Business context and reporting period
Globalwise Investments, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2012. Globalwise was previously a non-operating public shell; on February 10, 2012, it acquired Intellinetics, Inc. in a share exchange accounted for as a reverse merger and recapitalization. Intellinetics is the operating subsidiary, developing and selling enterprise content management software and related services. Comparatives reflect Intellinetics’ historical results.
Key financial results
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Revenue | $360,328 | $239,126 |
| Gross profit / margin | $56,381 / 16% | $34,983 / 15% |
| Operating expenses | $1,148,905 | $368,053 |
| Operating loss | $(1,092,524) | $(333,070) |
| Interest expense, net | $55,349 | $38,035 |
| Net loss | $(1,147,873) | $(371,105) |
| Basic and diluted loss per share | $(0.04) | $(0.02) |
| Cash from (used in) operating activities | $(618,068) | $(200,909) |
| Cash at period end | $140,510 | $19,926 |
Revenue rose 51%. Consulting services increased to $112,105 from $22,016, maintenance revenue rose 15% to $177,451, and software-as-a-service revenue declined to $29,041 from $31,417. Gross margin improved by about one percentage point, but remained low. As of March 31, 2012, total assets were $410,979, total liabilities were $5,262,411, and the working-capital deficit was $2,842,321. Total notes payable were $2,645,982, including $1,188,510 current; related-party notes totaled $550,707, of which $288,000 was current.
Material changes and unusual items
- Net loss increased substantially, primarily reflecting $596,841 of legal, consulting and professional fees related to the share exchange and public-company reporting, plus higher sales and marketing costs. Sales and marketing expense increased 140% to $321,895.
- Costs of revenue increased 49%. Management cited additional staffing and third-party costs for a document-conversion project. Costs on unfinished customized-software projects were expensed before related revenue recognition; the filing reports deeply negative margins for that category.
- Operating cash use rose to $618,068. Financing provided $657,289, including $724,556 in new borrowings, partly offset by repayments. Cash increased by only $239 during the quarter.
- The company issued $130,000 of contingently convertible notes bearing 10% annual interest and due June 1, 2012; certain holders could convert at a 50% discount to a specified market-price average, subject to conditions. A director loaned the company $238,000 at 10% per quarter, due June 27, 2012.
- The share exchange terminated the mandatory-redemption arrangement and reclassified the prior deficit presentation into stockholders’ equity accounts. At March 31, 32,590,850 common shares were outstanding.
Outlook, risks and contingencies
Management planned to expand reseller channels, sales staff and marketing, and to raise at least $2 million through a 2012–2013 private placement. It said current cash and operating margins were insufficient to meet obligations and expected growth and public-company costs to consume substantially all anticipated operating cash flows and financing proceeds over the next 10 to 16 months. No new financing commitments were in place. Management disclosed substantial doubt about the company’s ability to continue as a going concern; the financial statements contain no adjustments for a possible failure to continue operations.
If additional financing is unavailable, stated cash-conservation options include limiting hiring, reducing staff, deferring key-employee compensation, extending vendor payment terms and encouraging early customer payments. The Ohio development loans carry covenants and job-creation requirements; covenant noncompliance was waived on February 10, 2012, and failure to meet specified Ohio employment levels could increase loan rates to 10%. The two largest customers accounted for approximately 17% and 14% of Q1 2012 revenue. The filing reports no legal proceedings and no material capital-expenditure commitments.
Facts investors should verify
- Whether the planned $2 million equity raise was completed, on what terms, and whether additional financing is available to address the going-concern risk.
- Repayment, extension or conversion of the short-term and related-party notes due in 2012, including the director note and convertible notes.
- Progress in improving gross margins and completing customized projects whose costs were incurred before revenue recognition.
- Customer and reseller concentration, continued revenue from major accounts, and collections; the filing says the three largest customer receivable balances at March 31 were subsequently fully collected.
- Reconciliation of the MD&A’s stated Q1 2012 net loss of $1,147,843 with the financial statements’ reported net loss of $1,147,873; the filing text does not explain the difference.