiver form BridgeBank. The
waiver included a personal guarantee from a director (Michael Taglich) for up to $1 million.
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Bridgeline Digital, Inc.
iAPPS Platform
The iAPPS technology platform consists of a content and commerce manager with additional modules – marketing,
analytics, and social media.
iAPPS content manager – allows non-technical users to create, edit, and publish content via a browser-based
interface and enables customers to keep content and promotions fresh for the Internet/company intranet.
Administrators can configure a simple or advanced workflow, accommodating the complexity of larger companies
with strict regulatory policies.
iAPPS commerce – enables customers to maximize and manage all aspects of their domestic and international
commerce initiatives through customizable dashboards by providing a real-time overview of the performance of
customers’ online stores.
iAPPS marketier – a life cycle management solution includes customer transaction analysis, email management,
surveys, polls, event registration, and issue of tracking to measure campaign ROI and client satisfaction.
iAPPS analytics – enables management, measurement, and optimization of Website properties by recording detailed
events and data mine (for statistical analysis) the results within the web application.
iAPPS social – enables customers the ability to use social media as a business channel by allowing customers to
identify, engage, and capitalize with ongoing conversations taking place across the entire web.
The platform enables the company to offer:
A Digital Subscription Platform (iAPPSds) – a cloud-based software-as-a-service that eliminates the need for
franchise or dealer network organizations to maintain their own information technology infrastructure.
Enterprise Services (iAPPS) – provides development and integration services, including data warehouse, legacy
integration, inventory management, order fulfillment, and order tracking. Bridgeline’s web application development
services are focused on web design and development, usability engineering, information architecture, rich media
development, and search engine optimization.
4Q14 and 2014 Results
In 4Q14, revenue decreased 14% to $5.8 million, which was below our forecast of $6 million. Sales decreased due to
a 20% reduction in digital engagement services to $4 million, partly offset by a 6.4% increase in
subscription/perpetual license revenue to $1.4 million.
Gross profit decreased by $1 million to $2.8 million due to lower sales and gross margin contraction to 47.8% from
55.6% in the year-ago period. In 4Q14, operating expenses decreased 2.1% to $4.2 million due to a 9.3% decrease in
SG&A expense to $3 million reflecting reductions in legal fees, headcount, and compensation. Partly offsetting lower
operating expenses was a 42.5% increase in R&D expense to $671,000 reflecting capitalization of software
development costs related to iAPPS enhancements and upgrades made to the company network operation center, as
well as a 4.3% increase in depreciation expense due to amortization of intangible assets acquired from acquisitions.
Net operating losses nearly tripled to $1.4 million resulting in net operating expense margin increasing to 72.7%
from 64% due to sales decreasing faster then operating expenses.
Other expense of $215,000 consisting of interest expense less interest income, was up from $79,000 due to a higher
outstanding debt balance. In 4Q14 the company lost $1.8 million or ($0.08) per share compared to a loss of
$705,000 or ($0.04) per share. We projected a loss of $1.3 million or ($0.06) per share.
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Bridgeline Digital, Inc.
In the FY14 revenue increased 3.1% to $23.7 million. The decrease was due to a 12% decrease in digital
engagement services to $16.4 million and a 15.7% decline to $1.6 million in managed service hosting, partly offset
by a 43.7% gain in subscriptions/perpetual licenses. The decrease in digital engagement services was due primarily
to a $1.8 million decline in non-iAPPS services.
Gross profit dropped 11% to $11.5 million due to gross margin compression to 48.6% from 52.9% reflecting higher
fixed costs to support revenue and increases in third party labor costs to deliver iAPPS services.
In the FY14, operating expenses increased 4% to $16.8 million due to a 75% increase in R&D expense to $2.4
million and a 18.3% increase in depreciation/amortization expense, partly offset by a 5.3% decrease in SG&A
expense to $12.4 million. Net operating losses increased to $5.2 million from $3.2 million due to higher operating
expenses and lower gross margin. Net operating expense margin increased to 70.6% from 65.8% due to higher
operating expenses.
