Intellinetics, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with the three months ended March 31, 2014 unless noted. Intellinetics develops, sells, and supports enterprise content-management software, delivered through customer-installed licenses and software-as-a-service (SaaS). The filing identifies the company as a smaller reporting company.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $583,775 | $299,183 |
| Gross profit / gross margin | $470,238 / 81% | $235,755 / 79% |
| Operating expenses | $583,195 | $591,573 |
| Loss from operations | $(112,957) | $(355,818) |
| Interest expense, net | $(95,900) | $(48,004) |
| Net loss / loss per share | $(208,857) / $(0.03) | $(403,822) / $(0.06) |
| Net cash used in operating activities | $(248,749) | $(374,503) |
Revenue increased 95%. Software-license revenue rose to $190,037 from $8,000, SaaS revenue increased 43% to $56,539, maintenance revenue rose 9% to $228,671, and professional-services revenue increased to $82,238 from $29,424. Management attributed growth to license sales, new customers, and channel-partner activity. Cost of revenue rose 79% to $113,537. Gross margin improved by about two percentage points, primarily due to revenue mix.
General and administrative expense declined 22% to $365,840, while sales and marketing expense rose 84% to $213,977 as the company added sales personnel and expanded channel-partner activity. The net loss narrowed 48%, but net interest expense approximately doubled, which management attributed primarily to higher average debt outstanding.
Financial position and liquidity
- Cash was $79,775 at March 31, 2015, down from $184,081 at December 31, 2014. Accounts receivable was $226,297, versus $99,061 at year-end.
- Working capital deficit was $3,585,504. Total liabilities were $4,805,335, compared with total assets of $386,102; stockholders’ deficit was $4,419,233.
- Balance-sheet notes payable, including related-party notes, totaled approximately $3.20 million. Approximately $2.53 million was classified as current. Management separately stated that debt obligations due within the next 12 months were approximately $2.5 million.
- Operating activities used $248,749 in cash; financing activities provided $144,443, including $200,000 of new related-party convertible-note proceeds, partly offset by debt repayments. Cash declined by $104,306 during the quarter.
Changes, outlook, and risks
Management said cash flow before working-capital changes was short by approximately $150,000–$200,000 per quarter. Unless revenue increases, it estimated a $1.05 million–$1.25 million operating funding shortfall over the next 12 months, in addition to near-term debt obligations. The company planned to grow reseller channels and sales, develop its product portfolio, control costs, and negotiate to extend maturities, defer payments, or convert obligations to equity. It reported no commitment for additional financing beyond disclosed note issuances and cautioned that financing may not be available on acceptable terms. The filing states these conditions raise substantial doubt about the company’s ability to continue as a going concern.
The company had disclosed noncompliance with an employment covenant on Ohio State Development Authority Loan No. 1; the lender increased its rate from 6% to 7% effective October 1, 2014, increasing the September 2015 balloon payment by about $6,000. Failure to satisfy the employment requirements for Loan No. 2 could increase its rate to 10%. Management said it was otherwise in compliance with loan covenants, but noted future compliance was not assured.
Revenue is subject to volatility because software projects can take a long time to complete and revenue is often recognized upon completion. The company also cited a long sales cycle, reliance on channel partners, government-customer risks, financing needs, and security and privacy risks. Two customers accounted for 15% and 8% of Q1 2015 revenue; government contracts represented approximately 45%. No legal proceedings were reported. Management reported disclosure controls were effective as of March 31, 2015 and no material change in internal control during the quarter.
After quarter-end, on April 30, 2015, the company announced a new board chair and two director departures, adopted a 2015 equity incentive plan reserving 2 million shares, and granted options for 640,000 shares and 128,000 shares, subject to vesting.
Important facts for investors to verify
- Whether the company can secure financing or restructure approximately $2.5 million of obligations due within 12 months, and meet ongoing operating cash needs.
- The status of negotiations with lenders, upcoming maturities, payment deferrals, and compliance with Ohio loan covenants.
- Whether Q1 revenue growth is repeatable, particularly the large increase in software-license revenue, and whether channel and SaaS growth can continue.
- Collection of receivables and customer concentration, including the status of the largest customer balances.
- Potential dilution from convertible notes, approximately 4.7 million shares reserved for outstanding warrants, and the post-quarter equity plan and option grants.