Business context and reporting period
Globalwise Investments, Inc. filed this Form 10-Q for the quarter ended September 30, 2012. Its wholly owned subsidiary, Intellinetics, Inc., develops, sells, and supports enterprise content-management software and related services. Globalwise acquired Intellinetics on February 10, 2012 in a reverse merger; Intellinetics is the accounting acquirer, so the financial statements principally reflect its operating history. The filing’s company name differs from the requested metadata: the registrant is Globalwise Investments, Inc.
Financial performance and position
- Revenue: Q3 revenue was $711,737, up 15% from $617,026. Nine-month revenue was $1,959,350, up 36% from $1,438,203.
- Profitability: Q3 gross profit was $484,205 (68% gross margin), versus $395,104 (64%) a year earlier. Nine-month gross profit was $1,137,709 (58%), versus $794,748 (55%). Operating loss was $405,571 for Q3 and $1,581,036 for nine months; net loss was $492,607 and $1,795,731, respectively. Prior-year net losses were $91,749 and $555,893. Basic and diluted loss per share was $0.01 for Q3 and $0.05 for nine months.
- Cash flow: Nine-month operating cash use was $1,165,697, compared with $529,747 in 2011. Investing cash use was $48,179; financing provided $1,094,810. Cash fell by $119,066 to $21,205.
- Liquidity and debt: Working capital deficit was $3,201,549. Current liabilities were $3,555,208, against current assets of $353,657. Total liabilities were $5,591,450 versus assets of $458,350; stockholders’ deficit was $5,133,100. Notes payable included $2,848,460 excluding related-party notes and $646,707 of related-party notes; the balance sheet separately reports $97,500 of convertible notes net of discount. Cash was $21,205 at September 30.
Material changes versus the prior comparable period
- Nine-month revenue growth was led by consulting services (+106%), unmodified software licenses (+44%), modified software licenses (+31%), and maintenance (+24%). SaaS revenue declined 29% for the nine-month period and 39% for Q3.
- Operating expenses rose substantially: nine-month general and administrative expense increased 141% to $1,758,602, and sales and marketing increased 101% to $938,969. Management attributed the increases principally to Share Exchange and public-company costs, stock compensation, and expansion of sales and marketing.
- Nine-month interest expense rose to $214,695 from $122,131, reflecting increased borrowing, debt discount amortization, and loan participation fees.
- Government contracts represented 43% of nine-month revenue, down from 64% in 2011; Q3 proportions were 65% and 70%, respectively. Resellers were significant customers, including Tiburon at 23% of nine-month revenue.
Outlook, commentary, risks and unusual items
- Management plans to expand its reseller network, sales force, marketing, product portfolio, and SaaS business. It intended to raise at least $2 million in 2012–2013, but disclosed no financing commitment and gave no revenue or earnings guidance.
- Management stated that cash and operating margins were insufficient to meet obligations and that external financing was necessary. The filing says substantial doubt exists about the company’s ability to continue as a going concern. If financing is unavailable, contemplated measures include limiting hiring, reducing staff, deferring compensation, extending vendor payment terms, and encouraging early customer payments.
- On November 8, 2012, the company amended its JMJ note after receiving only $100,000 of the stated $400,000 facility. The amended current balance was $134,166.66; an additional 15% prepayment fee could bring the amount due to $154,291.66. The note also contains conversion rights and significant default provisions.
- Several short-term notes, including related-party obligations, had maturities in late 2012; certain director notes had repeatedly been extended. The Ohio development loans carry covenants, including an employment target; the company obtained a waiver for prior noncompliance in February 2012. Failure to meet specified job requirements can raise interest to 10%.
- Q3 included $206,800 of noncash stock-grant expense. The company also reported a $5,478,906 accumulated deficit. Revenue from modified software projects is recognized on completion, so quarterly revenue may fluctuate; management cited a historically long sales cycle of 18–24 months.
- Management concluded disclosure controls were effective at a reasonable-assurance level as of September 30, 2012. No legal proceedings were reported.
Important facts for investors to verify
- Whether the company raised the intended financing and obtained enough liquidity to meet near-term obligations and sustain operations.
- The status, repayment terms, conversion, extension, and potential fees or penalties on the JMJ note and other near-term or repeatedly extended debt.
- Whether reseller-led growth, customer concentration, and the planned expansion of sales and SaaS can improve revenue and margins enough to offset operating costs.
- The impact of Ohio loan covenants and employment requirements, and whether any further waivers or rate changes occurred.
- Debt figures and classifications across the notes and balance sheet, as well as dilution from note conversions and stock issuances.