UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended March 31, 2024

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____________________to _________________________

 

Commission file number: 001-41495

 

INTELLINETICS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada		87-0613716
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

 

2190 Dividend Drive
Columbus, Ohio		43228
(Address of Principal Executive Offices)		(Zip Code)

 

(614) 921-8170

(Registrant’s telephone number, including area code)

 

 

(Former name and former address, if changed since the last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, $0.001 par value		INLX		NYSE American

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b- 2 of the Exchange Act.

 

Large accelerated filer	☐	(Do not check if a smaller reporting company)	Accelerated filer	☐
Non-accelerated filer	☐		Smaller reporting company	☒
Emerging growth company	☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No ☒

 

As of May [11], 2024, there were 4,113,621 shares of the issuer’s common stock outstanding, each with a par value of $0.001 per share.

 

 

 

INTELLINETICS, INC.

Form 10-Q

March 31, 2024

TABLE OF CONTENTS

 

		Page No.
PART I
FINANCIAL INFORMATION		4
ITEM 1.	Financial Statements.	4
	Condensed Consolidated Balance Sheets as of March 31, 2024 (Unaudited) and December 31, 2023	4
	Condensed Consolidated Statements of Operations for the three months ended March 31, 2024 and 2023 (Unaudited)	5
	Condensed Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2024 and 2023 (Unaudited)	6
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2024 and 2023 (Unaudited)	7
	Notes to Condensed Consolidated Financial Statements (Unaudited)	8
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	21
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk.	29
ITEM 4.	Controls and Procedures.	29
PART II
OTHER INFORMATION		30
ITEM 1.	Legal Proceedings.	30
ITEM 1A.	Risk Factors.	30
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	30
ITEM 3.	Defaults Upon Senior Securities.	30
ITEM 4.	Mine Safety Disclosures.	30
ITEM 5.	Other Information.	30
ITEM 6.	Exhibits.	30
SIGNATURES		31

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q and the documents incorporated into this report by reference contain forward-looking statements. In addition, from time to time we may make additional forward-looking statements in presentations, at conferences, in press releases, in other reports and filings and otherwise. Forward-looking statements are all statements other than statements of historical facts, including statements that refer to plans, intentions, objectives, goals, targets, strategies, hopes, beliefs, projections, prospects, expectations or other characterizations of future events or performance, and assumptions underlying the foregoing. The words “may,” “could,” “should,” “would,” “will,” “project,” “intend,” “continue,” “believe,” “anticipate,” “estimate,” “forecast,” “expect,” “plan,” “potential,” “opportunity,” “scheduled,” “goal,” “target,” and “future,” variations of such words, and other comparable terminology and similar expressions and references to future periods are often, but not always, used to identify forward-looking statements. Examples of forward-looking statements include, among other things, statements about the following:

 

	●	the effects on our business, financial condition, and results of operations of current and future economic, business, market and regulatory conditions, including the current global inflation, economic downturn, and other economic and market conditions, and their effects on our customers and their capital spending and ability to finance purchases of our products, services, technologies and systems;
	●	our prospects, including our future business, revenues, recurring revenues, expenses, net income, earnings per share, margins, profitability, cash flow, cash position, liquidity, financial condition and results of operations, backlog of orders and revenue, our targeted growth rate, our goals for future revenues and earnings, and our expectations about realizing the revenues in our backlog and in our sales pipeline;
	●	our expectation that the shift from an offline to online world will continue to benefit our business;
	●	our ability to integrate our recent acquisitions and any future acquisitions, grow their businesses and obtain the expected financial and operational benefits from those businesses;
	●	the effects of fluctuations in sales on our business, revenues, expenses, net income, earnings per share, margins, profitability, cash flow, capital expenditures, liquidity, financial condition and results of operations;
	●	our products, services, technologies and systems, including their quality and performance in absolute terms and as compared to competitive alternatives, their benefits to our customers and their ability to meet our customers’ requirements, and our ability to successfully develop and market new products, services, technologies and systems;
	●	our markets, including our market position and our market share;
	●	our ability to successfully develop, operate, grow and diversify our operations and businesses;
	●	our business plans, strategies, goals and objectives, and our ability to successfully achieve them;
	●	the sufficiency of our capital resources, including our cash and cash equivalents, funds generated from operations, availability credit and financing arrangements and other capital resources, to meet our future working capital, capital expenditure, lease and debt service and business growth needs;
	●	the value of our assets and businesses, including the revenues, profits and cash flow they are capable of delivering in the future;
	●	the amount and timing of revenue recognition from customer contracts with commitments for performance obligations, including our estimate of the remaining amount of commitments and when we expect to recognize revenues;
	●	industry trends and customer preferences and the demand for our products, services, technologies and systems; and
	●	the nature and intensity of our competition, and our ability to successfully compete in our markets.

 

Any forward-looking statements we make are based on our current plans, intentions, objectives, strategies, projections and expectations, as well as assumptions made by and information currently available to management. Forward-looking statements are not guarantees of future performance or events, but are subject to and qualified by substantial risks, uncertainties and other factors, which are difficult to predict and are often beyond our control. Forward-looking statements will be affected by assumptions and expectations we might make that do not materialize or that prove to be incorrect and by known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those expressed, anticipated or implied by such forward-looking statements. These risks, uncertainties and other factors include, but are not limited to, those described in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed on March 28, 2024, as well as other risks, uncertainties and factors discussed elsewhere in this Quarterly Report, in documents that we include as exhibits to or incorporate by reference in this report, and in other reports and documents we from time to time file with or furnish to the Securities and Exchange Commission (the “SEC”). In light of these risks and uncertainties, you are cautioned not to place undue reliance on any forward-looking statements that we make.

 

Any forward-looking statements contained in this report speak only as of the date of this report, and any other forward-looking statements we make from time to time in the future speak only as of the date they are made. We undertake no duty or obligation to update or revise any forward-looking statement or to publicly disclose any update or revision for any reason, whether as a result of changes in our expectations or the underlying assumptions, the receipt of new information, the occurrence of future or unanticipated events, circumstances or conditions or otherwise.

 

As used in this Quarterly Report, unless the context indicates otherwise:

 

	●	the terms “Intellinetics,” “Company,” “the company” “us,” “we,” “our,” and similar terms refer to Intellinetics, Inc., a Nevada corporation, and its subsidiaries;
	●	“Intellinetics Ohio” refers to Intellinetics, Inc., an Ohio corporation and a wholly-owned subsidiary of Intellinetics; and
	●	“Graphic Sciences” refers to Graphic Sciences, Inc., a Michigan corporation and a wholly-owned subsidiary of Intellinetics.

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

INTELLINETICS, INC. and SUBSIDIARIES

Condensed Consolidated Balance Sheets

 

		(unaudited)
		March 31,				December 31,
		2024				2023
ASSETS
Current assets:
Cash		$	1,184,944			$	1,215,248
Accounts receivable, net			1,931,342				1,850,375
Accounts receivable, unbilled			1,286,457				1,320,837
Parts and supplies, net			93,090				110,272
Contract assets			130,829				140,165
Prepaid expenses and other current assets			402,444				367,478
Total current assets			5,029,106				5,004,375
Property and equipment, net			880,740				924,257
Right of use assets, operating			2,461,680				2,532,928
Right of use assets, finance			292,298				219,777
Intangible assets, net			3,781,761				3,909,338
Goodwill			5,789,821				5,789,821
Other assets			680,780				645,764
Total assets		$	18,916,186			$	19,026,260
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	278,486			$	194,454
Accrued compensation			558,191				337,884
Accrued expenses			262,050				164,103
Lease liabilities, operating - current			779,741				712,607
Lease liabilities, finance - current			64,429				49,926
Deferred revenues			2,583,207				2,927,808
Notes payable - current			325,000				-
Total current liabilities			4,851,104				4,386,782
Long-term liabilities:
Notes payable - net of current portion			1,438,032				2,209,242
Notes payable - related party			567,407				560,602
Notes payable			567,407				560,602
Lease liabilities, operating - net of current portion			1,803,213				1,942,970
Lease liabilities, finance - net of current portion			236,591				175,943
Total long-term liabilities			4,045,243				4,888,757
Total liabilities			8,896,347				9,275,539
Stockholders’ equity:
Common stock, $0.001 par value, 25,000,000 shares authorized; 4,113,621 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively			4,114				4,114
Additional paid-in capital			31,285,462				30,841,630
Accumulated deficit			(21,269,737	)			(21,095,023	)
Total stockholders’ equity			10,019,839				9,750,721
Total liabilities and stockholders’ equity		$	18,916,186			$	19,026,260

