Bridgeline Digital, Inc. — 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, analytics, SaaS subscriptions, perpetual licenses, hosting, and related digital services. The filing covers the quarter and nine months ended June 30, 2015; amounts are in thousands except per-share data.
- More than 2,500 customers; no customer represented 10% or more of revenue.
- A 1-for-5 reverse stock split became effective May 7, 2015, with all share and per-share data presented on a retroactively adjusted basis.
Financial Results and Key Metrics
| Metric | Q3 FY2015 | Q3 FY2014 | 9M FY2015 | 9M FY2014 |
|---|---|---|---|---|
| Revenue | $4,876 | $6,152 | $14,675 | $17,967 |
| Gross profit | $2,213 | $3,133 | $5,895 | $8,775 |
| Gross margin | 45% | 51% | 40% | 49% |
| Loss from operations | $(807) | $(1,092) | $(4,562) | $(3,793) |
| Net loss | $(1,110) | $(1,306) | $(5,293) | $(4,397) |
| Net loss applicable to common shareholders | $(1,141) | $(1,306) | $(5,375) | $(4,397) |
| Loss per common share | $(0.26) | $(0.31) | $(1.24) | $(1.16) |
| Adjusted EBITDA | $(190) | $(336) | $(2,646) | $(1,639) |
- Q3 revenue declined 21%; nine-month revenue declined 18%.
- Digital engagement services revenue fell 30% in Q3 and 26% for the nine-month period. Subscription and perpetual license revenue was approximately flat in Q3 and down 3% for nine months. Managed hosting revenue increased 1% in both periods.
- Operating expenses declined 29% in Q3 and 17% for nine months, primarily from lower sales, marketing, general and administrative, research and development, and personnel costs.
- Nine-month cash used in operating activities was $2,637, compared with $2,878 in the prior-year period. Investing cash use was $519, compared with $862; financing activities provided $2,507, compared with $2,600.
- Cash and cash equivalents were $583 at June 30, 2015, down from $1,256 at September 30, 2014. Accounts receivable, net, was $3,155 and deferred revenue was $2,191.
- Total debt, net of debt discounts, was $7,953, including $3,093 of line-of-credit borrowings, $3,000 of subordinated convertible debt, and $2,000 of shareholder term notes. Current debt was $360 and long-term debt was $7,593.
- Total liabilities were $14,405 versus $13,627 at September 30, 2014; accumulated deficit was $32,904.
Material Changes Versus the Prior Comparable Period
- Revenue contraction was concentrated in digital engagement services, reflecting fewer new engagements, project delays, and lower-margin iAPPSds engagements used to compete in the market.
- Gross margin declined from 51% to 45% in Q3 and from 49% to 40% for nine months, as revenue fell while fixed costs remained in place and certain projects carried lower margins.
- Q3 net loss improved by $196, but nine-month net loss worsened by $896. The nine-month operating loss increased by $769.
- Adjusted EBITDA improved in Q3 but deteriorated for the nine-month period, indicating that cost reductions did not offset the cumulative revenue and margin decline.
- The Company raised approximately $1,722 net from Series A convertible preferred stock, received $2,000 in shareholder term-note proceeds, and used bank borrowings and repayments to support liquidity.
- Preferred stock outstanding increased to 205,132 shares, with a $2,082 liquidation preference and cumulative dividends; $82 of preferred dividends were recorded for the nine-month period.
Outlook, Liquidity, Risks, and Unusual Items
- Management stated that expense reductions should allow positive Adjusted EBITDA and believes available operating cash flows, credit availability, equity financing, and shareholder loans can fund operations for at least the next twelve months. This depends on achieving anticipated sales levels and maintaining financing access.
- The BridgeBank facility provides up to $5,000 of revolving advances, generally limited to the lesser of $5,000 or 80% of eligible receivables, with additional out-of-formula borrowing supported by a director/shareholder guarantee. The facility was subsequently extended to September 30, 2016.
- The Company was not in compliance with certain May 2015 reporting covenants but obtained a waiver and was in compliance as of June 30, 2015. The borrowing rate increased from prime plus 1% to prime plus 5% under the amendment.
- After quarter-end, the Company issued a $500 shareholder term note bearing 8% interest and maturing July 21, 2016, together with warrants for 160,000 common shares at $1.75 per share.
- Accrued contingent acquisition consideration was $583, scheduled to be paid through fiscal 2016 if specified revenue and earnings targets are achieved. A $131 adjustment to an earnout accrual was recorded in general and administrative expense during the nine-month period.
- Series A preferred dividends are cumulative at 6% annually, may be paid in additional preferred shares, and increase to 12% after two years if preferred shares remain outstanding.
- Material risks include continuing operating losses and cash usage, declining services revenue and margins, dependence on debt and related-party financing, covenant compliance, limited liquidity, competition, technology and cybersecurity risks, customer retention and renewals, dependence on key personnel, and the limited market and volatility of the common stock.
- No material legal proceedings were reported. Management concluded disclosure controls were effective and reported 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 after the reported decline in digital engagement services.
- Whether the Company achieves positive Adjusted EBITDA and reduces operating cash burn without impairing product development or customer service.
- Availability, borrowing-base capacity, interest rate, maturity, and covenant status of the BridgeBank facility, including any future waivers.
- Repayment or refinancing requirements for the $7,953 of net debt and the shareholder term notes maturing during 2016.
- Potential dilution from convertible preferred stock, convertible debt, stock options, warrants, earnout shares, and additional preferred-stock dividends.
- Whether the $23,141 goodwill balance remains recoverable given sustained losses, declining revenue, and the Company’s market valuation.