Bridgeline Digital, Inc. — Q1 FY2017 Form 10-Q Summary
Reporting period: Three months ended December 31, 2016; filed February 14, 2017. The unaudited statements are presented under U.S. GAAP. Bridgeline provides digital engagement services, software subscriptions and perpetual licenses, and managed hosting through its iAPPS platform.
Financial Highlights
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Total revenue | $3.991 million | $4.243 million | Down 6% |
| Gross profit | $2.296 million | $2.154 million | Up 7% |
| Gross margin | 58% | 51% | Up 7 percentage points |
| Loss from operations | $365 thousand | $1.059 million | Improved $694 thousand |
| Net loss | $408 thousand | $1.348 million | Improved $940 thousand |
| Net loss applicable to common shareholders | $476 thousand | $1.380 million | Improved $904 thousand |
| Loss per common share | $0.02 | $0.25 | Improved |
| Adjusted EBITDA | $10 thousand | $65 thousand | Down $55 thousand |
| Cash used in operating activities | $293 thousand | $687 thousand | Improved $394 thousand |
Revenue from digital engagement services declined 15% to $2.026 million, subscription and perpetual license revenue increased 13% to $1.725 million, and managed hosting revenue declined 31% to $240 thousand. Cost of revenue fell 19% to $1.695 million, reflecting lower facilities and overhead costs and improved utilization.
Sales and marketing expense increased 21% to $1.294 million as the Company rebuilt and expanded its sales organization. General and administrative expense declined 8% to $791 thousand, research and development expense increased 6% to $360 thousand, and restructuring expense declined to $31 thousand from $586 thousand.
Liquidity, Capital Resources, and Debt
- Cash and cash equivalents were $1.428 million at December 31, 2016, compared with $661 thousand at September 30, 2016.
- Total current assets were $4.402 million versus current liabilities of $3.474 million. Accounts receivable and unbilled receivables, net, were $2.630 million; deferred revenue was $1.547 million.
- Total debt was approximately $2.423 million, consisting primarily of borrowings under the Heritage Bank revolving credit facility. The balance sheet reports $2.390 million of debt net of current portion plus $33 thousand of current capital lease obligations.
- The Heritage facility provides for up to $2.5 million of revolving advances, subject to borrowing-base limitations, and expires June 9, 2018. Interest accrues at Wall Street Journal Prime plus 1.75%, stated as 5.5% at the filing date.
- The Company borrowed $355 thousand and repaid $80 thousand on the credit line during the quarter. All financial covenants were met at December 31, 2016.
- Financing activities provided $1.079 million, including $891 thousand of net proceeds from a November 2016 common-stock private placement and $355 thousand of credit-line borrowings, partially offset by debt, contingent consideration, and capital lease payments.
- Management stated that the cost structure, expected sales, financing proceeds, and available credit were expected to fund operations for at least the next twelve months, but noted that this depends on achieving anticipated sales levels and continued access to financing.
Material Changes Versus Prior Comparable Period
- Total revenue decreased $252 thousand, primarily because of lower digital engagement and managed hosting revenue, partly offset by higher subscription and license revenue.
- Gross profit increased $142 thousand and gross margin expanded from 51% to 58%.
- Operating expenses decreased $552 thousand, largely because of lower restructuring and depreciation and amortization expenses, although sales and marketing costs increased.
- Net loss improved substantially, but the Company remained unprofitable and Adjusted EBITDA declined from $65 thousand to $10 thousand.
- Operating cash burn declined from $687 thousand to $293 thousand, while cash increased because of equity issuance and additional borrowings.
- Common shares outstanding increased to 20.784 million at December 31, 2016 from 18.638 million at September 30, 2016. The November financing issued 2.135 million common shares at $0.48 per share and warrants to purchase 1.068 million shares at $0.70 per share.
Outlook, Commentary, Risks, and Unusual Items
- Management attributed weaker services revenue to fewer new iAPPS engagements while rebuilding the sales team and to reduced emphasis on lower-margin non-iAPPS services. License growth reflected increased new SaaS and perpetual license sales.
- Management expects restructuring and efficiency initiatives to support positive Adjusted EBITDA in fiscal 2017, but the filing provides no formal revenue or earnings guidance.
- Preferred stock carries cumulative dividends that increased from 6% to 12% effective January 1, 2017. The Company elected to pay the next quarterly dividend in kind, declaring 6,792 additional preferred shares.
- Goodwill was tested during fiscal 2016 and was not impaired. The filing reports no material subsequent events requiring adjustment and no material legal proceedings.
- Key risks include continuing operating losses and cash use, dependence on sales growth and customer renewals, limited access to capital, credit-facility covenants and borrowing-base requirements, competition, technology and cybersecurity risks, customer concentration, dependence on key personnel, stock-price volatility, and the ability to maintain Nasdaq listing.
- One customer represented 12% of quarterly revenue, compared with 11% in the prior-year quarter.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether revenue growth, particularly subscription and perpetual license growth, offsets continuing declines in digital engagement and managed hosting revenue.
- Whether the Company achieves sustained positive Adjusted EBITDA and converts that performance into positive operating cash flow.
- Cash runway, availability under the Heritage Bank facility, compliance with the minimum cash and Adjusted EBITDA covenants, and the facility’s borrowing-base capacity.
- The dilution impact of outstanding preferred stock, approximately 2.711 million warrants, approximately 2.218 million stock options, and future in-kind preferred dividends.
- Customer renewal rates, customer concentration, and the effect of rebuilding the sales organization on new bookings.
- The accounting and financial impact of the pending revenue-recognition, lease, share-based-payment, and cash-flow accounting standards identified in the filing.