Bridgeline Digital, Inc. — Q3 2018 Form 10-Q Summary
Business context and reporting period
Bridgeline Digital provides digital-experience software and services through its Unbound platform, including SaaS and perpetual licensing, digital engagement services, and managed hosting. The company reports on a September 30 fiscal year and is a smaller reporting company. This filing covers the three and nine months ended June 30, 2018, compared with the corresponding 2017 periods.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $3.083 million | $4.074 million | $10.765 million | $12.059 million |
| Gross profit | $1.549 million | $2.239 million | $5.383 million | $6.813 million |
| Gross margin | 50% | 55% | 50% | 56% |
| Loss from operations | $(5.187) million | $(0.323) million | $(6.146) million | $(1.135) million |
| Net loss | $(5.162) million | $(0.332) million | $(6.272) million | $(1.270) million |
| Net loss applicable to common shareholders | $(5.241) million | $(0.403) million | $(6.503) million | $(1.477) million |
| Loss per common share | $(1.24) | $(0.10) | $(1.54) | $(0.36) |
| Adjusted EBITDA | $(0.332) million | $0.049 million | $(0.611) million | $0.081 million |
Q3 revenue declined 24%, while nine-month revenue declined 11%. Digital engagement services fell 26% in Q3 and 12% year to date. Subscription and perpetual-license revenue fell 26% in Q3 and 13% year to date. Managed hosting revenue was broadly flat in Q3 and increased 13% year to date.
Cash used in operating activities was $0.972 million for the nine months ended June 30, 2018, compared with $0.823 million in the prior-year period. Investing cash outflow was $0.030 million, and financing activities provided $0.682 million, principally reflecting a $1.0 million Montage term loan partly offset by net repayments on the Heritage line of credit.
At June 30, 2018, cash and cash equivalents were $0.427 million, accounts receivable and unbilled receivables were $2.103 million, total assets were $11.422 million, and total liabilities were $6.090 million. Debt totaled $3.008 million, consisting of $2.267 million under the Heritage revolving facility and $1.0 million of Montage term debt, net of $0.259 million of debt discount. Preferred stock had a $2.624 million liquidation preference.
Material changes versus the prior comparable period
- Revenue decreased $0.991 million, or 24%, in Q3 and $1.294 million, or 11%, for the first nine months.
- Gross margin declined five percentage points in Q3 and six percentage points year to date, principally due to higher SaaS-support costs and lower-margin third-party subcontractor work.
- Operating expenses increased 163% in Q3 and 45% year to date because of a $4.615 million goodwill impairment charge. Excluding the impairment, operating expenses decreased 17% in Q3 and 13% year to date.
- Goodwill declined from $12.641 million at September 30, 2017 to $8.026 million at June 30, 2018 following the impairment test.
- Sales and marketing expense declined 17% in both Q3 and the nine-month period; general and administrative expense declined 22% in Q3 and 10% year to date. Research and development expense increased 3% in Q3 and 4% year to date.
- Accounts receivable and unbilled receivables declined from $3.026 million at September 30, 2017 to $2.103 million at June 30, 2018, while cash declined from $0.748 million to $0.427 million.
Outlook, commentary, risks, and unusual items
Management stated that operating losses and negative operating cash flow are expected to continue for the remainder of fiscal 2018. The filing contains no formal revenue or earnings guidance. Management plans to fund operations through existing cash, additional equity or debt financing, and continued cost reductions, but stated that these sources are not assured.
The company disclosed substantial doubt about its ability to continue as a going concern within the next twelve months. At June 30, 2018, there was no additional borrowing availability under the Heritage line because borrowing capacity depends on eligible receivables. Failure to obtain funding could materially adversely affect operations.
After quarter-end, a large customer notified the company that it would not renew one contract. Management expects subscription revenue to decline by approximately $0.375 million per quarter beginning in the quarter ending December 31, 2018 unless replacement business is obtained.
The Heritage facility was subsequently amended on August 10, 2018 to extend its maturity to September 7, 2019. The company reported compliance with its Heritage and Montage financial covenants at June 30, 2018, although it had previously received a waiver for failing to meet a Montage EBITDA covenant at March 31, 2018. Montage debt bears interest at 12.75% and requires monthly principal payments beginning July 1, 2018.
Other unusual items include a $4.615 million non-cash goodwill impairment, $0.187 million of year-to-date restructuring charges, and a $0.156 million year-to-date reduction in the fair value of the Montage warrant liability. The company early adopted the simplified goodwill-impairment standard. It expected the then-upcoming revenue-recognition standard to have no significant overall impact, although sales commissions may require capitalization and amortization.
Principal risks identified include continued losses and liquidity constraints, dependence on financing, customer concentration and renewals, competition, declining market share or margins, technology and cybersecurity risks, dependence on key personnel, stock-price volatility, and the ability to maintain Nasdaq listing. Management reported that disclosure controls and procedures were effective as of June 30, 2018, with no material changes in internal control over financial reporting.
Facts investors should verify
- Availability, borrowing-base capacity, covenants, interest rates, and maturity terms under the Heritage facility after the August 2018 amendment.
- Ability to secure additional financing and the company’s cash balance and operating cash burn following June 30, 2018.
- Whether the approximately $0.375 million quarterly subscription-revenue loss is replaced by new contracts.
- Customer renewal rates, concentration, and the sustainability of the decline in license and digital-services revenue.
- Underlying operating performance excluding the $4.615 million goodwill impairment, including whether gross-margin deterioration reverses.
- Potential dilution from 460,246 outstanding options, 584,308 warrants, convertible preferred stock, and future equity financing.