Intellinetics, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2021; comparisons are with the three and nine months ended September 30, 2020. The company provides document-management software and document-conversion, storage and retrieval services. Results include its Graphic Sciences and CEO Image acquisitions, completed in 2020.
Financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $3.171 million | $2.511 million | $8.716 million | $5.558 million |
| Gross profit | $1.916 million | $1.490 million | $5.335 million | $3.407 million |
| Gross margin | 60.4% | 59.3% | 61.2% | 61.3% |
| Operating income (loss) | $409,467 | $271,171 | $825,918 | ($725,896) |
| Net income (loss) | $296,437 | $155,673 | $1.332 million | ($772,894) |
| Operating cash flow | $821,129 | Not stated for quarter | $1.408 million | ($392,155) |
Q3 diluted earnings per share were $0.10, versus $0.06; nine-month diluted earnings per share were $0.43, versus a loss of $0.34. Nine-month 2021 net income includes an $845,083 gain from forgiveness of the PPP loan; Q3 had no such gain. The filing does not provide adjusted earnings excluding this item.
At September 30, cash was $1.829 million, current assets $3.750 million, and current liabilities $3.757 million, resulting in a $7,473 working-capital deficit. Total liabilities were $9.594 million. Outstanding notes had $2.0 million principal, bearing 12% interest and due February 2023; the balance-sheet carrying amount, net of discounts and issuance costs, was $1.702 million. Lease liabilities totaled approximately $4.088 million. The company reported $532,151 in capital expenditures for the nine months.
Changes and operating trends
- Revenue increased 26% year over year in Q3 and 57% for the nine-month period. The nine-month comparison is affected by acquisitions and by 2020 COVID-related shutdowns; Graphic Sciences was included for only part of the 2020 comparison period.
- Document Conversion drove most of the growth: Q3 segment revenue rose to $2.379 million from $1.730 million; nine-month revenue rose to $6.397 million from $3.539 million. Document Management revenue was $793,000 in Q3 and $2.319 million for nine months.
- Professional services and storage/retrieval growth supported revenue. SaaS revenue also grew—25% in Q3 and 39% year to date—while software-license revenue fell 52% year to date, reflecting project timing and a longer-term shift toward SaaS.
- Nine-month operating income turned positive. Interest expense declined 35% year over year for the nine-month period; 2020 included higher debt-related and conversion costs. Prior-year significant transaction costs also did not recur in 2021.
Outlook, risks and unusual items
- Management believes cash and expected operating cash generation will cover ordinary-course needs, including working capital, earnouts, capital spending and debt service, for at least 12 months. No numerical revenue or earnings guidance is provided.
- COVID-19 continues to create demand uncertainty. Management reported that Michigan, its largest customer, had not returned to normal operations and that some customers remained below pre-pandemic activity. The company cited possible effects from customer spending, liquidity, economic conditions and workforce disruptions, and said it was monitoring expenses and cash preservation.
- Customer concentration is substantial: the State of Michigan represented 38% of Q3 and 44% of nine-month revenue. Government contracts represented 52% and 60%, respectively. The two largest customers accounted for 42% and 22% of gross receivables at quarter-end.
- The company paid $954,733 in acquisition earnouts during the first half of 2021; earnout liabilities were $1.566 million at September 30. Their fair values rely on significant unobservable assumptions.
- Management reported no material legal proceedings, no material changes to internal control, and effective disclosure controls. It reported no material changes to previously disclosed risk factors. Deferred tax assets remain fully offset by a valuation allowance.
Investor facts to verify
- Whether the 12-month liquidity assessment remains supportable given the small working-capital deficit, earnout obligations and $2.0 million note maturity in 2023.
- How revenue and cash collections depend on the State of Michigan and other concentrated customers, including the status of the large quarter-end receivables.
- Underlying profitability and cash generation excluding the one-time PPP forgiveness gain, and the extent to which acquisition timing affects comparisons.
- Progress on warehouse consolidation and its effect on storage-service margins, which declined year over year.
- Potential variability in acquisition earnouts and the assumptions used to estimate their remaining fair value.