Bridgeline Digital, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended March 31, 2019; fiscal second quarter 2019. Filed May 15, 2019. Bridgeline provides digital experience software and services through its Unbound platform, including SaaS, perpetual licenses, hosting, implementation, eCommerce, content management, marketing automation and analytics.
Financial Performance and Position
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $2.196 million, down 41% | $4.571 million, down 41% |
| Gross profit | $789 thousand | $1.823 million |
| Gross margin | 36%, versus 49% | 40%, versus 50% |
| Operating loss | $(1.971) million | $(6.705) million |
| Net loss | $(12.522) million | $(17.477) million |
| Net loss attributable to common shareholders | $(12.600) million | $(17.634) million |
| Loss per common share | $(41.52) | $(67.36) |
| Adjusted EBITDA | $(1.546) million | $(2.412) million |
- Revenue declines reflected lower digital engagement services, subscription and perpetual license revenue, and managed service hosting revenue.
- Cash and cash equivalents were $1.615 million at March 31, 2019, compared with $644 thousand at September 30, 2018.
- Operating cash flow was $(2.549) million for the six months, compared with $(429) thousand in the prior-year period. Investing cash flow was $(5.636) million, primarily for acquisitions; financing cash flow was $9.150 million.
- Debt was reduced to zero at March 31, 2019 from $3.591 million at September 30, 2018. The Heritage Bank credit facility remained available, subject to borrowing-base and covenant requirements.
- Total liabilities were $24.260 million and stockholders’ equity was $(8.145) million at March 31, 2019. Warrant liabilities accounted for $20.622 million of liabilities.
Material Changes Versus Prior Comparable Period
- Digital engagement services revenue decreased 53% for the quarter and 50% year to date, primarily due to fewer new service engagements.
- Subscription and perpetual license revenue decreased 30% for the quarter and 33% year to date, primarily due to the loss of a large customer and lower SaaS license revenue.
- Managed service hosting revenue decreased 18% for the quarter and 16% year to date due to customer attrition.
- Gross margin declined because lower digital engagement services revenue reduced the contribution from that higher-margin activity; subscription and license costs also increased as a percentage of related revenue because of fixed cloud infrastructure and support costs.
- Operating expenses increased 13% for the quarter, principally due to acquisition-related costs, and increased 78% year to date because of a $3.732 million goodwill impairment charge and $304 thousand of acquisition-related expenses. Excluding those items, year-to-date operating expenses decreased $301 thousand.
- Interest and other expense included a $10.3 million non-cash charge related to the fair-value allocation of warrants issued with the Series C preferred stock financing, and the quarter also included a $221 thousand loss on early extinguishment of debt.
- The Company adopted ASC 606 using the modified retrospective method effective October 1, 2018. Management stated that the adoption did not materially affect revenue; it primarily changed the amortization period for deferred sales commissions.
Acquisitions, Financing, Outlook and Risks
- In February 2019, Bridgeline acquired selected Seevolution assets for approximately $995 thousand of total consideration, including cash, deferred cash payments and 40,000 common shares.
- In March 2019, Bridgeline acquired substantially all of Stantive Technologies Group’s assets and its Australian subsidiary for approximately $5.2 million in cash. The transaction added the Orchestra CMS platform and resulted in $3.0 million of identifiable intangible assets and $1.3 million of goodwill. Acquired businesses contributed $295 thousand of revenue during the quarter and year to date.
- A March private placement generated approximately $8.9 million of net cash proceeds. The proceeds were used to repay the Heritage Bank line, repay the Montage Capital loan, and fund acquisitions. The Series C financing created substantial warrant liabilities and potential future dilution.
- Management stated that the $1.615 million cash balance, expected cash flows from acquired customers and existing accounts were expected to satisfy obligations for at least twelve months from the financial statement issuance date. Management also cautioned that anticipated sales may not be achieved and that future availability of the Heritage credit facility and other financing is uncertain.
- The Company was not in compliance with the Heritage Bank adjusted EBITDA covenant at March 31, 2019 but disclosed that it received a waiver for the quarter.
- On April 26, 2019, stockholders approved an increase in authorized shares and a 1-for-50 reverse stock split. The reverse split became effective May 1, 2019. On April 29, the charter was amended, enabling conversion of Series C preferred stock and exercise of related warrants. As of the filing date, 625,816 common shares had been issued from Series C conversions and warrant exercises.
- Principal risks include sustained operating losses and negative cash flow, revenue concentration and customer attrition, dependence on acquisitions and successful integration, potential warrant and preferred-stock dilution, covenant compliance, limited liquidity and financing availability, competition, cybersecurity and technology risks, dependence on key personnel, Nasdaq listing requirements, and potential future goodwill impairment.
Important Facts for Investors to Verify
- Whether acquired Stantive and Seevolution customers generate the expected revenue and cash flow to offset the Company’s continuing operating losses.
- The cash burn rate, availability under the Heritage facility, covenant compliance and the Company’s ability to fund operations beyond the stated twelve-month outlook.
- The terms, reset provisions, conversion activity and potential dilution associated with the Series C preferred stock and its warrants.
- The sustainability of revenue after the loss of a large customer and the extent to which recurring subscription revenue can replace declining services revenue.
- The valuation of the $20.622 million warrant liability and the resulting volatility in reported earnings.
- The impact of the reverse stock split and subsequent share issuances on outstanding shares, market liquidity and Nasdaq compliance.
- Future goodwill and intangible-asset impairment risk, given the March 2019 goodwill balance of $5.346 million and the recent $3.732 million impairment charge.