Bridgeline Digital, Inc. — Q1 FY2020 Form 10-Q Summary
Reporting period: Three months ended December 31, 2019; comparative period ended December 31, 2018. The interim financial statements are unaudited. The company provides digital experience software and services, including SaaS, perpetual licenses, eCommerce, content management, marketing automation, site search, portals and analytics.
Key Financial Metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Revenue | $2.832 million | $2.375 million | +19% |
| Gross profit | $1.521 million | $1.034 million | +47% |
| Gross margin | 54% | 44% | +10 percentage points |
| Operating loss | $(962) thousand | $(4.734) million | Improved by $3.772 million |
| Net income/(loss) | $136 thousand | $(4.955) million | Improved by $5.091 million |
| Net loss applicable to common shareholders | $(2.257) million | $(5.034) million | Improved by $2.777 million |
| Basic loss per share | $(0.81) | $(22.87) | Improved |
| Adjusted EBITDA | $(669) thousand | $(1.016) million | Improved by $347 thousand |
| Cash flow from operations | $110 thousand provided | $(1.555) million used | Improved by $1.665 million |
Revenue and Margins
- Digital engagement services revenue increased 2% to $1.096 million and represented 39% of total revenue.
- Subscription and perpetual license revenue increased 33% to $1.736 million and represented 61% of total revenue. Management attributed much of the increase to acquisitions completed in the second quarter of fiscal 2019.
- Total cost of revenue declined 2% to $1.311 million. Digital services cost declined 32%, primarily from lower headcount, while subscription and perpetual license costs increased 50%, reflecting cloud-hosting and internal support costs.
- Sales and marketing expense increased 32% to $1.076 million, primarily due to acquisition-related headcount. General and administrative expense decreased 3% to $754 thousand, and research and development expense decreased 7% to $390 thousand.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $408 thousand at December 31, 2019, compared with $296 thousand at September 30, 2019.
- Total current assets were $1.919 million and total current liabilities were $5.018 million. Deferred revenue increased to $1.963 million from $1.262 million.
- The company reported no debt and no interest expense at quarter-end. Warrant liabilities were $2.413 million, down from $3.514 million at September 30, 2019.
- Operating lease assets were $462 thousand and lease liabilities totaled $462 thousand following adoption of ASC 842. The company also disclosed a new Woodbury, New York lease entered into in January 2020 with total commitments of $434 thousand.
- Management stated that additional financing will be needed to adequately fund operations over the next twelve months. No definitive financing agreement was in place as of the filing date, and management concluded that substantial doubt exists regarding the company’s ability to continue as a going concern.
Material Changes and Unusual Items
- Net income included a $1.101 million gain from the decrease in the fair value of warrant liabilities, driven primarily by a decline in the company’s stock price. This was a non-cash item.
- The prior-year quarter included a $3.732 million goodwill impairment charge, which did not recur.
- On December 31, 2019, the company amended its Series A Convertible Preferred Stock. The conversion price was reduced from $812.50 to $1.75 per share, and the amendment resulted in a $2.314 million deemed dividend charged against income available to common shareholders.
- Series A preferred dividends accrue at 5% annually for the first 18 months beginning January 1, 2020, increasing to 12% thereafter. Previously issued PIK shares had reached the authorized cap, so future dividends are expected to be paid in cash.
- The company adopted the new lease accounting standard on October 1, 2019. Adoption was non-cash and did not affect reported cash flows.
- The company completed a 1-for-50 reverse stock split in May 2019; prior-period share and per-share information was retrospectively adjusted.
Outlook, Risks and Contingencies
Management expects revenue and cash flows from the acquired businesses, together with cost controls and restructuring actions, to support future growth. The filing does not provide quantified revenue, earnings or cash-flow guidance.
- Liquidity is the principal near-term risk. The company has a limited cash balance, recurring operating losses and no committed additional financing.
- Operations remain dependent on revenue growth, successful acquisition integration, customer renewals, margin improvement and the ability to raise capital on acceptable terms.
- Other identified risks include competition, rapidly changing technology and customer requirements, cybersecurity and software security, dependence on key personnel, customer concentration, potential impairment of goodwill and intangible assets, stock-price volatility, limited trading liquidity and maintaining Nasdaq listing requirements.
- One customer represented approximately 12% of quarterly revenue. Three customers represented approximately 19%, 18% and 10% of accounts receivable at December 31, 2019.
- The company reported no material legal proceedings, no material commitments or contingencies, and no material subsequent events requiring adjustment other than items disclosed in the filing.
- Management reported that disclosure controls and procedures were effective as of December 31, 2019, with no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether the company secures additional financing before available cash and operating cash flow become insufficient.
- Whether revenue growth from the fiscal 2019 acquisitions is sustained and produces positive operating cash flow.
- The recurring versus perpetual-license composition of revenue, customer renewal rates and the durability of the 54% gross margin.
- The potential dilution from Series A preferred stock, approximately 5.5 million outstanding warrants and approximately 690 thousand outstanding options.
- The valuation sensitivity of the $2.413 million warrant liability and the potential for future non-cash gains or losses.
- Whether the Series A amendment, preferred dividends and liquidation preference affect common-shareholder value.
- Future goodwill and intangible-asset impairment risk, particularly if revenue, operating performance or the stock price declines.