Intellinetics, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Intellinetics provides document-management software and services. Results include Graphic Sciences from its March 2, 2020 acquisition; the April 21, 2020 CEO Image acquisition occurred after quarter-end.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $1.214 million | $515,385 |
| Gross profit / gross margin | $766,125 / 63% | $372,920 / 72% |
| Operating expenses | $1.598 million | $809,626 |
| Operating loss | $(831,507) | $(436,706) |
| Net loss | $(646,211) | $(669,853) |
| Basic and diluted loss per share | $(0.54) | $(1.81) |
| Cash used in operations | $(143,951) | $(288,423) |
- Revenue rose 135% year over year. Graphic Sciences contributed $556,254 for the month included; excluding it, revenue increased 28% to $657,410.
- Cash was $1.047 million at March 31, versus $404,165 at year-end 2019. Net working capital was $560,669. Operating activities used $143,951; investing activities used $3.897 million, primarily for the acquisition; financing activities provided $4.684 million.
- Current assets were $2.795 million and current liabilities $2.234 million. Total liabilities were $6.149 million; stockholders’ equity was $2.661 million, compared with a $6.376 million deficit at December 31, 2019.
- Debt at quarter-end included $2.0 million principal on 12% subordinated notes due February 2023 and $47,728 on related-party notes. The balance sheet reports $1.386 million of long-term notes payable net of discounts. Lease liabilities totaled approximately $3.004 million, and acquisition contingent consideration was $686,200.
- Overall gross margin declined to 63% from 72%, primarily due to the acquired document-conversion business and revenue mix. Excluding Graphic Sciences, management reported a 69% margin, versus 72% a year earlier.
Material changes and unusual items
- Graphic Sciences was acquired for a preliminary purchase price of $4.592 million, comprising $3.906 million cash and $686,200 estimated contingent consideration. The earnout can reach $2.5 million over three years, based on gross-profit targets. Purchase accounting remained preliminary.
- On March 2, the company raised $5.5 million gross in a private placement: $3.5 million of common stock and $2.0 million of 12% notes. It also converted approximately $6 million of existing convertible debt and accrued interest into equity, contributing to a large increase in shares outstanding.
- Q1 included $460,767 of significant transaction costs, a $287,426 gain on extinguishment of debt, and a $188,300 income-tax benefit related to the acquisition and deferred taxes.
- Revenue from cloud-based delivery, including hosting, was 19% of total revenue, versus 39% in Q1 2019; the acquired services business materially changed the revenue mix.
Outlook, risks and contingencies
- Management provided no numerical revenue or earnings guidance. Its strategy is to grow targeted-market sales, reseller and direct channels, cloud software, and cross-selling of software to Graphic Sciences customers.
- Management stated that substantial doubt exists about the company’s ability to continue as a going concern. It cited recurring losses, uncertain operating cash generation and financing availability, and COVID-19 disruption. No additional financing commitments were in place.
- COVID-19 restrictions in Michigan reduced Graphic Sciences operations, with only work deemed essential being processed as of May 13. Management reported slower demand in other areas and warned of possible customer spending reductions, subscription terminations, government budget pressure, and prolonged operating disruption. The company furloughed employees and reduced executive and manager compensation.
- After quarter-end, the company received an $838,700 PPP loan at 1% interest, due in two years, with potential forgiveness subject to program conditions; forgiveness was not assured. It also acquired CEO Image for an initial approximately $300,000, with up to $370,000 in potential earnouts.
- Customer concentration increased: the State of Michigan represented 38% of Q1 revenue, and the two largest customers represented 64% and 7% of gross receivables at March 31. The filing notes Graphic Sciences derives over 75% of revenue from one customer, the State of Michigan.
Investor facts to verify
- Whether COVID-19 restrictions and demand weakness materially affect Graphic Sciences revenue, collections, and operating cash flow.
- Cash runway and access to financing, given the going-concern warning and the company’s recent acquisitions and financing needs.
- State of Michigan contract continuity, customer concentration, and collection of large receivables.
- Final Graphic Sciences purchase accounting and earnout obligations; integration progress and results from CEO Image.
- PPP loan forgiveness eligibility and the full effects of debt conversion, new notes, warrants, and equity issuance on dilution.