 

See Notes to these condensed consolidated financial statements

 

 

INTELLINETICS, INC. and SUBSIDIARIES

Condensed Consolidated Statements of Operations

(unaudited)

 

		2024				2023
		For the Three Months Ended March 31,
		2024				2023
Revenues:
Sale of software		$	5,779			$	15,293
Software as a service			1,405,153				1,238,432
Software maintenance services			357,983				349,542
Professional services			2,479,678				2,299,289
Storage and retrieval services			258,491				284,277
Total revenues			4,507,084				4,186,833
Cost of revenues:
Sale of software			5,065				8,181
Software as a service			215,992				220,640
Software maintenance services			15,710				16,716
Professional services			1,284,063				1,187,116
Storage and retrieval services			86,610				108,341
Total cost of revenues			1,607,440				1,540,994
Gross profit			2,899,644				2,645,839
Operating expenses:
General and administrative			2,128,493				1,554,611
Sales and marketing			541,621				579,511
Depreciation and amortization			264,010				227,718
Total operating expenses			2,934,124				2,361,840
(Loss) income from operations			(34,480	)			283,999
Interest expense, net			(140,234	)			(171,436	)
Net (loss) income		$	(174,714	)		$	112,563
Basic net (loss) income per share:		$	(0.04	)		$	0.03
Diluted net (loss) income per share:		$	(0.04	)		$	0.03
Weighted average number of common shares outstanding - basic			4,113,621				4,073,757
Weighted average number of common shares outstanding - diluted			4,113,621				4,392,459

 

See Notes to these condensed consolidated financial statements

 

 

INTELLINETICS, INC. and SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity

For the Three Months Ended March 31, 2024 and 2023

(unaudited)

 

		Shares				Amount				Capital				Deficit				Total
		Common Stock								Additional Paid-in				Accumulated
		Shares				Amount				Capital				Deficit				Total
Balance, December 31, 2022			4,073,757			$	4,074			$	30,179,017			$	(21,614,289	)		$	8,568,802
Stock Option Compensation			-				-				118,162				-				118,162
Net Income			-				-				-				112,563				112,563
Balance, March 31, 2023			4,073,757			$	4,074			$	30,297,179			$	(21,501,726	)		$	8,799,527
Balance, December 31, 2023			4,113,621			$	4,114			$	30,841,630			$	(21,095,023	)		$	9,750,721
Balance			4,113,621			$	4,114			$	30,841,630			$	(21,095,023	)		$	9,750,721
Stock Option Compensation			-				-				115,456				-				115,456
Restricted Share Issuance			-				-				328,376				-				328,376
Net Loss			-				-				-				(174,714	)			(174,714	)
Net Income/Loss			-				-				-				(174,714	)			(174,714	)
Balance, March 31, 2024			4,113,621			$	4,114			$	31,285,462			$	(21,269,737	)		$	10,019,839
Balance			4,113,621			$	4,114			$	31,285,462			$	(21,269,737	)		$	10,019,839

 

See Notes to these condensed consolidated financial statements

 

 

INTELLINETICS, INC. and SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

		2024				2023
		For the Three Months Ended March 31,
		2024				2023
Cash flows from operating activities:
Net (loss) income		$	(174,714	)		$	112,563
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Depreciation and amortization			264,010				227,718
Bad debt (recovery) expense			(14,588	)			20,102
Amortization of deferred financing costs			60,595				49,997
Amortization of debt discount			-				11,378
Amortization of right of use assets, financing			16,768				6,709
Share based compensation			443,832				118,162
Changes in operating assets and liabilities:
Accounts receivable			(66,379	)			(81,542	)
Accounts receivable, unbilled			34,380				(291,332	)
Parts and supplies			17,182				(8,234	)
Prepaid expenses and other current assets			(25,630	)			(1,931	)
Accounts payable and accrued expenses			402,286				229,849
Operating lease assets and liabilities, net			(1,375	)			3,992
Deferred revenues			(344,601	)			(571,788	)
Total adjustments			786,480				(286,920	)
Net cash provided by (used in) operating activities			611,766				(174,357	)
Cash flows from investing activities:
Capitalization of internal use software			(109,621	)			(112,208	)
Purchases of property and equipment			(18,311	)			(22,361	)
Net cash used in investing activities			(127,932	)			(134,569	)
Cash flows from financing activities:
Payment of earnout liabilities			-				(700,000	)
Principal payments on financing lease liability			(14,138	)			(5,467	)
Repayment of notes payable			(500,000	)			(262,950	)
Net cash used in financing activities			(514,138	)			(968,417	)
Net decrease in cash			(30,304	)			(1,277,343	)
Cash - beginning of period			1,215,248				2,696,481
Cash - end of period		$	1,184,944			$	1,419,138
Supplemental disclosure of cash flow information:
Cash paid during the period for interest		$	88,935			$	116,110
Cash paid during the period for income taxes		$	956			$	2,499
Supplemental disclosure of non-cash financing activities:
Right-of-use asset obtained in exchange for finance lease liability		$	89,289			$	-

 

See Notes to these condensed consolidated financial statements

 

 

INTELLINETICS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1. Business Organization and Nature of Operations

 

Intellinetics, Inc., formerly known as GlobalWise Investments, Inc., is a Nevada corporation incorporated in 1997, with two wholly-owned subsidiaries: Intellinetics, Inc., an Ohio corporation (“Intellinetics Ohio”), and Graphic Sciences, Inc., a Michigan corporation (“Graphic Sciences”). Intellinetics Ohio was incorporated in 1996, and on February 10, 2012, Intellinetics Ohio became our sole operating subsidiary as a result of a reverse merger and recapitalization. On March 2, 2020, we purchased all the outstanding capital stock of Graphic Sciences.

 

Our digital transformation products and services are provided through two reporting segments: Document Management and Document Conversion. Our Document Management segment, which includes the Yellow Folder, LLC (“Yellow Folder”) asset acquisition in April 2022 and the CEO Imaging Systems, Inc. (“CEO Image”) asset acquisition in April 2020, consists primarily of solutions involving our software platform, allowing customers to capture and manage their documents across operations such as scanned hard-copy documents and digital documents including those from Microsoft Office 365, digital images, audio, video and emails. Our Document Conversion segment, which includes and primarily consists of the Graphic Sciences acquisition, provides assistance to customers as a part of their overall document strategy to convert documents from one medium to another, predominantly paper to digital, including migration to our software solutions, as well as long-term storage and retrieval services. Our solutions create value for customers by making it easy to connect business-critical documents to the people who need them by making those documents easy to find and access, while also being secure and compliant with the customers’ audit requirements. Solutions are sold both directly to end-users and through resellers.

 

2. Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”).

 

The financial statements presented in this Quarterly Report on Form 10-Q are unaudited. However, in the opinion of management, these unaudited condensed consolidated financial statements include all adjustments, consisting solely of normal recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows for the periods presented in conformity with GAAP applicable to interim periods. The financial data and other financial information disclosed in these notes to the accompanying condensed consolidated financial statements are also unaudited. As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to applicable rules and regulations thereunder.

 

Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the full fiscal year ending December 31, 2024 or any other future period.

 

These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed with the SEC filed on March 28, 2024.

