Edgar Filing: Bridgeline Digital, Inc.

blin20130630_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission File Number 333-139298

Bridgeline Digital, Inc.

(Exact name of registrant as specified in its charter)

Delaware	52-2263942
State or other jurisdiction of incorporation or organization	IRS Employer Identification No.

80 Blanchard Road
Burlington, Massachusetts	01803
(Address of Principal Executive Offices)	(Zip Code)

(781) 376-5555

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

(Do not check if a smaller reporting company)

Smaller reporting company ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No ☒

The number of shares of Common Stock par value $0.001 per share, outstanding as of August 9, 2013 was 17,672,281

Bridgeline Digital, Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period ended June 30, 2013

Index

		Page
Part I	Financial Information

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets (unaudited) as of June 30, 2013 and September 30, 2012	4

	Condensed Consolidated Statements of Operations (unaudited) for the three months and nine months ended June 30, 2013 and 2012	5

	Condensed Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended June 30, 2013 and 2012	6

	Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended June 30, 2013 and 2012	7

	Notes to Interim Condensed Consolidated Financial Statements (unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Qualitative and Quantitative Disclosures About Market Risk	30

Item 4.	Controls and Procedures	30

Part II	Other Information

Item 1.	Legal Proceedings	31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31

Item 6.	Exhibits	32

Signatures		33

Bridgeline Digital, Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period ended June 30, 2013

Statements contained in this Report on Form 10-Q that are not based on historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of forward-looking terminology such as “should,” “could,” “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intends,” “continue,” or similar terms or variations of those terms or the negative of those terms. These statements appear in a number of places in this Form 10-Q and include statements regarding the intent, belief or current expectations of Bridgeline Digital, Inc. Forward-looking statements are merely our current predictions of future events. Investors are cautioned that any such forward-looking statements are inherently uncertain, are not guaranties of future performance and involve risks and uncertainties. Actual results may differ materially from our predictions. Important factors that could cause actual results to differ from our predictions include the impact of the weakness in the U.S. and international economies on our business, our inability to manage our future growth effectively or profitably, fluctuations in our revenue and quarterly results, our license renewal rate, the impact of competition and our ability to maintain margins or market share, the limited market for our common stock, the volatility of the market price of our common stock, the performance of our products, our ability to respond to rapidly evolving technology and customer requirements, our ability to protect our proprietary technology, the security of our software, our dependence on our management team and key personnel, our ability to hire and retain future key personnel, or our ability to maintain an effective system of internal controls. Although we have sought to identify the most significant risks to our business, we cannot predict whether, or to what extent, any of such risks may be realized, nor is there any assurance that we have identified all possible issues which we might face. We assume no obligation to update our forward-looking statements to reflect new information or developments. We urge readers to review carefully the risk factors described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012 as well as in the other documents that we file with the Securities and Exchange Commission. You can read these documents at www.sec.gov.

Where we say “we,” “us,” “our,” “Company” or “Bridgeline Digital” we mean Bridgeline Digital, Inc.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

BRIDGELINE DIGITAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share and per share data)

(Unaudited)

ASSETS	June 30, 2013			September 30, 2012
Current assets:
Cash and cash equivalents	$	1,715		$	2,126
Accounts receivable and unbilled receivables, net		3,379			3,977
Prepaid expenses and other current assets		954			648
Total current assets		6,048			6,751
Equipment and improvements, net		3,341			2,735
Intangible assets, net		1,029			1,527
Goodwill		21,880			21,545
Other assets		1,676			1,132
Total assets	$	33,974		$	33,690

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	1,265		$	1,132
Accrued liabilities		926			1,306
Accrued earnouts, current		322			375
Debt, current		1,541			1,424
Capital lease obligations, current		431			230
Deferred revenue		2,548			1,144
Total current liabilities		7,033			5,611

Accrued earnouts, net of current portion		586			990
Debt, net of current portion		2,501			2,988
Capital lease obligations, net of current portion		604			127
Other long term liabilities		912			1,004
Total liabilities	$	11,636		$	10,720

Commitments and contingencies

Stockholders’ equity:
Preferred stock - $0.001 par value; 1,000,000 shares authorized; none issued and outstanding		-			-
Common stock -$0.001 par value; 20,000,000 shares authorized; 17,672,281 and 15,203,538 shares issued and outstanding,		18			15
Additional paid-in capital		43,066			40,847
Accumulated deficit		(20,609	)		(17,716	)
Accumulated other comprehensive loss		(137	)		(176	)
Total stockholders’ equity		22,338			22,970
Total liabilities and stockholders’ equity	$	33,974		$	33,690

The accompanying notes are an integral part of these consolidated financial statements.

BRIDGELINE DIGITAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except share and per share data)

(Unaudited)

	Three Months Ended June 30,						Nine Months Ended June 30,
	2013			2012			2013			2012
Revenue:
Web application development services	$	4,276		$	5,055		$	13,614		$	15,804
Managed service hosting		409			631			1,456			1,858
Subscription and perpetual licenses		915			686			2,726			1,899
Total revenue		5,600			6,372			17,796			19,561
Cost of revenue:
Web application development services		2,341			2,611			7,566			8,237
Managed service hosting		76			98			224			289
Subscription and perpetual licenses		330			117			770			337
Total cost of revenue		2,747			2,826			8,560			8,863
Gross profit		2,853			3,546			9,236			10,698
Operating expenses:
Sales and marketing		2,275			1,965			6,266			5,526
General and administrative		1,140			923			3,440			2,924
Research and development		515			370			893			1,253
Depreciation and amortization		412			446			1,226			1,296
Impairment of intangible asset		-			-			-			281
Total operating expenses		4,342			3,704			11,825			11,280
Loss from operations		(1,489	)		(158	)		(2,589	)		(582	)
Interest income (expense), net		(59	)		(98	)		(194	)		(234	)
Loss before income taxes		(1,548	)		(256	)		(2,783	)		(816	)
Provision for income taxes		21			21			110			90
Net loss	$	(1,569	)	$	(277	)	$	(2,893	)	$	(906	)

Net loss per share:
Basic and diluted	$	(0.10	)	$	(0.02	)	$	(0.19	)	$	(0.07	)
Number of weighted average shares:
Basic and diluted		15,037,767			12,971,259			14,902,419			12,543,019

The accompanying notes are an integral part of these consolidated financial statements.

BRIDGELINE DIGITAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands, except share and per share data)

(Unaudited)

	Three Months Ended June 30,						Nine Months Ended June 30,
	2013			2012			2013			2012
Net Loss	$	(1,569	)	$	(277	)	$	(2,893	)	$	(906	)
Other comprehensive income (loss):
Net change in foreign currency translation adjustment		(12	)		(27	)		39			(63	)
Other comprehensive income (loss):		(12	)		(27	)		39			(63	)
Comprehensive loss	$	(1,581	)	$	(304	)	$	(2,854	)	$	(969	)

The accompanying notes are an integral part of these consolidated financial statements.

