Bridgeline Digital, Inc. 10-Q Summary
Business Context and Reporting Period
Bridgeline Digital provides digital experience software and services through its Unbound platform, including web content management, eCommerce, marketing automation, site search, portals, social media management, translation and analytics. The platform is offered through SaaS, perpetual-license and hosted-service models. This unaudited Form 10-Q covers the three and nine months ended June 30, 2019, with comparisons to the same periods in 2018.
During fiscal 2019, the Company acquired selected assets of Seevolution and substantially all relevant assets of Stantive Technologies Group and its Australian subsidiary. The acquisitions contributed $968 thousand of revenue in the quarter and $1.3 million for the nine-month period.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Nine Months Ended June 30 |
|---|---|---|
| Revenue | $2.693 million vs. $3.083 million | $7.264 million vs. $10.765 million |
| Gross profit | $1.202 million vs. $1.549 million | $3.025 million vs. $5.383 million |
| Gross margin | 45% vs. 50% | 42% vs. 50% |
| Loss from operations | $(2.839) million vs. $(5.187) million | $(9.544) million vs. $(6.146) million |
| Net income/(loss) | $7.311 million vs. $(5.162) million | $(10.166) million vs. $(6.272) million |
| Adjusted EBITDA | $(1.562) million vs. $(332) thousand | $(3.974) million vs. $(611) thousand |
- Quarterly revenue declined 13%, while nine-month revenue declined 33%. Digital engagement services declined 29% in the quarter and 44% year to date, primarily from fewer new service engagements.
- Subscription and perpetual-license revenue increased 5% in the quarter, helped by the acquisitions, but declined 22% year to date, primarily because of lower SaaS revenue following the loss of a large customer.
- Gross margin declined because of the lower mix of digital engagement services and higher costs associated with the cloud-based hosting model and internal support.
- Quarterly net income was driven by a $10.1 million gain from changes in the fair value of warrant liabilities. This non-cash gain more than offset the operating loss and should not be viewed as recurring operating profitability.
- Year-to-date results included a $3.732 million goodwill impairment charge, $1.242 million of restructuring and acquisition-related expenses, and a $11.272 million warrant-liability expense that was largely offset by fair-value gains.
- Cash and cash equivalents were $1.298 million at June 30, 2019, compared with $644 thousand at September 30, 2018. Accounts receivable, net, was $1.658 million, and deferred revenue was $1.832 million.
- Cash used in operating activities was $3.308 million for the nine months, compared with $972 thousand in the prior-year period. Investing cash use was $5.671 million, primarily for the acquisitions. Financing cash provided was $9.644 million, primarily from equity offerings.
- The Company reported no debt at June 30, 2019, compared with $3.591 million of total debt at September 30, 2018. It retained access to a Heritage Bank revolving facility of up to $2.5 million, subject to borrowing-base and covenant requirements.
- Stockholders’ equity was $3.154 million at June 30, 2019, compared with $4.424 million at September 30, 2018. Warrant liabilities were $5.726 million, all classified as Level 3 fair-value liabilities.
Material Changes Versus the Prior Comparable Period
- Revenue contracted materially, particularly in digital engagement services and year-to-date SaaS-related revenue.
- Operating losses widened for the nine-month period despite a lower quarterly operating loss, reflecting the goodwill impairment and restructuring and acquisition costs.
- Operating expense composition changed following the acquisitions: sales and marketing, support, general and administrative, research and development, and amortization increased as a percentage of revenue.
- The Company completed a March 2019 private offering that generated approximately $9.1 million of net proceeds and used the proceeds to repay the Heritage Bank line, repay Montage Capital, and fund the Stantive acquisition.
- Series C preferred stock and associated warrants generated substantial accounting volatility. Most Series C preferred stock had been converted into common stock by June 30, 2019, and 5.498 million warrants remained outstanding.
- A 1-for-50 reverse stock split became effective May 1, 2019. The filing retroactively reflects the split in share and per-share data.
- The Company adopted ASC 606 using the modified retrospective method. Management stated that adoption did not materially affect revenue, although it changed the amortization period for certain sales commissions.
Guidance, Outlook, Commentary, Risks and Unusual Items
No quantitative revenue or earnings guidance is provided. Management stated that the combination of expected revenue and cash flows from the acquired customers, the Company’s cost structure and $1.3 million of cash was expected to support working capital, capital expenditures and any debt-repayment needs for at least twelve months from the filing date. Management also stated that significant additional restructuring and acquisition-related costs were not expected for the remainder of fiscal 2019.
Management cautioned that anticipated acquisition-related sales and cash flows may not be achieved. The Company has a history of operating losses and negative operating cash flow, and other financing may not be available on acceptable terms. Key risks include customer attrition and renewal rates, revenue volatility, competition, maintaining margins and market share, dependence on key personnel, rapidly changing technology, cybersecurity and software performance, intellectual-property protection, access to capital, Nasdaq listing requirements, internal controls and economic conditions.
The Company reported no material legal proceedings or material commitments and contingencies as of June 30, 2019. Restructuring liabilities totaled $441 thousand, primarily employee termination costs. The Company stated that its disclosure controls and procedures were effective as of June 30, 2019, with no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether acquired customer revenue and expected cash flows offset continuing operating losses and the $3.3 million year-to-date operating cash burn.
- The sustainability of revenue after the loss of a large SaaS customer and the decline in professional-services engagements.
- The effect of the 5.498 million outstanding warrants, preferred-stock conversions and other potential dilution on future share count and capital structure.
- The valuation assumptions and potential volatility of the $5.726 million Level 3 warrant liability.
- Whether the Company can maintain adequate liquidity with only $1.298 million of cash and no outstanding debt but continuing negative Adjusted EBITDA.
- The completion and financial effect of international restructuring and the extent of any remaining severance or facility obligations.
- The filing contains an apparent inconsistency in quarterly net income applicable to common shareholders: the statement of operations reports $7.233 million, while the earnings-per-share note uses $7.215 million. This should be reconciled against the filed financial statements and XBRL data.