Intellinetics, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparative period is Q1 2020. The unaudited consolidated company provides document-management software and services and document-conversion, storage and retrieval services. Results include Graphic Sciences for a full quarter in 2021 but only about one month in Q1 2020; CEO Image was acquired in April 2020.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $2.635 million | $1.214 million |
| Gross profit / gross margin | $1.605 million / 60.9% | $766,125 / 63.1% |
| Operating income (loss) | $110,733 | $(831,507) |
| Net income (loss) | $842,772 | $(646,211) |
| Basic / diluted EPS | $0.30 / $0.27 | $(0.54) / $(0.54) |
| Operating cash flow | $326,869 | $(143,951) |
| Investing cash flow | $(231,699) | $(3.897 million) |
- Revenue rose 117% year over year, primarily from acquisitions. Graphic Sciences contributed $1.843 million and CEO Image $132,605 in Q1 2021. Document Conversion revenue was $1.899 million; Document Management revenue was $735,818.
- Professional services revenue increased to $1.652 million from $560,029, and storage and retrieval revenue increased to $308,990 from $72,298. SaaS revenue rose 43% to $323,726; software-license revenue fell 90% to $9,594.
- Gross profit increased in dollars, while consolidated gross margin declined to 60.9% from 63.1%. Management said margins excluding Graphic Sciences improved to 77% from 69%; professional-services margin fell to 32% from 42%.
- Q1 2021 net income included an $845,083 gain from full forgiveness of the PPP loan and interest. Without that gain, reported net income materially overstates income from ordinary operations. Operating income was $110,733.
- Cash was $2.003 million at quarter-end, up from $1.908 million at year-end 2020; working capital was $455,067. Capital spending was $231,699, largely property and equipment. No financing cash flows occurred in Q1.
- At March 31, total assets were $10.594 million and total liabilities were $8.516 million. Notes payable were $2.0 million principal, net of discounts and financing costs on the balance sheet; the 12% subordinated notes mature in February 2023. Lease liabilities totaled about $2.586 million, and acquisition earnout liabilities totaled $2.514 million.
Changes, outlook and risks
- Compared with Q1 2020, operating results improved to operating income and positive operating cash flow, but the comparison is heavily affected by the acquisitions and by $460,767 of transaction costs in the prior-year quarter.
- The company received SBA forgiveness of the $838,700 PPP principal and related interest in January 2021. The reported $845,083 gain is a significant non-recurring item.
- Management said current capital resources and expected operating cash flows should cover ordinary-course needs, working capital, earnouts, capital spending and debt service for at least 12 months. No specific revenue or earnings guidance was provided.
- Management identified COVID-19-related uncertainty, customer spending and liquidity, and ongoing weakness or uneven recovery in demand. Michigan, the largest customer, had not fully resumed normal operations; the company also noted efforts to reduce expenses and preserve cash.
- Revenue and receivables are concentrated: the State of Michigan and Quicken Loans represented 46% and 11% of Q1 2021 revenue, respectively; government contracts were about 64% of revenue. The two largest customers accounted for 40% and 17% of gross receivables at quarter-end.
- Earnout fair values use significant unobservable assumptions; improved acquired-business performance increased the earnout liability by $69,950 in the quarter. The company also committed $326,864 to warehouse racking, with $171,927 purchased by quarter-end, and was evaluating financing options.
- Legal proceedings: none reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Investor verification points
- Separate acquisition-driven growth from organic growth, particularly in Document Conversion and professional services.
- Reconcile reported net income to recurring operating performance by accounting for the PPP forgiveness gain and earnout remeasurement.
- Track cash conversion, receivables collections, working capital and the planned warehouse-equipment financing against management’s 12-month liquidity assessment.
- Monitor the 12% notes due in 2023, lease commitments, and potential acquisition earnout payments.
- Assess customer and government-contract concentration, including the recovery in Michigan demand and the status of large receivables.
- Review potential dilution: 2,823,072 common shares were outstanding at March 31, 2021; the filing also reported outstanding warrants and stock options.