Bridgeline Digital, Inc. — Q3 2020 Form 10-Q Summary
Business context and reporting period
Bridgeline Digital provides digital experience software and services, including SaaS and perpetual licensing, content management, eCommerce, marketing automation, site search, portals, analytics and related implementation services. The unaudited report covers the three and nine months ended June 30, 2020, within the fiscal year ending September 30, 2020. The company operates primarily in the United States, with Canadian, Australian and Indian subsidiaries.
Key financial metrics
| Metric | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Nine months ended June 30, 2020 | Nine months ended June 30, 2019 |
|---|---|---|---|---|
| Revenue | $2.632 million | $2.693 million | $8.202 million | $7.264 million |
| Gross profit | $1.553 million | $1.202 million | $4.580 million | $3.025 million |
| Gross margin | 59% | 45% | 56% | 42% |
| Income (loss) from operations | $0.150 million | $(2.839) million | $(1.808) million | $(9.544) million |
| Net income (loss) | $(1.701) million | $7.311 million | $(0.742) million | $(10.166) million |
| Net loss applicable to common shareholders | $(1.701) million | $7.233 million | $(3.162) million | $(10.401) million |
| Basic EPS | $(0.44) | $3.62 | $(0.97) | $(12.38) |
| Adjusted EBITDA | $0.428 million | $(1.556) million | $(0.571) million | $(3.968) million |
Subscription and perpetual license revenue was $1.919 million in the quarter and $5.494 million year to date, representing 73% and 67% of total revenue, respectively. Digital engagement services revenue was $0.713 million in the quarter and $2.708 million year to date.
Cash and cash equivalents were $1.165 million at June 30, 2020, compared with $0.296 million at September 30, 2019. Current assets were $2.249 million and current liabilities were $4.798 million. Accounts receivable, net, was $0.799 million, and deferred revenue was $1.779 million. Total assets were $11.297 million and stockholders’ equity was $3.247 million.
Cash used in operating activities was $0.227 million for the nine months ended June 30, 2020, compared with $3.308 million in the prior-year period. Investing cash flow was zero versus $5.671 million of cash used in the prior-year period, primarily reflecting the absence of acquisitions. Financing activities provided $1.048 million, consisting of Paycheck Protection Program proceeds, compared with $9.644 million in the prior-year period.
Total debt was $1.048 million at June 30, 2020, consisting of the PPP loan, with $0.466 million classified as current and $0.582 million as long term. The PPP loan bears interest at 1%, has an initial two-year term and may be forgiven subject to applicable requirements; forgiveness had not been obtained and was not assured.
Material changes versus the prior comparable period
- Quarterly revenue declined 2%, while nine-month revenue increased 13%, driven by subscription and license revenue from the two fiscal 2019 acquisitions.
- Digital engagement services revenue declined 36% in the quarter and 13% year to date, partly reflecting a shift toward subscription and license revenue.
- Gross margin improved to 59% from 45% in the quarter and to 56% from 42% year to date, primarily due to a higher mix of license revenue, workforce reductions and lower third-party consultant costs.
- Operating expenses declined 65% in the quarter and 49% year to date. Sales and marketing expense declined substantially due to lower headcount and commissions.
- The company generated quarterly operating income of $0.150 million, compared with an operating loss of $2.839 million in the prior-year quarter. It remained operating-loss-making year to date.
- The quarterly net loss was materially affected by a $1.843 million loss from the change in fair value of warrant liabilities. The prior-year quarter included a $10.146 million warrant liability gain.
- The prior-year nine-month period included a $3.732 million goodwill impairment charge, $1.242 million of restructuring and acquisition-related expenses, and an $11.272 million warrant liability expense; these items did not recur or were substantially lower in 2020.
- Common shares outstanding increased to 4,419,614 at June 30, 2020 from 2,798,475 at September 30, 2019, primarily through preferred stock conversions and settlement of preferred dividends in shares.
Guidance, outlook, risks and unusual items
The filing does not provide formal revenue, earnings or margin guidance. Management expects acquisitions completed in fiscal 2019 to contribute to revenue and cash flow as integration continues and states that it is maintaining tight control over discretionary spending.
Management disclosed substantial doubt about the company’s ability to continue as a going concern for at least twelve months after issuance of the filing. Management stated that additional financing would be required to adequately fund operations. On August 13, 2020, after quarter-end, the company established an at-the-market offering for up to 3,822,339 common shares, but the placement agent had no obligation to sell shares and there was no assurance that any proceeds would be raised.
COVID-19 created uncertainty regarding customer demand, operations, employee productivity, suppliers, partners, revenue, profitability and financial position. The company also reported a March 2020 reduction in force affecting 15 U.S. and Canadian positions, with $0.365 million of related costs and $0.338 million paid during the nine months.
The Series A preferred stock amendment reduced the conversion price to $1.75 and resulted in a $2.314 million deemed dividend during the nine months. All previously outstanding Series A preferred shares were converted into common stock during the period. Outstanding warrants totaled approximately 5.493 million shares at June 30, 2020, creating potential dilution and a $2.436 million warrant liability.
The company adopted the new lease standard on October 1, 2019, recognizing operating lease assets and liabilities. Operating lease liabilities totaled $0.325 million at June 30, 2020. The company also reported an undetermined commencement date for a new Woodbury, New York office lease because of COVID-19-related construction and permitting delays.
Management stated that disclosure controls and procedures were effective as of June 30, 2020 and that no material changes occurred in internal control over financial reporting. No material legal proceedings were reported.
Important facts for investors to verify
- Whether the company raised meaningful capital under the August 2020 ATM offering and whether additional financing was obtained.
- Whether the PPP loan qualifies for forgiveness; any unforgiven amount would remain debt.
- Cash burn, operating cash flow and liquidity relative to the company’s substantial going-concern uncertainty.
- Retention, cancellation and expansion trends for legacy and acquired SaaS customers.
- The sustainability of improved gross margins and sharply reduced operating expenses.
- Potential dilution from approximately 5.493 million outstanding warrants, stock options and remaining preferred-stock conversion rights.
- Future changes in the fair value of warrant liabilities, which may materially affect reported earnings without corresponding operating cash flows.
- COVID-19 effects on demand, collections, customer concentration and employee productivity.