Business context and reporting period
Intellinetics, Inc. develops, sells and supports enterprise content management software for public- and private-sector customers. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2016; comparatives are for the same 2015 periods. The company is pursuing growth through cloud-based software and channel partners. SaaS represented 19% of nine-month revenue, up from 10%.
Financial results and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $679,445 | $621,974 | $1,919,585 | $1,767,919 |
| Gross profit | $537,532 | $491,280 | $1,449,134 | $1,401,243 |
| Gross margin | 79% | 79% | 75% | 79% |
| Operating expenses | $762,215 | $584,755 | $2,448,766 | $2,179,726 |
| Operating loss | $(224,683) | $(93,475) | $(999,632) | $(778,483) |
| Interest expense, net | $(22,084) | $(160,078) | $(184,865) | $(351,690) |
| Net loss | $(246,767) | $(253,553) | $(1,184,497) | $(1,130,173) |
| Basic and diluted loss per share | $(0.01) | $(0.04) | $(0.07) | $(0.16) |
- Revenue rose 9% in both the quarter and year-to-date periods. Q3 net loss narrowed 3%; nine-month net loss widened 5%.
- Q3 operating expenses increased 30%, principally due to added personnel, stock-option compensation, director fees and professional fees. Nine-month sales and marketing expense rose 35%, including investment in sales staff, channel development and branding.
- For nine months, software-license revenue fell 36%, while SaaS revenue grew 100%. Maintenance revenue increased 7%; professional services increased 3%; third-party services increased 65%. Management attributed the license decline to its focus on SaaS growth.
- Cash was $159,553 at September 30, 2016, versus $1,117,118 at December 31, 2015. The MD&A separately reports $159,533; the filing does not provide a clear reconciled value for this discrepancy.
- Working-capital deficit was $1,214,195. Current assets were $660,702 and current liabilities were $1,874,897. Total liabilities were $2,649,348; stockholders’ deficit was $1,957,052.
- Nine-month operating cash use was $1,249,649, compared with $411,111 in 2015. Investing cash use was $6,867; financing provided $298,951. Ending cash was $159,553.
- Notes payable principal totaled approximately $1,009,414, including $873,034 owed under Ohio State Development Authority loans and $136,380 owed to a related party. Current notes payable on the balance sheet were $392,136, including related-party debt; long-term notes payable were $615,147, including related-party debt. The company also reported deferred interest and accrued loan-related amounts.
Material changes, outlook, and risks
- Management estimated cash requirements exceeded available cash flows by approximately $103,000 per month. It expected growth, debt service and public-company operating costs to consume substantially all anticipated operating cash flows over the next 12 months, and said additional capital was necessary.
- The filing states that, absent improved operating cash flow or additional capital or debt financing, the company would not have sufficient liquidity to fund operations over the next 9–12 months. No new financing commitments were in place. Management identified substantial doubt about the company’s ability to continue as a going concern.
- The company raised $607,919 gross through a January 2016 private placement of shares and warrants; cash-flow financing reports $559,285 from stock sales. Convertible notes and accrued interest were converted into shares and warrants; no convertible notes remained outstanding at quarter-end. Shares outstanding increased to 16,815,850 from 14,908,439 at year-end 2015.
- The company’s strategy is to expand reseller/channel relationships and sales capacity and grow cloud-based delivery. Management cautioned that sales cycles can last 18–24 months and that results may fluctuate with project timing, customer spending, renewals, capital availability and other risks. No specific revenue or earnings guidance was provided.
- Customer and receivable concentrations are relevant: the two largest customers accounted for 24% of Q3 revenue combined; the three largest accounted for 44% of gross receivables at quarter-end. Government contracts represented 37% of Q3 revenue and 41% for nine months.
- The company disclosed a material weakness in internal control over financial reporting related to insufficient technical accounting knowledge and GAAP training; it remained unremediated, and disclosure controls were deemed ineffective. Management was evaluating resources and possible use of consultants.
- Other notable items: the prior-year nine-month 2015 results were restated to reduce software and total revenue by $25,000, increasing reported net loss by the same amount. The Columbus office lease was extended through December 31, 2021, with future minimum payments of $275,157. The company reported no legal proceedings and no defaults upon senior securities.
Important facts for investors to verify
- Confirm the quarter-end cash figure: the balance sheet reports $159,553, while MD&A reports $159,533.
- Assess near-term liquidity, debt-payment obligations and the company’s ability to raise capital, given the stated monthly cash shortfall and going-concern warning.
- Track whether SaaS and channel sales growth can offset declining software-license revenue and restore gross margins.
- Review the dilution potential from outstanding warrants and equity-plan reserves, alongside the growth in shares outstanding.
- Monitor remediation of the disclosed material weakness and the reliability of future financial reporting.
- Consider customer and receivables concentration, government-contract exposure, debt covenants and scheduled loan payments.