Intellinetics, Inc. — Q1 2018 Form 10-Q
Business context and period. Intellinetics develops and sells document-management software and related services to public- and private-sector customers. This unaudited report covers the three months ended March 31, 2018, compared with Q1 2017. The company is shifting toward cloud and software-as-a-service (SaaS) delivery; cloud revenue, including hosting, rose to 33% of revenue from 19%.
Financial results and position
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Revenue | $525,374 | $707,617 |
| Gross profit / margin | $377,814 / 72% | $500,737 / 71% |
| Operating expenses | $807,340 | $818,836 |
| Operating loss | $(429,526) | $(318,099) |
| Interest expense, net | $(208,984) | $(132,095) |
| Net loss / loss per share | $(638,510) / $(0.04) | $(450,194) / $(0.03) |
| Cash from operating activities | $(405,756) | $(548,769) |
| Cash, March 31 / December 31 | $710,088 | $1,125,921 |
| Working capital | $(1,493,633) | — |
Revenue fell 26% year over year. Software license sales declined 75% to $40,994; SaaS revenue increased 36% to $176,600. Maintenance revenue decreased 3%, professional services decreased 45%, and third-party services decreased 91%. Cost of revenue fell 29%, and gross margin improved by about one percentage point, but lower gross profit and higher interest expense drove the larger net loss. Operating expenses decreased 1% overall.
At March 31, total assets were $1.126 million, total liabilities $4.288 million, and stockholders’ deficit $3.162 million. Notes payable carrying values were approximately $2.196 million, plus approximately $746,000 of related-party notes. Cash declined $415,833 during the quarter; investing cash flow was zero and financing cash flow was $(10,077). Deferred revenue was $604,753. The company reported $150,071 of remaining performance obligations on qualifying SaaS and maintenance contracts, with about 75% expected to be recognized within 12 months.
Material changes and management commentary
- Management attributed weaker license revenue to lower demand for on-premise solutions and the absence of large installations. SaaS growth primarily reflected new customers; maintenance declines reflected renewals lost exceeding new growth.
- Management plans to pursue targeted vertical markets, expand reseller partnerships, strengthen direct sales and marketing, and develop software integration and customization capabilities. The filing provides no specific revenue or earnings guidance.
- The company estimates its cash requirements exceed available operating cash flows by approximately $111,000 per month. It expects growth, public-company costs, and debt service to consume substantially all anticipated operating cash flows over the next 12 months; without increased operating cash flow or new financing, it says funds will be insufficient for planned operations and existing debt obligations.
- Management states that additional capital may be needed, but there are no financing commitments or arrangements in place and no assurance financing will be available on acceptable terms. The filing identifies substantial doubt about the company’s ability to continue as a going concern.
- Convertible notes carry significant interest and maturity obligations. The company reports $875,000 of current unrelated notes and $418,024 of current related-party notes; the notes include conversion rights. At quarter-end, 23,166,150 shares were reserved for warrants, convertible notes, options, and the equity plan, versus 17,729,421 common shares outstanding.
- Disclosure controls and procedures were deemed ineffective due to a material weakness in controls and segregation of duties for technical GAAP application and financial reporting schedules. Management described remediation steps, but the weakness was not yet considered fully remediated.
- The company adopted ASC 606 retrospectively. The reported Q1 2017 comparison reflects adjustments of $(2,777) to revenue and $(1,485) to net income (increased loss); management described the overall effect as limited.
Key facts for investors to verify
- Cash runway, monthly cash shortfall, and whether additional financing can be obtained in time and on acceptable terms.
- Debt maturities, interest terms, conversion rights, related-party obligations, and potential dilution.
- Whether SaaS growth and reseller/direct-sales initiatives can offset falling license and services revenue and improve cash generation.
- Progress in remediating the material weakness and the reliability of financial reporting.
- Customer and channel concentration: the two largest customers generated 12% and 10% of Q1 revenue; government contracts represented about 35%.