Intellinetics, Inc. — Form 10-Q Summary
Business context and period. This unaudited filing covers the quarter and nine months ended September 30, 2022. Intellinetics provides document-management software and document-conversion, storage, and retrieval services. Results include Yellow Folder, acquired April 1, 2022, from the acquisition date onward. The common stock began trading on NYSE American under INLX on September 9, 2022.
Financial results and liquidity
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | 2022: $3.860 million; 2021: $3.171 million (+22%) | 2022: $9.979 million; 2021: $8.716 million (+14%) |
| Gross profit / margin | $2.506 million / 65%; prior year $1.916 million / 60% | $6.327 million / 63%; prior year $5.335 million / 61% |
| Operating income | $458,003; prior year $409,467 | $416,779; prior year $825,918 |
| Net income (loss) | $217,536; prior year $296,437 | $(176,757); prior year $1.332 million |
| Operating cash flow | Management reported $1.852 million for the quarter | $1.925 million; prior year $1.408 million |
- Quarterly SaaS revenue rose to $1.211 million from $352,192, largely reflecting Yellow Folder and continued cloud growth. Professional-services revenue declined 7% in the quarter and 9% year to date, with hiring and staffing constraints cited as key factors.
- Quarterly net income declined despite higher operating income, as interest expense increased and the company recorded a $28,494 earnout fair-value expense. For the nine months, the prior-year comparison also included an $845,083 gain from PPP loan forgiveness; 2022 included $355,281 of acquisition and fundraising transaction costs and $144,999 of earnout fair-value expense.
- Cash was $3.777 million at September 30, 2022, compared with $1.753 million at year-end 2021. Current assets were $5.644 million and current liabilities $7.129 million, a working-capital deficit of approximately $1.485 million.
- Cash used in investing was $6.841 million, primarily the $6.383 million Yellow Folder acquisition and capitalized software. Financing provided $6.941 million, including stock and note proceeds, partly offset by issuance costs and earnout payments.
- Notes had $4.965 million aggregate principal outstanding: $2.0 million of 12% notes due February 28, 2023, and $2.965 million of 12% notes due March 30, 2025, including $600,000 issued to a related party. The balance sheet also reports lease liabilities of about $3.478 million.
Material changes versus the prior period
- Yellow Folder expanded the Document Management business: that segment’s nine-month revenue increased to $4.181 million from $2.319 million. Document Conversion revenue declined to $5.798 million from $6.397 million.
- Reported revenue growth includes the acquisition. Pro forma nine-month revenue, assuming Yellow Folder had been acquired at the start of 2021, was approximately $10.757 million in 2022 versus $10.762 million in 2021; pro forma net results were a $142,241 loss versus $963,866 income.
- Cash and total assets increased substantially, alongside acquisition-related goodwill and intangible assets. Goodwill rose to $5.790 million from $2.323 million; intangible assets, net, rose to $4.547 million from $968,496.
- Shares outstanding increased to 4,073,757 from 2,823,072 at year-end 2021, principally reflecting the April stock issuance of 1,242,588 shares.
Outlook, commentary, and risks
- Management gave no specific revenue or earnings guidance. It believes cash, expected operating cash flow, and potential financing options will meet ordinary-course needs for at least 12 months. However, it cautioned that operating cash flow alone may not cover obligations in the first half of 2023, including the $2.0 million note maturity and possible earnout payments of up to $833,333 in the second quarter. Management said refinancing or other modifications may be pursued.
- Management cited wage inflation, difficulty recruiting and retaining staff, and lingering COVID-19 absences and customer workflow effects as pressures on Document Conversion capacity and margins. Long-term government contract pricing can limit the ability to recover higher labor costs. It also cited lower mortgage-industry activity as a factor affecting storage and retrieval work.
- Customer concentration remains notable: the State of Michigan generated 37% of nine-month revenue and 37% of third-quarter revenue; government contracts represented about 52% and 49%, respectively. Management noted uncertainty from inflation, economic conditions, COVID-19, acquisition integration, competition, and customer spending.
- The filing reports no material change to previously disclosed risk factors, no legal proceedings, and effective disclosure controls as of September 30, 2022. The Yellow Folder purchase-price allocation remained preliminary and could be adjusted.
Key facts for investors to verify
- How much reported growth and future cash generation are attributable to Yellow Folder, and whether the acquisition’s integration and expected synergies are being realized.
- Whether staffing and customer workflow improve enough to restore Document Conversion revenue and margins, and how wage inflation affects contract profitability.
- How the company will address the February 2023 $2.0 million note maturity and possible 2023 earnout payments, including refinancing availability, terms, and any dilution.
- The sustainability of operating cash flow and liquidity given the working-capital deficit, debt service, lease commitments, and acquisition-related obligations.
- The effects of customer concentration, particularly exposure to the State of Michigan and government work, and the continuing decline in mortgage-related activity.