Other expense of $739,000 consisting of interest expense less interest income, was up from $273,000 due to a higher
outstanding debt balance. In FY14 the company lost $6.2 million or ($0.32) per share compared to a loss of $3.6
million or ($0.23) per share. At September 30, 2014 the company had net operating loss carryforwards of $13
million.
Finances
In the 4Q14, cash burn was $832,000. Working capital increased by $138,000 due to a reduction in payables,
accruals, and deferred revenue, partly offset by an increase in receivables. Cash used in operations of $970,000,
capital expenditures, and repayment of debt obligations fell short of bank borrowings reducing cash by $297,000 to
$1.3 million at September 30, 2014.
In FY14, BLIN burned cash of $3 million and increased working capital by $835,000. Working capital increased due
to a reduction in payables, accruals, and an increase in receivables. Proceeds from a $2.8 million common stock
offering and $2 million in bank borrowings did not cover cash used in operations of $3.8 million, capital
expenditures and repayment of debt obligations. Cash decreased by $1.6 million to $1.3 million at September 30,
2014.
Competition
Content management is a highly competitive and fragmented segment of the information technology industry.
Bridgeline provides more than content management, as it integrates additional components into its iAAPS
technology. Large existing companies that add components use acquisitions as their primary tool, so integration of a
particular component tends to lack cohesion with its existing technology. In addition, Bridgeline’s targeted market of
organizations with sales of $25 million to $250 million tends to be underserved by the larger technology companies,
which can only offer one or two aspects of what iAPPS can provide.
An industry standard of software delivery is typically in either a cloud/SaaS environment or in a dedicated server
environment. Brideline developed and designed the iAPPS architecture to be flexible, enabling deployment in either
a cloud/SaaS or dedicated server environment.
Large public competitors in content management include Adobe, International Business Machines Corporation, EMC
Corporation, Autonomy plc, Oracle, Microsoft, Symantec, and Hewlett-Packard. There are many smaller software
vendors competing within individual software product areas. Competition also is from systems integrators that
configure hardware and software into customized systems. The most significant attributes in the industry include
platform availability, scalability, integration with other enterprise applications, and support services.
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Bridgeline Digital, Inc.
Risks
In our view, these are the principal risks underlying the stock:
Losses
The company’s operations have yet to turn profitable. In FY14 the company’s accumulated deficit reached $27.5
million, up from $17.7 million in FY12. While we forecast losses should continue through FY16, losses should
diminish to $2 million from $4.5 million in FY15.
Economy
An economic slowdown could reduce customer demand and confidence in technology investments.
Competition
Content management, web stores and analytics are a highly competitive and fragmented segment of the information
technology industry.
Software Renewal Rate
Subscription licenses are renewed annually. If the renewal rate were to fall substantially, revenue could decrease.
Infringement
Claims of infringement are becoming commonplace within the software industry. While the company does not
believe it infringes on the rights of third parties, a third party may assert Bridgeline’s technology violates their
intellectual property rights.
Delisting
The company’s common shares are not in compliance with the minimum closing bid price of at least $1.00 per share,
which is a requirement for continued listing on the NASDAQ Capital Market. On December 1, 2014 the company
was notified by NASDAQ that it was eligible for an additional 180 calendar day period, or until May 26, 2015 to
regain compliance.
Shareholder Control
The CEO, executives, and directors collectively own in excess of 13.6% of the outstanding voting stock (as of the
SEC filing in July 2014). This group could potentially greatly influence the outcome of matters requiring
stockholder approval. These decisions may or may not be in the best interests of the other shareholders.
Dilution
The company has raised capital four times since 2012. The issuance of over 7 million common shares since May
2012 diluted the ownership interest common shareholders had prior to that time. Future issuances of common stock
(i.e., convertible debt and preferred offerings in September and October 2013, and October 2014) would further
dilute current shareholders’ ownership.
