Intellinetics, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Unaudited consolidated results. Intellinetics provides document-management software and services and document-conversion, storage, and retrieval services.
Financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $4.25 million | $3.86 million | $12.69 million | $9.98 million |
| Gross profit | $2.61 million | $2.51 million | $7.84 million | $6.33 million |
| Gross margin | 61.3% | 64.9% | 61.8% | 63.4% |
| Operating income | $346,000 | $458,000 | $926,000 | $417,000 |
| Net income (loss) | $209,000 | $218,000 | $458,000 | $(177,000) |
| Diluted EPS | $0.05 | $0.05 | $0.10 | $(0.05) |
Q3 revenue grew 10% year over year; nine-month revenue grew 27%. SaaS revenue rose 7% in Q3 and 36% year to date, while professional-services revenue rose 16% and 33%, respectively. Professional services drove much of the growth, particularly document-conversion project work. Storage and retrieval revenue remained soft, reflecting lower activity from a major mortgage-industry customer.
Margin compression reflected a higher share of lower-margin professional-services work, along with labor and wage costs. Q3 operating income and net income declined year over year despite higher revenue; year-to-date operating income improved, and the company returned to profitability. The 2022 year-to-date comparison included $355,000 of acquisition transaction costs and $145,000 of earnout fair-value expense.
Cash, liquidity, and debt
- Cash was $1.69 million at September 30, 2023, down from $2.70 million at December 31, 2022. Working capital was approximately $59,000; accumulated deficit was $21.16 million.
- Nine-month operating cash flow was $1.13 million, versus $1.92 million in 2022. Investing used $432,000, mainly for capitalized software; financing used $1.70 million, including $700,000 in final earnout payments and $980,000 in note repayments.
- Outstanding 2022 notes had approximately $2.96 million of principal, bear 12% interest, and mature March 30, 2025. The filing says operating cash flow alone may be insufficient to repay the debt in full at maturity.
- Management believes available resources, operating cash flows, and potential financing options will meet ordinary-course needs for at least 12 months. It may pursue refinancing or other modifications of the notes.
Changes, outlook, and risks
- Yellow Folder, acquired April 2022, contributed to year-over-year growth; 2023 year-to-date results include nine months of its operations versus six months in 2022. The acquisition also affects expense and margin comparisons.
- The State of Michigan contract was renewed for October 1, 2023 through May 30, 2025, with an estimated net rate increase of approximately 21% versus rates under the prior contract period.
- No specific revenue or earnings guidance was provided. Management said wage inflation appeared to have stabilized and reported no diminished customer demand from adverse economic conditions as of the filing date. It cited economic uncertainty and customers’ technology budgets as risks.
- Customer and sector concentration is material: the State of Michigan represented 31% of Q3 revenue and 34% of nine-month revenue; government and education contracts represented approximately 82% and 79%, respectively. The company also reported continued softness in transactional work from Rocket Mortgage.
- Staffing and wage increases in Document Conversion may constrain project throughput and pressure margins. Management described the project backlog and hiring needs as relevant to growth.
- The filing reports no legal proceedings or material changes to previously disclosed risk factors. Management concluded disclosure controls were effective as of September 30, 2023.
Investor verification points
- Confirm the State of Michigan renewal’s effective terms, expected revenue impact, and customer concentration exposure.
- Assess the plan and financing capacity to address approximately $3.0 million of 12% notes due in March 2025, given management’s warning about cash flow sufficiency.
- Track whether professional-services growth can be sustained while staffing costs and lower segment margins weigh on consolidated gross margin.
- Monitor operating cash generation and working-capital trends; receivables, including unbilled receivables, increased during the period.
- Reconcile the MD&A’s Q3 operating-cash-flow figure with the financial statements: the statements provide nine-month operating cash flow, while the MD&A cites a separate Q3 figure.