BRIDGELINE DIGITAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	Nine Months Ended June 30,
	2013			2012
Cash flows from operating activities:
Net loss	$	(2,893	)	$	(906	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Amortization of intangible assets		391			571
Impairment of intangible asset		-			281
Depreciation		835			725
Other amortization		201			130
Stock-based compensation		334			256
Contingent earnout liability adjustment		(497	)		(780	)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable and unbilled receivables		562			(76	)
Prepaid expenses and other assets		(162	)		(18	)
Accounts payable and accrued liabilities		(512	)		(761	)
Deferred revenue		1,381			(9	)
Other liabilities		(92	)		(205	)
Total adjustments		2,441			114
Net cash used by operating activities		(452	)		(792	)
Cash flows from investing activities:
Equipment and improvements		(545	)		(855	)
Acquisitions, net of cash acquired		-			(35	)
Software development capitalization costs		(739	)		(182	)
Contingent acquisition payments		(314	)		(324	)
Net cash used in investing activities		(1,598	)		(1,396	)
Cash flows from financing activities:
Proceeds from sale of common stock, net of issuance costs		2,062			2,242
Proceeds from exercise of employee stock options		75			128
Proceeds from employee stock purchase plan		74			-
Borrowings from bank line of credit		725			1,876
Payments on bank term loan		(275	)		-
Payments on bank line of credit		(652	)		(2,021	)
Payments on acquired debt		-			(221	)
Payments on subordinated promissory notes		(168	)		(138	)
Principal payments on capital leases		(241	)		(201	)
Net cash provided by financing activities		1,600			1,665
Effect of exchange rate changes on cash and cash equivalents		39			(63	)
Net decrease in cash and cash equivalents		(411	)		(586	)
Cash and cash equivalents at beginning of period		2,126			2,528
Cash and cash equivalents at end of period	$	1,715		$	1,942
Supplemental disclosures of cash flow information:
Cash paid for:
Interest	$	194		$	234
Income taxes	$	13		$	34
Non cash activities:
Equipment purchased under capital leases	$	912		$	137
Equipment and other assets included in accounts payable	$	-		$	13
Accrued contingent consideration (earnouts)	$	83		$	1,207
Common stock issued in connection with acquisition	$	-		$	412

The accompanying notes are an integral part of these consolidated financial statements.

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

1. Description of Business

Overview

Bridgeline Digital enables its customers to maximize the performance of their mission critical websites, intranets, and online stores. Bridgeline is the developer of the award-winning iAPPS Web Engagement Management (WEM) product platform and related digital solutions. The iAPPS platform deeply integrates Web Content Management, eCommerce, eMarketing, and web Analytics capabilities within the heart of websites or eCommerce web stores to help marketers deliver online experiences that attract, engage, and convert their customers across all digital channels. Bridgeline’s iAPPS platform combined with its digital services assists customers in maximizing on-line revenue, improving customer service and loyalty, enhancing employee knowledge, and reducing operational costs.

The iAPPS platform is delivered through a cloud-based SaaS (“Software as a Service”) multi-tenant business model, whose flexible architecture provides customers with state of the art deployment providing maintenance, daily technical operation and support; or via a traditional perpetual licensing business model, in which the iAPPS software resides on a dedicated server in either the customer’s facility or Bridgeline’s co-managed hosting facility.

Bridgeline Digital was incorporated under the laws of the State of Delaware on August 28, 2000.

Locations

The Company’s corporate office is located in Burlington, Massachusetts. The Company maintains regional field offices serving the following geographical locations: Atlanta, GA; Baltimore, MD; Boston, MA; Chicago, IL; Dallas, TX; Denver, CO; New York, NY; Philadelphia, PA; San Diego, CA; and Tampa, FL. The Company has one wholly-owned subsidiary, Bridgeline Digital Pvt. Ltd. located in Bangalore, India.

2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated.

Unaudited Interim Financial Information

The accompanying interim Condensed Consolidated Balance Sheet as of June 30, 2013, the Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2013 and 2012, respectively, the Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended June 30, 2013 and 2012, respectively, and the Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2013 and 2012, respectively, are unaudited. The unaudited interim condensed consolidated statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and in the opinion of the Company’s management have been prepared on the same basis as the audited consolidated financial statements as of and for the year ended September 30, 2012. These consolidated condensed financial statements include all adjustments, consisting of normal recurring adjustments and accruals, necessary for the fair presentation of the Company’s financial position at June 30, 2013 and its results of operations for the three and nine months ended June 30, 2013 and 2012, respectively, and its cash flows for the nine months ended June 30, 2013 and 2012, respectively. The results for the three months ended June 30, 2013 are not necessarily indicative of the results to be expected for the year ending September 30, 2013. The accompanying September 30, 2012 Condensed Consolidated Balance Sheet has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by US GAAP for complete financial statements.

Subsequent Events

On August 1, 2013 the Company completed the acquisition of Transformational Technologies, Inc., d/b/a Elements Local, a franchise web platform developer based in central coast California. The Company acquired all the outstanding capital stock of Elements Local for consideration consisting of (i) 0.4 million in cash, (ii) 0.6 million in common stock, (iii) the assumption of $0.2 million in debt and (iv) contingent consideration of $1.3 million to be paid in a combination of cash and stock. The contingent consideration is payable quarterly over the 12 consecutive calendar quarters following the acquisition, contingent upon the acquired business achieving certain quarterly revenue targets during the period. To the extent that the quarterly revenue target is not met in any particular quarter, the earn-out period will be extended for up to four additional quarters. Subsequent events have been evaluated through the date the accompanying condensed consolidated financial statements were issued.

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-05 (“ASU 2011-05”), Presentation of Comprehensive Income, which amends ASC Topic 220, Comprehensive Income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as a part of the statement of stockholders’ equity and requires other comprehensive income to be presented as part of a single continuous statement of comprehensive income or in a statement of other comprehensive income immediately following the statement of operations. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income. ASU 2011-05 is effective for fiscal years beginning after December 15, 2011 and must be retrospectively applied to all reporting periods presented. The Company adopted ASU 2011-05 on October 1, 2012. The adoption of ASU 2011-05 did not have an impact on the Company’s financial condition, results of operations or cash flows.

3. Accounts Receivable and Unbilled Receivables

Accounts receivable and unbilled receivables consists of the following:

	As of June 30, 2013			As of September 30, 2012
Accounts receivable	$	3,176		$	3,794
Unbilled receivables		280			381
Subtotal		3,456			4,175
Allowance for doubtful accounts		(77	)		(198	)
Accounts receivable and unbilled receivables, net	$	3,379		$	3,977

4. Acquisitions

MarketNet, Inc.

On May 31, 2012, the Company completed the acquisition of MarketNet, Inc. (“MarketNet”), an interactive technology company that provides web application development based in Dallas, Texas. The Company acquired all of the outstanding capital stock of MarketNet for consideration consisting of (i) $20 thousand in cash, (ii) assumption of debt of $244 thousand and (ii) contingent consideration of up to $650 thousand in cash and 204,331 shares of Bridgeline Digital common stock, valued at $250 thousand ($1.22 per share). The cash consideration was reduced by $58 thousand due to the Seller’s inability to meet an agreed upon target for working capital at the time of acquisition and was applied against Marketnet’s earnout payment for the three months ended December 31, 2012. The contingent consideration is payable quarterly over the 12 consecutive calendar quarters following the acquisition, contingent upon the acquired business achieving certain quarterly revenue and quarterly operating income targets during the period. To the extent that either the quarterly revenue target or the quarterly operating income target is not met in a particular quarter, the earn-out period will be extended for up to four additional quarters. MarketNet is also eligible to earn additional bonus equity consideration of 200,000 shares, if annual net revenues of the acquired business exceed a certain threshold in any fiscal year through September 30, 2015. The Company is required to assess the probability of the acquired business achieving the contingent cash and stock payments which requires management to make estimates and judgments based on forecasts of future performance. As a result, the Company reduced the initial estimate of $607 thousand for the contingent cash consideration to be achieved and $262 thousand for the contingent stock consideration to be achieved by $8 thousand and $30 thousand, respectively. The contingent common stock has been issued and is being held in escrow pending satisfaction of the applicable targets. MarketNet achieved its quarterly revenue and operating income targets for the first two quarterly periods after the acquisition date and its operating income target for the periods ending March 31, 2013 and June 30, 2013. MarketNet’s operating results are reflected in the Company’s condensed consolidated financial statements as of the acquisition date.

