Intellinetics, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; unaudited. Intellinetics provides document-management software and services and document-conversion, storage, and retrieval services. The April 1 acquisition of Yellow Folder materially expanded its Document Management business.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $3.416 million | $2.910 million | $6.119 million | $5.545 million |
| Gross profit / margin | $2.189 million / 64% | $1.814 million / 62% | $3.821 million / 62% | $3.419 million / 62% |
| Operating income (loss) | $(134,000) | $306,000 | $(41,000) | $416,000 |
| Net income (loss) | $(374,000) | $192,000 | $(394,000) | $1.035 million |
| Basic and diluted EPS | $(0.09) | $0.07 basic; $0.06 diluted | $(0.11) | $0.37 basic; $0.33 diluted |
- Q2 revenue rose 17% year over year, primarily due to Yellow Folder, which contributed $790,000 for the quarter. Six-month revenue rose 10%. Management said revenue excluding Yellow Folder was down $216,000, or 4%, reflecting Graphic Sciences hiring and project-mix challenges, partly offset by SaaS growth.
- For the six months, SaaS revenue increased to $1.590 million from $700,000; professional services revenue declined to $3.214 million from $3.550 million. Q2 SaaS revenue was $1.158 million, including a substantial Yellow Folder contribution.
- Operating expenses increased 54% in Q2 and 29% for the six-month period. Q2 included $285,000 of acquisition transaction costs; six-month transaction costs were $355,000. Higher amortization and sales and marketing costs also contributed.
- Six-month 2021 net income included an $845,000 gain from forgiveness of the PPP loan; therefore, the year-over-year earnings comparison includes this unusual item.
Cash flow, liquidity, and debt
- Cash was $2.113 million at June 30, 2022, compared with $1.753 million at year-end 2021. Current assets were $3.924 million and current liabilities $5.795 million, a working-capital deficit of approximately $1.871 million.
- Six-month operating cash flow was $73,000, down from $587,000 in 2021. Investing activities used $6.653 million, including $6.383 million for Yellow Folder. Financing activities provided $6.941 million, largely from the April equity and debt offering. Management separately reported Q2 operating cash use of $404,000.
- At June 30, total note principal was approximately $5.565 million: $2.000 million of 2020 notes and $2.965 million of 2022 notes, including $600,000 issued to a related party. Both carry 12% interest. The 2020 notes mature in February 2023; the 2022 notes mature March 30, 2025. The balance sheet also reports $2.981 million of long-term and $654,000 of current lease liabilities.
- Management said operating cash flow alone may not cover the 2023 note maturity and potential earnout payments of up to $833,000 in Q2 2023. It believes resources, expected operating cash flow, and potential financing options should cover needs for at least 12 months, and stated it may seek refinancing or other modifications.
Material developments, outlook, and risks
- Yellow Folder was acquired for a reported $6.383 million cash purchase price in the preliminary purchase-price allocation. It contributed $790,000 of revenue and $197,000 of net income since acquisition. The allocation remains preliminary; recorded goodwill increased to $5.790 million and intangible assets to $4.675 million.
- The April financing generated approximately $5.741 million gross from issuing 1,242,588 shares at $4.62 and $2.965 million in 12% subordinated notes. The share count rose to 4,073,757 at June 30 from 2,823,072 at year-end. The company also issued placement-agent warrants and extended existing warrants.
- Management cited ongoing COVID-related uncertainty, reduced work volumes from Michigan agencies not fully returning onsite, hiring constraints, unfavorable project mix, and reduced Rocket Mortgage work amid a mortgage-industry slowdown. The State of Michigan represented 35% of Q2 revenue and 37% of six-month revenue; government contracts were 49% and 54%, respectively.
- Management expects continued opportunity from cloud/SaaS adoption and digital transformation but provided no specific quantitative revenue or earnings guidance. It described results as subject to fluctuation and said interim results are not necessarily indicative of full-year performance.
- The filing reports no material changes to the risk factors in the 2021 Form 10-K, no material legal proceedings, and effective disclosure controls as of June 30. Management cautioned that COVID-19, customer spending, acquisition integration, customer concentration, and access to financing could affect results and liquidity.
Important facts for investors to verify
- Whether operating cash generation and available financing will be sufficient for the February 2023 note maturity and potential 2023 earnout payments.
- Yellow Folder’s post-acquisition revenue, profitability, integration progress, and final purchase-price allocation.
- Progress in resolving Graphic Sciences staffing and project-mix issues, and the recovery or further decline in Michigan and Rocket Mortgage-related demand.
- Customer concentration, particularly Michigan’s share of revenue and receivables, and the effect of the April share issuance and outstanding warrants on dilution.
- The filing’s differing descriptions of Q2 operating cash flow: MD&A states $404,000 used, while the six-month cash-flow statement reports $73,000 provided. The quarterly figure is stated in MD&A rather than presented as a separate cash-flow statement value.