Intellinetics, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; filed August 14, 2018. Intellinetics develops and sells document-management software and related implementation, maintenance, and third-party services to public- and private-sector customers. The company is emphasizing cloud delivery and reseller/channel sales.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $549,678 | $737,269 | $1,075,052 | $1,444,886 |
| Gross profit | $390,077 | $524,135 | $767,889 | $1,024,873 |
| Gross margin | 71% | 71% | 71% | 71% |
| Operating expenses | $840,175 | $688,471 | $1,647,513 | $1,507,307 |
| Operating loss | $(450,098) | $(164,336) | $(879,624) | $(482,434) |
| Interest expense, net | $(219,353) | $(138,183) | $(428,336) | $(270,278) |
| Net loss | $(669,451) | $(302,519) | $(1,307,960) | $(752,712) |
| Net loss per share, basic and diluted | $(0.04) | $(0.02) | $(0.07) | $(0.04) |
- Revenue fell 25% in Q2 and 26% for the first half. Software-license and professional-services revenue declined sharply; SaaS revenue grew 19% in Q2 and 27% in the first half.
- At June 30, cash was $280,972, compared with $1,125,921 at December 31, 2017. The company reported a working-capital deficit of $1,969,892 and total stockholders’ deficit of $3,769,705.
- Operating cash outflow was $817,592 for the first half, versus $638,532 in 2017. Investing cash outflow was $3,410; financing cash outflow was $23,947. Cash declined by $844,949 during the period.
- Balance-sheet notes payable, net of financing-cost discounts, totaled approximately $3.055 million, including current portions of $875,000 and $419,476. Gross principal disclosed in the debt notes was approximately $3.336 million. Certain convertible notes mature in December 2018; substantial related-party and other debt is also due in 2019–2020.
Changes, outlook, and risks
- Management attributed lower revenue mainly to fewer large on-premise installations and the timing of consulting projects. SaaS and cloud-hosted revenue represented 32% of first-half revenue, up from 20% a year earlier.
- First-half G&A expense rose 5% and sales and marketing expense rose 20%, reflecting higher share-based compensation, research and development, financing-related professional fees, and increased marketing investment. Interest expense increased 58%, primarily due to the November 2017 convertible-note financing and related financing-cost amortization.
- Management stated cash needs exceeded available cash flows by approximately $90,000 per month. It expected growth initiatives and public-company costs to consume substantially all anticipated operating cash flows over the next 12 months, and said existing cash and operating margins might not cover obligations. No new financing commitments were in place. The filing states these conditions raise substantial doubt about the company’s ability to continue as a going concern.
- Management’s plan is to grow through reseller training and onboarding, direct marketing, and expanded software integration and customization capabilities. No specific revenue, earnings, or cash-flow guidance was provided; plans depend on revenue growth and obtaining additional capital.
- Risks include long and variable sales cycles, reliance on resellers and government-related business, customer concentration, collections and renewals, competition, product-market acceptance, data security and privacy, and access to financing. Two customers each contributed about 10% of first-half revenue. Government contracts represented approximately 32% of first-half revenue.
- The company adopted ASC 606 using the full retrospective method; disclosed adjustments to 2017 results were limited. The company said it had remediated the previously reported internal-control material weakness and concluded disclosure controls were effective at June 30, 2018. No legal proceedings or defaults upon senior securities were reported.
Important facts for investors to verify
- Whether the company can raise capital or otherwise meet the stated monthly cash shortfall, operating needs, and upcoming debt maturities.
- Whether SaaS growth and reseller/channel initiatives can offset declines in license and professional-services revenue, and whether the reported pipeline converts to revenue and cash.
- Debt principal, accrued interest, conversion terms, maturity dates, and potential refinancing or dilution; 23.5 million shares were reserved for warrants, convertible notes, options, and the equity plan, in addition to 17.7 million shares outstanding.
- Customer and reseller concentration, accounts-receivable collections, and the sustainability of maintenance renewals and gross margins.
- Whether the remediated accounting controls remain effective and whether financing and revenue-recognition estimates are appropriately reflected in subsequent filings.