 

3. Summary of Significant Accounting Policies

 

Principles of Consolidation

 

The condensed consolidated financial statements accompanying these notes include the accounts of Intellinetics and the accounts of all its subsidiaries in which it holds a controlling interest. Under GAAP, consolidation is generally required for investments of more than 50% of the outstanding voting stock of an investee, except when control is not held by the majority owner. We have two subsidiaries: Intellinetics Ohio and Graphic Sciences. We consider the criteria established under Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 810, “Consolidations” in the consolidation process. All significant intercompany balances and transactions have been eliminated in consolidation.

 

 

Concentrations of Credit Risk

 

We maintain our cash with high credit quality financial institutions. At times, our cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation insurance limit.

 

We do not generally require collateral or other security to support customer receivables; however, we may require customers to provide retainers, up-front deposits or irrevocable letters-of-credit when considered necessary to mitigate credit risks. The Company recognizes current estimated credit losses (“CECL”) for accounts receivable and accounts receivable-unbilled. The CECL for trade receivables are estimated based on the trade receivable aging category, credit risk of specific customers, past collection history, and management’s evaluation of accounts receivable. Provisions for CECL are classified within selling, general and administrative costs.

 

Upon the adoption of FASB ASU No. 2016-13 (CECL model) effective January 1, 2023, Intellinetics, Inc. has revised its methodology for estimating expected credit losses on financial instruments, specifically trade receivables. This new model requires the recognition of lifetime expected credit losses at each reporting date, considering past events, current conditions, and reasonable forecasts. In assessing the credit quality of our portfolio, management utilizes a provision matrix that classifies trade receivables by customer type and age of receivable. Government and education sector receivables carry a low risk, while a higher risk is attributed to the remaining receivables as their aging progresses. For receivables with questionable collectability, a specific reserve is assigned. The estimated credit losses are a reflection of these factors, with the matrix applying percentages to the receivables based on their risk profile, adjusted for current and expected future conditions.

 

During the reporting period, the estimate of credit losses may change due to several factors including payment patterns of customers, changes in customer creditworthiness, and broader economic conditions. Such changes are captured in the financial statements to ensure they accurately reflect the company’s assessment of credit risk and expected losses at the end of each reporting period. Credit losses have been within management’s expectations. At March 31, 2024 and December 31, 2023, our allowance for credit losses was $109,515 and $124,103, respectively.

 

Changes in the allowance for credit losses for the period ended March 31, 2024 and 2023 were as follows:

 Schedule of Allowance for Credit Losses

		Trade Receivables
As of December 31, 2023		$	(124,103	)
(Provisions) Reductions charged to operating results		$	14,588
Accounts write-offs			1,640
As of March 31, 2024		$	(109,515	)

 

		Trade Receivables
As of December 31, 2022		$	(88,331	)
(Provisions) Reductions charged to operating results		$	(21,742	)
Accounts write-offs		$	1,640
As of March 31, 2023		$	(108,433	)

 

Revenue Recognition

 

We categorize revenue as software, software as a service, software maintenance services, professional services, and storage and retrieval services. We earn the majority of our revenue from the sale of professional services, followed by the sale of software maintenance services and software as a service. We apply our revenue recognition policies as required in accordance with ASC 606 based on the facts and circumstances of each category of revenue. More detail regarding each category of revenue is contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed with the SEC filed on March 28, 2024.

 

Contract balances

 

The following tables present changes in our contract assets during the three months ended March 31, 2024 and 2023:

 Schedule of Changes in Contract Assets and Liabilities

		Balance at Beginning of Period				Billings				Payments Received						Balance at End of Period
Three months ended March 31, 2024
Accounts receivable		$	1,850,375		-	$	4,242,590		-	$	(4,161,623	)-		-	-	$	1,931,342
Three months ended March 31, 2023
Accounts receivable		$	1,121,083			$	3,341,583			$	(3,280,143	)				$	1,182,523

 

		Balance at Beginning of Period				Revenue Recognized in Advance of Billings				Billings				Balance at End of Period
Three months ended March 31, 2024
Accounts receivable, unbilled		$	1,320,837			$	1,380,300			$	(1,414,680	)		$	1,286,457
Three months ended March 31, 2023
Accounts receivable, unbilled		$	596,410			$	1,336,851			$	(1,045,519	)		$	887,742

 

		Balance at Beginning of Period				Commissions Paid				Commissions Recognized				Balance at End of Period
Three months ended March 31, 2024
Other contract assets		$	140,165			$	1,336,851			$	(37,518	)		$	130,829
Three months ended March 31, 2023
Other contract assets		$	80,378			$	27,792			$	(27,593	)		$	80,577

 

Deferred revenue

 

Amounts that have been invoiced are recognized in accounts receivable, deferred revenue or revenue, depending on whether the revenue recognition criteria have been met. Deferred revenue represents amounts billed for which revenue has not yet been recognized. Deferred revenues typically relate to maintenance and software-as-a-service agreements which have been paid for by customers prior to the performance of those services, and payments received for professional services and license arrangements and software-as-a-service performance obligations that have been deferred until fulfilled under our revenue recognition policy.

 

 

Remaining performance obligations represent the transaction price from contracts for which work has not been performed or goods and services have not been delivered. We expect to recognize revenue on approximately 99% of the remaining performance obligations over the next 12 months, with the remainder recognized thereafter. As of March 31, 2024, the aggregate amount of the transaction price allocated to remaining performance obligations for software as a service and software maintenance contracts with a duration greater than one year was $35,095. As of December 31, 2023, the aggregate amount of the transaction price allocated to remaining performance obligations for software as a service and software maintenance contracts with a duration greater than one year was $72,212. This does not include revenue related to performance obligations that are part of a contract whose original expected duration is one year or less.

 

 

 

Software Development Costs

 

We design, develop, test, market, license, and support new software products and enhancements of current products. We continuously monitor our software products and enhancements to remain compatible with standard platforms and file formats. In accordance with ASC 985-20 “Costs of Software to be Sold, Leased or Otherwise Marketed,” we expense software development costs, including costs to develop software products or the software component of products to be sold, leased, or marketed to external users, before technological feasibility is reached. Once technological feasibility has been established, certain software development costs incurred during the application development stage are eligible for capitalization. Based on our software development process, technical feasibility is established upon completion of a working model. Technological feasibility is typically reached shortly before the release of such products. No such costs were capitalized during the periods presented in this report.

 

In accordance with ASC 350-40, “Internal-Use Software,” we capitalize purchase and implementation costs of internal use software. Once an application has reached development stage, internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing. We also capitalize costs related to specific upgrades and enhancements when it is probable that the expenditure will result in additional functionality. Such costs in the amount of $109,621 and $112,208 were capitalized during the first quarter 2024 and 2023, respectively.

 

Capitalized costs are stated at cost less accumulated amortization. Amortization is computed over the estimated useful lives of the related assets on a straight-line basis, which is three years. At March 31, 2024 and December 31, 2023, our condensed consolidated balance sheets included $665,995 and $630,979, respectively, in other long-term assets.

 

For the three months ended March 31, 2024 and 2023, our expensed software development costs were $159,731 and $131,743, respectively.

 

 

Recently Issued Accounting Pronouncements Not Yet Effective

 

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This ASU improves financial reporting by requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”) and included with each reported measure of significant profit or loss on an annual and interim basis. This ASU also requires that a public entity disclose the title and position of the CODM and an explanation of how the CODM uses the reported measures of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources. The ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. This ASU is required to be applied retrospectively for all prior periods presented in the financial statements. We are evaluating the adoption impact of this ASU on our condensed consolidated financial statements and related disclosures but do not expect any material impact upon adoption.

 

In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures, which amends the guidance in ASC 740, Income Taxes. The ASU is intended to improve the transparency of income tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. It also includes certain other amendments to improve the effectiveness of income tax disclosures. The ASU’s amendments are effective for public business entities for annual periods beginning after December 15, 2024. Entities are permitted to early adopt the standard “for annual financial statements that have not yet been issued or made available for issuance.” We are currently evaluating the impact of this ASU but do not expect any material impact upon adoption.

