Intellinetics, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019; filed March 30, 2020. The audited 2019 results cover Intellinetics and its then-operating subsidiary, not Graphic Sciences, which was acquired after year-end on March 2, 2020. Unless stated otherwise, amounts are U.S. dollars.
Business context
Intellinetics provides document-management software and services to businesses and government customers, through on-premise installations and cloud/SaaS subscriptions. Management identified growing SaaS delivery as a central growth strategy. Cloud-based software revenue, including hosting, was 34% of revenue in 2019 versus 31% in 2018. Government contracts represented approximately 41% of 2019 revenue versus 30% in 2018.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $2,535,955 | $2,381,427 |
| Gross profit / gross margin | $1,968,112 / 78% | $1,639,022 / 69% |
| Operating expenses | $3,120,704 | $3,113,801 |
| Operating loss | $(1,152,592) | $(1,474,779) |
| Interest expense, net | $(980,689) | $(865,501) |
| Net loss | $(2,133,281) | $(2,340,280) |
| Cash used in operating activities | $(982,169) | $(1,157,407) |
| Cash at year-end | $404,165 | $1,088,630 |
Revenue grew 6%. SaaS revenue rose 15% to $859,637, professional services rose 55% to $449,707, and maintenance revenue rose 2% to $1,011,278. Third-party services revenue fell 85% to $26,168, partly reflecting project timing and a shift toward the company’s own services. The gross-margin improvement reflected lower costs and a more favorable revenue mix. Operating expenses were nearly flat, while interest expense increased 13%.
At December 31, 2019, total assets were $986,574, current liabilities were $7,309,514, and the company reported a $6,437,382 working-capital deficit and $6,376,258 stockholders’ deficit. Notes payable and related-party notes, net of discounts, totaled approximately $4.81 million; accrued interest payable was approximately $1.21 million. Capital expenditures were $5,489.
Material changes, outlook and risks
- Going concern: The auditor’s report includes a going-concern explanatory paragraph, citing recurring losses and negative operating cash flows. Management said cash flows might not cover operating costs and growth needs over the next 12 months and that additional financing or improved operating cash flow would be needed. The filing states that the financial statements include no adjustments that might be required if the company cannot continue as a going concern.
- Subsequent financing and debt conversion: On March 2, 2020, the company raised $5.5 million gross in a private placement: $3.5 million from common shares and $2.0 million from 12% subordinated notes with a February 2023 maturity. It also converted outstanding 2016–2018 notes and part of the 2019 notes into 1,433,739 shares at $4 per share. The company reported that outstanding debt declined from approximately $6.02 million at year-end to $2.0 million after these transactions. After acquisition costs and fees, approximately $530,000 remained for working capital and general corporate purposes.
- Graphic Sciences acquisition: Also on March 2, 2020, Intellinetics acquired Graphic Sciences for approximately $3.5 million cash, subject to a working-capital adjustment, with potential earnouts of up to $2.5 million over three years. Graphic Sciences’ sales are primarily supported by multi-year government contracts. The filing says acquisition accounting and combined-company pro forma results were incomplete and would be reported later; Graphic Sciences is not included in 2019 audited results. Its unaudited 2019 net income was described as approximately $644,000.
- COVID-19: The filing describes the pandemic’s effects as uncertain and potentially materially adverse. At filing, Graphic Sciences’ Michigan operations were restricted to projects considered essential under state guidance. The company warned of possible customer disruption, lower demand, subscription terminations, and pressure on cash flows.
- Other key risks: Customer and government-contract concentration, government funding and termination risk, dependence on resellers, competition and pricing pressure, cybersecurity and third-party hosting disruptions, financing and dilution risk, and acquisition integration risk. Management reported disclosure controls and internal control over financial reporting effective as of December 31, 2019; the auditor did not attest to internal-control effectiveness.
Important facts for investors to verify
- Reconcile reported loss per share: the financial statements show basic and diluted loss per share of $5.76 for 2019, while the MD&A cites $0.12. The filing discusses a 1-for-50 reverse split effective March 20, 2020, so confirm the share basis used in each figure.
- Review the subsequent quarterly filing for Graphic Sciences’ completed purchase-price allocation, acquired liabilities and goodwill, pro forma results, and actual post-acquisition performance.
- Confirm current cash, remaining financing proceeds, debt service obligations, and liquidity after acquisition and transaction costs; the filing reported only about $530,000 remaining for working capital after specified uses and fees.
- Assess the terms and cash interest burden of the new 12% subordinated notes, alongside any subsequent borrowing, conversion, or dilution.
- Track COVID-19’s effects on government and commercial customers, Michigan operations, collections, renewals, and the company’s ability to meet its going-concern funding needs.