Business context and reporting period
GlobalWise Investments, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2014. Its operating subsidiary, Intellinetics, Inc., develops and sells enterprise content management software, related services, and cloud-based subscriptions. The filing is by GlobalWise, notwithstanding the request metadata naming Intellinetics.
Financial results and position
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Revenue | $299,183 | $354,871; down 16% |
| Gross profit / margin | $235,755 / 79% | $175,387 / 49%; margin up about 30 percentage points |
| Operating expenses | $591,573 | $801,275; down $209,702 |
| Operating loss | $355,818 | $625,888 |
| Net loss | $403,822; $0.01 per share | $671,797; $0.02 per share |
| Cash used in operations | $374,503 | $1,171,211 |
| Cash at quarter-end | $19,332 | $260,560 at Dec. 31, 2013 |
At March 31, total assets were $331,587, current liabilities $2,479,020, total liabilities $3,576,602, and stockholders’ deficit $3,245,015. Working capital deficiency was $2,222,659. Notes payable were $1,966,019, plus $217,915 of related-party notes; $949,765 of notes payable and all related-party principal were classified as current. The company reported $135,359 of net cash from financing, including $240,000 of new note proceeds, partly offset by repayments.
Material changes and management commentary
- Revenue fell mainly because professional services revenue declined $43,348 after a large project completed in 2013, while maintenance revenue fell $12,942. SaaS revenue rose 13% to $39,442; it represented 13% of revenue versus 9% a year earlier.
- Gross margin improved as cost of revenue fell 65%, reflecting revenue mix and lower revenue. Management attributed lower general and administrative and sales and marketing costs primarily to staffing reductions and a greater channel-partner focus.
- Management is expanding reseller distribution and cloud delivery. Two MarketCommand resellers were onboarded by quarter-end; management said the rollout was expected to finish by the end of April, with three more resellers scheduled to complete onboarding by June 30, 2014. These are plans, not guaranteed results.
- The company estimated an operating cash shortfall of about $120,000 per month and a need for $1.44 million to $1.8 million over the next 9–12 months if operating cash flow did not improve. It stated that no new financing commitments were in place and that these conditions raised substantial doubt about its ability to continue as a going concern.
- The company received the remaining $110,000 under its February convertible-note financing on April 4, 2014. Those notes mature September 30, 2014, bear 10% interest before maturity and 15% thereafter if unpaid, and are convertible at $0.08 per share under specified circumstances. The company agreed to seek shareholder approval to increase authorized shares by at least 20 million.
Risks, contingencies, and other items
Risks include severe liquidity constraints, recurring losses, debt maturities, dependence on additional financing, and potential covenant or employment-target noncompliance under Ohio Development Authority loans. Government contracts accounted for about 44% of Q1 revenue. Two customers accounted for 22% of revenue, and four customers represented 66% of gross receivables at quarter-end. The company also cited long and variable sales cycles, project timing, competition, customer renewals and collections, data security, and channel-partner execution as operating risks. It reported no legal proceedings, no defaults upon senior securities, and no material change to the risk factors in its 2013 Form 10-K. Management concluded disclosure controls were effective as of March 31, 2014; no material internal-control changes were reported.
Important facts for investors to verify
- Whether the company secured enough financing to fund operations and meet near-term debt obligations, and the effect of any financing on dilution.
- Whether the April receipt of $110,000 occurred as disclosed and how the September 2014 convertible notes were repaid, converted, or refinanced.
- Progress and revenue contribution from MarketCommand resellers, and whether SaaS growth can offset declines in maintenance and services.
- Compliance with loan covenants and required Ohio employment levels, including any consequences for interest rates or repayment terms.
- The extent of customer concentration and collection of receivables, and the basis for the reported 79% gross margin amid lower revenue.