Intellinetics, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Intellinetics provides document-management software and services and document-conversion, storage, and retrieval services. The comparison period is Q1 2022. Results include Yellow Folder, acquired April 1, 2022; Q1 2022 does not.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $4.187 million | $2.704 million |
| Gross profit / margin | $2.646 million / 63.2% | $1.632 million / 60.4% |
| Operating income | $284,000 | $92,000 |
| Net income (loss) | $113,000 | $(20,000) |
| Basic and diluted EPS | $0.03 | $(0.01) |
| Operating cash flow | $(174,000) | $506,000 |
| Investing cash flow | $(135,000) | $(85,000) |
| Financing cash flow | $(968,000) | $0 |
Cash was $1.419 million at March 31, down from $2.696 million at year-end 2022. The company reported a $0.8 million working-capital deficit and a $21.5 million accumulated deficit. Total assets were $18.8 million and stockholders’ equity was $8.8 million.
Outstanding note principal was approximately $3.682 million: $3.082 million to unrelated investors and $600,000 to a related party. Notes carry 12% interest. The remaining $717,500 of 2020 Notes is due August 31, 2023; $2.9645 million of 2022 Notes is due March 30, 2025. Operating lease liabilities totaled $3.191 million; finance lease liabilities were $150,000.
Changes and operating performance
- Revenue rose 55% year over year, including $875,000 from Yellow Folder. Excluding Yellow Folder, management said revenue increased 23%.
- Document Management revenue increased to $1.769 million from $915,000; Document Conversion revenue increased to $2.417 million from $1.789 million.
- SaaS revenue grew 187%, largely due to Yellow Folder; excluding the acquisition, SaaS grew 18%. Professional services revenue rose 45%. Software sales declined 76%, while storage and retrieval revenue was essentially flat.
- Gross margin improved to 63.2% from 60.4%, principally reflecting the higher SaaS revenue mix. Wage increases and lower storage-and-retrieval margins partly offset the improvement.
- Operating expenses increased 53%, including higher general and administrative, sales and marketing, and depreciation and amortization costs. Q1 2022 included $64,000 of earnout fair-value expense and $70,000 of transaction costs; neither recurred in Q1 2023. Interest expense rose 52% to $171,000.
- Operating cash flow turned negative, mainly reflecting a $572,000 decline in deferred revenue and increases in operating assets. Financing cash use included $700,000 to settle the final earnout and $263,000 of note principal repayment. Capital spending was $135,000, including $112,000 of capitalized internal-use software.
Outlook, risks, and unusual items
Management stated that cash, expected operating cash flows, and potential financing options should cover ordinary-course needs, including working capital and debt service, for at least the next 12 months. It also cautioned that operating cash flow alone may be insufficient to meet 2023 debt obligations and said refinancing or other modifications may be pursued. No numerical revenue or earnings guidance was provided.
Management reported wage inflation and hiring constraints that have slowed completion of project backlog; it said wage inflation appeared to have stabilized and that staffing had increased from the prior year. It had not experienced reduced customer demand from economic conditions as of the filing, but noted recession could affect customers’ technology budgets. Results may fluctuate and are not necessarily indicative of future performance.
Customer and sector concentration is significant: the State of Michigan represented 34% of Q1 revenue and Rocket Mortgage 10%; government contracts, including K-12 education, represented approximately 72%. Management cited softer transactional storage-and-retrieval demand from the mortgage industry. The filing reported no material change to the risk factors in the 2022 Form 10-K, no legal proceedings, and no material capital-expenditure commitments.
Important facts for investors to verify
- Whether the company refinances or otherwise addresses the $717,500 note maturity in August 2023, and its ability to service debt carrying 12% interest.
- Whether operating cash flow improves, particularly as deferred revenue, receivables, and project execution affect cash conversion.
- How much reported growth is sustained without Yellow Folder and whether SaaS growth and gross-margin improvement continue.
- Whether staffing and wage pressures constrain backlog conversion or profitability, and whether mortgage-related storage demand recovers.
- The effect of customer concentration, especially the State of Michigan’s share of revenue and receivables, on results and collections.
- Management’s liquidity assessment alongside the working-capital deficit and cash decline; the filing says resources are expected to suffice for at least 12 months but identifies financing as a possible need.