Intellinetics, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2019. The company develops and sells document-management software and related services to public- and private-sector customers. Financial statements are unaudited.
Financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $755,568 | $673,111 | $1,911,561 | $1,748,161 |
| Gross profit | $607,878 | $411,353 | $1,491,302 | $1,179,241 |
| Gross margin | 80% | 61% | 78% | 67% |
| Operating expenses | $761,475 | $684,627 | $2,315,920 | $2,332,140 |
| Operating loss | $(153,597) | $(273,274) | $(824,618) | $(1,152,899) |
| Interest expense, net | $(245,156) | $(206,642) | $(717,650) | $(634,978) |
| Net loss | $(398,753) | $(479,916) | $(1,542,268) | $(1,787,877) |
| Basic and diluted loss per share | $(0.02) | $(0.03) | $(0.08) | $(0.10) |
- Cash flow: Net cash used in operating activities was $745,439 for the first nine months, compared with $923,737 in 2018. Investing used $5,489; financing used $34,622. Cash fell by $785,550 to $303,080.
- Liquidity: Current assets were $779,114 and current liabilities were $1,235,218, a working-capital deficit of $456,104.
- Debt and liabilities: Balance-sheet notes payable, including related-party notes and net of discounts, totaled approximately $4.39 million; accrued interest on notes was about $1.03 million. Total liabilities were $6.71 million. Convertible notes generally mature December 31, 2020; certain notes carry higher interest after maturity if unpaid.
- Equity: Stockholders’ deficit was $5.80 million. Shares outstanding were 18,524,878 at September 30; 37,795,963 shares were reserved for warrants, convertible notes and stock options.
Changes versus prior period
- Nine-month revenue increased 9%; Q3 revenue increased 12%. SaaS revenue grew 22% for the nine months and 23% in Q3, while professional services rose 84% and 104%, respectively.
- Software license revenue increased, largely reflecting timing of on-premise projects and license delivery. Third-party services fell 86% for the nine months and 96% in Q3, partly because Q3 2018 was unusually high.
- Nine-month gross margin improved to 78% from 67%, reflecting improved SaaS and software margins and a more favorable mix. Operating expenses were broadly stable for the nine-month period, but interest expense increased 13%.
- Cash declined from $1.09 million at December 31, 2018. Accounts receivable rose to $348,993 from $135,739. Adoption of lease accounting in 2019 added a right-of-use asset and lease liabilities.
Outlook, risks and unusual items
- Management states that expected cash needs over the next 12 months—for operations, growth and debt service—exceed anticipated operating cash flows. It says additional financing or substantially improved operating cash flow is necessary; no financing commitments were in place. The filing identifies substantial doubt about the company’s ability to continue as a going concern.
- Management plans to pursue targeted vertical markets, expand reseller relationships and direct sales, and invest in marketing, onboarding, integration and customization. SaaS is a strategic growth focus; cloud-delivered revenue was 34% of nine-month revenue, versus 30% in 2018. No specific revenue or earnings guidance is provided.
- Risks include recurring losses, limited liquidity, dependence on external financing, debt maturities and interest burden, sales-cycle variability, customer renewals and collections, competition, data security and privacy, and reliance on resellers. Government contracts represented 41% of nine-month revenue, compared with 26% in 2018.
- Two customers each accounted for approximately 12% of nine-month 2019 revenue. The three largest customers represented 23%, 20% and 13% of gross receivables, respectively.
- The company reported effective disclosure controls. The filing lists no legal proceedings; its risk factors were stated to be not materially changed from the 2018 Form 10-K.
Key facts for investors to verify
- Whether the company can raise capital on acceptable terms or improve cash generation enough to fund operations and meet debt obligations.
- Debt principal, accrued interest, maturity terms and potential dilution from convertible notes, warrants and options.
- Whether SaaS and professional-services growth can continue, and whether improving gross margins translate into lower operating losses and positive cash flow.
- Collections and customer concentration, particularly the large receivable exposures and reliance on government customers.
- The reported liquidity figures and the going-concern disclosure in the full filing and subsequent reports.