 

There are no other accounting standards that have been issued but not yet adopted that we believe could have a material impact on our consolidated financial statements.

 

Advertising

 

We expense the cost of advertising as incurred. Advertising expense for the three months ended March 31, 2024 and 2023 amounted to $5,977 and $6,120, respectively.

 

Earnings (Loss) Per Share

 

Basic income or loss per share is computed by dividing net income or loss by the weighted average number of shares of common stock outstanding during the period. Diluted income or loss per share is computed by dividing net income or loss by the diluted weighted average number of shares of common stock outstanding during the period. The diluted weighted average number of shares gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method. Diluted earnings per share exclude all diluted potential shares if their effect is anti-dilutive, including warrants or options which are out-of-the-money and for those periods with a net loss.

 

We have outstanding warrants and stock options which have not been included in the calculation of diluted net loss per share for the three months ended March 31, 2024 and 2023 because to do so would be anti-dilutive. For the first quarter 2024 and 2023, certain options and warrants were in-the-money and others were not. The three months ended March 31, 2024 reported a net loss, while the three months ended March 31, 2023 reported net income. For the first quarter 2024, the numerator and the denominator used in computing both basic and diluted net loss per share are the same.

 

Income Taxes

 

We file a consolidated federal income tax return with our subsidiaries. The provision for income taxes is computed by applying statutory rates to income before taxes.

 

We account for uncertainty in income taxes in our financial statements as required under ASC 740, “Income Taxes.” The standard prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The standard also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition accounting. Management determined there were no material uncertain positions taken by us in our tax returns.

 

Deferred income taxes are recognized for the tax consequences in future years of temporary differences between the financial reporting and tax bases of assets and liabilities as of each period-end based on enacted tax laws and statutory rates. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. A 100% valuation allowance has been established on deferred tax assets at March 31, 2024 and December 31, 2023, due to the uncertainty of our ability to realize future taxable income.

 

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below:

Schedule of Deferred Tax Assets and Liabilities 

		March 31, 2024				December 31, 2023
Deferred tax assets
Reserves and accruals not currently deductible for tax purposes		$	84,441			$	69,676
Amortizable assets			120,946				109,612
Net operating loss carryforwards			4,655,024				4,771,762
Deferred tax assets, gross			4,860,411				4,951,050
Deferred tax liabilities
Amortizable assets			(203,414	)			(197,579	)
Property and equipment			(202,219	)			(214,698	)
Net Deferred tax assets			4,454,778				4,538,773
Valuation allowance			(4,454,778	)			(4,538,773	)
Deferred tax assets, net		$	-			$	-

 

As of March 31, 2024 and December 31, 2023, we had federal net operating loss carry forwards of approximately $15,498,000 and $15,972,479, respectively, which can be used to offset future federal income tax. A portion of the federal and state net operating loss carry forwards expire at various dates through 2040, and a portion of the net operating loss carry forwards have an indefinite carry forward period. We recorded a valuation allowance against all of our deferred tax assets as of both March 31, 2024, and December 31, 2023. We intend to continue maintaining a full valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability that we are able to actually achieve.

 

Segment Information

 

Operating segments are defined in the criteria established under ASC 280, “Segment Reporting,” as components of public entities that engage in business activities from which they may earn revenues and incur expenses for which separate financial information is available and which is evaluated regularly by our chief operating decision maker (“CODM”) in deciding how to assess performance and allocate resources. Our CODM assesses performance and allocates resources based on two operating segments: Document Management and Document Conversion. These segments contain individual business components that have been combined on the basis of common management, customers, solutions offered, service processes and other economic characteristics. We currently have immaterial intersegment sales. We evaluate the performance of our segments based on gross profits.

 

The Document Management Segment provides cloud-based and premise-based content services software. Its modular suite of solutions complements existing operating and accounting systems to serve a mission-critical role for organizations to make content secure, compliant, and process-ready. This segment conducts its primary operations in the United States. Markets served include highly regulated, risk and compliance-intensive markets in healthcare, K-12 education, public safety, other public sector, risk management, financial services, and others. Solutions are sold both directly to end-users and through resellers.

 

The Document Conversion Segment provides services for scanning and indexing, converting images from paper to digital, paper to microfilm, and microfiche to microfilm, as well as long-term physical document storage and retrieval. This segment conducts its primary operations in the United States. Markets served include businesses and federal, county, and municipal governments. Solutions are sold both directly to end-users and through a reseller distributor.

 

 

Information by operating segment is as follows:

 Schedule of Segment Information

		Three months ended March 31, 2024				Three months ended March 31, 2023
Revenues
Document Management		$	1,820,420			$	1,769,483
Document Conversion			2,686,664				2,417,350
Total revenues		$	4,507,084			$	4,186,833
Gross profit
Document Management		$	1,556,893			$	1,483,108
Document Conversion			1,342,751				1,162,731
Total gross profit		$	2,899,644			$	2,645,839
Capital additions, net
Document Management		$	110,619			$	116,041
Document Conversion			17,313				18,528
Total capital additions, net		$	127,932			$	134,569

 

		March 31, 2024				December 31, 2023
Goodwill
Document Management		$	3,989,645			$	3,989,645
Document Conversion			1,800,176				1,800,176
Total goodwill		$	5,789,821			$	5,789,821

 

		March 31, 2024				December 31, 2023
Total assets
Document Management		$	9,618,219			$	10,104,004
Document Conversion			9,297,967				8,922,256
Total assets		$	18,916,186			$	19,026,260

 

Statement of Cash Flows

 

For purposes of reporting cash flows, cash includes cash on hand and demand deposits held by banks.

 

 

4. Intangible Assets, Net

 

At March 31, 2024, intangible assets consisted of the following:

 Schedule of Intangible Assets

		Estimated						Accumulated
		Useful Life		Costs				Amortization				Net
Trade names		10 years		$	297,000			$	(84,192	)		$	212,808
Proprietary technology		10 years			861,000				(172,200	)			688,800
Customer relationships		5-15 years			4,091,000				(1,210,847	)			2,880,153
				$	5,249,000			$	(1,467,239	)		$	3,781,761

 

At December 31, 2023, intangible assets consisted of the following:

 

		Estimated						Accumulated
		Useful Life		Costs				Amortization				Net
Trade names		10 years		$	297,000			$	(76,767	)		$	220,233
Proprietary technology		10 years			861,000				(150,675	)			710,325
Customer relationships		5-15 years			4,091,000				(1,112,220	)			2,978,780
				$	5,249,000			$	(1,339,662	)		$	3,909,338

 

Amortization expense for the three months ended March 31, 2024 and 2023 amounted to $127,577. The following table represents future amortization expense for intangible assets subject to amortization.

 Schedule of Amortization Expense for Intangible Assets

For the Twelve Months Ending March 31,		Amount
2025		$	510,308
2026			473,125
2027			326,108
2028			324,410
2029			305,733
Thereafter			1,842,077
Intangible assets		$	3,781,761

 

5. Fair Value Measurements

 

We paid our final earnout liability of $700,000 in January 2023 and as of March 31, 2023, there were no earnout liabilities remaining.

 

6. Property and Equipment

 

Property and equipment are comprised of the following:

 Schedule of Property and Equipment

		March 31, 2024				December 31, 2023
Computer hardware and purchased software		$	1,455,334			$	1,437,023
Leasehold improvements			395,919				395,919
Furniture and fixtures			324,296				324,296
Property and equipment, gross			2,175,549				2,157,238
Less: accumulated depreciation			(1,294,809	)			(1,232,981	)
Property and equipment, net		$	880,740			$	924,257

 

Total depreciation expense on our property and equipment for the three months ended March 31, 2024 and 2023 amounted to $61,828 and $61,939, respectively.

 

 

7. Notes Payable

 

Summary of Notes Payable to Unrelated Parties

 

The table below summarizes all notes payable at March 31, 2024 and December 31, 2023, respectively with the exception of related party notes disclosed in Note 8 “Notes Payable - Related Parties.”

