Bridgeline Digital, Inc. — Fiscal 2016 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2016, filed December 16, 2016. The filing covers the full fiscal year rather than a standalone fourth quarter. Bridgeline provides the iAPPS digital engagement platform, including content management, eCommerce, eMarketing, analytics and social media capabilities, together with digital engagement services and managed hosting.
Key Financial Metrics
<>| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Total revenue | $15.895 million | $19.224 million | Down 17% |
| Digital engagement services revenue | $8.520 million | $11.903 million | Down 28% |
| Subscription and perpetual licenses | $6.084 million | $5.792 million | Up 5% |
| Managed service hosting | $1.291 million | $1.529 million | Down 16% |
| Gross profit | $8.613 million | $8.185 million | Up 5% |
| Gross margin | 54% | 43% | Up 11 percentage points |
| Loss from operations | $(3.543) million | $(16.102) million | Improved |
| Net loss | $(7.824) million | $(16.768) million | Improved 53% |
| Net loss attributable to common shareholders | $(7.955) million | $(16.882) million | Improved |
| Basic and diluted loss per share | $(0.84) | $(3.88) | Improved |
| Adjusted EBITDA | $(0.785) million | $(2.624) million | Improved |
| Cash used in operating activities | $(2.682) million | $(2.763) million | Improved modestly |
| Cash and cash equivalents | $0.661 million | $0.337 million | Up $0.324 million |
All dollar amounts above are from the filing and are presented in millions unless otherwise stated. Operating expenses totaled $12.156 million, down 50%, primarily because fiscal 2015 included a $10.5 million goodwill impairment charge. Excluding that impairment, operating expenses declined by approximately $1.6 million. Research and development expense was $1.578 million, or 10% of revenue.
Liquidity, Debt and Capital Resources
- Total assets were $17.728 million and total liabilities were $6.226 million at September 30, 2016.
- Debt declined from approximately $7.787 million at September 30, 2015 to $2.115 million at September 30, 2016. The remaining debt was borrowings under the Heritage Bank of Commerce revolving credit facility.
- The Heritage facility had a stated revolving commitment of $2.5 million after an August 2016 amendment and expires June 9, 2018. Borrowings are secured by company assets and intellectual property and are subject to borrowing-base, financial and reporting covenants.
- Fiscal 2016 financing activities provided $3.168 million, including $3.715 million of net common-stock proceeds and $1.0 million of shareholder term-note proceeds, partly offset by debt repayments and contingent acquisition payments.
- At September 30, 2016, contractual obligations totaled approximately $3.515 million, including $2.115 million of line-of-credit obligations, $1.280 million of net operating leases, $45 thousand of capital leases and $75 thousand of contingent acquisition payments.
- In November 2016, the Company raised net proceeds of approximately $987 thousand through the sale of 2,135,362 common shares at $0.48 per share, together with warrants. Management stated that this financing, expected operating cash flows and available borrowing capacity were expected to fund foreseeable working-capital and capital-expenditure needs, but warned that financing availability was not assured.
Material Changes Versus the Prior Comparable Period
- Revenue declined 17%, driven principally by a $3.383 million decrease in digital engagement services revenue from fewer large iAPPS engagements.
- Revenue mix shifted toward licenses: subscription and perpetual licenses increased to 38% of revenue from 30%, while digital engagement services declined to 54% from 62%.
- Gross margin improved substantially to 54% from 43%, reflecting lower delivery costs, cost alignment, facility reductions and increased SaaS license revenue.
- Sales and marketing, general and administrative, research and development, and depreciation and amortization expenses all declined.
- Restructuring expense increased to $879 thousand from $496 thousand, reflecting workforce reductions, office consolidations, lease renegotiations and related costs.
- No goodwill impairment was recorded in fiscal 2016, compared with a $10.5 million impairment charge in fiscal 2015.
- The Company converted approximately $6.0 million of convertible debt and shareholder term notes into equity. The conversions produced a $3.414 million non-cash debt-inducement charge and materially increased common shares outstanding.
- Common shares outstanding increased from approximately 4.638 million at September 30, 2015 to approximately 18.638 million at September 30, 2016, primarily due to debt conversions and equity financing.
Outlook, Commentary, Risks and Unusual Items
Management stated that restructuring and cost-reduction actions were intended to create a cost structure appropriate for anticipated fiscal 2017 sales and to enable positive Adjusted EBITDA. The filing does not provide specific revenue, earnings or cash-flow guidance. Management also stated that continued losses, cash use, covenant requirements and dependence on external financing create uncertainty regarding liquidity.
- NASDAQ notified the Company in August 2016 that its common stock did not meet the $1.00 minimum bid-price requirement. The Company had until February 15, 2017 to regain compliance, subject to potential additional compliance procedures and delisting risk.
- The Company operates in highly competitive and rapidly changing software and digital-services markets. Risks include pricing pressure, customer nonrenewals, long sales cycles, technology changes and competition from substantially larger companies.
- Customer concentration increased: one customer represented 10.2% of fiscal 2016 revenue, compared with no customer exceeding 10% in fiscal 2015. Two customers represented more than 10% of accounts receivable at September 30, 2016.
- The business depends on a third-party data center for SaaS and managed hosting. Service disruptions, security breaches, capacity constraints or unfavorable renewal terms could harm revenue, reputation and customer retention.
- The Company reported approximately $26 million of federal net operating loss carryforwards and approximately $22 million of state NOLs, but maintained a full valuation allowance. Section 382 limitations had not been analyzed and could restrict future utilization.
- Goodwill of $12.641 million remained on the balance sheet after the 2016 impairment assessment found no impairment. Future deterioration in revenue, market valuation or projected performance could result in additional impairment.
- The independent auditor issued an unqualified opinion on the consolidated financial statements. Because the Company is a smaller reporting company, the auditor did not provide an attestation opinion on internal control over financial reporting; management concluded controls were effective.
- The Company had no material legal proceedings and no material off-balance-sheet arrangements other than operating leases and contingent acquisition payments.
Most Important Facts for Investors to Verify
- Whether the Company can convert improved gross margins and reduced expenses into positive operating cash flow and positive Adjusted EBITDA.
- Current liquidity, borrowing-base availability and compliance with Heritage Bank financial covenants and minimum-cash requirements.
- Fiscal 2017 revenue trends, particularly SaaS subscription growth, service revenue stabilization and customer renewal rates.
- The effect of substantial equity issuance, warrants, options and preferred-stock dividends on dilution and per-share value.
- Whether the Company regained NASDAQ’s $1.00 minimum bid-price compliance by the applicable deadline.
- The collectability of receivables, given the increased customer concentration and higher allowance for doubtful accounts.
- Potential future goodwill impairment and the realizability of tax NOL carryforwards.
- The adequacy of cash resources after the November 2016 financing and the Company’s ability to fund operations without additional capital.