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

Magnetic Corporation

On October 3, 2011, the Company completed the acquisition of Magnetic Corporation (“Magnetic”), a web technology company based in Tampa, Florida. Bridgeline acquired all of the outstanding capital stock of Magnetic for consideration consisting of (i) $150 thousand in cash and (ii) contingent consideration of up to $600 thousand in cash and 166,666 shares of Bridgeline Digital common stock, valued at $150 thousand ($0.90 per share). The cash consideration was reduced by $100 thousand due to the Seller’s inability to meet an agreed upon target for working capital at the time of acquisition. The contingent consideration is payable quarterly over the 12 consecutive calendar quarters following the acquisition, contingent upon the acquired business achieving certain quarterly revenue and quarterly operating income targets during the period. The contingent common stock has been issued and is being held in escrow pending satisfaction of the applicable targets. To the extent that either the quarterly revenue target or the quarterly operating income target is not met in a particular quarter, the earn-out period will be extended for up to four additional quarters. The Company is required to assess the probability of the acquired business achieving the contingent cash and stock payments which requires management to make estimates and judgments based on forecasts of future performance. As a result, the Company estimated and accrued $600 thousand of the contingent cash consideration to be achieved and $150 thousand of the contingent stock consideration to be achieved. Magnetic achieved its quarterly revenue and operating income targets for all periods since the acquisition date. Magnetic’s operating results are reflected in the Company’s condensed consolidated financial statements as of the acquisition date, which corresponds to the Company’s commencement of fiscal 2012.

The estimated fair value of net assets acquired from the MarketNet and Magnetic acquisitions are summarized as follows:

Net assets acquired:	Amount
Cash	$	35
Accounts Receivable, net		327
Other Assets		181
Fixed Assets		91
Intangible Assets		910
Goodwill		1,426
Total Assets		2,970
Current Liabilities		1,210
Liabilities, net of current		73
Total liabilities assumed		1,283
Net assets acquired:	$	1,687

Purchase Price:
Cash Paid	$	70
Contingent earnouts - payable in cash		1,206
Contingent earnouts - payable in common stock		411
	$	1,687

As part of the Magnetic acquisition, of the $430 thousand allocated to intangible assets, $350 thousand is allocated to customer relationships and $80 thousand is allocated to non-compete agreements, with an average useful life of five years.

The Company completed its formal valuation of intangibles acquired in the MarketNet transaction during the three months ended June 30, 2013. As a result, the Company’s initial estimate of $600 thousand allocated to intangible assets was reduced to $480 thousand. $370 thousand was allocated to customer relationships with and estimated useful life of 5 years and $110 thousand allocated to non-compete agreements with an estimated useful life of 7 years.

The goodwill recorded as a result of the Magnetic and MarketNet acquisitions is nondeductible for tax purposes.

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

The following unaudited pro forma financial information reflects the combined results of operations for Bridgeline for the three and nine months ended June 30, 2012, including certain adjustments, as if the acquisition of MarketNet had occurred on October 1, 2011. This information does not necessarily reflect the results of operations that would have occurred had the acquisitions taken place at the beginning of the period, and is not necessarily indicative of the results which may be obtained in the future (in thousands, except per share data):

	Three Months Ended June 30, 2013			Nine Months Ended June 30, 2013

Total revenue	$	6,829		$	21,284
Net loss	$	(239	)	$	(920	)
Net loss per share:
Basic and diluted	$	(0.02	)	$	(0.07	)
Number of weighted average shares:
Basic and diluted		12,988,287			12,560,047

Contingent earnout liabilities for acquisitions completed after September 30, 2009 were recorded at fair value based on valuation models that utilize relevant factors such as estimated probabilities of the acquisitions achieving the performance targets throughout the earnout period. During the three months ended June 30, 2013, total estimated contingent earnout liabilities, cash and stock, were reduced by $181 thousand which comprised $31 thousand of contingent cash earnouts and $150 thousand of contingent stock earnouts. The following table summarizes the changes in accrued earnout liabilities for the nine months ended June 30, 2013:

Balance at September 30, 2012	$	1,365
Contingent earnout liability accruals		83
Contingent earnout liability payments		(314	)
Contingent earnout reduced by working capital adjustment		(55	)
Contingent earnout liability estimate adjustment		(171	)
Balance at June 30, 2013	$	908

5. Intangible Assets

Changes in the carrying amount of intangible assets are as follows:

	As of June, 2013
	Gross Amount		Accumulated Amortization			Impairment			Net Amount
Intangible assets:
Domain and trade names	$	26	$	(26	)	$	-		$	-
Customer related		4,126		(2,969	)		(281	)		876
Non-compete agreements		831		(678	)		-			153
Acquired software		362		(362	)		-			-
Total intangible assets	$	5,345	$	(4,035	)	$	(281	)	$	1,029

	As of September 30, 2012
	Gross Amount		Accumulated Amortization			Impairment			Net Amount
Intangible assets:
Domain and trade names	$	26	$	(26	)	$	-		$	-
Customer related		4,187		(2,654	)		(281	)		1,252
Non-compete agreements		877		(602	)		-			275
Acquired software		362		(362	)		-			-
Total intangible assets	$	5,452	$	(3,644	)	$	(281	)	$	1,527

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

Total amortization expense related to intangible assets for the three months ended June 30, 2013 and 2012 was $117 thousand and $194 thousand, respectively, and amortization expense related to intangible assets for the nine months ended June 30, 2013 and 2012 was $391 thousand and $571 thousand, respectively. They are reflected in operating expenses on the Condensed Consolidated Statements of Operations.

6. Goodwill

Changes in the carrying amount of goodwill follows:

	As of June 30, 2013		As of September 30, 2012
Balance at beginning of period	$	21,545	$	20,122
Acquisitions		-		1,175
Contingent acquisition payments		83		248
Purchase price allocation adjustments		252		-
Balance at end of period	$	21,880	$	21,545

7. Debt

Bank Term Loan

In March 2010, the Company entered into an Amended and Restated Loan and Security Agreement SVB (the “Loan Agreement”) with Silicon Valley Bank (“SVB”). The Loan Agreement has a two year term which expired on March 31, 2012. In May 2011, the Company amended its loan arrangement (the “Amendment”) with SVB, extending the maturity date of the line of credit for one year to March 31, 2013. The Amendment also revised certain financial covenants and amended the out of formula borrowings to be structured as a $2 million term loan and interest on the term loan will be at SVB’s prime rate plus 1.75%. In May 2012, the Company amended its loan agreement (the “2012 Amendment”) with SVB, extending the maturity date of the line of credit for one year to March 31, 2014. The 2012 Amendment also revised certain financial covenants. In February 2013, the Company amended its loan agreement (the “February 2013 Amendment”) with SVB, extending the maturity date of the line of credit for one year to March 31, 2015. The 2013 Amendment also revised certain financial covenants. The Company would not have been in compliance with one of its covenants for the three months ended December 31, 2012 if the amendment was not completed. The Company was compliant with its financial covenants as of March 31, 2013. In July 2013, the Company amended its loan arrangement (the “July 2013 Amendment”) with Silicon Valley Bank. The July 2013 Amendment increased the borrowing availability on accounts receivable, revised certain financial covenants, and increased the interest rate on the line of credit from prime plus 1.25% to prime plus 2.25% and increased the interest rate on the term loan from prime plus 1.75% to prime plus 2.75%. Both these rates may return to the previous levels upon achievement of certain financial measures. In addition, the repayment schedule for the term loan was accelerated to end in April 2014. There was $611 thousand remaining on the term loan as of June 30, 2013. The July 2013 Amendment also included a waiver by Silicon Valley Bank of certain financial covenant defaults. The Company would not have been in compliance with certain of its financial covenants as of June 30, 2013 if the July 2013 Amendment was not completed and the waiver was not granted.

