Bridgeline Digital, Inc. — Q1 FY2019 Form 10-Q Summary
Reporting period: Three months ended December 31, 2018, compared with the three months ended December 31, 2017. The company provides digital experience software and services through its Unbound platform, including SaaS and perpetual licenses, professional digital engagement services, and managed hosting.
Financial Highlights
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Total revenue | $2.375 million | $3.969 million | Down 40% |
| Gross profit | $1.034 million | $2.012 million | Down 49% |
| Gross margin | 44% | 51% | Down 7 percentage points |
| Loss from operations | $(4.734) million | $(0.343) million | Worsened by $4.391 million |
| Net loss | $(4.955) million | $(0.430) million | Worsened by $4.525 million |
| Net loss attributable to common shareholders | $(5.034) million | $(0.505) million | |
| Basic and diluted loss per share | $(0.46) | $(0.12) | |
| Adjusted EBITDA | $(0.866) million | $(0.094) million | Worsened by $0.772 million |
| Cash used in operating activities | $(1.555) million | $(0.575) million | Higher cash use |
Revenue declined across all major categories: digital engagement services fell 48% to $1.073 million, subscription and perpetual licenses fell 35% to $1.045 million, and managed hosting fell 15% to $257,000. Management attributed the license decline primarily to the loss of a large customer and the hosting decline to customer attrition.
The quarter included a $3.732 million goodwill impairment charge following an interim impairment test prompted by the decline in the company’s stock price and other negative qualitative factors. Excluding the impairment, operating expenses decreased $319,000 year over year; however, the company remained unprofitable and Adjusted EBITDA deteriorated because of lower revenue.
Liquidity, Debt and Capitalization
- Cash and cash equivalents were $2.101 million at December 31, 2018, compared with $644,000 at September 30, 2018.
- Accounts receivable and unbilled receivables, net, increased to $2.267 million from $1.721 million.
- Total debt was $2.521 million, consisting primarily of $1.880 million under the Heritage Bank line of credit and $844,000 under the Montage Capital term loan, net of $203,000 of debt discount.
- The Heritage facility had approximately $200,000 of additional borrowing capacity at December 31, 2018. Borrowings were secured by the company’s assets and intellectual property, and the company reported compliance with applicable financial covenants.
- Financing activities provided $3.030 million, principally from the October 2018 public offering. The company used part of the proceeds to repay approximately $954,000 of promissory term notes.
- Common shares outstanding increased to 14.081 million at December 31, 2018 from 4.241 million at September 30, 2018. The offering also resulted in substantial warrant and convertible preferred share exposure.
Material Changes and Unusual Items
- Goodwill declined from $7.782 million to $4.050 million because of the $3.732 million impairment charge.
- The company adopted ASC 606 using the modified retrospective method on October 1, 2018. Revenue was not materially affected, but sales commissions were capitalized and amortized over an estimated customer life. Adoption increased other current assets by $50,000, other assets by $27,000, and retained earnings by $77,000.
- Deferred revenue increased to $935,000 current and $13,000 noncurrent at December 31, 2018. Approximately $13,000 of revenue remained associated with performance obligations exceeding one year.
- Gross margin declined primarily because digital engagement services represented a smaller portion of revenue and had higher subcontractor costs relative to revenue. Cloud infrastructure costs also increased the cost ratio for subscription and perpetual licenses.
- Two customers represented 18% and 19% of quarterly revenue, indicating significant customer concentration.
Outlook, Risks and Subsequent Events
Management stated that revenue declined in the prior fiscal year and is expected to decline further in fiscal 2019. The company is continuing workforce, facilities and discretionary-spending reductions, but acknowledged that cost reductions may not offset future revenue declines. Management believed cash, expected collections and its cost structure would be sufficient to meet working capital, capital expenditure and debt repayment needs for at least the next twelve months; this expectation depends on achieving anticipated sales, collecting receivables, maintaining financing availability and complying with debt covenants.
Key risks include continued revenue and customer attrition, dependence on significant customers, recurring operating losses and negative operating cash flow, limited borrowing capacity, the need for additional capital, debt covenant compliance, stock-price volatility and Nasdaq listing requirements, competition, cybersecurity and software performance, reliance on key personnel, and the ability to maintain effective internal controls.
- On February 13, 2019, the company agreed to acquire specified assets of Seevolution and Celebros for $400,000 in cash, an additional $100,000 payable over ten months, and 2.0 million Bridgeline common shares.
- On February 14, 2019, the company paid a $498,000 deposit related to a potential acquisition of an unnamed Canadian company subject to due diligence and court approval.
- After the quarter end, the Heritage Bank facility maturity was extended to February 29, 2020.
- The company reported no material legal proceedings and no material commitments or contingencies as of December 31, 2018.
Investor Verification Points
- Verify whether revenue stabilizes after the loss of the large customer and whether customer concentration declines.
- Assess the company’s ability to generate positive operating cash flow without repeated equity financings or expanded borrowing.
- Review Heritage Bank and Montage Capital covenants, borrowing-base availability, interest costs and maturity requirements.
- Model dilution from 11.443 million outstanding warrants, Series B preferred conversion rights, stock options and the 2.0 million shares issued for the Seevolution/Celebros acquisition.
- Evaluate the financial impact and integration risks of the announced acquisitions and the potential Canadian transaction.
- Reconcile management’s narrative cash-flow comparison with the audited condensed cash-flow statement, which reports $575,000 of operating cash use for the prior-year quarter.