Intellinetics, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; comparisons are with FY 2013. Intellinetics develops and sells enterprise content management software and related implementation, maintenance, and cloud services to public- and private-sector customers.
Financial performance and position
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Revenue | $1.486 million | $1.554 million | Down 4% |
| Gross profit / margin | $1.185 million / 80% | $0.969 million / 62% | Profit up 22%; margin up 18 percentage points |
| Operating expenses | $2.583 million | $2.940 million | Down $0.357 million |
| Operating loss | $(1.398) million | $(1.971) million | Loss narrowed |
| Net loss | $(1.649) million | $(2.140) million | Loss narrowed 23% |
| Net loss per share | $(0.24) | $(0.33) | Improved |
| Cash used in operations | $(1.040) million | $(2.460) million | Use of cash decreased |
| Cash at year-end | $184,081 | $260,560 | Down $76,479 |
FY 2014 revenue mix included software licenses of $223,276 (down 15%), SaaS of $189,945 (up 37%), maintenance of $865,743 (up 1%), professional services of $144,809 (down 43%), and third-party services of $62,100 (up 44%). SaaS represented 13% of revenue, versus 9% in 2013. Maintenance remained the largest revenue source.
At December 31, 2014, total assets were $385,290, total liabilities $4.639 million, and stockholders’ deficit $4.254 million. Working capital deficit was $3.372 million. Notes payable totaled approximately $3.068 million, including $1.767 million owed to related parties; the company classified $2.307 million of notes as current. Interest expense, net, rose 36% to $250,756 as average debt increased.
Material changes and business developments
- Revenue declined modestly, while gross profit and gross margin improved substantially, primarily because 2014 software projects required less customization and engineering labor than certain 2013 projects.
- Operating costs fell, particularly general and administrative costs, reflecting lower legal and professional fees. The company also attributed lower sales and marketing costs to greater use of channel partners.
- Channel relationships accounted for 48% of revenue in both years. One channel partner generated 17% of 2014 revenue; the two largest customers represented approximately 12% and 5%.
- Government contracts accounted for 50% of 2014 revenue, down from 57%. These contracts typically have terms under 18 months and may depend on public budgets and renewal decisions.
- The company raised $1.225 million in new note financing during 2014, largely from related parties, and issued 357,144 shares for services. Common shares outstanding were 7,123,074 at year-end.
Outlook, risks, and unusual items
- Going concern: The auditor’s report and management’s 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 financial statements include no adjustments for the outcome of this uncertainty.
- Funding needs: Management estimated cash needs exceeded available resources by approximately $180,000 per month and projected an additional $2.16 million to $3.60 million would be needed over the next 9–12 months without improved operating cash flow. Financing was not committed, and management cautioned that funding might not be available on acceptable terms.
- Subsequent financing: The filing reports up to $200,000 of convertible notes issued after year-end. Disclosures are inconsistent about dates, maturity, and interest: some passages state 6% interest through December 31, 2015, while another states 10% and a September 30, 2015 maturity. Verify the executed note terms.
- Debt and covenants: Ohio development loans had payment deferrals into June 2015. A jobs covenant breach increased one loan’s rate from 6% to 7%, adding approximately $6,000 to a September 2015 balloon payment. Failure to meet further employment targets could increase another loan’s rate to 10%. The company stated it was otherwise in material covenant compliance.
- Liquidity and dilution: Most 2014 convertible notes mature in 2015 and carry conversion rights, generally at prices from $0.30 to $0.56 per share. Further borrowing, conversion, or equity issuance could materially dilute shareholders. Related-party borrowing and extensions are also significant.
- Operating risks: Key exposures include reliance on channel partners and a small number of customers, public-sector spending and contract renewals, long and variable sales cycles, competitive pressure, and the company’s ability to grow cloud sales and generate sufficient cash.
- Share trading: Common stock trades on the OTC Bulletin Board; the filing describes limited liquidity and price volatility. No dividends are anticipated.
Investor verification priorities
- Confirm the company’s current liquidity, monthly cash burn, financing commitments, and ability to meet near-term obligations in light of the going-concern warning.
- Reconcile the filing’s operating-expense figures: the MD&A overview cites $2.833 million for 2014, while the audited income statement reports $2.583 million; the latter is consistent with the listed expense components.
- Verify the terms and funding received for the post-year-end convertible notes, including the conflicting maturity and interest disclosures.
- Review the 2015 maturity schedule, covenant status, Ohio loan balloon payments, and potential consequences of further covenant breaches.
- Assess customer and partner concentration, government-contract renewal exposure, and whether SaaS growth can offset declines in license and professional-services revenue.