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

Promissory Notes

In May 2012, the Company assumed two Promissory Notes in connection with the acquisition of MarketNet, Inc. The first Promissory Note in the amount of $63 thousand is payable in eight equal installments of $8 thousand, including interest accrued at 5%, and matures in May 2014. The first installment was due in July 2012. The second Promissory Note in the amount of $80 thousand is payable in twelve equal installments of $7 thousand, including interest accrued at 5%, and matures in May 2015. The first installment was due in July 2012.

Debt consists of the following:

	As of June 30, 2013		As of September 30, 2012
Line of credit borrowings	$	3,230	$	3,182
Bank term loan		642		892
Subordinated promissory notes		170		338
Total debt	$	4,042	$	4,412
Less current portion	$	1,541	$	1,424
Long term debt, net of current portion	$	2,501	$	2,988

8. Other Long Term Liabilities

Deferred Rent

In connection with new leases for the Company’s headquarters in Burlington, Massachusetts and a new location in New York, the Company made investments in leasehold improvements at these locations of approximately $1.4 million, of which the respective landlords funded approximately $857 thousand. The capitalized leasehold improvements are being amortized over the initial lives of each lease. The improvements funded by the landlords are treated as lease incentives. Accordingly, the funding received from the landlords was recorded as fixed asset additions and a deferred rent liability on the Condensed Consolidated Balance Sheet. As of June 30, 2013, $120 thousand was reflected in Accrued Liabilities and $549 thousand is reflected in Other Long Term Liabilities. The deferred rent liability is being amortized as a reduction of rent expense over the lives of the leases.

9. Shareholder’s Equity

Common Stock

On June 16, 2013 the Company sold 2,300,000 shares of common stock at $1.00 per share for gross proceeds of $2.3 million in a private placement. Net proceeds to the Company after offering expenses were approximately $2.1 million. In addition, the Company issued the investors and the placement agent and its affiliates five year warrants to purchase an aggregate of 690,000 shares of Bridgeline’s common stock at a price equal to $1.25 per share. The Company agreed to provide piggyback registration rights with respect to the shares of common stock sold in the offering and underlying the warrants.

On May 31, 2012, the Company sold 2,173,913 shares of common stock at $1.15 per share for gross proceeds of $2.5 million in a private placement. Net proceeds to the Company after offering expenses were approximately $2.3 million. In addition, the Company issued the placement agent and its affiliates five year warrants to purchase an aggregate of 217,913 shares of Bridgeline’s common stock at a price equal to $1.40 per share. The Company agreed to provide piggyback registration rights with respect to the shares of common stock sold in the offering and underlying the warrants.

In connection with the acquisition of MarketNet on May 31, 2012, contingent consideration of 204,331 shares of Bridgeline Digital common stock is contingently issuable to the sole stockholder of MarketNet. The contingent consideration is payable quarterly over the 12 consecutive calendar quarters following the acquisition, contingent upon the acquired business achieving certain operating and revenue targets. The common stock has been issued and is being held in escrow pending satisfaction of the applicable earnout targets. In addition, MarketNet is also eligible to earn additional bonus equity consideration of 200,000 shares of Bridgeline Digital common stock if a certain annual revenue threshold is met in any fiscal year during the next three years. As of June 30, 2013, the sole stockholder of MarketNet had earned 51,084 shares of common stock.

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

In connection with the acquisition of Magnetic Corporation on October 3, 2011, contingent consideration of 166,666 shares of Bridgeline Digital common stock is contingently issuable to the sole stockholder of Magnetic. The contingent consideration is payable quarterly over the 12 consecutive calendar quarters following the acquisition, contingent upon the acquired business achieving certain operating and revenue targets. The common stock has been issued and is being held in escrow pending satisfaction of the applicable earnout targets. As of June 30, 2013, the sole stockholder of Magnetic had earned 97,223 shares of common stock.

Employee Stock Purchase Plan

On April 12, 2012, the Company’s stockholders approved and adopted the Bridgeline Digital, Inc. 2012 Employee Stock Purchase Plan (the “ESPP”). Under the terms of the ESPP, the Company will grant eligible employees the right to purchase shares of Bridgeline common stock through payroll deductions at a price equal to 85% of the fair market value of Bridgeline common stock on the purchase termination date of defined offering or purchase periods. Each offering period is six months in duration. The ESPP permits the Company to offer up to 300,000 shares of common stock. The maximum number of shares of common stock that may be purchased by all participants in any purchase period may not exceed 150,000 shares. During the nine months ended June 30, 2013, 56,112 shares were purchased by employees.

Common Stock Warrants

On June 16, 2013, the Company issued five year warrants to the investors and the placement agent in the Company’s private placement. The warrants are exercisable to purchase 690,000 shares of the Company’s common stock at a price equal to $1.25 per share.

On May 31, 2012, the Company issued five year warrants to the placement agent in the Company’s private placement. The warrants are exercisable to purchase 217,931 shares of the Company’s common stock at a price equal to $1.40 per share.

On October 29, 2010, the Company issued four year warrants to the placement agent in the Company’s private placement. The warrants are exercisable to purchase 64,000 shares of the Company’s common stock at a price equal to $1.45 per share. In return for such warrants, the placement agent agreed to cancel 71,231 warrants issued to the placement agent in April 2006 and 57,000 IPO Warrants. In December 2012 all 64,000 warrants were exercised using a cashless feature where the holders forfeited 41,401 shares in lieu of paying the exercise price.

On October 21, 2010, the Company issued 50,000 common stock warrants to purchase shares of the Company’s common stock to a non-employee consultant as compensation for services rendered. The warrants vested over a one year period and expire on October 15, 2015. Of the warrants issued, 25,000 are exercisable at an exercise price of $1.00 per share and 25,000 are exercisable at an exercise price of $2.00 per share.

Summary of Option and Warrant Activity and Outstanding Shares

	Stock Options					Stock Warrants
	Options			Weighted Average Exercise Price		Warrants			Weighted Average Exercise Price

Outstanding, September 30, 2012		2,989,620		$	0.86		331,931		$	1.42
Granted		441,500		$	1.63		690,000		$	1.25
Exercised		(83,532	)	$	0.90		(22,599	)	$	1.45
Forfeited or expired		(268,505	)	$	1.25		(41,401	)	$	1.45
Outstanding, June 30, 2013		3,079,083		$	0.94		957,931		$	1.30

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

10. Accumulated Other Comprehensive Loss

The following table presents changes in accumulated other comprehensive loss for nine months ended June 30, 2013 (in thousands):

	Cumulative Foreign Currency Translation Adjustment

Balance at September 30, 2012	$	(176	)
Current period other comprehensive income		39
Balance at June 30, 2013	$	(137	)

11. Net Loss Per Share

Basic and diluted net loss per share is computed as follows:

(in thousands, except per share data)	Three Months Ended June 30,						Nine Months Ended June 30,
	2013			2012			2013			2012
Net loss	$	(1,569	)	$	(277	)	$	(2,893	)	$	(906	)
Weighted average common shares outstanding - basic		15,038			12,971			14,902			12,543
Effect of dilutive securities (primarily stock options)		-			-			-			-
Weighted average common shares outstanding - diluted		15,038			12,971			14,902			12,543

Net loss per share - basic and diluted	$	(0.10	)	$	(0.02	)	$	(0.19	)	$	(0.07	)

Basic net income per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding. Diluted net income per share is computed by using the weighted average number of common shares outstanding during the period plus the dilutive effect of outstanding stock options and warrants using the “ treasury stock” method.

