Intellinetics, Inc. — 2017 Form 10-K Summary
Business context and reporting period. The company develops and sells document-management, workflow and records-management software, delivered on-premises or through cloud/SaaS offerings, along with maintenance and professional services. This filing covers the fiscal year ended December 31, 2017, compared with 2016; it was filed April 2, 2018.
Financial performance and position
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $2.623 million | $2.602 million | Up 1% |
| Gross profit / gross margin | $1.863 million / 71% | $1.892 million / 73% | Gross profit down 2%; margin down 2 percentage points |
| Operating expenses | $3.032 million | $3.262 million | Down 7% |
| Operating loss | $(1.169) million | $(1.370) million | Loss narrowed |
| Net loss | $(1.359) million | $(1.576) million | Loss narrowed 14% |
| Net loss per share, basic and diluted | $(0.08) | $(0.09) | |
| Cash used in operating activities | $(1.122) million | $(1.261) million | Use decreased |
| Cash at year-end | $1.126 million | $0.690 million |
Revenue mix: Software sales were $452,238, up 16%; SaaS revenue was $625,557, up 19%; maintenance revenue was $966,011, down 2%; professional services were $451,628, down 10%; and third-party services were $128,007, down 34%. Cloud-based delivery, including hosting, represented 24% of revenue, versus 20% in 2016.
Profitability and unusual items: Higher costs of revenue—up 7% to $760,462—contributed to the lower gross margin, including increased SaaS and professional-services costs. Sales and marketing expense fell 28%, mainly because 2016 included one-time channel-partner consulting and IntelliCloud University launch costs. Net interest expense rose 196% to $609,851, primarily from financing costs and convertible-note discounts. A $419,090 gain on retirement of Ohio Development Authority debt partly offset those costs.
Liquidity and debt: Year-end working capital was negative $1.096 million. Total liabilities were $4.244 million, compared with total assets of $1.609 million; stockholders’ deficit was $2.635 million. The filing reports approximately $3.231 million of aggregate note principal outstanding at year-end, including related-party notes; carrying amounts on the balance sheet are lower after unamortized discounts. Scheduled principal payments include $1.292 million in 2018 and the balance in 2019. The company reported that cash requirements exceeded available cash flow by approximately $107,000 per month and that it needed additional financing and/or increased revenue to fund operations and debt service.
Financing activities provided $1.571 million of cash in 2017, including $2.710 million of note proceeds, partly offset by repayments and financing costs. Investing activities used $12,624. Management stated that no material capital-expenditure commitments existed at year-end.
Material changes versus 2016
- Revenue was nearly flat overall, while SaaS grew 19% and its share of total revenue increased; maintenance and professional-services revenue declined.
- Operating expenses decreased, primarily due to lower sales and marketing costs, but gross margin fell from 73% to 71%.
- Net loss narrowed, though interest expense increased sharply. The debt-retirement gain was a significant, non-recurring benefit to 2017 results.
- Operating cash use improved but remained substantial. Cash rose largely alongside new borrowing, and the working-capital deficit widened to $1.096 million from $946,409 in 2016.
- Government contracts accounted for approximately 41% of revenue, versus 40% in 2016. Two customers each contributed about 10% of 2017 revenue.
Outlook, risks and other disclosures
- Going concern: Management and the independent auditor cited substantial doubt about the company’s ability to continue as a going concern, based on recurring losses, negative operating cash flow and capital needs. The financial statements contain no adjustments for a possible inability to continue operating. Management’s plan depends on revenue growth, cash management and obtaining additional financing; no new financing commitments were in place.
- Funding and dilution: The company relied on convertible-note financings in 2017. Additional debt or equity may not be available on acceptable terms; equity issuance, conversions and outstanding warrants could substantially dilute existing holders. Debt covenants restrict financing flexibility, and note defaults could permit creditors to foreclose on substantially all company assets.
- Controls: Management concluded that disclosure controls and internal control over financial reporting were ineffective at December 31, 2017, citing insufficient segregation of duties and weaknesses in accounting controls. Remediation steps had begun but were not yet demonstrated effective. The auditor did not attest to internal-control effectiveness.
- Business risks: Long and variable sales cycles, reliance on resellers and a concentrated customer base, government-budget dependence, competition, SaaS adoption, third-party hosting and security, and customer renewals and collections may affect revenue and liquidity. Government contracts typically have terms shorter than 18 months and may be terminated or subject to audit and sanctions.
- Share and financing considerations: Common stock trades on the OTCQB, with limited liquidity and significant volatility. At March 27, 2018, 17,729,421 shares were outstanding and 22,963,385 shares were reserved for warrants, convertible notes, options and the equity plan. The company reported no dividends and did not anticipate paying them in the foreseeable future.
- Subsequent-period item: The exhibit index lists a March 28, 2018 amendment to the secured convertible notes. The filing text provided does not clearly state the amendment’s substantive terms or financial effect.
- Accounting update: The company planned to adopt the new revenue-recognition standard on January 1, 2018, using full retrospective application if systems and analysis were ready. Management expected no material impact overall, while noting potential timing changes for certain bundled arrangements.
Important facts for investors to verify
- Whether the company obtained sufficient financing or increased operating cash generation after year-end to address the stated monthly cash shortfall and going-concern uncertainty.
- The current terms, maturity schedule, security and covenant status of the convertible notes, including the March 28, 2018 amendment and any subsequent conversions or repayments.
- Whether internal-control remediation was completed and operating effectively, and whether later filings reported any further accounting adjustments.
- Whether SaaS growth, customer renewals and reseller-channel sales continued, and whether customer and government-contract concentration changed.
- The actual dilution from the large pool of reserved shares, warrants and convertible securities, including cashless exercises and note conversions.