Intellinetics, Inc. — 2015 Form 10-K
Business and period: Annual report for the fiscal year ended December 31, 2015, compared with 2014. Intellinetics develops and sells enterprise content management software and related services to public- and private-sector customers. It delivers products through on-premises licenses and cloud subscriptions, and is shifting toward sales through reseller and other channel partners.
Financial performance
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $2.337 million | $1.486 million |
| Gross profit / margin | $1.855 million / 79% | $1.185 million / 80% |
| Operating expenses | $3.411 million | $2.583 million |
| Operating loss | $(1.556) million | $(1.398) million |
| Net loss | $(3.921) million | $(1.649) million |
| Net loss per share, basic and diluted | $(0.55) | $(0.24) |
| Cash used in operating activities | $(0.620) million | $(1.040) million |
| Cash at year-end | $1.117 million | $0.184 million |
| Working capital | $(0.794) million | Not stated here |
- Revenue rose 57%. Software license revenue increased 169% to $601,141; SaaS revenue rose 48% to $281,899; maintenance revenue rose 9% to $941,531; and professional services revenue increased to $382,717 from $144,809.
- Gross margin slipped one percentage point. Research and development expense was $497,976, up from $407,716.
- Interest expense increased to $2.366 million from $251,000, driving the larger net loss. The 2015 amount included $2.083 million of expense related to warrants issued with debt conversions; the filing identifies this as a non-cash adjustment in the cash flow statement.
- Year-end total liabilities were $3.237 million. Notes payable and related-party notes totaled approximately $1.408 million at year-end; substantial convertible debt was converted into equity on December 31, 2015.
Changes, financing and unusual items
- General and administrative expense increased 49%, principally due to legal and professional fees related to financing transactions, placement-agent costs, and director share-based compensation. Sales and marketing expense decreased 2%.
- During 2015, the company began recognizing certain software-and-services contracts using percentage of completion when estimates were dependable, rather than exclusively using completed-contract accounting. Management said 2015 revenue would have been $103,752 lower if it had continued using completed-contract accounting exclusively.
- By December 31, the company had raised $1.392 million gross in a private stock-and-warrant offering and converted $2.034 million of convertible-note principal plus $429,000 accrued interest into shares and warrants. The offering closed in January 2016 with an additional $608,000 gross proceeds. Noteholders also converted a further $135,000 principal plus accrued interest in January 2016.
- Outstanding common shares were 14.9 million at year-end and 16.8 million as of March 23, 2016. The company reported 7.44 million shares reserved for warrants, options and its equity plan as of that date, indicating potential further dilution.
Liquidity, outlook and risks
- The auditor’s report and management disclosure state that recurring losses and negative operating cash flows raise substantial doubt about the company’s ability to continue as a going concern. The financial statements contain no adjustments for the possible outcome of that uncertainty.
- Management estimated cash needs exceeded available resources by about $70,000 per month and said that expected operating cash flows would not cover anticipated costs and growth spending over the next 12 months. Additional financing or improved cash generation is therefore important; there is no assurance financing will be available on acceptable terms.
- Management’s strategy is to expand channel sales and product offerings and to grow cloud delivery. Cloud revenue was 12% of total revenue in 2015, compared with 13% in 2014, despite higher SaaS revenue. No specific revenue or earnings guidance was provided.
- Government contracts represented 42% of 2015 revenue, down from 50%. The two largest customers represented approximately 10% and 5% of revenue. Sales cycles, customer concentration, dependence on resellers, government budgets and contract renewals, and competition are material business risks.
- The company disclosed ineffective disclosure controls and a material weakness in internal control over financial reporting, citing insufficient technical accounting knowledge and GAAP training. The audit identified required adjustments related to the stock offering and debt conversions.
- Ohio development loans were amended to defer certain principal or interest payments until October 2016 and mature in August 2018. The company disclosed past employment-covenant noncompliance that increased one loan’s rate from 6% to 7%; it reported current compliance with material covenants.
Investor verification priorities
- Review the going-concern disclosure, monthly cash shortfall, subsequent financing proceeds, and the company’s near-term cash requirements.
- Reconcile year-end debt balances and maturities with the December 2015 conversions and subsequent 2016 payments and conversions.
- Assess fully diluted share count, warrant terms—including cashless exercise—and the potential dilution from outstanding securities and equity awards.
- Verify the composition and recurrence of 2015 interest expense, particularly the warrant-related charges, and the effects of the revenue-recognition change.
- Track remediation of the accounting-control material weakness and monitor customer, reseller and government-contract concentration.