For the three months ended June 30, 2013, options and warrants to purchase shares of the Company’s common stock of 923,205 were excluded from the computation of diluted net loss per share as the effect was anti-dilutive to the Company’s net loss. Also excluded for the three months ended June 30, 2013 were 994,662 contingent shares to be issued in connection with prior acquisitions.

For the nine months ended June 30, 2013, options and warrants to purchase shares of the Company’s common stock of 1,260,430 were excluded from the computation of diluted net loss per share as the effect was anti-dilutive to the Company’s net loss. Also excluded for the three months ended June 30, 2013 were 994,662 contingent shares to be issued in connection with prior acquisitions.

For the three months ended June 30, 2012, options and warrants to purchase shares of the Company’s common stock of 1,328,518 were excluded from the computation of diluted net loss per share as the effect was anti-dilutive to the Company’s net loss. Also, excluded were 1,118,331 contingent shares to be issued in connection with the prior acquisitions.

For the nine months ended June 30, 2012, options and warrants to purchase shares of the Company’s common stock of 378,795 were excluded from the computation of diluted net loss per share as the effect was anti-dilutive to the Company’s net loss. Also, excluded were 1,118,331 contingent shares to be issued in connection with the prior acquisitions.

12. Income Taxes

Income tax expense was $21 thousand for the three months ended June 30, 2013 and 2012. Income tax expense consists of the estimated liability for federal, state and foreign income taxes owed by the Company, including the alternative minimum tax and deferred tax liabilities related to indefinite-lived, tax deductible goodwill acquired in previous acquisitions. Net operating loss carry forwards are estimated to be sufficient to offset additional taxable income for all periods presented.

BRIDGELINE DIGITAL, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share data)

The Company does not provide for U.S. income taxes on the undistributed earnings of its Indian subsidiary, which the Company considers to be a permanent investment.

13. Related Party Transactions

As part of the Magnetic acquisition, the Company entered into an operating lease for the Bridgeline Tampa location with the previous owner of Magnetic who now serves as the Regional Senior Vice President and General Manager of Bridgeline Tampa. The lease term is three years and rent is $85 thousand per year.

14. Legal Proceedings

Bridgeline Digital, Inc. vs. e.Magination network, LLC and its principal owner, Daniel Roche.

In August 2010, Bridgeline initiated a lawsuit against e.Magination network, LLC and its principal owner, Daniel Roche, in the Federal District Court of Massachusetts. Bridgeline sought damages for accounts receivable allegedly collected by Mr. Roche and e.Magination and used to pay obligations of e.Magination and Mr. Roche (accounts receivable contractually belonging to Bridgeline). e.Magination and Mr. Roche asserted counterclaims against Bridgeline and Thomas Massie alleging that Bridgeline had breached Mr. Roche’s employment agreement by improperly terminating Mr. Roche for cause and also alleging breach of the Asset Purchase Agreement by Bridgeline. In the latter half of the three months ended June 30, 2013 the parties entered into a settlement agreement pursuant to which Bridgeline will pay Mr. Roche a total of $300 thousand, $163 thousand, which was accrued as of June 30, 2013 in accrued liabilities and general and administrative expenses on the Condensed and Consolidated Balance Sheets and Condensed and Consolidated Statements of Operations, respectively, and the payment of previously earned contingent consideration which was accrued at the date of acquisition. These amounts are to be paid over 18 months beginning August 2013.

15. Subsequent Event

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This section contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of a variety of factors and risks including risks described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012 as well as in the other documents that we file with the Securities and Exchange Commission. You can read these documents at www.sec.gov.

This section should be read in combination with the accompanying unaudited consolidated financial statements and related notes prepared in accordance with United States generally accepted accounting principles.

Overview

Bridgeline Digital enables its customers to maximize the performance of their mission critical websites, intranets, and online stores. Bridgeline is the developer of the award-winning iAPPS® Web Engagement Management (WEM) product platform and related digital solutions. The iAPPS platform deeply integrates Web Content Management, eCommerce, eMarketing, and web Analytics capabilities within the heart of websites or eCommerce web stores to help marketers deliver online experiences that attract, engage, and convert their customers across all digital channels. Bridgeline’s iAPPS platform combined with its digital services assists customers in maximizing on-line revenue, improving customer service and loyalty, enhancing employee knowledge, and reducing operational costs.

In fiscal 2012 Bridgeline Digital announced the release of a new product, iAPPS ds (“distributed subscription”), a platform that empowers franchise and large dealer networks with state-of-the-art web engagement management while providing superior oversight of corporate branding. iAPPS ds deeply integrates content management, eCommerce, eMarketing and web analytics and is a self-service web platform that is offered to each authorized franchise or dealer for a monthly subscription fee. On August 1, 2013, we acquired franchise web developer Transformational Technologies, Inc., d/b/a Elements Local (“Elements Local”), expanding Bridgeline Digital’s presence in the franchise market place. Please see Acquisitions section for more detail on the Elements Local acquisition.

In 2012, KMWorld Magazine Editors selected Bridgeline Digital as one of the 100 Companies That Matter in Knowledge Management and also selected iAPPS as a Trend Setting Product in 2012. iAPPS Content Manager and iAPPS Commerce were selected as finalists for the 2012 and 2013 CODiE Awards for Best Content Management Solution and Best Electronic Commerce Solution, globally. In 2013 the Web Marketing Association sponsored Internet Advertising Competition honored Bridgeline Digital with three awards for iAPPS customer websites. In addition, in 2013 Bridgeline Digital won fifteen Horizon Interactive Awards for outstanding development of web applications and websites and B2B Magazine has selected Bridgeline Digital as one of the Top Interactive Technology companies in the United States.

Bridgeline Digital was incorporated under the laws of the State of Delaware on August 28, 2000.

Customer Information

We currently have over 2,500 customers. For the three and nine months ended June 30, 2013 and 2012 no customer represented 10% or more of total revenue.

Acquisitions

Elements Local

On August 1, 2013 we completed the acquisition of Transformational Technologies, Inc, d/b/a Elements Local, a franchise web platform developer based in central coast California. Elements Local has developed a SaaS platform that incorporates brand reputation management tools, web content management, social media, marketing and web analytics. Elements Local is a respected web platform brand and we believe the acquisition will both strengthen the iAPPS ds brand and accelerate our penetration into the Franchise market. Elements Local currently has 35 franchisor customers with approximately 3,200 franchises on their platform, including national franchise brands such as SportsClips®, MAACO®, Glass Doctor®, Molly Maids® and Mr. Handyman®. We acquired all the outstanding capital stock of Elements Local for consideration consisting of (i) 0.4 million in cash, (ii) 0.6 million in common stock, (iii) the assumption of $0.2 million in debt and (iv) contingent consideration of $1.3 million to be paid in a combination of cash and stock. The contingent consideration is payable quarterly over the 12 consecutive calendar quarters following the acquisition, contingent upon the acquired business achieving certain quarterly revenue targets during the period. To the extent that the quarterly revenue target is not met in any particular quarter, the earn-out period will be extended for up to four additional quarters. We are required to assess the probability of the acquired business achieving the contingent cash and stock payments which requires management to make estimates and judgments based on forecasts of future performance.

MarketNet, Inc.