Miscellaneous Risk
The company’s financial results and equity values are subject to other risks and uncertainties, including competition,
operations, financial markets, regulatory risk, and/or other events. These risks may cause actual results to differ from
expected results.
Trading Volume
Based on our calculations, the average daily-volume in 2013 was 41,294 shares traded a day, which increased to
93,966 in 2014. During the last three months to January 28, 2015 volume decreased to 69,202. The company has a
float of 19.3 million shares and shares outstanding of 22 million at December 12, 2014.
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Bridgeline Digital, Inc.
Consolidated Balance Sheets
FY12 – FY16E
(in thousands)
Source: Company reports and Taglich Brothers estimates
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Bridgeline Digital, Inc.
Annual Income Statement – Ending September 30,
FY12 – FY16E
(in thousands)
Source: Company reports and Taglich Brothers estimates
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Bridgeline Digital, Inc.
Income Statement Model
Quarters FY14A – 2016E
(in thousands)
Source: Company reports and Taglich Brothers estimates
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Bridgeline Digital, Inc.
Cash Flow Statement, Ending September 30,
FY11 – FY15E
(in thousands)
Source: Company reports and Taglich Brothers estimates
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Bridgeline Digital, Inc.
Price Chart
Taglich Brothers Current Ratings Distribution
Investment Banking Services for Companies Covered in the Past 12 Months
Rating
Buy
Hold
Sell
Not Rated
#
%
2
7
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Bridgeline Digital, Inc.
Important Disclosures
As of the date of this report, Taglich Brothers, Inc. and/or its affiliates, own more than 1% of BLIN
common stock. Michael Taglich, President of Taglich Brothers, Inc. and appointed to BLIN’s Board of
Directors on November 1, 2013, owns or has a controlling interest in 510,869 restricted common
shares, 187,815 restricted warrants (47,500 at an exercise price of $1.40, 93,350 at $1.25 per share, and
46,965 at $1.30 per share), 310,000 shares of BLIN common stock, $100,000 worth of 10% secured
subordinated convertible note, and 3,000 restricted series A convertible preferred stock. Robert
Taglich, Managing Director of Taglich Brothers, Inc., owns or has a controlling interest in 993,706
shares of restricted common shares and 187,815 restricted warrants (47,500 at an exercise price of
$1.40, 93,350 at $1.25 per share, and 46,965 at $1.30 per share), 50,000 shares of BLIN common stock,
$200,000 worth of 10% secured subordinated convertible note, and 50,000 restricted series A
convertible preferred stock. Richard Oh, Managing Director of Taglich Brothers, Inc., owns 25,000
shares of BLIN restricted common stock and 31,077 restricted warrants (9,000 at an exercise price of
$1.40, 10,000 at $1.25 per share, and 12,077 at $1.30 per share). Doug Hailey, Director of Investment
Banking at Taglich Brothers, Inc., owns 50,000 shares of BLIN restricted common stock and 71,000
restricted warrants (23,000 at an exercise price of $1.40, 24,000 at $1.25 per share, and 24,000 at $1.30
per share). Other employees at Taglich Brothers, Inc., also own or have a controlling interest in 58,700
restricted common shares, and 299,953 restricted warrants (90,391 at an exercise price of $1.40,
108,800 at $1.25 per share, and 100,762 at $1.30 per share). Taglich Brothers, Inc. has five-year
warrants to purchase an aggregate of 320,000 shares of BLIN common stock at an exercise price of
$1.05 per share. Taglich Brothers, Inc. has an Investment Banking relationship with the company
mentioned in this report. In May 2012, June 2012, March 2014, and October 2014 Taglich Brothers,
Inc. acted as the exclusive placement agent for common stock and preferred offerings.
All research issued by Taglich Brothers, Inc. is based on public information. In January 2012, the
company paid Taglich Brothers a monetary fee of $4,500 (USD) representing payment for the creation
and dissemination of research reports for three months. Beginning in June 2012, the company will pay
Taglich Brothers a monthly monetary fee of $1,500 (USD) for the creation and dissemination of
research reports.
