Intellinetics, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; compared with the corresponding 2016 periods. The company develops and sells content-services software, including premise-based licenses and cloud/SaaS offerings.
Key financial metrics
| Metric | Q3 2017 | Nine months 2017 | Period-end / cash-flow data |
|---|---|---|---|
| Revenue | $674,240 | $2,121,987 | — |
| Gross profit / margin | $490,282 / 73% | $1,518,015 / 72% | — |
| Operating expenses | $635,489 | $2,140,935 | — |
| Operating loss | $(145,207) | $(622,920) | — |
| Interest expense, net | $(141,483) | $(411,761) | — |
| Net loss | $(286,690) | $(1,034,681) | — |
| Cash | — | — | $183,703 at September 30 |
| Net cash used in operating activities | — | $(805,404) | $(1,249,649) in prior-year period |
Material changes versus prior comparable periods
- Q3 revenue declined 1% year over year; nine-month revenue increased 11%.
- Q3 SaaS revenue grew 31% to $180,517; for the quarter, cloud-based revenue, including hosting, was 27% of total revenue versus 20% a year earlier. Nine-month SaaS revenue rose 27% to $461,734.
- Nine-month software-license and professional-services revenue increased 30% and 29%, respectively. Maintenance revenue declined 2% over nine months, and third-party services revenue declined 36%.
- Q3 gross margin fell to 73% from 76%; nine-month gross margin was 72% in both years. Management attributed the quarterly margin decline primarily to strong-margin professional-services projects in Q3 2016.
- Nine-month operating expenses decreased 10%, mainly because 2016 included one-time sales and marketing investments. Nine-month net loss narrowed 13%; Q3 net loss increased 16%, primarily reflecting substantially higher interest expense.
- Cash declined from $689,946 at December 31, 2016 to $183,703. Current liabilities were $2,283,128 against current assets of $805,732, a $1,477,396 working-capital deficiency. Total liabilities were $3,347,550 and stockholders’ deficit was $2,507,565.
Debt, liquidity, outlook and risks
- Notes payable, net of debt discounts, totaled approximately $1.64 million at September 30, 2017, including $518,265 current non-related-party notes and $157,322 current related-party notes. Gross principal disclosed for notes was approximately $1.70 million. Major maturities include Ohio State Development Authority loans due August 2018 and convertible notes due September and December 2018.
- The company raised $560,000 gross from unrelated convertible notes in January 2017 and $150,000 net from related-party bridge notes in September. Financing cash flow was $313,363 for the nine months, after borrowings, repayments and financing costs.
- Management estimated cash requirements exceeded available operating cash flow by approximately $77,000 per month and warned that, without improved cash flow or additional financing, funds would be insufficient for planned operations and current debt obligations within six months. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern; no assurance was given that further financing would be available on acceptable terms.
- Management’s strategy centers on growing SaaS and sales through resellers and direct channels, with additional capital needed for sales, onboarding, marketing and product integration. No quantified revenue or earnings guidance was provided.
- Risk factors include recurring losses, financing dependence, long sales cycles, government-customer exposure, customer and receivables concentration, and competition. Government contracts represented about 42% of nine-month revenue; the four largest customers represented 68% of gross receivables at quarter-end.
- Disclosure controls were deemed ineffective due to a material weakness in technical accounting knowledge and GAAP training; management said remediation had begun but insufficient time had passed to conclude the weakness was resolved. No legal proceedings were reported.
- Potential dilution is significant: 10,017,318 shares were reserved for warrants, convertible notes, options and the equity plan as of November 13, 2017, compared with 17,376,012 common shares outstanding. The filing also reports 1.25 million employee options granted in September, with vesting and plan-approval conditions described in the notes.
Important facts for investors to verify
- Near-term liquidity, monthly cash burn, debt-service obligations and the status and terms of any subsequent financing.
- Whether SaaS growth, reseller activity and customer collections are sufficient to improve operating cash flow and reduce going-concern risk.
- Convertible-note maturity, conversion and interest terms, related-party transactions, and the potential dilution from reserved shares and options.
- Progress in remediating the material weakness in internal controls and implementation of the new revenue-recognition standard.