Bridgeline Digital, Inc. — Q2 FY2018 Form 10-Q Summary
Reporting period: Quarterly and year-to-date periods ended March 31, 2018, compared with the corresponding periods ended March 31, 2017. The filing was signed May 15, 2018. Bridgeline provides digital experience software and services through its Unbound platform, including SaaS, perpetual licensing, digital engagement services, and managed hosting.
Financial Overview
| Metric | Q2 FY2018 | Q2 FY2017 | Six Months FY2018 | Six Months FY2017 |
|---|---|---|---|---|
| Revenue | $3.713 million | $3.994 million | $7.682 million | $7.985 million |
| Gross profit | $1.822 million | $2.278 million | $3.834 million | $4.574 million |
| Gross margin | 49% | 57% | 50% | 57% |
| Operating loss | $(616) thousand | $(447) thousand | $(959) thousand | $(812) thousand |
| Net loss | $(680) thousand | $(530) thousand | $(1.110) million | $(938) thousand |
| Net loss attributable to common shareholders | $(757) thousand | $(598) thousand | $(1.262) million | $(1.074) million |
| Loss per common share | $(0.18) | $(0.14) | $(0.30) | $(0.26) |
| Adjusted EBITDA | $(185) thousand | $22 thousand | $(279) thousand | $32 thousand |
- Revenue mix: Q2 digital engagement services revenue was $1.921 million, subscription and perpetual licenses were $1.499 million, and managed hosting was $293 thousand.
- Cash flow: Cash used in operations was $429 thousand for the six months, compared with $155 thousand used in the prior-year period. Investing cash use was $13 thousand, while financing activities provided $451 thousand.
- Liquidity: Cash and cash equivalents were $756 thousand at March 31, 2018, compared with $748 thousand at September 30, 2017. Accounts receivable and unbilled receivables, net, were $2.879 million.
- Debt: Total debt was $2.711 million, net of a $287 thousand debt discount, consisting primarily of $1.998 million drawn under the Heritage revolving facility and a $1.0 million Montage term loan. Current debt was $120 thousand.
- Capital structure: Common shares outstanding were 4,241,225 at March 31, 2018. Convertible preferred stock had a liquidation preference of $2.624 million and accrued dividends at a 12% annual rate.
Material Changes Versus the Prior Comparable Period
- Revenue declined 7% in Q2 and 4% for the first six months. Digital engagement services fell 11% in Q2 and 5% year to date; license revenue fell 5% and 6%, respectively. Managed hosting increased 12% in Q2 and 19% year to date.
- Gross profit declined 20% in Q2 and 16% year to date. Gross margin contracted from 57% to 49% in Q2 and from 57% to 50% year to date.
- Digital engagement service costs increased substantially, with costs equal to 67% of related revenue in Q2 versus 53% in the prior-year quarter. Management attributed the deterioration to internal and subcontractor costs on a strategic customer project completed at a lower margin.
- Operating expenses decreased 11% in both Q2 and the first six months, primarily from lower sales personnel, marketing, headcount, facilities, and depreciation expenses. These reductions did not offset the revenue and gross-margin pressures.
- The company moved from positive Adjusted EBITDA of $22 thousand in Q2 FY2017 and $32 thousand year to date to negative Adjusted EBITDA of $185 thousand and $279 thousand, respectively.
- Restructuring continued, including costs related to restructuring the Burlington, Massachusetts headquarters and disposing of property and equipment. Q2 restructuring charges were $181 thousand.
- The company entered into the $1.0 million Montage term loan in October 2017 and reduced Heritage line borrowings from $2.5 million at September 30, 2017 to approximately $2.0 million at March 31, 2018.
Outlook, Risks, Contingencies, and Unusual Items
- Management stated that cash on hand, accounts receivable collections, and expected Heritage borrowings should meet obligations for at least twelve months from the financial statement issuance date. The company borrowed $500 thousand in April 2018 to fund operations.
- The company was not in compliance with the Adjusted EBITDA covenants under both the Heritage and Montage facilities as of March 31, 2018. Waivers were obtained under amendments dated May 10, 2018. Continued access to the Heritage facility remains subject to borrowing-base availability, covenants, and lender requirements.
- Heritage provides a revolving facility of up to $2.5 million, subject to eligible receivables and other terms, and matures in 2019. The Montage loan bears interest at 12.75%, matures in 2020, and may provide an additional $500 thousand through May 31, 2018 if milestones and covenants are met.
- Management acknowledged that additional capital may be needed if anticipated sales are not achieved or expenses cannot be reduced. The filing states that financing may not be available on acceptable terms or in a timely manner.
- The company issued Montage an eight-year warrant for 66,315 common shares at $2.65 per share, with potential expansion to 100,082 shares if the second loan tranche is advanced. The warrant liability was valued at $318 thousand at March 31, 2018.
- Preferred stock dividends totaled $152 thousand for the first six months. The company declared a partial preferred-stock dividend and a $38 thousand cash dividend due April 1, 2018; future dividends are expected to be paid in cash after the cumulative PIK dividend limit was reached.
- The company is assessing the Tax Cuts and Jobs Act and had not finalized its effect on deferred tax assets and valuation allowances. No material income-tax impact was recorded for the reported periods.
- The company plans to adopt the new revenue recognition standard in fiscal 2019 using the full retrospective method and currently expects no significant overall impact, although sales commissions may require capitalization and amortization.
- Two customers represented 19% and 14% of Q2 revenue, and two customers represented 15% and 12% of year-to-date revenue. Two customers also represented 21% and 10% of accounts receivable at March 31, 2018.
- No material legal proceedings or material off-balance-sheet arrangements were reported. Management concluded that disclosure controls and procedures were effective.
Important Facts for Investors to Verify
- Whether revenue stabilization and improved project execution can restore gross margins toward historical levels.
- Compliance with Heritage and Montage financial covenants after the reported waivers expire and the availability of the additional Montage tranche.
- The pace of operating cash burn and whether the $756 thousand cash balance plus borrowing capacity will be sufficient without additional equity or debt financing.
- The terms, dilution potential, and accounting treatment of preferred-stock dividends, outstanding options, and 611,908 common-stock warrants.
- The concentration of revenue and receivables among major customers and the risk of customer renewals or collections falling short.
- The final effects of the Tax Cuts and Jobs Act and the adoption of the new revenue recognition standard.