INTELLINETICS, INC. / GLOBALWISE INVESTMENTS, INC. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013; unaudited. The filing is by Globalwise Investments, Inc., whose wholly owned operating subsidiary is Intellinetics, Inc.
Business context and financial results
The company develops and sells enterprise content management software and related implementation, consulting, maintenance, and SaaS services, serving public- and private-sector customers. It is shifting toward reseller channels and SaaS, while historically relying on customized, premises-based projects.
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $381,078, down 46% from $711,737 | $1,317,114, down 33% from $1,959,350 |
| Gross profit / margin | $266,162 / 70%, versus $484,205 / 68% | $840,349 / 64%, versus $1,137,709 / 58% |
| Operating loss | $501,371, versus $405,571 | $1,494,939, versus $1,581,036 |
| Net loss | $541,412, versus $492,607 | $1,622,116, versus $1,795,731 |
| Net loss per share | $0.01, versus $0.01 | $0.04, versus $0.05 |
Quarterly revenue fell primarily because software licenses with professional services and consulting declined. For the nine months, license-with-services revenue fell 73% and consulting revenue fell 50%; maintenance revenue rose 13% and SaaS revenue rose 32%. SaaS represented about 8% of revenue in both 2013 periods. Gross margin improved year over year, partly because 2012 included higher third-party costs on a document-conversion project. Quarterly net loss increased despite lower operating expenses, as the gross-profit decline outweighed expense reductions.
Cash flow, balance sheet, and financing
- At September 30, cash was $170,975, versus $46,236 at December 31, 2012. Current assets were $760,701 and current liabilities were $1,647,178, a working-capital deficit of $886,477.
- Nine-month operating cash use was $2,247,426, compared with $1,165,697 in 2012. Investing cash use was $22,773; financing provided $2,394,938. The reported financing inflow included common-stock proceeds and was offset by $336,083 of debt repayments.
- Notes payable totaled approximately $1.75 million, including $230,415 owed to related parties. Total liabilities were $3,176,589; stockholders’ deficit was $2,323,605.
- The company sold 15 million shares in a private placement at $0.20 per share and reported $2,731,021 of net new funds raised during the nine months. Shares outstanding were 47,362,047 at September 30 and November 12, up from 36,490,345 at year-end 2012.
Outlook, risks, and unusual items
- Liquidity and going concern: Management estimated a cash shortfall of about $120,000 per month and said an additional $1.08 million to $1.44 million could be needed over the next 9–12 months if operating cash flow does not improve. It stated that these conditions raise substantial doubt about the company’s ability to continue as a going concern. Additional financing was not committed, apart from the subsequent notes described below.
- Debt terms and covenants: Payments on both Ohio Development Authority loans were deferred until December 31, 2013, with payments scheduled to resume January 1, 2014. The company disclosed past covenant noncompliance but said it was then in compliance with material covenants. Failure to meet specified Ohio employment levels could raise loan interest rates to 10%.
- Post-quarter developments: On November 12, 2013, the company issued $160,000 of convertible notes bearing 10% interest, maturing July 31, 2014, and convertible at $0.10 per share under specified circumstances. It agreed to seek shareholder approval to increase authorized shares by at least 10 million. On October 9, 2013, the company agreed to pay $75,000 to settle claims by a former employee.
- Management and operating strategy: Matthew L. Chretien became interim CEO on July 31, 2013, replacing a departing CEO; he continued as director, CTO, and treasurer. Management is expanding reseller relationships and expects SaaS to grow over time. The company reported 400 SaaS subscribers at September 30, 2013, versus 231 at December 31, 2012, but gave no quantified revenue or earnings guidance.
- Concentration and dilution: Government contracts accounted for about 50% of nine-month revenue. Two customers represented 20% and 15% of gross receivables at September 30. The filing also describes placement-agent warrants and 7 million founder warrants contingent on an increase in authorized shares, creating potential dilution.
- Other item: A $15,470 derivative gain was recognized in the first nine months following payoff of a convertible note in January 2013. The filing reports no material capital-expenditure commitments.
Investor verification priorities
- Assess the going-concern risk against cash burn, the stated monthly funding gap, and the availability and terms of new financing.
- Reconcile the private-placement proceeds, debt conversion, placement fees, and the $2,731,021 financing cash-flow figure with the transaction disclosures.
- Confirm the repayment schedule and covenant status for the Authority loans, including the scheduled January 2014 resumption of payments and employment requirements.
- Review the potential dilution from outstanding and contingent warrants, convertible notes, and the proposed increase in authorized shares.
- Track whether reseller and SaaS growth can offset declining customized license and consulting revenue, and monitor customer and receivables concentration.