Bridgeline Digital, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Bridgeline provides digital engagement software and services through its iAPPS platform, including web content management, eCommerce, eMarketing, social media management, analytics, SaaS subscriptions, perpetual licenses, implementation services, and hosting. The filing covers the three and nine months ended June 30, 2017, the company’s fiscal third quarter and year-to-date period. The company reported more than 3,000 active customers.
Key Financial Metrics
| Metric | Q3 FY2017 | Q3 FY2016 | 9M FY2017 | 9M FY2016 |
|---|---|---|---|---|
| Revenue | $4.074 million | $3.696 million | $12.059 million | $12.171 million |
| Gross profit | $2.239 million | $2.008 million | $6.813 million | $6.405 million |
| Gross margin | 55% | 54% | 56% | 53% |
| Loss from operations | $(323) thousand | $(1.011) million | $(1.135) million | $(2.746) million |
| Net loss | $(332) thousand | $(2.032) million | $(1.270) million | $(4.385) million |
| Net loss applicable to common shareholders | $(403) thousand | $(2.065) million | $(1.477) million | $(4.482) million |
| Loss per common share | $(0.10) | $(1.03) | $(0.36) | $(3.28) |
| Adjusted EBITDA | $49 thousand | $(575) thousand | $81 thousand | $(484) thousand |
Revenue increased 10% in the quarter but declined 1% year to date. Digital engagement services represented 52% of year-to-date revenue, subscription and perpetual licenses 42%, and managed hosting 6%. Cash used in operating activities was $823 thousand for the nine months, compared with $1.509 million in the prior-year period. Investing cash use was $59 thousand, while financing activities provided $971 thousand.
At June 30, 2017, cash and cash equivalents were $753 thousand, accounts receivable and unbilled receivables were $3.056 million, total current assets were $4.214 million, and total current liabilities were $3.766 million. Debt was $2.344 million, consisting of borrowings under the Heritage Bank revolving credit facility. Stockholders’ equity was $11.484 million, and accumulated deficit was $53.843 million.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue rose $378 thousand, or 10%, driven by 15% growth in digital engagement services and 12% growth in subscription and perpetual license revenue. Hosting revenue declined 24%.
- Year-to-date revenue declined $112 thousand, or 1%, as lower digital engagement services and hosting revenue offset 10% growth in subscription and perpetual licenses.
- Gross margin improved by one percentage point in the quarter and three percentage points year to date, primarily from lower facilities and overhead costs and improved billable utilization.
- Total operating expenses declined 15% in the quarter and 13% year to date. General and administrative expense declined 23% in the quarter and 10% year to date; depreciation and amortization declined materially following asset retirements and lower capital spending.
- Net loss improved substantially, partly because the prior-year periods included a $726 thousand loss on inducement of convertible notes and higher interest expense.
- Restructuring charges declined to $249 thousand year to date from $795 thousand. The company continued office and workforce reductions and initiated a plan to shut down its India operations.
- The company raised net proceeds of $853 thousand from a November 2016 common-stock offering and borrowed $1.859 million while repaying $1.630 million on its credit line during the nine months.
Guidance, Outlook, Risks, and Unusual Items
No formal revenue or earnings guidance was provided. Management stated that fiscal 2017 revenue was comparable to the prior fiscal year and believed the reduced cost structure, operating cash flows, Heritage Bank credit facility, and potential securities offerings would fund operations through at least the next twelve months. Management also cautioned that anticipated sales may not be achieved and that financing may not remain available on acceptable terms.
The Heritage facility provides up to $2.5 million of revolving advances, subject to borrowing-base and financial covenant requirements, and was amended after quarter-end to extend maturity to June 15, 2019. Borrowings are secured by company assets and intellectual property; all financial covenants were met for the quarter. A director and shareholder provided a guaranty for certain out-of-formula borrowings, subsequently reduced from $2.0 million to $1.5 million under the amendment.
The company filed a Form S-3 registration statement permitting offerings of up to $10 million of common stock, preferred stock, warrants, or units. Future equity issuance could provide liquidity but may dilute existing shareholders. Series A preferred stock carries a 12% cumulative dividend rate beginning in 2017, and the company elected to pay the July 1, 2017 dividend in additional preferred shares.
A 1-for-5 reverse stock split was approved on June 29, 2017 and became effective July 24, 2017, with split-adjusted trading beginning July 25, 2017. The filing retroactively reflects the split. The company had 4,200,848 common shares outstanding as of August 11, 2017, and 539,593 common-stock warrants outstanding at June 30, 2017.
Principal risks include continuing operating losses and negative operating cash flow, dependence on financing and credit availability, borrowing-base and covenant compliance, customer concentration, competition, renewal rates, technology and cybersecurity risks, dependence on key personnel, potential dilution, limited trading liquidity, and the ability to maintain Nasdaq listing. Two customers represented approximately 27% of quarterly revenue and 25% of year-to-date revenue in aggregate.
Most Important Facts for Investors to Verify
- Whether the company can achieve sustained positive operating cash flow without additional equity or debt financing.
- Available borrowing capacity under the Heritage facility relative to the $2.344 million outstanding balance and eligible receivables.
- The terms and potential dilution from the $10 million Form S-3 shelf, preferred-stock PIK dividends, warrants, and outstanding options.
- Progress and cash costs associated with the India shutdown and other restructuring initiatives.
- Customer concentration, subscription renewal rates, and the sustainability of recent license revenue growth.
- Whether improved gross margins and reduced expenses can offset the company’s continuing net losses and accumulated deficit.
- The impact of the reverse stock split and post-quarter-end amendments to the credit facility and guaranty.