Intellinetics, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; comparisons are to FY2019. This is an annual report, not a standalone fourth-quarter filing. Intellinetics provides document-management software and document-conversion, storage, and retrieval services. FY2020 results include Graphic Sciences from March 2 and CEO Image from April 21, so reported growth is not directly comparable with FY2019.
Financial results and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $8.253 million | $2.536 million |
| Gross profit and margin | $4.991 million; approximately 60% | $1.968 million; approximately 78% |
| Operating loss | $2.038 million | $1.153 million |
| Net loss | $2.200 million; $0.91 per share | $2.133 million; $5.76 per share |
| Cash from (used in) operations | $125,000 | $(982,000) |
- Revenue increased 225%. Graphic Sciences contributed $5.239 million and CEO Image $376,000 of FY2020 revenue. Document Management revenue was $2.817 million, up from $2.368 million; Document Conversion revenue was $5.437 million, up from $168,000.
- Professional services generated $5.008 million, and storage and retrieval services contributed $739,000. SaaS revenue grew 23% to $1.055 million; maintenance revenue grew 24% to $1.257 million.
- Gross margin declined largely because acquired Document Conversion services represented a much larger share of revenue. Excluding Graphic Sciences, management reported gross margin of 74%, versus 78% in 2019.
- Operating expenses were $7.029 million, including $1.555 million of noncash earnout fair-value expense, $636,000 of significant transaction costs, and $297,000 of depreciation and amortization. Management described net loss excluding transaction costs and earnout fair-value changes as approximately $9,000; this is a company-presented adjusted figure, not GAAP net income.
- Cash and equivalents were $1.908 million at year-end, versus $404,000 a year earlier. Net working capital was negative $159,000, or positive $427,000 excluding the PPP loan principal and interest then classified as current.
- Investing cash outflow was $4.096 million, primarily for acquisitions; financing cash inflow was $5.475 million. Capital expenditures were $77,000, excluding acquisitions. The company reported an accumulated deficit of $22.996 million.
Debt, acquisitions, and unusual items
- The company raised $5.5 million in a March 2020 private placement, including $3.5 million from common stock and $2.0 million from 12% subordinated notes due February 2023. Approximately $6 million of older convertible debt and accrued interest was converted into equity, reducing the prior debt burden.
- At December 31, 2020, the 2020 notes had $2.0 million principal outstanding; the PPP loan had $838,700 principal outstanding on that date. The SBA forgave the PPP principal and interest in full in January 2021; the company said it would recognize $845,083 of forgiveness income in 2021.
- Earnout liabilities for the acquisitions were revalued to $2.444 million at year-end, including a $1.555 million FY2020 fair-value charge. The amount is sensitive to management’s revenue and performance assumptions.
- The auditor issued an unqualified opinion on the financial statements and identified earnout valuation and going concern as critical audit matters. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation.
Outlook, risks, and management commentary
- Management expects cash and operating cash generation to cover anticipated needs, including working capital, earnouts, capital spending, and debt service, for at least 12 months from the report date. However, the filing states that conditions raise substantial doubt about the company’s ability to meet obligations over the following 12 months; management’s assessment is based on plans and assumptions and is not assured.
- Management’s strategy emphasizes SaaS growth, targeted vertical markets, reseller and direct sales, cross-selling across acquired customer bases, and potential complementary acquisitions. No quantified revenue or earnings guidance is provided.
- COVID-19 restricted Graphic Sciences operations from March 24 to June 15, 2020. Work volumes, especially from Michigan, remained below pre-pandemic levels afterward. Management warned that weaker public-sector and small-business spending, renewed restrictions, and customer delays could continue to affect results.
- Customer and government exposure is substantial: the State of Michigan represented approximately 47% of total FY2020 revenue, and government contracts represented approximately 64%, compared with 41% in 2019. Michigan accounted for 71% of Document Conversion revenue. The Michigan contract runs through May 2023, with two possible one-year extensions, but agencies may choose other providers.
- Other principal risks include continued losses and financing needs, integration and performance of acquisitions, sizable earnout obligations, competition and reseller dependence, security or data-center disruptions, and limited trading liquidity in OTCQB-listed shares. The company does not expect to pay dividends in the foreseeable future.
- In February 2021, the company committed to $327,000 of warehouse racking and signed a lease for a new Michigan storage facility, with rent beginning in May 2021.
Key facts for investors to verify
- Whether operating cash flow and liquidity remain sufficient as PPP forgiveness is reflected in 2021 and debt service and earnout payments come due.
- The timing, amount, and assumptions underlying acquisition earnouts, particularly the $2.444 million year-end fair value.
- Michigan work orders, contract renewal and extension prospects, and the company’s ability to reduce customer and government concentration.
- Organic growth and margins by segment, separating acquired revenue from comparable operations and monitoring SaaS and maintenance renewals.
- How management reconciles the reported $2.200 million GAAP net loss with its approximately $9,000 adjusted-loss presentation, including treatment of transaction costs and earnout remeasurement.