Bridgeline Digital, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Bridgeline Digital provides digital engagement software and services through its iAPPS platform, including web content management, eCommerce, eMarketing, social media, analytics, SaaS subscriptions, perpetual licenses, professional services, and managed hosting. The filing covers the three and nine months ended June 30, 2016, the company’s fiscal third quarter, with comparative periods ended June 30, 2015. The financial statements are unaudited.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Nine Months Ended June 30 |
|---|---|---|
| Revenue | $3.696 million, down 24% | $12.171 million, down 17% |
| Gross profit | $2.008 million | $6.405 million |
| Gross margin | 54%, versus 45% | 53%, versus 40% |
| Loss from operations | $1.011 million | $2.746 million |
| Net loss | $2.032 million | $4.385 million |
| Net loss applicable to common shareholders | $2.065 million, or $0.21 per share | $4.482 million, or $0.66 per share |
| Adjusted EBITDA | Negative $575 thousand | Negative $484 thousand |
| Cash used in operating activities | $1.509 million for the nine months |
- Digital engagement services revenue declined 37% in the quarter and 28% year to date, primarily because of fewer new iAPPS implementations.
- Subscription and perpetual license revenue increased 2% in the quarter and 7% year to date, reflecting higher SaaS subscription revenue and new websites.
- Managed hosting revenue declined 24% in the quarter and 17% year to date.
- Gross profit declined in the quarter but increased year to date as cost reductions and workforce alignment more than offset lower revenue.
- Operating expenses were $3.019 million in the quarter and $9.151 million year to date. Year-to-date operating expenses declined 12%, although restructuring charges totaled $795 thousand.
- Cash and cash equivalents were $233 thousand at June 30, 2016, versus $337 thousand at September 30, 2015. Total current assets were $2.740 million versus current liabilities of $4.171 million.
- Total debt was $4.270 million at June 30, 2016, down from $7.787 million at September 30, 2015. The debt consisted primarily of $1.840 million in line-of-credit borrowings and $2.430 million of subordinated convertible debt.
- Accounts receivable and unbilled receivables, net, declined to $1.984 million from $2.463 million; the allowance for doubtful accounts increased to $257 thousand from $71 thousand.
Material Changes Versus the Prior Comparable Period
- Revenue fell because of lower professional-services activity, while the revenue mix shifted toward subscriptions and licenses.
- Gross margin improved substantially because of lower labor, facility, and overhead costs.
- Quarterly net loss worsened to $2.032 million from $1.110 million, primarily reflecting the $726 thousand non-cash loss on the inducement of convertible note conversions and lower gross profit.
- Year-to-date net loss improved from $5.293 million to $4.385 million, and operating cash usage improved from $2.637 million to $1.509 million.
- The company converted approximately $3.8 million of term and convertible notes into common stock during the quarter and reduced reported debt by approximately $3.5 million from fiscal year-end.
- The company continued workforce and facilities reductions, with a remaining restructuring liability of $578 thousand at June 30, 2016.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- No specific revenue or earnings guidance was provided. Management stated that expense reductions, debt restructuring, equity financing, and expected operating cash flow should fund ordinary-course operations for at least the next twelve months, but acknowledged that further expense reductions or additional financing may be necessary if revenue remains deficient.
- In June 2016, the company replaced its BridgeBank facility with a Heritage Bank of Commerce facility. The original facility provided up to $3 million of revolving credit, subject to borrowing-base limitations, at approximately 5.25% interest at quarter-end. Borrowings are secured by substantially all company assets and intellectual property.
- The company was not in compliance with the Adjusted EBITDA covenant for the quarter ended June 30, 2016 and obtained a bank waiver. A subsequent August 15, 2016 amendment reduced the revolving commitment to $2.5 million, imposed a $500 thousand minimum cash requirement, and revised the September 30, 2016 covenant.
- Subsequent to quarter-end, the remaining approximately $2.4 million of convertible notes converted into common stock. The company also sold 2.2 million common shares in July 2016 for approximately $1.5 million of net proceeds.
- The conversion-price reduction on the convertible notes created a total expected inducement expense of approximately $3.4 million; $726 thousand was recorded through June 30, 2016 and management expected to record an additional $2.7 million in the fourth quarter.
- Preferred stock had a $2.221 million liquidation preference at June 30, 2016 and accrued dividends at a 6% annual rate. The company elected to pay the next quarterly dividend in additional preferred shares.
- Remaining contingencies included $151 thousand of acquisition-related contingent consideration, a $578 thousand restructuring liability, operating lease obligations, and customary litigation and claims. The company reported no material legal proceedings.
- Principal business risks include continuing operating losses and negative cash flow, revenue volatility, dependence on successful debt and equity financing, covenant compliance, customer renewals, competition, rapid technology changes, cybersecurity, protection of intellectual property, and reliance on key personnel.
Most Important Facts for Investors to Verify
- Verify the company’s ability to maintain minimum cash and comply with the amended Heritage Bank covenants after the June 30 breach and waiver.
- Verify post-quarter-end equity conversions, share dilution, the July 2016 financing proceeds, and the resulting debt balance.
- Assess whether subscription growth can offset continued weakness in digital engagement services revenue.
- Reconcile the expected $2.7 million fourth-quarter convertible-note inducement charge and its effect on reported earnings and equity.
- Evaluate liquidity using only $233 thousand of quarter-end cash, negative operating cash flow, current liabilities exceeding current assets, and ongoing operating losses.
- Review the allowance for doubtful accounts, restructuring liability, contingent consideration, preferred-stock dividends, and related-party financing and guarantees.