Intellinetics, Inc. / Globalwise Investments, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. The registrant is Globalwise Investments, Inc.; Intellinetics, Inc. is its wholly owned operating subsidiary. Globalwise acquired Intellinetics in a 2012 reverse merger and recapitalization.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Revenue | $354,871 | $360,328; down about 2% |
| Gross profit / margin | $175,387 / 49% | $56,381 / 16% |
| Operating loss | $(625,888) | $(1,092,524) |
| Net loss | $(671,797) | $(1,147,873) |
| Basic and diluted loss per share | $(0.02) | $(0.04) |
| Net cash used in operating activities | $(1,171,211) | $(618,068) |
Revenue mix shifted toward recurring services: software maintenance revenue rose 26% to $223,464 and SaaS revenue rose 20% to $34,790. Consulting revenue fell 22% to $87,957; software license revenue without professional services fell 60% to $8,660, and no license revenue with professional services was reported. Gross margin improved largely because the company had fewer low-margin third-party conversion and hardware costs.
General and administrative expense declined 31% to $568,148, mainly because Q1 2012 included significant share-exchange-related professional costs. Sales and marketing expense declined 29% to $227,783, primarily reflecting fewer sales personnel as the company emphasized channel partners. Interest expense, net, increased 11% to $61,379.
At March 31, cash was $1,363,552, compared with $46,236 at year-end 2012. Working capital was $205,160; current assets were $1,847,155 and current liabilities were $1,641,995. Total assets were $1,938,708 and total liabilities were $3,311,994. Stockholders’ deficit improved to $1,373,286 from $4,283,380 at year-end, principally reflecting equity issuance and debt conversions.
Notes payable totaled $1,588,998, plus $255,415 of related-party notes payable. The company also reported deferred compensation of $319,163 in total and deferred interest of $52,065. Cash from financing activities was $2,492,135, primarily from the share offering, partly offset by debt repayments. The company used $1,171,211 in operating cash during the quarter.
Material changes and financing
- In February and March, the company sold 15,000,000 common shares at $0.20 per share in a private placement. The filing reports $2,650,000 in cash proceeds and $350,000 of convertible notes exchanged; it also reports placement-agent fees and expenses. The cash-flow statement reports $2,731,021 from sale of common stock.
- Debt conversions reduced obligations but increased shares outstanding: $489,211 of debt converted into 1,686,935 shares, and a related-party note and accrued interest converted into 311,434 shares. Shares outstanding rose to 47,362,047 at March 31 from 36,490,345 at December 31, 2012.
- Two Ohio Development Authority loans had principal and interest payments deferred until December 31, 2013, with payments next due January 1, 2014. The company also repaid the $400,000-note lender in full for $154,292 in January.
- Two directors returned 3.5 million shares each to treasury in exchange for warrants to repurchase the same number of shares at $0.001 per share, exercisable after shareholders increase authorized common shares. The company had 50 million authorized shares and 47,362,047 outstanding at quarter-end.
Outlook, risks, and other notable matters
Management plans to expand reseller and channel-partner sales, broaden its product portfolio, and invest in sales, marketing, staffing, and infrastructure. It expects SaaS to become a primary revenue source, but provides no quantified revenue or earnings guidance. Management said growth and public-company costs are expected to consume substantially all operating cash flows and private-placement funds over the next 10 to 16 months; expected gross profit may not cover anticipated operating costs.
The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern. Management said there were no commitments for additional financing and no assurance that financing would be available on acceptable terms. Increased revenue and additional capital, if needed, were described as critical.
- Revenue is project-dependent and may fluctuate because certain software-project revenue is recognized only on completion. The historical sales cycle is described as 18–24 months.
- The two largest customers represented 21% of Q1 2013 revenue combined; government contracts represented approximately 45% of revenue.
- Ohio loan covenants include a requirement to create or retain a combined 25 full-time jobs in Ohio by specified deadlines; failure may increase loan interest rates to 10%. The loans are secured by business assets and are subject to lender cross-notification arrangements.
- The filing reports no material capital-expenditure commitments and no legal proceedings. Management concluded disclosure controls were effective at the reasonable-assurance level as of March 31, 2013; no material change in internal control was reported during the quarter.
Important facts for investors to verify
- Available cash against the reported operating cash burn and management’s 10-to-16-month funding estimate; subsequent financing or operating results are not provided here.
- Terms, payment status, and covenant compliance for the bank and Ohio development loans, including the deferred-payment schedule and Ohio employment requirements.
- Actual net cash proceeds and fees from the private placement, and reconciliation to the $2,731,021 reported in financing cash flows.
- Potential dilution from placement-agent and investor warrants, the contingent 7 million director warrants, and other reserved shares; confirm the status of any authorized-share increase and resale registration filing.
- The quarter-over-quarter and year-over-year revenue trends, including customer and government-sector concentration. The MD&A states revenue declined by $5,427, while the reported totals imply a $5,457 decline; verify the discrepancy.