Bridgeline Digital, Inc. — Q2 FY2017 Form 10-Q Summary
Reporting period: Three and six months ended March 31, 2017, compared with the corresponding periods ended March 31, 2016. The filing was signed May 15, 2017. Bridgeline provides digital engagement software and services through its iAPPS platform, including content management, eCommerce, eMarketing, analytics, subscriptions, licenses, professional services, and hosting.
Financial Performance and Position
| Metric | Three months ended March 31, 2017 | Three months ended March 31, 2016 | Six months ended March 31, 2017 | Six months ended March 31, 2016 |
|---|---|---|---|---|
| Revenue | $4.0 million | $4.2 million | $8.0 million | $8.5 million |
| Gross profit | $2.3 million | $2.2 million | $4.6 million | $4.4 million |
| Gross margin | 57% | 53% | 57% | 52% |
| Loss from operations | $(447) thousand | $(677) thousand | $(812) thousand | $(1.7) million |
| Net loss | $(530) thousand | $(1.0) million | $(938) thousand | $(2.4) million |
| Net loss applicable to common shareholders | $(598) thousand | $(1.0) million | $(1.1) million | $(2.4) million |
| Loss per common share | $(0.03) | $(0.20) | $(0.05) | $(0.46) |
| Adjusted EBITDA | $22 thousand | $25 thousand | $32 thousand | $90 thousand |
- Revenue mix: Six-month digital engagement services revenue declined 12% to $4.2 million; subscription and perpetual license revenue increased 9% to $3.3 million; managed service hosting revenue declined 25% to $501 thousand.
- Profitability: Gross profit increased despite lower revenue, primarily because of lower facilities and overhead costs and improved billable-services utilization. The company remained unprofitable under GAAP.
- Operating expenses: Six-month operating expenses declined 12% to $5.4 million. Restructuring expense fell to $200 thousand from $780 thousand, and depreciation and amortization declined to $342 thousand from $694 thousand. Sales and marketing increased 7% as the company expanded its direct and inside sales teams.
- Cash flow: Cash used in operating activities was $155 thousand for the six months, compared with $729 thousand in the prior-year period. Investing cash use was $49 thousand, including $41 thousand of capitalized software development costs. Financing activities provided $871 thousand.
- Liquidity: Cash and cash equivalents were $1.3 million at March 31, 2017, compared with $661 thousand at September 30, 2016. Current assets were $3.9 million and current liabilities were $3.5 million.
- Debt: Debt was $2.2 million, consisting of borrowings under the Heritage Bank revolving credit facility. The facility provides for up to $2.5 million, is secured by company assets and intellectual property, bears interest at Wall Street Journal Prime plus 1.75% (stated as 5.50% at filing), and expires June 9, 2018.
- Equity and dilution: Common shares outstanding increased to 20.97 million at March 31, 2017 from 18.63 million at September 30, 2016. The November 2016 private placement generated $853 thousand of net proceeds and included warrants to purchase common stock. A total of 2.74 million warrants and 2.23 million options were outstanding at quarter-end.
Material Changes Versus Prior Comparable Period
- Total revenue decreased 6% for both the quarter and six-month period, reflecting lower digital engagement services and hosting revenue.
- Subscription and perpetual license revenue became a larger portion of revenue, increasing to 40% of quarterly revenue and 41% of six-month revenue, compared with 36% in both prior comparable periods.
- Gross margin improved by four percentage points for the quarter and five percentage points for the six-month period.
- Operating losses and net losses narrowed substantially, primarily due to cost reductions, lower restructuring charges, lower depreciation and amortization, and lower interest expense.
- Adjusted EBITDA was positive but essentially flat for the quarter and declined for the six-month period to $32 thousand from $90 thousand.
- The company initiated a plan during the quarter to shut down its India operations. Restructuring liabilities declined to $252 thousand from $440 thousand at September 30, 2016.
- Customer concentration increased: two customers represented approximately 13% and 11% of quarterly revenue and approximately 12% and 10% of six-month revenue; no customer exceeded 10% in the prior-year periods.
Outlook, Liquidity, Risks, and Unusual Items
- Management stated that restructuring and cost reductions are expected to support positive Adjusted EBITDA and believes available cash, operating cash flow, financing proceeds, and the credit facility should fund operations for at least the next twelve months. Management cautioned that this depends on achieving anticipated sales levels.
- The Heritage facility is subject to borrowing-base limits, minimum cash requirements, an Asset Coverage Ratio, Adjusted EBITDA requirements, and other covenants. The company reported that all financial covenants were met for the quarter.
- The company has incurred operating losses and used cash in operations for several years. Future financing may be required, and management stated that additional financing may not be available on acceptable terms or on a timely basis.
- Preferred stock carries a 12% cumulative dividend rate beginning January 1, 2017. The company elected to pay the April 1, 2017 dividend in additional preferred shares, including 6,824 PIK shares.
- Key risks include declining or volatile revenue, customer and renewal concentration, competition, rapid technology changes, software security and intellectual-property protection, dependence on key personnel, access to capital, Nasdaq listing requirements, and the ability to maintain effective internal controls.
- The filing reports no material legal proceedings and no material subsequent events requiring adjustment or disclosure beyond those already reported.
- Management stated that disclosure controls and procedures were effective as of March 31, 2017, with no material changes to internal control over financial reporting during the quarter.
Investor Verification Priorities
- Verify whether the company achieves the sales levels and positive Adjusted EBITDA contemplated by management, given continued GAAP losses and limited operating cash generation.
- Monitor cash balances, borrowing-base availability, covenant compliance, minimum cash requirements, and the June 2018 expiration of the Heritage credit facility.
- Assess whether subscription growth can offset declines in digital engagement services and managed hosting revenue.
- Review the effects of the India shutdown and remaining restructuring obligations, including the $252 thousand accrued restructuring liability.
- Quantify potential dilution from preferred-stock conversion, 2.74 million outstanding warrants, 2.23 million options, and PIK preferred dividends.
- Evaluate customer concentration and renewal trends, particularly because two customers accounted for approximately 24% of quarterly revenue and 22% of six-month revenue on a combined basis.
- Confirm the impact of the November 2016 equity financing and related-party participation by directors and executive officers.