Intellinetics, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; comparative figures are for the year ended December 31, 2017. This is an annual report, not a standalone fourth-quarter report. Intellinetics develops and sells document-management software and services, through both on-premises licenses and cloud/SaaS delivery.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $2,381,427 | $2,620,108 |
| Gross profit / margin | $1,639,022 / 69% | $1,859,646 / 71% |
| Operating expenses | $3,113,801 | $3,034,249 |
| Operating loss | $(1,474,779) | $(1,174,603) |
| Interest expense, net | $865,501 | $609,851 |
| Net loss / diluted loss per share | $(2,340,280) / $(0.13) | $(1,365,364) / $(0.08) |
| Cash used in operating activities | $(1,157,407) | $(1,122,444) |
- Revenue mix: SaaS revenue increased 20% to $748,754 and maintenance revenue increased 3% to $995,170. On-premises software sales fell 62% to $173,691; professional services declined 36% to $289,962. Cloud delivery, including hosting, rose to 31% of revenue from 24%.
- Cash and liquidity at year-end: Cash was $1,088,630, down from $1,125,921. Current assets were $1,386,864 and current liabilities $1,243,713, leaving working capital of $143,151. The company stated its cash requirements exceeded available cash flows by approximately $86,000 per month.
- Debt and equity: The balance sheet reported $3,144,926 of long-term notes payable and $1,045,937 of long-term related-party notes, plus $46,807 of current related-party notes. Disclosed principal balances totaled approximately $4.75 million, before discounts and issuance costs. Total liabilities were $5,936,871; stockholders’ deficit was $4,530,592.
- Capital expenditures were $3,410. Deferred revenue was $723,619. No dividends were paid, and the company said it did not anticipate paying dividends in the foreseeable future.
Material changes versus 2017
- Revenue contracted 9%, while gross margin declined two percentage points to 69%. Management attributed the revenue decline mainly to the shift from upfront on-premises licenses and related professional services to SaaS revenue recognized over time, as well as timing of large projects.
- Operating loss widened despite lower general and administrative expense, as sales and marketing costs increased 21% and gross profit fell. Net loss worsened by about $975,000; 2017 results included a $419,090 gain on debt retirement that did not recur.
- Interest expense increased 42%, primarily due to financing costs and debt issued in 2017 and 2018. Operating cash use increased modestly.
- Government contracts accounted for approximately 30% of revenue, down from 41%. Three reseller customers represented approximately 11%, 10%, and 10% of 2018 revenue.
Outlook, risks and unusual items
- Going concern: The auditor’s report and management disclosures state that recurring losses and negative operating cash flows raise substantial doubt about the company’s ability to continue as a going concern. The company had an accumulated deficit of $18,662,785. Financial statements contain no adjustments for a possible inability to continue as a going concern.
- Management’s plan is to grow SaaS, sales and reseller channels, and targeted vertical-market activity. It said the next 12 months’ operating, growth and debt-service needs were expected to exceed internally generated cash flows. There were no committed financing arrangements, and management provided no quantified revenue or earnings guidance.
- In September 2018, the company issued $1.3 million of convertible notes, and amended certain earlier notes to extend maturities to December 31, 2020. The notes generally carry 8% interest, with some older notes at 10%; conversion features and note covenants may constrain future financing. Failure to obtain additional funding could require significant curtailment of operations.
- Potential dilution is substantial: at December 31, 2018, 6,726,625 shares were reserved for warrants and 25,599,782 for conversion of debt, in addition to shares reserved under the equity plan. The company also disclosed cashless-exercise warrants. Shares outstanding were 17,729,421 at year-end.
- Key operating risks include customer and reseller concentration, government budget exposure and short contract terms, competition and pricing pressure, long or variable sales cycles, SaaS adoption, third-party hosting and cybersecurity risks, and the need to retain employees and develop products.
- Management said disclosure controls and internal control over financial reporting were effective at December 31, 2018, following remediation of a prior-year material weakness involving technical U.S. GAAP controls and segregation of duties. The auditor did not attest to internal-control effectiveness.
- ASC 606 was adopted using the full retrospective method, requiring restatement of certain 2017 figures; the reported adjustment increased 2017 net loss by $6,027. The company expected adoption of the new lease standard in 2019 to result in a lease liability and right-of-use asset of approximately $140,000–$150,000.
Important facts for investors to verify
- Whether the company obtained adequate financing after year-end, and its actual cash runway, monthly cash burn and debt-service capacity.
- The full terms, security, conversion prices, maturity dates and covenant/default provisions of all notes, including related-party debt and any subsequent amendments or repayments.
- Progress in SaaS growth and renewals, gross margins by revenue category, and whether the decline in license and professional-services revenue is stabilizing.
- Customer receivable collection and renewal concentration: four customers represented 66% of gross receivables at year-end, and the filing says those balances had been partially collected by the report date.
- The potential share dilution from outstanding warrants, convertible notes and equity-plan reservations, relative to shares outstanding.
- Whether the prior internal-control weakness remains remediated and whether subsequent filings identify new control issues or financing-related developments.