Intellinetics, Inc. — Q1 2019 Form 10-Q
Period: Three months ended March 31, 2019; unaudited consolidated results. Intellinetics develops and sells document-management software and related services to public- and private-sector customers. Its strategy emphasizes cloud-based software and reseller/direct sales.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 / prior period |
|---|---|---|
| Revenue | $515,385 | $525,374; down 2% year over year |
| Gross profit / margin | $372,920 / 72% | $377,814 / 72% |
| Operating expenses | $809,626 | $807,340 |
| Operating loss | $(436,706) | $(429,526) |
| Interest expense, net | $(233,147) | $(208,984) |
| Net loss / diluted loss per share | $(669,853) / $(0.04) | $(638,510) / $(0.04) |
| Net cash used in operations | $(288,423) | $(405,756) |
| Cash | $788,952 at March 31 | $1,088,630 at December 31, 2018 |
Current assets were $1.064 million against current liabilities of $1.240 million, a working-capital deficit of $176,604. Total liabilities were $6.266 million and stockholders’ deficit was $5.057 million. Balance-sheet notes payable, including related-party notes and current portion, totaled approximately $4.29 million net of applicable discounts; accrued interest is also reported in other long-term liabilities. No investing cash flows or capital expenditures were reported in Q1.
Material changes and operating trends
- SaaS revenue rose 13% to $199,183 and maintenance revenue rose 4% to $252,636. Cloud-delivered revenue, including hosting, increased to 39% of total revenue from 33%.
- Software-license revenue fell 96% to $1,750; professional-services revenue declined 12% to $51,667. Management attributed the overall 2% revenue decline mainly to the shift from upfront premise licenses and related services toward SaaS, as well as project timing.
- Gross margin remained 72%; management said improved SaaS margins offset weaker margins in software and professional services. Operating expenses were nearly flat, while interest expense rose 12%, principally due to the September 2018 notes and related financing-cost amortization.
- Cash declined by $299,678 during the quarter. Operating cash use improved year over year, but the company continued to report substantial operating losses.
Outlook, risks, and unusual items
- Going concern: Management says cash needs for operations, growth, and debt service over the next 12 months are expected to exceed cash generated from operations. The company has no committed new financing, and the filing states these conditions raise substantial doubt about its ability to continue as a going concern. Additional capital and revenue growth are critical; financing availability and acceptable terms are uncertain.
- Business plans: The company intends to expand targeted marketing, reseller training and onboarding, direct sales, and software integration/customization. No specific revenue, profit, or cash-flow guidance is provided. Remaining performance obligations for SaaS and maintenance contracts longer than one year were $95,845; approximately 87% is expected to be recognized within 12 months.
- Debt and dilution: Convertible notes carry stated interest rates generally between 8% and 10%, with contractual rates increasing after maturity in specified circumstances. Several notes mature December 31, 2020. The company reported 18,524,878 shares outstanding at March 31 and 36,589,383 shares reserved for warrants, convertible debt, options, and the equity plan—a potentially significant dilution overhang. During the quarter, 795,457 shares were issued to directors and an employee; certain options were repriced to $0.13.
- Other risks: Two customers represented 19% of Q1 revenue in total; government contracts represented about 33%. The filing cites risks including customer and reseller dependence, sales-cycle variability, customer renewal and collection timing, competition, financing needs, and data security/privacy. No legal proceedings were reported; management said disclosure controls were effective.
- Lease accounting: Adoption of ASC 842 on January 1, 2019 resulted in recognition of a $143,761 lease liability and a $138,549 right-of-use asset.
Important facts for investors to verify
- Cash runway, near-term cash needs, and whether new financing can be secured on acceptable terms.
- Debt principal, accrued interest, maturity schedules, conversion provisions, and potential share dilution; reconcile note disclosures and debt schedules.
- Whether SaaS and maintenance growth can offset continued declines in license and professional-services revenue while improving operating results.
- Customer/reseller concentration, renewals, receivables collection, and realization of the disclosed remaining performance obligations.
- Potential effects of the going-concern uncertainty on asset values, liabilities, and future financing options.