 Schedule of Notes Payable

		March 31, 2024				December 31, 2023
Notes payable – “2022 Unrelated Notes”		$	1,864,500			$	2,364,500
Less unamortized debt issuance costs			(101,468	)			(155,258	)
Less current portion			(325,000	)			-
Long-term portion of notes payable		$	1,438,032			$	2,209,242

 

Subordinated Notes Payable				Issue Date		Interest Rate				Interest Due		Principal Due
$	325,000			April 1, 2022			12	%		Quarterly		March 30, 2025
$	1,539,500			April 1, 2022			12	%		Quarterly		December 31, 2025

 

Future minimum principal payments of the Notes Payable to Unrelated Parties are as follows:

 Schedule of Future Minimum Principal Payments of Notes payable

As of March 31,		Amount
2025		$	325,000
2026			1,539,500
Total		$	1,864,500

 

As of March 31, 2024 and December 31, 2023, accrued interest for these notes payable with the exception of the related party notes in Note 8, “Notes Payable - Related Parties,” was $0. As of March 31, 2024 and December 31, 2023, unamortized debt issuance costs were reflected within long term liabilities on the condensed consolidated balance sheets, netted with the notes payable balance.

 

With respect to all notes outstanding (other than the notes to related parties), interest expense, including the amortization of debt issuance costs and debt discount for the three months ended March 31, 2024 and 2023 was $124,725 and $151,605, respectively.

 

 

8. Notes Payable - Related Parties

 

Summary of Notes Payable to Related Parties

 

The table below summarizes all notes payable to related parties at March 31, 2024 and December 31, 2023:

 Schedule of Notes Payable

		March 31, 2024				December 31, 2023
Notes payable – “2022 Related Note”		$	600,000			$	600,000
Less unamortized debt issuance costs			(32,593	)			(39,398	)
Long-term portion of notes payable		$	567,407			$	560,602

 

Future minimum principal payments of the 2022 Notes to related parties are as follows:

 Schedule of Future Minimum Principal Payments of Notes Payable

As of March 31,		Amount
2026		$	600,000
Total		$	600,000

 

As of March 31, 2024 and December 31, 2023, accrued interest for these notes payable – related parties were $0. As of March 31, 2024 and December 31, 2023, unamortized deferred financing costs were reflected within long term liabilities on the consolidated balance sheets, netted with the corresponding notes payable balance.

 

With respect to all notes payable – related parties outstanding, interest expense, including the amortization of debt issuance costs, for the three months ended March 31, 2024 and 2023 and was $24,805 and $25,879, respectively.

 

9. Commitments and Contingencies

 

From time to time we are involved in legal proceedings, claims and litigation related to employee claims, contractual disputes and taxes in the ordinary course of business. Although we cannot predict the outcome of such matters, currently we have no reason to believe the disposition of any current matter could reasonably be expected to have a material adverse impact on our financial position, results of operations or the ability to carry on any of our business activities.

 

 

Leases

 

For each of the below listed leases, management has determined it will utilize the base rental period and have not considered any renewal periods.

 Schedule of Operating Lease

Location		Square Feet				Monthly Rent				Lease Expiry
Columbus, OH			6,000			$	5,250			December 31, 2028
Madison Heights, MI			36,000			$	44,048			August 31, 2026
Sterling Heights, MI			37,000			$	21,692			April 30, 2028
Traverse City, MI			5,200			$	5,100			January 31, 2026
Temporary space
Madison Heights, MI			3,200			$	1,605			month to month
Vehicles
various			n/a			$	4,901			September 30, 2028

 

The following table sets forth the future minimum lease payments under our leases:

 Schedule of Future Rental Payment for Operating Lease

For the twelve months ending March 31,		Finance Leases				Operating Leases
2025		$	89,954			$	951,885
2026			89,954				950,991
2027			71,204				578,184
2028			63,855				358,282
2029			39,194				76,821
Thereafter			1,883				-
Less Imputed Interest			(55,024	)			(333,209	)
		$	301,020			$	2,582,954

 

 

The following table summarizes the components of lease expense:

 Summary of Components of Lease Expense

For the three months ending March 31,		2024				2023
Finance lease expense:
Amortization of ROU asset		$	16,768			$	6,709
Interest on lease liabilities			6,468				2,832
Operating lease expense			234,439				237,449
Short-term lease expense			4,814				4,814

 

The following tables set forth additional information pertaining to our leases:

 Schedule of Additional Information Pertaining to Leases

For the three months ending March 31,		2024				2023
Cash paid for amounts included in the measurement of lease liabilities:
Financing cash flows from finance leases (interest)		$	6,468			$	2,832
Financing cash flows from finance leases (principal)			14,138				5,467
Operating cash flows from operating leases			187,724				170,759
ROU assets obtained in exchange for new finance lease liabilities			89,289				40,529
Weighted average remaining lease term – finance leases			4.3 years				5.5 years
Weighted average remaining lease term – operating leases			3.3 years				4.2 years
Weighted average discount rate – finance leases			9.75	%			7.50	%
Weighted average discount rate – operating leases			6.98	%			6.97	%

 

 

10. Stockholders’ Equity

 

Common Stock

 

As of March 31, 2024, 4,113,621 shares of common stock were issued and outstanding, 255,958 shares of common stock were reserved for issuance upon the exercise of outstanding warrants, 497,330 shares of common stock were reserved for issuance under our 2015 Equity Incentive Plan, as amended (the “2015 Plan”), and 150,000 shares were reserved for issuance under our 2023 Non-Employee Director Compensation Plan.

 

The following table describes the shares and warrants issued as part of our 2022 and 2020 private placements:

 Schedule of Shares and Warrants Issued

Issuance of Common Stock		Issue Date		Shares Issued				Price per share				Warrants Issued				Warrant Exercise Price				Warrant Fair Value
Private Placement 2022		April 1, 2022			1,242,588			$	4.62				124,258			$	4.62			$	3.91
Private Placement 2020		March 2, 2020			955,000			$	4.00				95,500			$	4.00			$	3.90

 

Amortization of the debt issuance costs for the Private Placement 2022 offering was recorded at $60,595 and $38,931 for the three months ended March 31, 2024 and 2023, respectively. Amortization of the debt issuance costs for the Private Placement 2020 offering was recorded at $11,065 for the three months ended March 31, 2023.

 

Warrants

 

The following sets forth the warrants to purchase our common stock that were outstanding as of March 31, 2024:

 Schedule of Warrants to Purchase Common Stock

Warrants Outstanding				Warrant Exercise Price				Warranty Expiry
	124,258			$	4.62			March 30, 2027
	95,500			$	4.00			March 30, 2027
	16,000			$	9.00			March 30, 2027
	17,200			$	12.50			March 30, 2027
	3,000			$	15.00			March 30, 2027

 

 

11. Stock-Based Compensation

 

From time to time, we issue stock options and restricted stock as compensation for services rendered by our directors and employees.

 

Restricted Stock

 

On March 19, 2024, we granted 127,500 shares of restricted common stock to certain employees. The grants of restricted common stock were made in accordance with the 2015 Plan and were subject to vesting, as follows: 42,495 shares vested on March 19, 2024; 42,495 shares vest on April 2, 2025, and 42,510 shares vest on April 2, 2026. Stock compensation of $397,901 was recorded on the issuance of the common stock for the three months ended March 31, 2024.

 

Stock Options

 

We did not make any stock option grants during the three months ended March 31, 2024 or 2023.