On May 31, 2012, we completed the acquisition of MarketNet, Inc. (“MarketNet”), an interactive technology company that provides web application development based in Dallas, Texas. We acquired all of the outstanding capital stock of MarketNet for consideration consisting of (i) $20 thousand in cash, (ii) assumption of debt of $244 thousand and (ii) contingent consideration of up to $650 thousand in cash and 204,331 shares of Bridgeline Digital common stock, valued at $250 thousand ($1.22 per share). The cash consideration was reduced by $58 thousand due to the Seller’s inability to meet an agreed upon target for working capital at the time of acquisition and was applied against MarketNet’s earnout payment for the three months ended December 31, 2012. The contingent consideration is payable quarterly over the 12 consecutive calendar quarters following the acquisition, contingent upon the acquired business achieving certain quarterly revenue and quarterly operating income targets during the period. To the extent that either the quarterly revenue target or the quarterly operating income target is not met in a particular quarter, the earn-out period will be extended for up to four additional quarters. MarketNet is also eligible to earn additional bonus equity consideration of 200,000 shares, if annual net revenues of the acquired business exceed a certain threshold in any fiscal year through September 30, 2015. We are required to assess the probability of the acquired business achieving the contingent cash and stock payments which requires management to make estimates and judgments based on forecasts of future performance. As a result, we reduced the initial estimate of $607 thousand for the contingent cash consideration to be achieved and $262 thousand for the contingent stock consideration to be achieved by $8 thousand and $30 thousand, respectively. The contingent common stock has been issued and is being held in escrow pending satisfaction of the applicable targets. MarketNet achieved its quarterly revenue and operating income targets for the first two quarterly periods after the acquisition date and the operating income targets for the two periods ended March 31, 2013 and June 30, 2013. MarketNet’s operating results are reflected in our condensed consolidated financial statements as of the acquisition date.

Magnetic Corporation

On October 3, 2011, we completed the acquisition of Magnetic Corporation (“Magnetic”), a web technology company based in Tampa, Florida. Bridgeline acquired all of the outstanding capital stock of Magnetic for consideration consisting of (i) $150 thousand in cash and (ii) contingent consideration of up to $600 thousand in cash and 166,666 shares of Bridgeline Digital common stock, valued at $150 thousand ($0.90 per share). The cash consideration was reduced by $100 thousand due to the Seller’s inability to meet an agreed upon target for working capital at the time of acquisition. The contingent consideration is payable quarterly over the 12 consecutive calendar quarters following the acquisition, contingent upon the acquired business achieving certain quarterly revenue and quarterly operating income targets during the period. The contingent common stock has been issued and is being held in escrow pending satisfaction of the applicable targets. To the extent that either the quarterly revenue target or the quarterly operating income target is not met in a particular quarter, the earn-out period will be extended for up to four additional quarters. We are required to assess the probability of the acquired business achieving the contingent cash and stock payments which requires management to make estimates and judgments based on forecasts of future performance. As a result, we estimated and accrued $600 thousand of the contingent cash consideration to be achieved and $150 thousand of the contingent stock consideration to be achieved. Magnetic achieved its quarterly revenue and operating income targets for all periods since the acquisition date. Magnetic’s operating results are reflected in the Company’s condensed consolidated financial statements as of the acquisition date, which corresponds to the Company’s commencement of fiscal 2012.

Results of Operations for the Three and Nine months ended June 30, 2013 compared to the Three and Nine months ended June 30, 2012

Total revenue for the three months ended June 30, 2013 was $5.6 million compared with $6.4 million for the prior period. We had a net loss of ($1.6) million for the three months ended June 30, 2013 compared with net loss of ($277) thousand for the prior period. Net loss per share was ($0.10) for the three months ended June 30, 2013 compared to ($0.02) for the prior period.

Total revenue for the nine months ended June 30, 2013 was $17.8 million compared with $19.6 million for the prior period. We had a net loss of ($2.9) million for the nine months ended June 30, 2013 compared with net loss of ($906) thousand for the prior period. Net loss per share was ($0.19) for the nine months ended June 30, 2013 compared to ($0.07) for the prior period.

The following table sets forth the percentages of revenue for items included in our unaudited condensed consolidated statement of operations presented in our Quarterly Reports on Form 10-Q for the periods presented.

Revenue:	Three Months Ended June 30, 2013			Three Months Ended June 30, 2012			$ Change			% Change			Nine Months Ended June 30, 2013			Nine Months Ended June 30, 2012			$ Change			% Change
Web application development services
iAPPS application development services	$	3,384		$	3,354			30			1	%	$	10,359		$	9,893			466			5	%
% of total revenue		60	%		53	%								58	%		51	%
Other application development services		892			1,701			(809	)		(48%	)		3,256			5,911			(2,655	)		(45%	)
% of total revenue		16	%		27	%								18	%		30	%
Subtotal web application development services		4,276			5,055			(779	)		(15%	)		13,615			15,804			(2,189	)		(14%	)
% of total revenue		76	%		79	%								77	%		81	%
Managed service hosting		409			631			(222	)		(35%	)		1,456			1,858			(402	)		(22%	)
% of total revenue		7	%		10	%								8	%		9	%
Subscription and perpetual licenses		915			686			229			33	%		2,726			1,899			827			44	%
% of total revenue		16	%		11	%								15	%		10	%
Total revenue		5,600			6,372			(772	)		(12%	)		17,797			19,561			(1,764	)		(9%	)
Cost of revenue:
Web application development services
iAPPS application development costs		1,795			1,512			283			19	%		5,485			4,651			834			18	%
% of iAPPS application development revenue		53	%		45	%								53	%		47	%
Other application development costs		546			1,099			(553	)		(50%	)		2,081			3,586			(1,505	)		(42%	)
% of other application development revenue		61	%		65	%								64	%		61	%
Subtotal web application development costs		2,341			2,611			(270	)		(10%	)		7,566			8,237			(671	)		(8%	)
% of web application development services revenue		55	%		52	%								56	%		52	%
Managed service hosting		76			98			(22	)		(22%	)		224			289			(65	)		(22%	)
% of managed service hosting revenue		19	%		16	%								15	%		16	%
Subscription and perpetual licenses		330			117			213			182	%		770			337			433			128	%
% of subscription and perpetual revenue		36	%		17	%								28	%		18	%
Total cost of revenue		2,747			2,826			(79	)		(3%	)		8,560			8,863			(303	)		(3%	)
Gross profit		2,853			3,546			(693	)		(20%	)		9,237			10,698			(1,461	)		(14%	)
Gross profit margin		51	%		56	%								52	%		55	%
Operating expenses:
Sales and marketing		2,275			1,965			310			16	%		6,266			5,526			740			13	%
% of total revenue		41	%		31	%								35	%		28	%
General and administrative		1,140			923			217			24	%		3,440			2,924			516			18	%
% of total revenue		20	%		14	%								19	%		15	%
Research and development		515			370			145			39	%		893			1,253			(360	)		(29%	)
% of total revenue		9	%		6	%								5	%		6	%
Depreciation and amortization		412			446			(34	)		(8%	)		1,226			1,296			(70	)		(5%	)
% of total revenue		6	%		7	%								7	%		7	%
Impairment of intangible asset		-			-			-			0	%		-			281			(281	)		(100%	)
% of total revenue		0	%		0	%								0	%		1	%
Total operating expenses		4,342			3,704			638			17	%		11,825			11,280			545			5	%

Loss from operations		(1,489	)		(158	)		(1,331	)		842	%		(2,588	)		(582	)		(2,006	)		345	%
Interest income (expense) net		(59	)		(98	)		39			(40%	)		(194	)		(234	)		40			(17%	)
Loss before income taxes		(1,548	)		(256	)		(1,292	)		505	%		(2,782	)		(816	)		(1,966	)		241	%
Provision for income taxes		21			21			-			0	%		110			90			20			22	%
Net loss	$	(1,569	)	$	(277	)	$	(1,292	)		466	%	$	(2,892	)	$	(906	)	$	(1,986	)		219	%
Adjusted EBITDA	$	(899	)	$	429		$	(1,328	)		(310%	)	$	(828	)	$	1,381		$	(2,209	)		(160%	)

Revenue

Our revenue is derived from three sources: (i) web application development services (ii) managed service hosting and (iii) subscription and perpetual licenses.

