Bridgeline Digital, Inc. — Q2 FY2015 Form 10-Q Summary
Business context and reporting period
Bridgeline Digital provides the iAPPS digital engagement platform, including web content management, eCommerce, eMarketing, social media management, analytics, hosting and related professional services. The filing covers the quarter and six months ended March 31, 2015, compared with the corresponding 2014 periods. The company reported more than 2,500 customers and no customer represented at least 10% of revenue.
Financial performance and liquidity
| Metric | Three months ended March 31, 2015 | Three months ended March 31, 2014 | Six months ended March 31, 2015 | Six months ended March 31, 2014 |
|---|---|---|---|---|
| Total revenue | $4.787 million | $5.302 million | $9.799 million | $11.815 million |
| Gross profit | $1.737 million | $2.113 million | $3.682 million | $5.642 million |
| Gross margin | 36% | 40% | 38% | 48% |
| Loss from operations | $(1.842) million | $(2.112) million | $(3.754) million | $(2.701) million |
| Net loss | $(2.073) million | $(2.314) million | $(4.183) million | $(3.091) million |
| Net loss attributable to common shareholders | $(2.103) million | $(2.314) million | $(4.234) million | $(3.091) million |
| Loss per common share | $(0.49) | $(0.65) | $(0.98) | $(0.86) |
| Adjusted EBITDA | $(1.174) million | $(1.294) million | $(2.420) million | $(1.274) million |
- Revenue declined 10% in the quarter and 17% year to date, primarily because of lower digital engagement services revenue.
- Digital engagement services revenue declined 15% in the quarter to $3.057 million and 23% year to date to $6.271 million. Management cited project delays, timing of new engagements and a reduction in lower-margin non-iAPPS work.
- Subscription and perpetual license revenue increased 4% in the quarter but declined 4% year to date. Managed hosting revenue was broadly stable year to date.
- Gross margin decreased to 36% from 40% in the quarter and to 38% from 48% year to date, reflecting fixed delivery costs and lower revenue.
- Operating expenses declined 15% in the quarter and 11% year to date, led by lower sales and marketing, headcount and depreciation and amortization costs.
- Quarterly net loss improved modestly, but the six-month net loss widened by $1.092 million. Adjusted EBITDA improved in the quarter but deteriorated substantially year to date.
- Cash used in operations was $2.193 million for the six months, compared with $1.659 million in the prior-year period. Cash used in investing was $399 thousand, while financing provided $2.484 million.
- Cash and cash equivalents were $1.126 million at March 31, 2015, compared with $1.256 million at September 30, 2014. Accounts receivable and unbilled receivables increased to $3.989 million from $3.342 million.
- Total debt, net of debt discount warrants, was $7.807 million at March 31, 2015, compared with $6.920 million at September 30, 2014. Debt included $3.048 million of line-of-credit borrowings, $3.0 million of subordinated convertible debt and $1.0 million of shareholder term notes.
- The BridgeBank facility provides up to $5 million of revolving advances, subject to eligible receivables and covenant requirements. The company reported compliance with reporting covenants at quarter end.
Material changes versus the prior comparable period
- Revenue and gross profit contracted materially, with the largest decline in digital engagement services.
- Cost reductions partially offset the revenue decline, including a 20% quarterly decrease in sales and marketing expense and a 19% decrease in research and development expense.
- Quarterly operating loss improved by $270 thousand, but year-to-date operating loss increased by $1.053 million because the revenue and margin declines exceeded expense reductions.
- The company raised approximately $1.8 million net from a Series A convertible preferred stock placement in October 2014 and received $1.0 million from two shareholder term notes during the first six months.
- Deferred revenue increased to $2.914 million from $1.990 million, while total liabilities increased to $15.619 million from $13.627 million.
- Accumulated deficit increased to $31.763 million from $27.529 million.
Guidance, outlook, risks and unusual items
Management stated that it was reducing operating expenses and expected an appropriate cost structure for anticipated sales in the second half of fiscal 2015. Management believed the company could achieve positive Adjusted EBITDA and fund ordinary-course operations for at least the next twelve months, but expressly noted that this depends on achieving anticipated sales levels.
- The company remained dependent on external financing and its BridgeBank borrowing facility. Management warned that financing may not remain available or may not be available on acceptable terms.
- In May 2015, the BridgeBank facility maturity was extended from March 31, 2016 to June 30, 2016. The company also issued an additional $500 thousand, 7% shareholder term note to Michael Taglich, accompanied by warrants to purchase 60,000 common shares at $4.00 per share.
- The company had $690 thousand of accrued contingent acquisition consideration, payable through fiscal 2016 if specified revenue and earnings targets are achieved.
- General and administrative expense included a $131 thousand adjustment to an acquisition earnout accrual.
- Series A preferred stock carries a 6% cumulative dividend, which may be paid in additional preferred shares. The company made preferred-stock-in-kind dividend elections, issuing 427 shares in January 2015 and 600 shares in April 2015.
- On May 7, 2015, the company effected a 1-for-5 reverse stock split; the filing’s historical share and per-share data were retroactively adjusted. The split reduced outstanding common shares from approximately 22 million to approximately 4.4 million.
- Key stated risks include continued operating losses and cash use, revenue volatility, project delays, margin pressure, competition, customer renewal rates, dependence on key personnel, technology and cybersecurity risks, limited trading liquidity, capital availability, Nasdaq listing requirements and internal-control effectiveness.
- The company reported no material legal proceedings and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth, project execution and gross-margin recovery materialize in the second half of fiscal 2015.
- Whether operating cash burn declines sufficiently and whether management achieves positive Adjusted EBITDA; Adjusted EBITDA remains a non-GAAP measure and was negative for both reported periods.
- Availability, borrowing-base capacity and covenant compliance under the BridgeBank facility, including the effect of the June 30, 2016 maturity extension.
- Repayment terms and related dilution from shareholder loans, preferred-stock conversion rights, warrants and other potentially dilutive securities.
- Ability to fund operations with only $1.126 million of quarter-end cash while carrying $7.807 million of net debt and continuing to report losses.
- Potential cash or equity obligations from the $690 thousand contingent acquisition consideration and preferred-stock dividends.
- The effects of the May 2015 reverse stock split and the related adjustments to share counts, conversion prices and exercise prices.