Bridgeline Digital, Inc. — Q1 Fiscal 2015 Form 10-Q Summary
Reporting period: Three months ended December 31, 2014; comparative period ended December 31, 2013. The interim financial statements are unaudited and prepared under U.S. GAAP. Bridgeline provides the iAPPS digital engagement platform, including web content management, eCommerce, eMarketing, social media, analytics, SaaS subscriptions, digital services, and managed hosting.
Key Financial Metrics
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|
| Total revenue | $5.012 million | $6.513 million | Down 23% |
| Gross profit | $1.944 million | $3.529 million | Down 45% |
| Gross margin | 39% | 54% | Down 15 percentage points |
| Loss from operations | $(1.913) million | $(589) thousand | Loss increased $1.324 million |
| Net loss | $(2.110) million | $(777) thousand | Loss increased $1.333 million |
| Net loss applicable to common shareholders | $(2.131) million | $(777) thousand | |
| Basic and diluted loss per share | $(0.10) | $(0.04) | |
| Adjusted EBITDA | $(1.247) million | $20 thousand | Down $1.267 million |
| Operating cash flow | $(1.247) million | $(1.430) million | Use decreased $183 thousand |
Revenue and Margin Drivers
- Digital engagement services revenue was $3.231 million, down 29%, primarily due to the timing of new engagements and project delays. Management also continued reducing lower-margin, non-iAPPS services.
- Subscription and perpetual license revenue was $1.380 million, down 12%, reflecting fewer perpetual licenses and a greater proportion of SaaS engagements.
- Managed service hosting revenue increased 4% to $401 thousand.
- Total cost of revenue increased 3% to $3.068 million despite lower revenue, largely because fixed labor costs remained in place to support iAPPS services. iAPPS digital engagement costs increased 11% while related revenue declined 27%.
- Operating expenses declined 6% to $3.857 million. Sales and marketing declined 14%, general and administrative declined 4%, research and development increased 15%, and depreciation and amortization was essentially flat.
Balance Sheet, Debt, and Liquidity
| Balance-sheet item | December 31, 2014 | September 30, 2014 |
|---|
| Cash and cash equivalents | $1.044 million | $1.256 million |
| Current assets | $4.831 million | $5.345 million |
| Total assets | $32.947 million | $33.560 million |
| Total debt, net of debt warrants | $6.571 million | $6.920 million |
| Total liabilities | $13.308 million | $13.627 million |
| Stockholders’ equity | $19.639 million | $19.933 million |
- Debt consisted principally of $2.477 million in line-of-credit borrowings, $3.0 million in subordinated convertible debt, $610 thousand in bank term debt, $500 thousand owed under a shareholder term note, and $14 thousand in subordinated promissory notes.
- The BridgeBank facility permits up to $5 million of revolving advances, generally limited to 80% of eligible receivables, plus up to $1 million of out-of-formula borrowings. The facility expires March 31, 2016 and bears interest at prime plus 1%, stated as 4.25% at quarter-end.
- The Company reported compliance with its reporting covenants at December 31, 2014. The $610 thousand BridgeBank short-term loan was repaid in January 2015.
- Operating, investing, and financing activities produced a net cash decrease of $212 thousand, leaving $1.044 million in cash at quarter-end.
- Financing cash flow of $1.295 million included approximately $1.8 million of net proceeds from Series A preferred stock, $500 thousand from a shareholder term note, and $610 thousand of bank borrowing, partially offset by debt repayments.
Material Changes and Unusual Items
- Revenue declined substantially while fixed delivery costs remained elevated, driving the gross-margin contraction and higher operating loss.
- On October 27, 2014, the Company issued 200,000 Series A convertible preferred shares for gross proceeds of $2.0 million and net proceeds of approximately $1.8 million. The preferred stock has a $10 stated value, an initial $0.65 conversion price, a 6% cumulative dividend, and liquidation preference ahead of common stock.
- The Company elected a paid-in-kind preferred dividend; 2,132 additional preferred shares were issued in January 2015. Preferred dividends of $21 thousand were accrued in the quarter.
- On January 7, 2015, the Company documented a $500 thousand shareholder term note at 7% interest, and in February 2015 entered into an additional $500 thousand term note with the same shareholder. Each note matures in 2016.
- In connection with the shareholder financing and a bank guaranty, the Company issued or agreed to issue warrants for 300,000 common shares at $0.80 per share, with additional potential warrants if the guaranty remains outstanding beyond 12 months.
- Acquisition-related contingent consideration had a fair value of $689 thousand at December 31, 2014 and is scheduled to be paid through fiscal 2016 if specified revenue or earnings targets are achieved.
- Goodwill was $23.141 million at quarter-end. Management stated that its fiscal 2014 qualitative assessment did not indicate that goodwill impairment was more likely than not.
Management Outlook, Risks, and Contingencies
- Management stated that it is reducing operating expenses and expects an appropriate cost structure for anticipated sales in the second half of fiscal 2015. Management expects this structure could support positive Adjusted EBITDA, but acknowledged that anticipated sales may not be achieved.
- Management believes operating cash flows, the bank line, equity financing, and shareholder term loans will fund working capital and capital expenditures in the foreseeable future and through at least the next twelve months. This depends on achieving expected sales and maintaining financing availability.
- The BridgeBank facility is subject to borrowing-base limitations and financial covenants; the Company cautioned that all or part of the facility may not remain available and that other financing may not be obtainable on acceptable terms.
- Key identified risks include continued operating losses and cash burn, revenue and quarterly volatility, project delays, dependence on key personnel, competition, rapidly changing technology, software security and intellectual-property protection, limited trading liquidity and stock-price volatility, Nasdaq listing requirements, and the need to raise capital.
- No material legal proceedings were reported. The Company disclosed ordinary routine litigation and claims incidental to its business.
- The Company reported effective disclosure controls and procedures as of December 31, 2014, with no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether revenue and project execution recover after the 23% year-over-year revenue decline and whether delayed engagements convert to revenue.
- Whether gross margin improves from 39%, particularly for iAPPS digital engagement projects with fixed labor costs and lower-margin work.
- Actual cash burn, cash collections, and availability under the BridgeBank borrowing base and covenants.
- Terms, maturity, security, and potential dilution from the $3.0 million subordinated convertible debt, Series A preferred stock, shareholder notes, and outstanding warrants.
- Whether management achieves positive Adjusted EBITDA in the second half of fiscal 2015; Adjusted EBITDA is non-GAAP and was $(1.247) million in the reported quarter.
- Potential dilution from preferred-stock conversion, preferred PIK dividends, options, warrants, and acquisition-related contingent shares.
- Whether the $23.141 million goodwill balance remains recoverable given the Company’s continuing losses and reduced revenue.