General Disclosures
The information and statistical data contained herein have been obtained from sources, which we
believe to be reliable but in no way are warranted by us as to accuracy or completeness. We do not
undertake to advise you as to changes in figures or our views. This is not a solicitation of any order to
buy or sell. Taglich Brothers, Inc. is fully disclosed with its clearing firm, Pershing, LLC, is not a
market maker and does not sell to or buy from customers on a principal basis. The above statement is
the opinion of Taglich Brothers, Inc. and is not a guarantee that the target price for the stock will be met
or that predicted business results for the company will occur. There may be instances when
fundamental, technical and quantitative opinions contained in this report are not in concert. We, our
affiliates, any officer, director or stockholder or any member of their families may from time to time
purchase or sell any of the above-mentioned or related securities. Analysts and members of the
Research Department are prohibited from buying or selling securities issued by the companies that
Taglich Brothers, Inc. has a research relationship with, except if ownership of such securities was prior
to the start of such relationship, then an Analyst or member of the Research Department may sell such
securities after obtaining expressed written permission from Compliance.
Analyst Certification
I, Howard Halpern, the research analyst of this report, hereby certify that the views expressed in this
report accurately reflect my personal views about the subject securities and issuers; and that no part of
my compensation was, is, or will be directly or indirectly related to the specific recommendations or views
contained in this report.
Taglich Brothers, Inc.
15
Bridgeline Digital, Inc.
Public Companies mentioned in this report:
Adobe Systems
Hewlett Packard
IBM
Symantec Corporation
Actuate Corporation
American Software
Inuvo, Inc.
(NASDAQ: ADBE)
(NYSE: HPQ)
(NYSE: IBM)
(NASDAQ: SYMC)
(NASDAQ: BRIT)
(NASDAQ: AMSWA)
(NASDAQ: INUV)
EMC Corporation
Oracle Corporation
Microsoft
United Parcel Service, Inc.
Constant Contact
Digital River
PFSweb Inc.
(NYSE: EMC)
(NASDAQ: ORCL)
(NASDAQ: MSFT)
(NYSE: UPS)
(NASDAQ: CTST)
(NASDAQ: DRIV)
(NASDAQ: PFSW)
Meaning of Ratings
Buy – The growth prospects, degree of investment risk, and valuation make the stock attractive relative
to the general market or comparable stocks.
Speculative Buy – Long-term prospects of the company are promising but investment risk is
significantly higher than it is in our BUY-rated stocks. Risk-reward considerations justify purchase
mainly by high risk-tolerant accounts. In the short run, the stock may be subject to high volatility and
could continue to trade at a discount to its market.
Neutral – Based on our outlook the stock is adequately valued. If investment risks are within
acceptable parameters, this equity could remain a holding if already owned.
Sell – Based on our outlook the stock is significantly overvalued. A weak company or sector outlook
and a high degree of investment risk make it likely that the stock will underperform relative to the
general market.
Dropping Coverage – Research coverage discontinued due to the acquisition of the company,
termination of research services, non-payment for such services, diminished investor interest, or
departure of the analyst.
Some notable Risks within the Microcap Market
Stocks in the Microcap segment of the market have many risks that are not as prevalent in
Large-cap, Blue Chips or even Small-cap stocks. Often it is these risks that cause Microcap stocks
to trade at discounts to their peers. The most common of these risks is liquidity risk, which is
typically caused by small trading floats and very low trading volume which can lead to large
spreads and high volatility in stock price. In addition, Microcaps tend to have significant
company-specific risks that contribute to lower valuations. Investors need to be aware of the
higher probability of financial default and higher degree of financial distress inherent in the
microcap segment of the market.
From time to time our analysts may choose to withhold or suspend a rating on a company. We continue to
publish informational reports on such companies; however, they have no ratings or price targets. In general, we
will not rate any company that has too much business or financial uncertainty for our analysts to form an
investment conclusion, or that is currently in the process of being acquired.
Taglich Brothers, Inc.
16