Intellinetics, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2020. The unaudited consolidated results include Graphic Sciences from March 2, 2020 and CEO Image from April 21, 2020. Intellinetics provides document-management software and related document conversion, storage, and retrieval services.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $2.511 million | $0.756 million | $5.558 million | $1.912 million |
| Gross profit / margin | $1.490 million / 59% | $0.608 million / 80% | $3.407 million / 61% | $1.491 million / 78% |
| Operating income (loss) | $0.271 million | $(0.154) million | $(0.726) million | $(0.825) million |
| Net income (loss) | $0.156 million | $(0.399) million | $(0.773) million | $(1.542) million |
| Net income (loss) per share | $0.06 | $(1.08) | $(0.34) | $(4.17) |
- Revenue increased 232% in Q3 and 191% for the nine months, primarily because of the acquisitions. Graphic Sciences contributed $3.409 million of nine-month revenue; CEO Image contributed $0.220 million. Management attributed most of the reported increase to the acquired businesses.
- Professional-services revenue rose substantially with Graphic Sciences, while software-license revenue declined. SaaS and maintenance revenue increased year over year. The reported gross-margin decline largely reflects the acquired businesses’ revenue mix; management reported nine-month gross margin excluding Graphic Sciences of 74%, versus 78% in 2019.
- Nine-month net loss includes $636,440 of transaction costs. Other items included a $287,426 gain on extinguishment of debt and a $188,300 income-tax benefit. Q3 was profitable, but the company remained loss-making for the nine-month period.
Cash flow, liquidity, and debt
- At September 30, cash was $1.512 million, versus $0.404 million at year-end 2019. Current assets were $3.382 million and current liabilities $3.145 million; reported net working capital was $236,418.
- For the first nine months, operating cash use was $392,155, investing cash use was $4.075 million (largely acquisitions), and financing provided $5.575 million. The filing’s MD&A separately reports Q3 operating cash deficit of $259,868.
- Notes payable had $2.939 million of principal outstanding, before unamortized issuance costs and discounts; the balance sheet reports $2.430 million net of those items. Debt includes $2.0 million of 12% subordinated notes due February 2023 and an $838,700 PPP loan. The PPP loan bears 1% interest, and forgiveness had not been confirmed. The remaining $100,000 CEO Image seller note was due November 1, 2020.
- Convertible debt of approximately $6 million was converted into equity in March. The company said this reduced its overall debt burden by approximately $3 million. Shares outstanding increased from 370,497 at December 31, 2019 to 2,810,865 at September 30, 2020; a 1-for-50 reverse split occurred in March.
- Lease liabilities totaled approximately $2.779 million, and acquisition-related earnout liabilities totaled $889,200. Graphic Sciences’ earnout can reach $2.5 million over three years; CEO Image’s can reach $370,000 over two years, subject to specified performance measures.
Outlook, risks, and notable items
- Management gave no specific quantified revenue or earnings guidance. It expects available capital and anticipated operating cash flows to cover needs for at least 12 months, but stated there is no assurance. The filing says conditions raise substantial doubt about the company’s ability to meet obligations over the following 12 months; additional financing may be difficult given the history of losses.
- Management’s plan emphasizes targeted vertical markets, cross-selling to acquired customers, direct sales, reseller development, and cloud-based software. These initiatives and potential acquisitions may require additional capital.
- COVID-19 restrictions curtailed Graphic Sciences operations from March 24 to June 15. Management said the company was unlikely to make up the lost 2020 revenue; Graphic Sciences achieved 83% of its comparable 2019 revenue from June through September. Continued customer weakness, renewed restrictions, and government budget cuts remain risks.
- Customer concentration is significant: Michigan represented approximately 47% of Q3 revenue and 43% of nine-month revenue; it accounted for 54% of gross receivables at September 30. Government contracts represented 65% of Q3 revenue. The filing says the largest receivables had been partially collected.
- Management believed the PPP loan met forgiveness requirements, but forgiveness remained subject to SBA approval. Acquisition purchase-price allocations were preliminary and could change. The company reported no legal proceedings and concluded disclosure controls were effective.
Important facts for investors to verify
- Subsequent collections from Michigan and other major customers, and whether customer concentration or public-sector spending changes.
- PPP forgiveness status and the company’s actual cash generation, debt service, and ability to fund operations over the next 12 months.
- Acquired-business performance, integration results, final purchase accounting, and future earnout obligations.
- Whether margin and profitability trends improve after accounting for acquisitions, transaction costs, and COVID-related disruption.
- Potential dilution from outstanding warrants and options, and compliance with the terms of the 12% notes and other debt.