Business context and reporting period
GlobalWise Investments, Inc. filed this Form 10-K for the fiscal year ended December 31, 2013. Its sole operating subsidiary, Intellinetics, develops, sells and supports enterprise content management software, including on-premises licenses and cloud-based services, for public- and private-sector customers. The figures below compare full-year 2013 with full-year 2012; this is not a quarterly-only report.
Management focused on expanding reseller and channel sales, cloud delivery and the MarketCommand program for print and imaging resellers. Cloud revenue was reported as 8% of total revenue in one section and 9% in another; the filing does not provide a consistent value.
Financial performance and position
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $1,554,185 | $2,734,950 | Down 43% |
| Gross profit / margin | $968,956 / 62% | $1,753,431 / 64% | Gross profit down 45%; margin down 2 percentage points |
| Operating loss | $(1,971,074) | $(1,671,076) | Loss increased |
| Net loss | $(2,139,704) | $(1,985,493) | Loss increased 8% |
| Net loss per share, basic and diluted | $(0.05) | $(0.06) | — |
| Cash used in operating activities | $(2,460,410) | $(1,147,491) | Cash use increased |
| Cash at year-end | $260,560 | $46,236 | Increased |
Maintenance revenue rose 8% to $856,755 and SaaS revenue rose 28% to $138,607. License revenue with professional services fell 79% to $196,485; consulting revenue fell 59% to $294,831. Government contracts represented 57% of revenue, versus 39% in 2012. One channel partner accounted for 18% of 2013 revenue.
At December 31, 2013, current assets were $443,873 and current liabilities were $1,696,340, a working-capital deficit of $1,252,467. Total liabilities were $3,367,217; reported notes payable, including related-party notes, totaled approximately $2,048,575. Stockholders’ deficit was $2,841,193 and accumulated deficit was $7,808,370. Financing activities provided $2,696,296 in 2013, including $2,731,021 from stock issuance, partly offset by debt repayments.
The audited statements report 2013 operating expenses of $2,940,030 and 2012 expenses of $3,424,507. The MD&A elsewhere gives different totals ($3,108,660 and $3,738,924); this discrepancy is not reconciled in the filing text.
Outlook, risks and unusual items
- Going concern and funding: The auditor’s report includes an explanatory paragraph stating that recurring losses and negative operating cash flows raise substantial doubt about the Company’s ability to continue as a going concern. Management said it needed additional capital and estimated a cash shortfall of about $120,000 per month. Funding estimates vary across the filing, including approximately $1.4 million–$1.8 million over the next 12 months and other ranges and time periods.
- Subsequent financing: In February 2014, the Company issued notes with a maximum aggregate principal of $350,000 and had received $240,000 by the filing date. The notes bear 10% interest, mature September 30, 2014, and may convert at $0.08 per share; unpaid amounts accrue 15% interest after maturity. The Company agreed to seek approval to increase authorized shares by at least 20 million.
- Other near-term debt: Two 2013 convertible-note issuances totaled $320,000, with stated July 31, 2014 maturities, 10% interest before maturity and 15% thereafter if unpaid; conversion prices are $0.10 and $0.08 per share. The filing also describes a commitment to seek shareholder approval for at least 10 million additional authorized shares.
- Execution and concentration risks: The strategy depends on channel partners, adoption of cloud services and successful reseller onboarding. Two MarketCommand resellers were onboarded after year-end; three more were scheduled for onboarding by June 30, 2014. Government contracts are generally short-term and may be terminated, audited or affected by budget decisions. Long sales cycles and project-completion revenue recognition can cause volatility.
- Debt covenants and related parties: Ohio development loans carry employment and other covenants; the Company disclosed past covenant non-compliance, though it said it was currently compliant. Several related-party notes were extended to 2015. The filing warns that covenant breaches could increase interest or accelerate repayment.
- Unusual items: The Company paid $75,000 to settle claims with a former employee. It also issued substantial equity in 2013 and had 47,362,047 common shares outstanding at year-end, against 50 million authorized; 1,848,214 additional shares were reserved for outstanding warrants.
- Controls and audit: Management concluded disclosure controls and internal control over financial reporting were effective at year-end. The auditor did not provide an opinion on internal control, as permitted for a smaller reporting company.
No formal revenue or earnings guidance is provided. Management described reseller expansion and cloud services as growth priorities, but emphasized the need for external financing and cautioned that plans may not succeed.
Important facts for investors to verify
- Reconcile the inconsistent cloud-revenue percentages and operating-expense totals in the filing.
- Confirm the Company’s actual cash runway, funding requirement and ability to obtain financing on acceptable terms; compare the varied shortfall estimates with subsequent cash flows.
- Check repayment, conversion and share-authorization status for the 2013 and February 2014 convertible notes, including post-maturity interest and potential dilution.
- Review debt maturities, Ohio loan covenants and employment requirements, including whether any covenant default or acceleration risk exists.
- Track whether MarketCommand resellers were onboarded as scheduled and whether channel and cloud growth offset declines in project-based license and consulting revenue.
- Assess customer and channel concentration, government contract renewals, receivable collections and the continuing going-concern uncertainty.