Business context and reporting period
This is Globalwise Investments, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2013, filed August 14, 2013. Globalwise is the parent of Intellinetics, Inc.; the consolidated operating business develops and sells enterprise content management software, related services, and SaaS offerings. The filing is therefore by Globalwise, not Intellinetics as a separate registrant.
Key financial results
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $581,164 in 2013; $887,285 in 2012, down 35% | $936,036 in 2013; $1,247,613 in 2012, down 25% |
| Gross profit / margin | $398,801 / 69%; $597,123 / 67% in 2012 | $574,187 / 61%; $653,504 / 52% in 2012 |
| Operating loss | $367,680; $82,939 in 2012 | $993,568; $1,175,464 in 2012 |
| Net loss | $408,907; $155,250 in 2012 | $1,080,704; $1,303,123 in 2012 |
| Basic and diluted loss per share | $0.01; $0.00 in 2012 | $0.03; $0.04 in 2012 |
At June 30, cash was $567,654 on the balance sheet and cash flow statement; the MD&A liquidity table instead reports $576,654. Accounts receivable were $744,876 and current assets were $1,383,322. Current liabilities were $1,636,746, producing a $253,424 working-capital deficit. Total liabilities were $3,261,164, and stockholders’ deficit was $1,782,193.
Six-month operating cash flow was negative $1,875,426, compared with negative $914,267 in 2012. Investing cash outflow was $16,555; financing provided $2,413,399, primarily from stock issuance. Cash increased from $46,236 at year-end to $567,654. Reported notes payable totaled $1,527,762, plus $237,915 of related-party notes; amounts include secured bank and Ohio development-authority debt. Total debt principal was reduced in part through repayment and conversion to equity.
Material changes versus the prior comparable period
- Second-quarter revenue declined 35%, mainly because software licenses bundled with professional services and consulting revenue fell. For the six months, these categories were down 71% and 51%, respectively.
- SaaS revenue increased 40% in the quarter and 29% for the six months; maintenance revenue increased 9% and 17%, respectively. The company reported 357 SaaS subscribers at June 30, versus 231 at December 31, 2012.
- Gross margin improved year over year for both periods, partly because 2012 included low-margin third-party conversion and hardware costs. Despite the higher margin, the quarterly net loss increased substantially as revenue and gross profit fell and general and administrative expense rose.
- Six-month net loss narrowed 17%, mainly as operating and other expenses declined, including costs associated with the 2012 share exchange. Cash used in operations nevertheless more than doubled.
- Common shares outstanding increased to 47,362,047 from 36,490,345 at December 31, 2012. A 15-million-share private placement and debt conversions funded operations and reduced liabilities; the offering also included placement-agent warrants.
Outlook, risks and unusual items
- Management plans to expand reseller/channel-partner sales, broaden the product portfolio, and grow SaaS. It expects SaaS to become a larger share of revenue but cautions that revenue can fluctuate because of long sales cycles, project-completion accounting, and varying channel-partner activity. No specific revenue or earnings guidance is provided.
- Management estimated a cash shortfall of approximately $120,000 per month and said an additional $1.2 million to $1.92 million could be needed over the next 10 to 16 months if operating cash flow does not improve. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern; no new financing commitments were in place.
- In March 2013, payments on both Ohio development-authority loans were deferred until December 31, 2013, with payments scheduled to resume January 1, 2014. The company disclosed prior covenant noncompliance but said it was in compliance with material covenants at June 30. Failure to meet Ohio job-retention requirements could raise loan rates to 10%.
- On July 31, after quarter-end, Matthew L. Chretien was appointed interim CEO following William J. Santiago’s resignation. Matthew Chretien is also a director, CTO, and treasurer, and is the son of the board chairman.
- Other notable financing and equity actions included settlement of $262,000 in payables partly with shares, conversion of $489,211 in debt to shares, and warrants issued in connection with the private placement. The company reported no legal proceedings and no material capital-expenditure commitments.
Important facts for investors to verify
- Reconcile the cash balance: the balance sheet and cash flow statement report $567,654, while the MD&A table reports $576,654.
- Review cash burn, the stated monthly funding gap, and the feasibility and terms of any additional financing; the filing identifies substantial going-concern uncertainty.
- Confirm debt payment schedules, loan covenant and employment requirements, and the resumption of Ohio loan payments in January 2014.
- Assess dilution from the 2013 share issuance and outstanding warrants, including any warrants or share rights not included in the reported 1,848,214 shares reserved for warrant exercise.
- Monitor revenue concentration and project timing: a small number of customers and government-related contracts represent meaningful portions of revenue, and completed-project accounting can make quarterly results volatile.