 

A summary of stock option activity during the three months ended March 31, 2024 and 2023 is as follows:

 Schedule of Stock Options Activity

										Weighted-
						Weighted-				Average
		Shares				Average				Remaining		Aggregate
		Under				Exercise				Contractual		Intrinsic
		Option				Price				Life		Value
Outstanding at January 1, 2024			357,887			$	5.69			8 years		$	-
Forfeited			(5,000				4.00
Outstanding at March 31, 2024			357,887			$	5.69			7 years		$	-
Exercisable at March 31, 2024			186,594			$	5.60			7 years		$	-

 

 

										Weighted-
						Weighted-				Average
		Shares				Average				Remaining		Aggregate
		Under				Exercise				Contractual		Intrinsic
		Option				Price				Life		Value
Outstanding at January 1, 2023			365,447			$	5.89			8 years		$	19,200
Forfeited			(5,000	)			4.00
Outstanding at March 31, 2023			360,447			$	5.92			8 years		$	19,200
Exercisable at March 31, 2023			92,860			$	6.50			7 years		$	19,200

 

During the three months ended March 31, 2024 and 2023, stock-based compensation for options was $115,456 and $118,162, respectively.

 

As of March 31, 2024 and December 31, 2023, there was $432,525 and $547,981, respectively, of total unrecognized compensation costs related to stock options granted under our stock option agreements. The unrecognized compensation cost is expected to be recognized over a weighted-average period of one year. The total fair value of stock options that vested during the three months ended March 31, 2024 and 2023 was $0 and $10,238, respectively.

 

12. Concentrations

 

Revenues from a limited number of customers have accounted for a substantial percentage of our total revenues. During the three months ended March 31, 2024 and 2023, our largest customer, the State of Michigan, accounted for 48% and 34%, respectively, of our total revenues for each period, and our second largest customer, Rocket Mortgage, accounted for 4% and 10% of our total revenues for each period.

 

For the three months ended March 31, 2024 and 2023, government contracts, including K-12 education, represented approximately 86% and 72% of our net revenues, respectively. A significant portion of our sales to resellers represent ultimate sales to government agencies.

 

As of March 31, 2024, accounts receivable concentrations from our two largest customers were 60% and 8% of gross accounts receivable, respectively by customer. As of December 31, 2023, accounts receivable concentrations from our two largest customers were 62% and 3% of gross accounts receivable, respectively by customer.

 

 

ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial conditions and results of operations should be read together with our condensed consolidated financial statements and notes thereto included in Part I, Item 1, “Financial Statements,” of this Quarterly Report on Form 10-Q, and with the condensed consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. Historical results and percentage relationships among any amounts in the financial statements are not necessarily indicative of trends in operating results for any future periods. Any forward-looking statements in this discussion and analysis should be read in conjunction with the information set forth in “Note Regarding Forward-Looking Statements” elsewhere herein. In this Quarterly Report, we sometimes refer to the three month period ended March 31, 2024 as the first quarter 2024, and to the three month period ended March 31, 2023 as the first quarter 2023.

 

Company Overview

 

We are a document services and software solutions company serving both the small-to-medium business and governmental sectors with their digital transformation and process automation initiatives. Our digital transformation products and services are provided through two reporting segments: Document Management and Document Conversion. Our Document Management segment consists primarily of solutions involving our software platform, allowing customers to capture and manage their documents across operations such as scanned hard-copy documents and digital documents including those from Microsoft Office 365, digital images, audio, video and emails. Our Document Conversion segment provides assistance to customers as a part of their overall document strategy to convert documents from one medium to another, predominantly paper to digital, including migration to our software solutions, as well as micrographics conversions and long-term storage and retrieval services. Our solutions create value for customers by making it easy to connect business-critical documents to the people who need them by making those documents easy to find and access, while also being secure and compliant with the customers’ audit requirements. Solutions are sold both directly to end-users and through resellers.

 

Our customers use our software by one of two methods: purchasing our software and installing it onto their own equipment, which we refer to as a “premise” model, or licensing and accessing our platform via the Internet, which we refer to as a “software as a service” or “SaaS” model and also as a “cloud-based” model. Licensing of our software through our SaaS model has become increasingly popular among our customers, especially in light of the increased deployment of remote workforce policies, and is a key ingredient in our revenue growth strategy. Our SaaS products are hosted with Amazon Web Services, Expedient, and Corespace, providing our customers with reliable hosting services that we believe are consistent with industry best practices in data security and performance.

 

We operate a U.S.-based business with concentrated sales to the State of Michigan for our Document Conversion segment, complemented by our diverse set of document management software solutions and services. We hold or compete for leading positions regionally in select markets and attribute this leadership to several factors including the strength of our brand name and reputation, our comprehensive offering of innovative solutions, and the quality of our service support. Net growth in sales of software as a service in recent years reflects market demand for these solutions over traditional sales of on-premise software. We expect to continue to benefit from our select niche leadership market positions, innovative product offerings, growing customer base, and the impact of our sales and marketing programs. Examples of these programs include identifying and investing in growth and expanded market penetration opportunities, more effective products and services pricing strategies, demonstrating superior value to customers, increasing our sales force effectiveness through improved guidance and measurement, and continuing to optimize our lead generation and lead nurturing processes.

 

For further information about our consolidated revenue and earnings, please see our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report.

 

How We Evaluate our Business Performance and Opportunities

 

There has been no material change during the first quarter 2024 to the major qualitative and quantitative factors we consider in the evaluation of our operating results as set forth in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — How We Evaluate our Business Performance and Opportunities” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

 

 

Executive Overview of Results

 

Revenues were up $320,251, or 7.6%, primarily driven by software as a service and professional services more than offsetting expected weakness in storage and retrieval and sales of direct premise software. In expenses, we recorded $397,901 in stock compensation expense related to our restricted stock awards to employees, without which our operating expenses (excluding cost of revenues) would have increased 7.4% year over year.

 

Below are our key financial results for the first quarter 2024 (consolidated unless otherwise noted):

 

	●	Revenues were $4,507,084, representing revenue growth of 7.6% year over year.
	●	Cost of revenues was $1,607,440, an increase of 4.3% year over year.
	●	Operating expenses (excluding cost of revenues) were $2,934,124, an increase of 24.2% year over year. This amount includes a 2024 stock compensation expense of $397,901 related to restricted stock awards to employees.
	●	Loss from operations was $34,480, compared to income from operations $283,999 in the first quarter 2023.
	●	Net loss was $174,714 with basic and diluted net loss per share of $0.04, compared to net income of $112,563 with basic and diluted net income per share of $0.03 in the first quarter 2023.
	●	Q1 2024 included $397,901 of stock compensation expense related to our restricted stock awards to employees.
	●	Net cash provided by operating activities was $611,766, compared to $174,357 used in operations in the first quarter 2023.
	●	Capital expenditures were $127,932 including capitalized software costs of $109,621, compared to $134,569 in the first quarter 2023, including capitalized software costs of $112,208.
	●	As of March 31, 2024, we had 180 employees, including 36 part-time employees, compared to 167 employees as of March 31, 2023.

 

Financial Impact of Current Economic Conditions

 

Our overall performance depends on economic conditions, including the current inflationary environment, increased interest rates, and slowing global growth rates.

 

Employee wages, our largest expense, have recently increased due to wage inflation. These increased labor costs have slightly decreased our profit margin over 2023 and continuing into the first quarter of 2024, but we continue to mitigate this by appropriately increasing customer renewal rates whenever we have the contractual ability to do so. We anticipate that the inflationary effect on our wages has stabilized.

 

Other volatility, particularly from global supply chain disruptions, has had and are expected to continue to have a minimal impact on us as we consume relatively little in raw materials. A global recession may affect our customers’ and potential customers’ budgets for technology procurement, but as of the date of this report, we have not experienced diminished customer demand due to adverse economic conditions. Absent global economic disruptions, and based on the current trend of our business operations and our continued focus on strategic initiatives to grow our customer base, we believe in the strength of our brand and that our focus on our strategic priorities will deliver consistent growth.

 

Uncertainties, Trends, and Risks that can cause Fluctuations in our Operating Results

 

Our operating results have fluctuated significantly in the past and are expected to continue to fluctuate in the future due to a variety of factors, in addition to economic conditions, that are discussed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Uncertainties, Trends, and Risks that can cause Fluctuations in our Operating Results” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. Due to all these factors and the other risks discussed in Part II, Item 1 of this Quarterly Report, and Part I, Item IA, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, our past results of operations should not be relied upon as an indication of our future performance. Comparisons of our operating results with prior periods is not necessarily meaningful or indicative of future performance.

