Intellinetics, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2020. The interim financial statements are unaudited. Intellinetics provides document-management software and services, including software subscriptions, document conversion, and physical storage and retrieval.
Financial results and liquidity
| Metric | Q2 2020 | Six months 2020 | Comparable 2019 period |
|---|---|---|---|
| Revenue | $1.836 million | $3.050 million | $0.641 million Q2; $1.156 million six months |
| Gross profit / margin | $1.171 million / 64% | $1.917 million / 63% | $0.511 million / 80% Q2; $0.883 million / 76% six months |
| Operating loss | $166,000 | $997,000 | $234,000 Q2; $671,000 six months |
| Net loss | $282,000 | $929,000 | $474,000 Q2; $1.144 million six months |
| Net loss per share, basic and diluted | $0.10 | $0.46 | $1.28 Q2; $3.09 six months |
| Cash used in operating activities | $132,000 for six months | $648,000 for six months |
Revenue increased 187% in Q2 and 164% for the first half, principally because Graphic Sciences was acquired in March and CEO Image in April. The reported six-month net loss includes a $287,000 gain on debt extinguishment and a $188,000 income-tax benefit. Q2 net loss improved year over year; the six-month operating loss widened.
At June 30, cash was $1.877 million and net working capital was $118,000. Total assets were $10.424 million and stockholders’ equity was $2.386 million, versus a $6.376 million deficit at year-end 2019. Six-month investing cash outflow was $4.040 million, largely for acquisitions; financing provided $5.645 million.
Outstanding note principal was $3.009 million: $2.000 million of 12% notes due in 2023, an $839,000 PPP loan, and $170,000 of seller notes. The balance sheet reports notes payable net of financing costs and discounts at $2.448 million. Lease liabilities totaled approximately $2.894 million. The company converted approximately $6 million of prior convertible debt into equity in March 2020 and reported that the transactions reduced its overall debt burden by approximately $3 million.
Material changes and operating context
- Graphic Sciences and CEO Image acquisitions expanded the business into document conversion, storage, and retrieval. Reported results are not directly comparable with 2019 because the acquired businesses were consolidated only after their acquisition dates.
- Acquisition-related transaction costs were $636,000 for the first half. Purchase-price allocations remain preliminary; goodwill recorded was $2.320 million.
- Gross margin declined to 63% for the first half from 76% a year earlier, primarily due to the acquired business mix and lower professional-services margins. Management reported a 73% first-half margin excluding Graphic Sciences, versus 76% a year earlier.
- Professional-services and storage revenue were affected by Michigan’s stay-at-home order and customer shutdowns. Graphic Sciences operations were restricted from March 24 through June 15; the company reported a project backlog but could not determine whether delayed revenue would be recovered during 2020.
- Michigan accounted for 40% of first-half revenue; the two largest customers represented 43% and 11% of Q2 revenue. Government contracts accounted for 57% of Q2 revenue. Cloud-delivered software revenue was 16% of first-half revenue, compared with 37% in 2019, reflecting the expanded consolidated revenue mix.
Outlook, risks, and unusual items
Management’s strategy is to grow sales through targeted vertical markets, cross-selling to acquired customers, direct sales, resellers, and expanded software integration. The filing provides no quantified revenue or earnings guidance. Management expects these initiatives may require additional capital.
The company states that substantial doubt remains about its ability to fund anticipated needs over the next 12 months, citing recurring losses, COVID-19 uncertainty, debt service, installment obligations, and potential acquisition earnouts. Continued operation as a going concern depends on improved operating cash flow, PPP forgiveness, successful integration of the acquisitions, and cash management; additional financing is not assured.
The company received an $839,000 PPP loan at 1% interest and believed it was complying with program requirements, but had no assurance that any amount would be forgiven. COVID-19 risks include further restrictions, weak customer demand, delayed project work, and possible subscription terminations. Other disclosed risks include customer concentration, collection timing, government-contract exposure, and information-security and data-privacy risks. Acquisition earnouts could reach up to $2.5 million for Graphic Sciences and $370,000 for CEO Image under their respective terms. The filing reports no legal proceedings or defaults upon senior securities. Management concluded disclosure controls were effective; it also described remediation of a bank-access segregation-of-duties issue at Graphic Sciences.
Investor verification priorities
- Track liquidity, operating cash flow, upcoming debt and installment payments, and whether financing is obtained if needed.
- Confirm the PPP forgiveness outcome and any resulting repayment obligations.
- Assess whether COVID-related delayed work converts to revenue and whether demand and margins recover.
- Monitor collections and exposure to Michigan and other major customers, including the substantial receivables concentration.
- Review acquisition integration, final purchase-price allocations, goodwill and intangible valuations, and earnout liabilities.
- Reconcile reported debt principal with balance-sheet carrying amounts and assess the cost and dilution from the March financing and note conversion.