Bridgeline Digital, Inc. Fiscal 2018 Form 10-K Summary
Business context and reporting period
Bridgeline Digital provides digital experience software and services through its Unbound platform, integrating web content management, eCommerce, eMarketing, social media management and analytics. Offerings are delivered through SaaS, perpetual-license and managed-hosting models, supplemented by digital engagement and professional services.
The filing covers the fiscal year ended September 30, 2018, with comparative fiscal 2017 results. The filing was signed on December 28, 2018. Bridgeline had 55 full-time employees and more than 3,000 active customers at fiscal year-end.
Financial performance and liquidity
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Total revenue | $13.568 million | $16.293 million | Down 17% |
| Digital engagement services revenue | $6.914 million | $8.498 million | Down 19% |
| Subscription and perpetual-license revenue | $5.609 million | $6.788 million | Down 17% |
| Managed-service hosting revenue | $1.045 million | $1.007 million | Up 4% |
| Gross profit | $6.820 million | $9.133 million | Down 25% |
| Gross margin | 50% | 56% | Down 6 percentage points |
| Loss from operations | $(6.989) million | $(1.385) million | Loss increased |
| Net loss | $(7.219) million | $(1.602) million | Loss increased 351% |
| Net loss attributable to common shareholders | $(7.529) million | $(1.883) million | Loss increased |
| Basic and diluted loss per share | $(1.78) | $(0.45) | Higher loss per share |
| Adjusted EBITDA | $(1.027) million | $0.122 million | Down $1.149 million |
| Cash used in operating activities | $(1.114) million | $(0.940) million | Higher cash use |
Operating expenses were $13.809 million, including a $4.859 million goodwill impairment charge and $187 thousand of restructuring expense. Excluding the impairment, the company remained unprofitable and Adjusted EBITDA was negative.
At September 30, 2018, cash and cash equivalents were $644 thousand, accounts receivable and unbilled receivables were $1.721 million, total assets were $11.0 million and stockholders’ equity was $4.424 million. Total debt was $3.591 million after debt discounts, comprising approximately $2.081 million drawn on the Heritage Bank credit line, $922 thousand owed to Montage Capital and $941 thousand of promissory term notes before related discounts.
The Heritage facility provided for up to $2.5 million but had no additional borrowing capacity at September 30, 2018. It was secured by the company’s assets and intellectual property, and the company was in compliance with its financial covenants at year-end. Contractual obligations totaled approximately $4.159 million, including debt and net operating-lease commitments.
Material changes versus the prior comparable period
- Revenue declined $2.725 million, primarily due to lower digital engagement services and license revenue.
- License revenue declined because of lower perpetual-license and SaaS revenue, including customer attrition and non-renewals.
- Gross margin declined from 56% to 50%, reflecting higher SaaS support costs and lower-margin third-party subcontractor work on a strategic customer project.
- Sales and marketing expense fell 18% and general and administrative expense fell 12%, mainly due to headcount, facility and travel reductions. Research and development expense was essentially unchanged at approximately $1.6 million.
- Goodwill was reduced by $4.859 million following interim and annual impairment testing, reflecting declines in operating performance, market value and other negative factors.
- Accounts receivable declined from $3.026 million to $1.721 million, while deferred revenue declined from $1.466 million to $594 thousand.
- The company issued approximately $941 thousand of subordinated promissory notes in September 2018 and subsequently repaid them after an October 2018 public offering.
- In October 2018, Bridgeline raised $5.0 million of gross proceeds through a public offering; net proceeds after offering costs and repayment of the promissory notes were approximately $3.4 million. The financing included common stock, Series B convertible preferred stock and warrants.
Guidance, outlook, commentary, risks and unusual items
The filing provides no formal revenue, earnings or margin guidance. Management expected negative operating cash flow to continue during fiscal 2019 and planned to fund operations through cash on hand, cost reductions and potential equity or debt financing. Management stated that it believed available resources would meet working-capital, capital-expenditure and debt-repayment needs for the following twelve months, but emphasized that additional financing might be required and might not be available on acceptable terms.
A large customer notified the company in the fourth quarter of fiscal 2018 that it would not renew one contract. Management estimated that, if not replaced, subscription-license revenue could decline by approximately $375 thousand per quarter beginning in the quarter ended December 31, 2018.
- Customer concentration increased: three customers represented approximately 37% of fiscal 2018 revenue, compared with two customers representing approximately 23% in fiscal 2017.
- The company has incurred losses every fiscal year since inception, with an accumulated deficit of approximately $61.8 million at September 30, 2018.
- Liquidity is constrained by low cash, negative operating cash flow, debt obligations and limited availability under the Heritage credit line.
- Debt facilities contain financial covenants; the company had failed to satisfy covenants in prior periods, although it was compliant at September 30, 2018.
- Bridgeline received a Nasdaq notice dated November 20, 2018 regarding its stock price being below the $1.00 minimum bid requirement. It needed to regain compliance by May 20, 2019 or potentially face delisting; management identified a reverse stock split as a possible corrective action.
- The company relies on Amazon Web Services for SaaS and managed hosting, creating service-continuity, cybersecurity and third-party-provider risks.
- The company faces intense competition, customer-renewal risk, long sales cycles, technology changes, intellectual-property risks and dependence on key personnel.
- The company had approximately $30 million of federal net operating loss carryforwards and approximately $26 million of state carryforwards, but utilization may be limited by Section 382 and a change in ownership.
- No material legal proceedings were pending, and management reported effective disclosure controls and internal control over financial reporting. The auditor did not provide an internal-control attestation because the company qualified for the smaller-reporting-company exemption.
Most important facts for investors to verify
- Whether the October 2018 financing and approximately $3.4 million of net proceeds were sufficient to stabilize liquidity and support operations.
- Whether the lost customer contract was replaced and the estimated $375 thousand quarterly subscription-revenue exposure was realized.
- Current cash balances, operating cash burn, borrowing availability and compliance with Heritage and Montage financial covenants.
- Progress toward revenue stabilization, positive Adjusted EBITDA and eventual profitability.
- Customer concentration, renewal rates and the sustainability of the managed-service and SaaS revenue base.
- Nasdaq listing compliance and any subsequent reverse-stock-split or other capital-structure actions.
- Potential dilution from Series A and Series B preferred stock, approximately 546,151 outstanding warrants and approximately 457,846 outstanding options.
- The valuation assumptions supporting goodwill and any risk of additional impairment.