Bridgeline Digital, Inc. — Q1 FY2018 Form 10-Q Summary
Reporting period: Three months ended December 31, 2017; filed February 14, 2018. Financial statements are unaudited and amounts are in thousands unless otherwise stated.
Business context
Bridgeline provides digital engagement software and services through its iAPPS platform, including web content management, eCommerce, eMarketing, social media management and analytics. Offerings include SaaS subscriptions, perpetual licenses, managed hosting and professional services. The company reported more than 3,000 active customers and operates primarily from Burlington, Massachusetts, with a wholly owned Indian subsidiary.
Financial performance and liquidity
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Total revenue | $3,969 | $3,991 | Down $22, or 1% |
| Gross profit | $2,012 | $2,296 | Down $284, or 12% |
| Gross margin | 51% | 58% | Down 7 percentage points |
| Loss from operations | $(343) | $(365) | Improved by $22 |
| Net loss | $(430) | $(408) | Worsened by $22 |
| Net loss applicable to common shareholders | $(505) | $(476) | Worsened by $29 |
| Basic and diluted loss per share | $(0.12) | $(0.12) | No change |
| Adjusted EBITDA | $(94) | $10 | Down $104 |
| Cash used in operating activities | $(575) | $(293) | Greater use of $282 |
Revenue mix was $2,060 from digital engagement services, $1,606 from subscription and perpetual licenses, and $303 from managed hosting. Digital engagement services increased 2%, hosting increased 26%, and subscription and perpetual-license revenue declined 7%; no perpetual licenses were sold in the quarter.
Cost of revenue increased 15% to $1,957, primarily because digital engagement services required higher internal and third-party subcontractor costs on a strategic customer project. Operating expenses declined 11% to $2,355, reflecting lower sales and marketing, general and administrative, depreciation and amortization, and restructuring costs, partially offset by higher research and development expense.
Cash and cash equivalents were $1,117 at December 31, 2017, compared with $748 at September 30, 2017. Accounts receivable and unbilled receivables, net, were $3,208, and deferred revenue was $1,380. Total assets were $18,105 and total stockholders’ equity was $10,942.
Total debt was $3,184, net of a $316 debt discount, compared with $2,500 at September 30, 2017. Debt consisted of a $2,500 Heritage Bank revolving facility and a $1,000 Montage term loan, less the debt discount. The company was in compliance with its financial covenants at quarter-end.
Material changes and financing
- On October 10, 2017, Bridgeline borrowed $1.0 million under a 36-month Montage Capital term loan bearing interest at 12.75%. An additional $500 may become available if specified financial milestones and covenants are met.
- The Montage financing included an eight-year warrant initially covering 66,315 common shares at $2.65 per share. The warrant was recorded as a liability with a fair value of $338 at quarter-end.
- The Heritage revolving facility had a $2.5 million outstanding balance, matures in June 2019, bears interest at Prime plus 1.75%, and is secured by company assets and intellectual property.
- Preferred-stock dividends increased to 12% annually. The company accrued $75 of preferred dividends for the quarter and elected a 7,567-share preferred-stock dividend payable January 1, 2018.
- The company completed a 1-for-5 reverse stock split effective July 24, 2017. Common shares outstanding were 4,200,219 at December 31, 2017.
Cash flow, outlook and risks
Operating cash use increased because of growth in accounts receivable and reduced accounts payable. Investing cash use was $8, primarily for property and equipment. Financing provided $953, primarily from the Montage term loan. Management stated that the $1.1 million cash balance and expected collections should fund obligations for at least twelve months from the financial statement issuance date.
Management is continuing a long-term cost-reduction program involving staff reductions and office-lease consolidation. It stated that the current cost structure is intended to support expected revenues, but cautioned that additional capital, Heritage borrowing capacity, or the second Montage tranche may be needed if sales targets are not achieved or expenses cannot be reduced sufficiently.
Key risks include recurring operating losses and negative operating cash flow, dependence on financing and covenant compliance, customer concentration, competition and margin pressure, fluctuating license renewals, technology and cybersecurity risks, limited trading liquidity, potential Nasdaq listing issues, reliance on key personnel, and possible goodwill impairment. Two customers represented 11% and 12% of quarterly revenue.
The company expected the adoption of the new revenue-recognition standard in fiscal 2019 to have no significant overall impact, although sales commissions may need to be capitalized and amortized. The Tax Cuts and Jobs Act was not expected to affect current-quarter tax expense because of the company’s full valuation allowance, but the final deferred-tax impact remained under evaluation.
No material legal proceedings or material subsequent events were reported. Management concluded that disclosure controls and procedures were effective and that no material changes occurred in internal control over financial reporting.
Investor verification checklist
- Verify whether revenue growth resumes and whether the higher-cost strategic services project has concluded, allowing gross margin to recover.
- Monitor operating cash burn, accounts-receivable collections and the sufficiency of the $1.1 million cash balance.
- Confirm continued compliance with Heritage and Montage covenants and availability of the additional $500 term-loan tranche.
- Assess refinancing and dilution risk from the company’s debt, preferred-stock dividends, warrants and registered but unsold securities capacity.
- Track recurring revenue, license renewals, customer concentration and the transition from perpetual licenses toward subscription and hosting revenue.
- Evaluate the risk of goodwill impairment given continued losses, negative Adjusted EBITDA and market-value sensitivity.