Web Application Development Services

Web application development services revenue is comprised of iAPPS development related services and other web development related services generated from non iAPPS related engagements.

Revenue from iAPPS application development services in the three months ended June 30, 2013 increased $30 thousand, or 1%, to $3.4 million compared to the prior period. Revenue from non-iAPPS application development services decreased $809 thousand, or 48%, compared to the prior period. The decrease in non-iAPPS application development services is due to our continued concentration on selling higher-margin iAPPS related engagements to both new and existing customers. As a result, total revenue from web application development services for the three months ended June 30, 2013, decreased $779 thousand, or 15%, to $4.3 million compared to the prior period.

Web application development services revenue as a percentage of total revenue for the three months ended June 30, 2013 decreased to 76% from 79% compared to the prior period. The decrease is attributable to the decrease in web application development services revenue discussed above and an increase in iAPPS license related revenue.

Revenue from iAPPS application development services in the nine months ended June 30, 2013 increased $0.5 million, or 5%, to $10.4 million compared to the prior period. The increase in iAPPS related revenue is due to the expansion of our iAPPS customer base by selling more iAPPS licenses, which was offset by longer than expected implementation times as the size and scope of iAPPS related projects has increased. Revenue from non-iAPPS application development services decreased $2.7 million, or 45%, compared to the prior period. The decrease in non-iAPPS application development services is due to our continued concentration on selling higher-margin iAPPS engagements to both new and existing customers. As a result, total revenue from web application development services for nine months ended June 30, 2013, decreased $2.2 million, or 14%, to $13.6 million compared to the prior period.

Web application development services revenue as a percentage of total revenue for the nine months ended June 30, 2013 decreased to 77% from 81% compared to the prior period. The decrease is attributable to the decrease in web application development services revenue discussed above and an increase in iAPPS related license revenue.

Managed Service Hosting

Revenue from managed service hosting for the three months ended June 30, 2013 decreased $222 thousand, or 35%, to $409 thousand compared to the prior period. The decrease is due to our efforts to engage with customers that are aligned with our core competencies and proactively end engagements with a number of smaller hosting customers obtained through previous acquisitions.

Managed services revenue as a percentage of total revenue for the three months ended June 30, 2013 decreased to 7% from 10% compared to the prior period due to the decrease in managed services revenue discussed above.

Revenue from managed service hosting for the nine months ended June 30, 2013 decreased $402 thousand, or 22%, to $1.5 million compared to the prior period. The decrease is due to our efforts to engage with customers that are aligned with our core competencies and proactively end our engagements with a number of smaller hosting customers obtained through previous acquisitions.

Managed services revenue as a percentage of total revenue for the nine months ended June 30, 2013 decreased to 8% from 9% compared to the prior period due to the decrease in managed services revenue discussed above.

Subscription and Perpetual Licenses

Revenue from subscription and perpetual licenses for the three months ended June 30, 2013 increased $0.2 million, or 33%, to $0.9 million compared to the prior period. The increase is due to license revenues from our new product, iAPPS ds, increases in iAPPS SaaS licenses sold, incremental non-iAPPS SaaS licenses from our acquisition of MarketNet and incremental annual maintenance revenue.

Subscription and perpetual license revenue as a percentage of total revenue for the three months ended June 30, 2013 increased to 16% from 11% compared to the prior period and a result of the increased license sales and revenues discussed above.

Revenue from subscription and perpetual licenses for the nine months ended June 30, 2013 increased $0.8 million, or 44%, to $2.7 million compared to the prior period. The increase is due to license revenues from our new product, iAPPS ds, increases in iAPPS SaaS licenses sold, incremental non-iAPPS SaaS licenses from our acquisition of MarketNet and incremental annual maintenance revenue.

Subscription and perpetual license revenue as a percentage of total revenue for the nine months ended June 30, 2013 increased to 15% from 10% compared to the prior period and a result of the increased license sales and revenues discussed above.

Costs of Revenue

Total cost of revenue for the three months ended June 30, 2013 decreased $80 thousand, or 3%, to $2.7 million compared to the prior period. Total cost of revenue for the nine months ended June 30, 2013 decreased $0.3 million, or 3%, to $8.6 million compared to the prior period. These decreases are primarily due to a reduction of labor costs and, to a lesser extent, efficiencies in costs for managed service hosting as we continue to make investments in our co-managed network operation center to support our core iAPPS customer base. These reductions in cost were offset by an increase in costs of subscription and perpetual licenses.

Cost of Web Application Development Services

Cost of web application development for the three months ended June 30, 2013 decreased $0.3 million, or 10%, to $2.3 million compared to the prior period. Cost of web application development for the nine months ended June 30, 2013 decreased $0.7 million, or 8%, to $7.6 million compared to the prior period. The decreases in both periods are due to reduced labor costs.

The cost of web application development services as a percentage web application development services revenue increased for both the three and nine months ended June 30, 2013 when compared to prior periods due to the decreases in non-iAPPS web application development revenue in both periods.

Cost of Managed Service Hosting

Cost of managed service hosting for the three months ended June 30, 2013 decreased $22 thousand, or 22%, to $76 thousand compared to the prior period. Cost of managed service hosting for the nine months ended June 30, 2013 decreased $65 thousand, or 22%, to $224 thousand compared to the prior period. The decreases in managed service hosting costs for both periods are due to cost efficiencies as we continue to consolidate hosting engagements on to our co-managed network operations center, reducing third party hosting costs.

The cost of managed service hosting as a percentage of managed service hosting revenue increased in the three months ended June 30, 2013 compared to the prior period due to an increase in the aforementioned ending of engagements with a number of smaller hosting customers obtained through previous acquisitions.

The cost of managed service hosting as a percentage of managed service hosting revenue decreased in the nine months ended June 30, 2013 compared to the prior period due to cost savings from consolidating hosting arrangements on to our co-managed network operations center.

Cost of Subscription and Perpetual License

Cost of subscription and perpetual licenses for the three months ended June 30, 2013 increased $0.2 million, or 182%, compared to the prior period. This is primarily due to the 33% increase in subscription and perpetual license revenue as more of the direct costs associated with our co-managed network operations center are being used to support subscription license revenue and software amortization costs of $90 thousand related to significant enhancements to our iAPPS platform that began in April 2013.

The cost of subscription and perpetual licenses as a percentage of subscription and perpetual license revenue for the three months ended June 30, 2013 increased to 36% from 17% compared to the prior period. This is primarily due to a decrease in perpetual license sales when compared to the prior period as perpetual licenses sales can fluctuate from quarter to quarter and have a significantly lower direct cost than subscription licenses and an increase in software amortization.

Cost of subscription and perpetual licenses for the nine months ended June 30, 2013 increased $0.4 million, or 128%, compared to the prior period. This is primarily due to the 44% increase in subscription and perpetual license revenue as more of the direct costs associated with our co-managed network operations center are being used to support subscription license revenue, software amortization costs of $90 thousand related to significant enhancements to our iAPPS platform that began in April 2013, investments made in our co-managed network operations center during the period and, to a lesser extent, incremental costs on lower margin, non-iAPPS SaaS licenses from the MarketNet acquisition.

The cost of subscription and perpetual licenses as a percentage of subscription and perpetual license revenue for the nine months ended June 30, 2013 increased to 28% from 18% compared to the prior period. This is primarily due to a decrease in perpetual license sales when compared to the prior period as perpetual licenses sales can be lumpy and have a significantly lower direct cost than subscription licenses and an increase in software amortization.