 

 

Reportable Segments

 

We have two reportable segments: Document Management and Document Conversion. These reportable segments are discussed above under “Company Overview.”

 

Results of Operations

 

Revenues

 

The following table sets forth our revenues by reportable segment for the periods indicated:

 

		Three months ended March 31, 2024				Three months ended March 31, 2023
Revenues
Document Management		$	1,820,420			$	1,769,483
Document Conversion			2,686,664				2,417,350
Total revenues		$	4,507,084			$	4,186,833
Gross profit
Document Management		$	1,556,893			$	1,483,108
Document Conversion			1,342,751				1,162,731
Total gross profit		$	2,899,644			$	2,645,839

 

The following table sets forth our revenues by revenue source for the periods indicated:

 

		Three months ended March 31, 2024				Three months ended March 31, 2023
Revenues by revenue source
Sale of software		$	5,779			$	15,293
Software as a service			1,405,153				1,238,432
Software maintenance services			357,983				349,542
Professional services			2,479,678				2,299,289
Storage and retrieval services			258,491				284,277
Total revenues		$	4,507,084			$	4,186,833

 

The following tables sets forth our revenues by revenue source and segment for the periods indicated:

 

		Three months ended March 31, 2024				Three months ended March 31, 2023
Document management segment revenues:
Sale of software		$	5,779			$	15,293
Software as a service			1,405,153				1,238,432
Software maintenance services			357,983				349,542
Professional services			51,505				166,216
Total document management segment revenues		$	1,820,420			$	1,769,483

 

		Three months ended March 31, 2024				Three months ended March 31, 2023
Document conversion segment revenues:
Professional services		$	2,428,173			$	2,133,073
Storage and retrieval services			258,491				284,277
Total document conversion segment revenues		$	2,686,664			$	2,417,350

 

Our total revenues in the first quarter 2024 increased by $320,251, or 7.6%, over our first quarter 2023 revenues, driven primarily by software as a service, which grew 13.5% year over year for the first quarter 2024. Our strong professional services, which grew 7.8%, also contributed. Growth was partially offset by continued softer demand for the transactional portion of our storage and retrieval services from a significant customer in the home mortgage lending industry, which decreased 9.1% year over year.

 

Software as a Service Revenues

 

We provide access to our software solutions as a service, accessible through the internet. Our customers typically enter into our software as a service agreement for periods of one year or more. Under these agreements, we generally provide access to the applicable software, data storage and related customer assistance and support. Revenues from the sale of software as a service, which are reported as part of our Document Management segment increased by $166,721, or 13.5% in the first quarter 2024 compared to 2023. This increase was primarily the result of new cloud-based solution sales, as well as expanded data storage, user seats, and hosting fees for existing customers.

 

 

Professional Services Revenues

 

Professional services revenues primarily consist of revenues from document scanning and conversion services, plus consulting, discovery, training, and advisory services to assist customers with document management needs. These revenues include arrangements that do not involve the sale of software. Of our $2,479,678 in professional services revenues during the first quarter 2024, $2,428,173 was derived from our Document Conversion operations and $51,505 was derived from our Document Management operations. Our overall professional services revenues increased by $180,389, or 7.8%, in the first quarter 2024 compared to 2023. This increase is the result of as strong pipeline in our Document Conversion segment, along with realized price increases in late 2023. However, we believe that our largest customer intends to renegotiate, and accordingly reduce, our pricing on a significant portion of our work for this customer, which could have a significant adverse impact on our future professional services revenues as well as our overall revenues, margins, net income and cash flows beginning later this year.

 

Costs of Revenues and Gross Profits

 

The following table sets forth our cost of revenues by reportable segment for the periods indicated:

 

		Three months ended March 31, 2024				Three months ended March 31, 2023
Cost of revenues by segment
Document Management		$	263,527			$	286,375
Document Conversion			1,343,913				1,254,619
Total cost of revenues		$	1,607,440			$	1,540,994

 

The following table sets forth our cost of revenues, by revenue source, for the periods indicated:

 

		Three months ended March 31, 2024				Three months ended March 31, 2023
Cost of revenues:
Sale of software		$	5,065			$	8,181
Software as a service			215,992				220,640
Software maintenance services			15,710				16,716
Professional services			1,284,063				1,187,116
Storage and retrieval services			86,610				108,341
Total cost of revenues		$	1,607,440			$	1,540,994

 

 

The following tables sets forth our cost of revenues by revenue source and segment for the periods indicated:

 

		Three months ended March 31, 2024				Three months ended March 31, 2023
Document management segment cost of revenues:
Sale of software		$	5,065			$	8,181
Software as a service			215,992				220,640
Software maintenance services			15,710				16,716
Professional services			27,160				61,986
Total document management segment cost of revenues		$	263,927			$	307,523

 

		Three months ended March 31, 2024				Three months ended March 31, 2023
Document conversion segment cost of revenues:
Professional services		$	1,256,903			$	1,125,130
Storage and retrieval services			86,610				108,341
Total document conversion segment cost of revenues		$	1,343,513			$	1,233,471

 

Our total cost of revenues during the first quarter 2024 increased by $66,446 or 4.3%, over 2023. Our cost of revenues for our Document Management segment decreased by $43,586, or 14.2%, primarily due to scale and efficiencies. Our cost of revenues for our Document Conversion segment increased by $110,042, or 8.9%, in the first quarter 2024 compared to 2023 primarily due to the increased demand, resulting in higher revenues and more labor to complete projects, as well as wage increases.

 

		For the three months ended March 31,
		2024				2023
Gross profit:
Sale of software		$	714			$	7,112
Software as a service			1,189,161				1,017,792
Software maintenance services			342,273				332,826
Professional services			1,195,615				1,112,173
Storage and retrieval services			171,881				175,936
Total gross profit		$	2,899,644			$	2,645,839
Gross profit percentage:
Sale of software			12.4	%			46.5	%
Software as a service			84.6	%			82.2	%
Software maintenance services			95.6	%			95.2	%
Professional services			48.2	%			48.4	%
Storage and retrieval services			66.5	%			61.9	%
Total gross profit percentage			64.3	%			63.2	%

 

Our overall gross profit increased to 64.3% in the first quarter 2024 from 63.2% in 2023. The increase in the mix of software as a service revenue was the principal driver of the increase, due to the addition of Yellow Folder and overall strong margins in the Document Management segment, partially offset by margin erosion in the Document Conversion segment, driven by reduced margins in the storage and retrieval services, as well as wage increases.

 

 

Cost of Software as a Service

 

Cost of software as a service, or SaaS, consists primarily of technical support personnel, hosting services, and related costs. Cost of software as a service during the first quarter 2024 decreased by $4,648, or 2.1%, from the first quarter 2023. This decrease in the cost of SaaS was the result of efficiencies in support, including reduced support call volume, as well as some benefits from scale. Our gross margin in the first quarter increased to 84.6% compared to 82.2% in 2023.

 

Cost of Professional Services

 

Cost of professional services consists primarily of compensation for employees performing the document conversion services, compensation of our software engineers and implementation consultants when working on billable customer projects, and related third-party costs. Cost of professional services increased in the first quarter 2024 by $96,947, or 8.2%, over 2023, primarily due to increased staffing levels in our Document Conversion segment, to support our corresponding increased revenues, as well as wage increases. Consolidated, our gross margin for professional services decreased to 48.2% during the first quarter 2024 compared to 48.4% in 2023. Gross margins related to consulting services in Document Management and digital transformation services in Document Conversion may vary widely, depending upon the nature of the project and the amount of labor required to complete a project.

