Bridgeline Digital, Inc. — Fiscal 2014 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2014, including fourth-quarter results. The filing was signed December 29, 2014. Bridgeline provides the iAPPS digital engagement platform, including web content management, eCommerce, eMarketing, social media management and web analytics, together with digital engagement services and managed hosting.
Financial Performance and Position
| Metric | Fiscal 2014 | Fiscal 2013 | Change |
|---|---|---|---|
| Total revenue | $23.7 million | $24.5 million | Down 3% |
| Digital engagement services revenue | $16.4 million | $18.6 million | Down 12% |
| Subscription and perpetual license revenue | $5.7 million | $4.0 million | Up 44% |
| Managed service hosting revenue | $1.6 million | $1.9 million | Down 16% |
| Gross profit | $11.5 million | $13.0 million | Down 11% |
| Gross margin | 49% | 53% | Down 4 percentage points |
| Loss from operations | $5.2 million | $3.2 million | Loss increased |
| Net loss | $6.2 million | $3.6 million | Loss increased 73% |
| Basic and diluted loss per share | $0.32 | $0.23 | Loss increased |
| Adjusted EBITDA | $(2.2) million | $(0.7) million | Loss increased |
| Cash used in operating activities | $3.8 million | $0.1 million | Use increased |
| Cash and cash equivalents | $1.3 million | $2.8 million | Down $1.6 million |
Subscription and perpetual licenses increased to 24% of revenue from 16%, while digital engagement services declined to 69% from 76%. Recurring revenue increased 33% to $6.9 million, and iAPPS-related revenue increased 8% to $20.3 million. No customer represented 10% or more of revenue in either year.
Margins and Operating Expenses
Total cost of revenue increased 6% to $12.2 million, primarily because iAPPSds engagements were sold at lower initial margins and subscription-related costs increased. Research and development expense rose 75% to $2.4 million, or 10% of revenue, reflecting additional personnel and investment in iAPPSds. Sales and marketing expense declined 7% to $8.0 million, while general and administrative expense declined 2% to $4.4 million. Depreciation and amortization increased 18% to $2.0 million.
Balance Sheet, Debt and Liquidity
At September 30, 2014, total assets were $33.6 million, total liabilities were $13.6 million and stockholders’ equity was $19.9 million. Goodwill was $23.1 million, representing a substantial portion of total assets. The Company reported total debt of approximately $6.9 million, including $2.9 million drawn under the BridgeBank line of credit, $3.0 million of 10% subordinated convertible debt and a $1.0 million short-term bank loan. The short-term loan was paid in October 2014.
The BridgeBank facility permits up to $5.0 million of revolving advances, subject to borrowing-base limitations, and matures March 31, 2016. Borrowings are secured by the Company’s assets and intellectual property. The Company was not in compliance with certain financial covenants at September 30, 2014 and obtained a waiver and prospective covenant amendments in December 2014. A director and stockholder provided a guarantee for up to $1.0 million of out-of-formula borrowings.
Material Changes Versus Fiscal 2013
- Total revenue declined modestly, but the mix shifted toward subscription and license revenue and away from lower-priority or non-iAPPS service engagements.
- Recurring revenue and iAPPS-related revenue increased, supported by iAPPSds, franchise and multi-unit customers, annual maintenance renewals and the full-year contribution from the ElementsLocal acquisition.
- Non-iAPPS-related digital engagement revenue declined 46%, and managed hosting revenue declined as the Company exited smaller hosting customers.
- Gross margin fell to 49% from 53%, primarily due to lower-margin iAPPSds service engagements and the decline in non-iAPPS services.
- Operating loss, net loss and Adjusted EBITDA loss all widened, despite lower sales and administrative expenses.
- Operating cash use increased materially, and year-end cash declined to $1.3 million.
- The Company completed a $3.2 million common-stock private placement in March 2014 and issued additional equity and warrants, increasing potential dilution.
- No acquisitions were completed in fiscal 2014. The Company continued to incur contingent earnout obligations related to prior acquisitions, with $868 thousand recorded at year-end.
Outlook, Commentary, Risks and Unusual Items
Management stated that it was reducing operating expenses and expected to achieve an appropriate cost structure for anticipated sales in the second half of fiscal 2015, with a goal of generating positive Adjusted EBITDA. Management also stated that available operating cash, financing arrangements and capital proceeds were expected to fund operations and capital expenditures for the foreseeable future, but cautioned that this depended on achieving anticipated sales and maintaining financing availability.
- Liquidity risk: The Company has a history of operating losses and operating cash outflows, relies on debt and equity financing, and had only $1.3 million of cash at year-end.
- Debt and covenant risk: The BridgeBank facility is secured, subject to borrowing-base and financial covenants, and required a waiver for fiscal 2014 covenant noncompliance.
- NASDAQ listing risk: The common stock traded below the $1.00 minimum bid requirement for 30 consecutive business days. Nasdaq granted an additional compliance period through May 26, 2015, subject to the stock meeting the required bid-price condition.
- Financing and dilution: The Company issued common stock, convertible debt, warrants and, after year-end, $2.0 million of convertible preferred stock. The preferred stock is convertible at $0.65 per common share and carries a 6% cash dividend rate, increasing to 12% after two years if shares remain outstanding.
- Competitive and execution risk: The digital engagement and software markets are rapidly changing, highly competitive and subject to pricing pressure, customer churn and long sales cycles.
- Technology and security risk: Software defects, cybersecurity incidents, intellectual-property claims or interruptions at the third-party data center could adversely affect operations and customer renewals.
- Goodwill concentration: Management performed a qualitative goodwill assessment and recorded no impairment; goodwill was $23.1 million at year-end. Future deterioration in operating performance or valuation could result in impairment.
- Unusual items: A previously disclosed litigation settlement was paid in fiscal 2014. The Company recorded no impairment of intangible assets in fiscal 2014 or 2013.
Important Facts for Investors to Verify
- Whether management achieved positive Adjusted EBITDA and reduced operating cash burn in fiscal 2015.
- Current availability, borrowing-base capacity, covenant compliance and maturity terms under the BridgeBank facility.
- Whether the Company maintained Nasdaq listing compliance by May 26, 2015.
- Growth, renewal rates and gross margins for iAPPSds, subscription licenses and recurring revenue.
- Remaining cash and common-stock earnout obligations from ElementsLocal and other prior acquisitions.
- Potential dilution from convertible debt, preferred stock, warrants, stock options and contingent shares.
- The recoverability of $23.1 million of goodwill and the Company’s ability to convert its federal and state net operating losses into future tax benefits.