Intellinetics, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. The company develops and sells enterprise content management software, delivered through on-premises licenses and cloud subscriptions. Financial statements are unaudited. Comparative 2013 figures include a restatement.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $316,762 | $381,078 | $942,297 | $1,207,123 |
| Gross profit | $257,031 | $266,162 | $750,603 | $730,359 |
| Gross margin | 81% | 70% | 80% | 61% |
| Operating expenses | $824,906 | $767,533 | $1,991,418 | $2,335,288 |
| Operating loss | $(567,875) | $(501,371) | $(1,240,815) | $(1,604,929) |
| Net loss | $(638,609) | $(541,412) | $(1,415,145) | $(1,732,106) |
| Basic and diluted loss per share | $(0.09) | $(0.08) | $(0.21) | $(0.27) |
For the nine-month period, cash used in operating activities was $885,528, compared with $2,247,426 in 2013. Investing activities provided $4,477; financing activities provided $634,776. Cash fell from $260,560 at year-end 2013 to $14,285 at September 30, 2014.
At September 30, current assets were $104,676 and current liabilities were $2,259,602, a working capital deficit of $2,154,926. Total liabilities were $4,189,905; notes payable were approximately $2.69 million, including related-party notes. Stockholders’ deficit was $4,020,213.
Changes versus prior periods
- Revenue declined 17% in Q3 and 22% for the first nine months. Lower software-license and professional-services revenue drove the decreases; management attributed the software-license decline partly to its focus on developing reseller channels.
- Cloud/SaaS revenue increased 51% in Q3 and 28% year to date. It represented 14% of nine-month revenue, versus 9% in 2013. Maintenance revenue was nearly flat in Q3 and down 2% year to date.
- Nine-month gross profit rose 3%, while gross margin increased to 80%, which management attributed primarily to revenue mix. Operating expenses fell 15% year to date, chiefly due to lower administrative and sales personnel costs, partly offset by consulting expense.
- Q3 net loss increased 18%, as higher sales and marketing expense and interest expense more than offset lower general and administrative expense. Nine-month net loss improved 18%; interest expense increased 22% year over year.
- The company restated the nine-month 2013 comparison after identifying a $109,990 revenue overstatement on a customer contract in the quarter ended June 30, 2013. The restatement increased the reported nine-month 2013 net loss by the same amount; Q3 2013 results were unchanged.
Outlook, liquidity, and risks
- Going concern: Management reported substantial doubt about the company’s ability to continue as a going concern. It estimated cash needs exceeded operating cash generation by approximately $180,000 per month and projected a need for $2.16 million to $2.56 million over the next 9–12 months, assuming no improvement in operating cash flow. No new financing commitments were in place.
- The company raised $850,000 in net new funds through notes during the first nine months, primarily for working capital and debt repayment. On October 9, 2014, after quarter-end, it issued another $175,000 of convertible notes.
- Management’s strategy is to grow sales through resellers and cloud delivery. Five MarketCommand resellers were signed and 27 subscriptions sold by September 2014; management did not expect the program to materially affect 2014 revenue.
- The company’s sales cycle can be long, and software-license revenue may fluctuate with project completion timing. Customer concentration is notable: two customers generated 26% of Q3 revenue; the three largest customers represented 72% of accounts receivable at quarter-end. Government contracts accounted for about half of revenue.
- The company failed to meet an Ohio loan employment requirement. The interest rate on one state loan increased from 6% to 7% effective October 1, 2014, with an estimated $6,000 effect on its September 2015 balloon payment. Failure to meet another employment target could raise a state loan’s rate to 10%. Management reported past covenant noncompliance, while stating it was then compliant with other covenants.
- Related-party and convertible borrowing carries stated interest rates generally of 10%, with higher default rates under certain terms. Deferred compensation of $215,012 was payable to founders on March 31, 2015.
- The company changed its name from GlobalWise Investments, Inc. to Intellinetics, Inc. and effected a 7-for-1 reverse stock split on September 1, 2014. It reported effective disclosure controls and no material changes in internal control during the quarter. No legal proceedings were reported.
Investor verification priorities
- Confirm the company’s ability to raise the stated $2.16–$2.56 million funding need and meet near-term obligations, given quarter-end cash of only $14,285.
- Review debt maturities, interest terms, related-party balances, and compliance with Ohio State Development Authority loan covenants and employment conditions.
- Assess whether reseller expansion and SaaS growth can compensate for lower license and professional-services revenue, and whether customer concentration affects collections.
- Check the restated 2013 revenue and loss figures against the original filing; the restatement disclosure contains inconsistent category-level figures, although it states the total adjustment was $109,990.
- Review the dilution implications of convertible notes, warrants, and the post-split share count.