We expect the increase in costs of subscription and perpetual licenses as a percentage of license revenue to be temporary and should begin to decrease in the three months ended September 30, 2013 due to the acquisition of Elements Local and the expansion of our iAPPS customer base by selling more iAPPS licenses, including iAPPS ds.

Operating Expenses

Sales and Marketing Expenses

Sales and marketing expenses for the three months ended June 30, 2013 increased $310 thousand, or 16%, to $2.3 million compared to the prior period. The increase is due to incremental sales and marketing expenses from the acquisition of MarketNet and an increase in sales and marketing related investments as we continue to focus on marketing our iAPPS web engagement products, including iAPPS ds.

Sales and marketing expenses as a percentage of total revenue for the three months ended June 30, 2013 increased to 41% from 31% compared to the prior period. This is due to the decrease in non-iAPPS application development revenue for the same period and the increase in expenses described above.

Sales and marketing expenses for the nine months ended June 30, 2013 increased $740 thousand, or 13%, to $6.3 million compared to the prior period. The increase is due to incremental sales and marketing expenses from the acquisition of MarketNet and an increase in marketing related expenses as we continue to focus on marketing our iAPPS products, including our new product, iAPPS ds.

Sales and marketing expenses as a percentage of total revenue for the nine months ended June 30, 2013 increased to 35% from 28% compared to the prior period. This is due to the decrease in non-iAPPS application development revenue for the same period and the increase in expenses described above.

General and Administrative Expenses

General and administrative expenses for the three months ended June 30, 2013 increased $217 thousand, or 24%, to $1.1 million compared to the prior period. The increase was primarily due to costs associated with the settlement of Bridgeline Digital, Inc. vs. e.Magination network, LLC and its principal owner, Daniel Roche, which is described in further detail in Part II – Other Information: Legal Proceedings.

General and administrative expenses as a percentage of total revenue for the three months ended June 30, 2013 increased to 20% from 14% compared to the prior period. This is due to the decrease in non-iAPPS application development revenue for the same period.

General and administrative expenses for the nine months ended June 30, 2013 increased $516 thousand, or 18%, to $3.4 million compared to the prior period. This was due to expenses associated with the settlement referred to above and the prior period reflecting a larger reduction of expense for changes in estimate of settlement of contingent earnout payments from prior acquisitions that, in our estimation, will not be achieved.

General and administrative expenses as a percentage of total revenue for the nine months ended June 30, 2013 increased to 19% from 15% compared to the prior period. This was due to the increase in expense discussed above and the decrease non-iAPPS application development revenue for the same period.

Research and Development

Research and development expense for the three months ended June 30, 2013 increased by $145 thousand, or 39%, to $515 thousand compared to the prior period. The increase in research and development expense is due to a decrease in capitalization of $113 thousand of software development costs in the three months ended June 30, 2013 compared to the prior period. Beginning in May 2012, we began capitalizing costs related to enhancements to our iAPPS product platform, iAPPS V.5, which was released in the current period. The remainder of the increase is due to incremental costs associated with the release of iAPPS V.5. Software development costs capitalized in the current period were $69 thousand and were related to internal projects.

Research and development expense as a percentage of total revenue for the three months ended June 30, 2013 increased to 9% from 6% compared to the prior period. This was due the capitalization of costs discussed above.

Research and development expense for the nine months ended June 30, 2013 decreased by $360 thousand, or 29%, to $893 thousand compared to the prior period. The decrease in research and development expense is due to the capitalization of $670 thousand of software development costs related to enhancements to our iAPPS product platform in the first six months of 2013. Software development costs capitalized in the prior period were $182 thousand.

Research and development expense as a percentage of total revenue for the three months ended June 30, 2013 decreased to 5% from 6% compared to the prior period. This was due the capitalization of costs discussed above.

Depreciation and Amortization

Depreciation and amortization expense for the three months ended June 30, 2013 decreased by $34 thousand, or 8%, compared to the prior period. This decrease was due to several intangibles from previous acquisitions reaching the end of their useful life since March 31, 2012, offset by incremental expense from the MarketNet acquisition.

Depreciation and amortization as a percentage of revenue were 6% and 7% for the three months ended June 30, 2013 and 2012, respectively.

Depreciation and amortization expense for the nine months ended June 30, 2013 decreased by $70 thousand, or 5%, compared to the prior period. This decrease was due to several intangibles from previous acquisitions reaching the end of their useful life since March 31, 2012, offset by incremental expense from the MarketNet acquisition.

Depreciation and amortization as a percentage of revenue were 7% for both the nine months ended June 30, 2013 and 2012.

Impairment of Intangible Assets

In the first quarter of fiscal 2012, the Company stopped servicing low margin non-iAPPS opportunities acquired from e.Magination IG, LLC. It was therefore determined that a portion of the customer list was impaired.

Income Taxes

The provision for income tax expense was $21 thousand for the three months ended June 30, 2013 and 2012. The provision for income tax expense was $110 thousand for the nine months ended June 30, 2013 compared to $90 thousand for the prior period. This increase is due to deferred tax liabilities related to indefinite lived, tax deductible assets from previous acquisitions.

Income tax expense represents the estimated liability for federal, state and foreign income taxes owed by the Company, including the alternative minimum tax and deferred tax liabilities related to indefinite lived, tax deductible assets from previous acquisitions. The Company has net operating loss carryforwards and other deferred tax benefits that are available to offset future taxable income.

Loss from Operations

The loss from operations was ($1.5) million for three months ended June 30, 2013, compared to a loss of ($158) thousand in the prior period. The loss from operations was ($2.6) million for nine months ended June 30, 2013, compared to a loss of ($582) thousand in the prior period. These increases were primarily attributable to the decrease in non-iAPPS application development services revenue.

Adjusted EBITDA

We also measure our performance based on a non-GAAP (“Generally Accepted Accounting Principles”) measurement of earnings before interest, taxes, depreciation, and amortization and before stock-based compensation expense and impairment of goodwill and intangible assets (“Adjusted EBITDA”).

We believe this non-GAAP financial measure of Adjusted EBITDA is useful to management and investors in evaluating our operating performance for the periods presented and provide a tool for evaluating our ongoing operations.

Adjusted EBITDA, however, is not a measure of operating performance under GAAP and should not be considered as an alternative or substitute for GAAP profitability measures such as (i) income from operations and net income, or (ii) cash flows from operating, investing and financing activities, both as determined in accordance with GAAP. Adjusted EBITDA as an operating performance measure has material limitations since it excludes the financial statement impact of income taxes, net interest expense, amortization of intangibles, depreciation, other amortization and stock-based compensation, and therefore does not represent an accurate measure of profitability. As a result, Adjusted EBITDA should be evaluated in conjunction with net income for a complete analysis of our profitability, as net income includes the financial statement impact of these items and is the most directly comparable GAAP operating performance measure to Adjusted EBITDA. Our definition of Adjusted EBITDA may also differ from and therefore may not be comparable with similarly titled measures used by other companies, thereby limiting its usefulness as a comparative measure. Because of the limitations that Adjusted EBITDA has as an analytical tool, investors should not consider it in isolation, or as a substitute for analysis of our operating results as reported under GAAP.

The following table reconciles net (loss) income (which is the most directly comparable GAAP operating performance measure) to EBITDA, and EBITDA to Adjusted EBITDA (in thousands):

	Three Months Ended June 30,						Nine Months Ended June 30,
	2013			2012			2013			2012
Net loss	$	(1,569	)	$	(277	)	$	(2,893	)	$	(906	)
Provision for income tax		21			21			110			90
Interest expense (income), net		59			98			194			234
Amortization of intangible assets		118			184			390			571
Impairment of intangible asset		-