Intellinetics, Inc. — FY2022 Form 10-K
Reporting period: Year ended December 31, 2022; comparative period is FY2021. The filing was signed March 27, 2023. Intellinetics provides document-management software and document-conversion, storage and retrieval services through its Document Management and Document Conversion segments.
Financial results
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $14.02 million | $11.46 million |
| Gross profit / gross margin | $8.91 million / 63.6% | $6.94 million / 60.6% |
| Operating income | $827,321 | $964,988 |
| Net income | $24,027; $0.01 diluted EPS | $1,357,951; $0.44 diluted EPS |
| Cash provided by operating activities | $1.99 million | $1.39 million |
| Cash and cash equivalents at year-end | $2.70 million | $1.75 million |
- Revenue by segment: Document Management was $6.00 million, versus $3.09 million; Document Conversion was $8.02 million, versus $8.37 million.
- Revenue growth was 22%, primarily reflecting the April 2022 Yellow Folder acquisition, which contributed $2.46 million after acquisition. Excluding Yellow Folder, revenue increased about 1%; SaaS revenue grew 34% organically.
- Operating expenses rose 35% to $8.08 million, including $355,281 of acquisition and fundraising transaction costs. Interest expense increased 78% to $803,294.
- Investing activities used $6.96 million, principally the $6.38 million Yellow Folder acquisition. Capital expenditures were $577,325, excluding acquisition cash.
Liquidity, debt and capital
- Year-end net working capital was a deficit of $1.1 million; accumulated deficit was $21.6 million.
- At December 31, 2022, notes had approximately $3.945 million of face principal: $980,450 on 2020 Notes, $2.3645 million on 2022 Notes and $600,000 on a related-party note. The notes carry 12% interest. The 2022 notes mature March 30, 2025; remaining 2020 note maturities were in 2023.
- The company reported that operating cash flow alone might not cover 2023 debt obligations. It paid $262,950 of 2020 Note principal on February 28, 2023; a $700,000 Graphic Sciences earnout was paid January 3, 2023. Management said it believed cash, expected operating funds and potential financing would cover anticipated needs for at least 12 months, and cited refinancing or modification as possible options.
- April 2022 financing included $5.74 million gross proceeds from common stock issuance and $2.9645 million of 12% notes. Shares outstanding increased from 2.82 million at year-end 2021 to 4.07 million at year-end 2022. No dividends were paid; management does not anticipate dividends in the foreseeable future.
Material changes and management commentary
- Yellow Folder was acquired on April 1, 2022, for $6.38 million cash. It added $2.46 million in revenue and reported $520,186 net income for the period included after acquisition. The purchase-price allocation included $3.89 million of intangible assets and $3.47 million of goodwill.
- SaaS growth and its higher gross margin supported overall margin improvement. Conversely, Document Conversion professional-services revenue was affected by staffing constraints, COVID-related impacts early in the year and project mix; storage and retrieval was affected by reduced work from Rocket Mortgage and a slowdown in mortgage refinancing.
- Management cited wage inflation and hiring difficulties as pressures on margins and project completion, while stating wage inflation appeared to have stabilized. It had not experienced reduced customer demand from adverse economic conditions as of the report date, but warned recession and customer budget constraints could affect spending.
- Management’s outlook emphasizes cloud software growth, customer retention and growth, reseller and direct sales, and integration of acquisitions. The filing provides no specific revenue or earnings guidance.
Risks, contingencies and unusual items
- Customer and government exposure is concentrated: the State of Michigan accounted for 38% of consolidated revenue in 2022 (47% in 2021); Rocket Mortgage accounted for 6% (9% in 2021). Government contracts, including K-12, represented approximately 77% of 2022 revenue. The Michigan contract was scheduled to expire May 30, 2023, with two one-year extension options.
- Other significant risks include labor cost and availability, customer renewals, reseller performance, competition, acquisition integration, data security and third-party hosting disruptions, and access to financing. Debt covenants may constrain financing or dividends.
- FY2021 net income included $845,083 of PPP loan forgiveness; FY2022 included $355,281 transaction costs and an $87,652 change in earnout fair value. FY2022 net income was nearly break-even despite higher revenue.
- The company reported no material legal proceedings. Management concluded disclosure controls and internal control over financial reporting were effective at year-end; the auditor did not attest to internal control effectiveness. The financial-statement audit opinion was unqualified, with acquisition-related intangible and goodwill valuation identified as a critical audit matter.
Most important facts for investors to verify
- Whether the Michigan contract was extended or renewed, and the resulting effect on revenue and customer concentration.
- Whether Yellow Folder’s growth, profitability and integration progress continue after its partial-year contribution in 2022.
- How the company refinanced, repaid or otherwise addressed 2023 debt maturities and the subsequent $700,000 earnout payment; confirm current cash, working capital and debt balances.
- Whether organic SaaS growth can offset staffing constraints, labor inflation and weakness in conversion and storage work.
- Whether customer concentration, government funding exposure and the company’s limited liquidity create material ongoing risk.