Bridgeline Digital, Inc. — Fiscal 2016 First-Quarter 10-Q Summary
Reporting period: Three months ended December 31, 2015, compared with the three months ended December 31, 2014. Amounts are in thousands, except per-share and share data, unless otherwise indicated. The interim financial statements are unaudited.
Business context
Bridgeline provides digital engagement software and services through its iAPPS platform, including web content management, eCommerce, eMarketing, social media management, analytics, SaaS subscriptions, perpetual licenses, professional services, and managed hosting. The Company reported more than 3,000 customers, primarily iAPPSds subscription customers, and no customer represented at least 10% of revenue in either comparable quarter.
Key financial metrics
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Total revenue | $4,243 | $5,012 | Down $769, or 15% |
| Gross profit | $2,154 | $1,944 | Up $210, or 11% |
| Gross margin | 51% | 39% | Up 12 percentage points |
| Loss from operations | $(1,059) | $(1,913) | Improved by $854 |
| Net loss | $(1,348) | $(2,110) | Improved by $762 |
| Net loss applicable to common shareholders | $(1,380) | $(2,131) | Improved by $751 |
| Basic and diluted loss per share | $(0.25) | $(0.49) | Improved |
| Adjusted EBITDA | $65 | $(1,247) | Improved by $1,312 |
| Cash used in operating activities | $(687) | $(1,247) | Use decreased by $560 |
Revenue composition was $2,373 from digital engagement services, $1,523 from subscription and perpetual licenses, and $347 from managed service hosting. Digital engagement services declined 27%, while subscription and perpetual-license revenue increased 10%; hosting revenue declined 13%.
Cash and cash equivalents were $580 at December 31, 2015, compared with $337 at September 30, 2015. Accounts receivable and unbilled receivables, net, were $2,507. Total assets were $18,992, and stockholders’ equity was $5,042.
Total debt was $8,379 at December 31, 2015, including $2,467 of line-of-credit borrowings, $500 of bank term debt, $3,000 of subordinated convertible debt, and $2,500 of shareholder term notes. The current portion was $500 and long-term debt was $7,879. The Company was in compliance with its financial reporting covenants at quarter-end.
Material changes versus the prior comparable period
- Revenue declined primarily because of fewer new iAPPS implementations and lower non-iAPPS engagement work.
- Gross margin improved from 39% to 51% as labor and facility costs were aligned with lower expected revenue.
- Sales and marketing expense declined 41% to $1,068; research and development expense declined 43% to $341; general and administrative expense declined 13% to $862.
- Total operating expenses declined 17% to $3,213, despite $586 of restructuring charges that were not recorded in the prior-year quarter.
- The Company raised approximately $669 net from the issuance of 680,000 common shares in October 2015 and received $500 from shareholder term notes and $500 from a short-term bank loan.
- Weighted-average common shares increased to 5.165 million from 4.343 million, reflecting equity issuance and other share activity.
Outlook, liquidity, risks, and unusual items
Management stated that restructuring actions, including workforce reductions and office consolidations, were intended to establish an appropriate cost structure for anticipated first-half fiscal 2016 sales. Management expects the reduced expense base could support positive Adjusted EBITDA and believes cash flows, available financing, equity proceeds, and shareholder loans will fund ordinary operations for at least the next twelve months. This expectation depends on achieving anticipated sales levels and maintaining access to financing; the filing does not provide formal revenue or earnings guidance.
Restructuring charges totaled $586 in the quarter, including approximately $506 of employee-related liabilities. The accrued restructuring liability was $744 at December 31, 2015, with certain severance payments expected through 2017. The Company also had $301 of accrued contingent acquisition consideration scheduled to be paid through fiscal 2016, subject to acquisition-related performance targets.
The BridgeBank revolving facility permits advances up to the lesser of $5 million or 80% of eligible receivables, with up to $1 million of specified out-of-formula borrowing. Its maturity was extended to December 31, 2016 during the quarter and subsequently to March 31, 2017 on February 11, 2016. Shareholder term notes and $3 million of secured convertible notes were amended to mature March 1, 2017, with increased interest rates and prepayment penalties.
Subsequent to quarter-end, the Company issued additional shareholder and other term notes. The filing contains an apparent inconsistency: the notes describe $250 loans to Michael and Robert Taglich, while the exhibit index identifies $200 notes for each. This amount should be verified against the filed exhibits.
Principal risks include continued operating losses and negative operating cash flow, dependence on additional financing, debt maturities and covenant compliance, uncertain sales execution, fluctuating quarterly revenue, competition, technology and cybersecurity risks, customer renewals, dependence on key personnel, limited trading liquidity, and potential loss of Nasdaq listing. The Company recorded a $10.5 million goodwill impairment in fiscal 2015 but no goodwill impairment in the reported quarter. No material legal proceedings were reported.
Important facts for investors to verify
- Whether revenue stabilizes after the 15% year-over-year decline and whether subscription growth offsets lower services revenue.
- Whether the improved 51% gross margin and positive $65 Adjusted EBITDA are sustainable after excluding restructuring and other non-GAAP items.
- Available borrowing capacity under the receivables-based facility, covenant headroom, interest rates, and the March 2017 debt maturities.
- The Company’s ability to fund operations given $687 of quarterly operating cash burn and only $580 of quarter-end cash.
- The final terms and principal amounts of the February 2016 related-party term notes, including the discrepancy between the notes disclosure and exhibit index.
- Potential dilution from 693,281 warrants, 831,197 options, convertible preferred stock, contingent acquisition shares, and additional equity financing.
- Execution of restructuring savings and the timing and amount of remaining severance, lease, and contingent acquisition payments.