 

Operating Expenses

 

The following table sets forth our operating expenses for the periods indicated:

 

		Three months ended March 31, 2024				Three months ended March 31, 2023
Operating expenses:
General and administrative		$	2,128,493			$	1,554,611
Sales and marketing			541,621				579,511
Depreciation and amortization			264,010				227,718
Total operating expenses		$	2,934,124			$	2,361,840

 

 

General and Administrative Expenses

 

General and administrative expenses increased in the first quarter 2024 $573,882 or 36.9%, primarily related to $397,901 in expense related to our restricted stock award grant to employees first quarter 2024. Excluding the restricted stock award expense, total expenses increased by $175,981, or 11.3%, over 2023, related to investments in order to scale, such as development, finance, and our SOC2 process, as well as wage increases and infrastructure investments such as our internal ERP system upgrade from QuickBooks to NetSuite. These increases were reflected in both our Document Management segment, in which our general and administrative expenses increased to $1,145,031 in first quarter 2024 from $800,729 in 2023, and also in our Document Conversion segment, in which our general and administrative expenses increased to $983,462 in first quarter 2024 from $753,882 in 2023.

 

Sales and Marketing Expenses

 

Sales and marketing expenses during the first quarter 2024 decreased by $37,890, or 6.5%, from the first quarter 2023, principally related to an open position, as well as normal fluctuations in commissions expense.

 

Depreciation and Amortization

 

Depreciation and amortization during the first quarter 2024 increased by $36,292, or 15.9%, over the first quarter 2023 primarily as a result of increased amortization of capitalized software costs.

 

Other Items of Income and Expense

 

Interest Expense, Net

 

Interest expense was $140,234 during the first quarter 2024, net of $9,296 of interest income, as compared with $171,436 during the first quarter 2023, representing a decrease of $31,202 or 18.2%. The decrease resulted from reduced interest resulting from principal repayment of the 2020 Notes on February 28, 2023 and August 31, 2023. The 2022 Notes principal prepayment of $500,000 on March 30, 2024 had a negligible impact on interest expense in the first quarter 2024.

 

 

Liquidity and Capital Resources

 

We have financed our operations primarily through a combination of cash on hand, cash generated from operations, borrowings from third parties and related parties, and proceeds from private sales of equity. Since 2012, we have raised a net total of approximately $24.0 million in cash through issuances of debt and equity securities, net of $2.5 million in debt repayments. As of March 31, 2024, we had approximately $1.2 million in cash and cash equivalents, net working capital of $0.2 million, and an accumulated deficit of $21.3 million. In March 2024, we prepaid $0.5 million in principal of the 2022 Notes.

 

In 2024 and 2023, we engaged in several actions that significantly improved our liquidity and cash flows, including (i) effective October 1, 2023 through September 30, 2024, securing a renewal contract with our largest customer, containing an estimated net rate increase for all non-fixed pricing projects of approximately 21%, compared to the current rates in effect for the contract period commencing June 1, 2018, and (ii) on March 13, 2024, we agreed with the note holders to amend the Unrelated Notes and Related Notes to extend the maturity date to December 31, 2025, for $1,519,500 of the remaining $2,364,500 in 2022 Unrelated Notes and all $600,000 of the 2022 Related Notes. However, we believe that our largest customer intends to renegotiate our pricing on a significant portion of our work this customer, which could have an adverse impact on our overall revenues, cash flows, liquidity and capital resources.

 

Our existing debt as of March 31, 2024 is comprised of approximately $0.3 million due March 30, 2025 and approximately $2.1 million due December 31, 2025. Our operating cash flow alone may be insufficient to meet the debt obligations in full in 2025. We believe we could seek additional debt or equity financing on acceptable terms. We believe that our balance sheet and financial statements would support a full or partial refinancing or other appropriate modification of the current promissory notes, such as an extension or conversion to equity. We are confident in our ability to prudently manage our current debt on terms acceptable to us.

 

Our ability to meet our capital needs in the short term will depend on many factors, including maintaining and enhancing our operating cash flow and successfully retaining and growing our client base in the midst of global inflation and general economic uncertainty.

 

Based on our current plans and assumptions, we believe our capital resources, including our cash and cash equivalents, along with funds expected to be generated from our operations and potential financing options, will be sufficient to meet our anticipated cash needs arising in the ordinary course of business for at least the next 12 months, including to satisfy our expected working capital needs and capital and debt service commitments.

 

Our ability to meet our capital needs further into the future will depend primarily on strategically managing the business and successfully retaining our client base.

 

Indebtedness

 

As of March 31, 2024, our outstanding long-term indebtedness consisted of the 2022 Notes issued to accredited investors on April 1, 2022, with an aggregate outstanding principal balance of $2,464,500 and accrued interest of $0.

 

See Note 7 and Note 8 to our condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report for further information on the 2022 notes.

 

Capital Expenditures

 

There were no material commitments for capital expenditures at March 31, 2024.

 

 

Cash Provided by and Used in Operating Activities

 

Net cash provided by operating activities during the first quarter 2024 was $611,766, primarily attributable to the net income adjusted for non-cash expenses of $770,617, an increase in operating assets of $40,447 and a decrease in operating liabilities of $56,310. Net cash used in operating activities during the first quarter 2023 was $174,357, primarily attributable to the net income adjusted for non-cash expenses of $434,066, an increase in operating assets of $383,039 and a decrease in operating liabilities of $337,947, primarily deferred revenues of $571,788.

 

Cash Used in Investing Activities

 

Net cash used in investing activities in the first quarter 2024 was $127,932, including $109,621 related to capitalized internal use software. Net cash used in investing activities in the first quarter 2023 was $134,569, including $112,208 related to capitalized internal use software.

 

Cash Used in Financing Activities

 

Net cash used in financing activities during 2024 amounted to $500,000 in repayment of notes payable, and $14,138 in the principal portion of finance lease liabilities. Net cash used in financing activities during 2023 amounted to $700,000 in earnout liability payments, $262,950 in repayment of notes payable, and $5,467 in the principal portion of a finance lease liability.

 

Critical Accounting Policies and Estimates

 

The preparation of our condensed consolidated financial statements in accordance GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period. We monitor and analyze these items for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. The actual results experienced by us may differ materially from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected.

 

Our critical accounting policies and estimates are set forth in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. There were no material changes to our critical accounting policies and estimates during the first quarter 2024.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not applicable to smaller reporting companies.

 

ITEM 4.

CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) at the end of the period covered by this this Quarterly Report.

 

Based on this evaluation, we concluded that, as of March 31, 2024, our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls system, no matter how well designed and operated, can provide only reasonable assurance of achieving its desired objectives. In addition, the design of disclosure controls and procedures must reflect resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).

 

We regularly review our internal control over financial reporting and, from time to time, we have made changes as we deemed appropriate to maintain and enhance the effectiveness of our internal controls over financial reporting, although these changes do not have a material effect on our overall internal control.

 

 

PART II — OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

None.

 

ITEM 1A. RISK FACTORS.

 

Our business and operating results are subject to many risks, uncertainties and other factors. If any of these risks were to occur, our business, affairs, assets, financial condition, results of operations, cash flows and prospects could be materially and adversely affected. There have been no material changes to the risk factors set forth in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, except as follows:

 

Our largest customer may renegotiate the pricing on a significant portion of our work with the customer, which could materially and adversely affect our business, operating results and cash flows.

 

We believe that our largest customer, may seek a reduction on the pricing on a significant portion of our work with them, which could take effect beginning in the fourth quarter of 2024. While we have not received any formal or written notice from this customer as of the date of this Quarterly Report, in the event of any such renegotiation resulting in a reduction on the pricing of our work, we intend to take actions with respect to other work with this customer that could mitigate the overall effects of any such pricing reduction, although there is no assurance that we will be able to mitigate the effects of any pricing reduction or how effective any such mitigation will be. This customer may terminate any contract or any portion thereof without cause, so it has the ability to renegotiate pricing even outside any stated contract term. The loss of revenue from this customer due to any such pricing reduction could materially and adversely affect our business, operating results and cash flows.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None.

 

ITEM 3. DEFAULT UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not Applicable.

 

ITEM 5. OTHER INFORMATION.

 

During the first fiscal quarter ended March 31, 2024, no Section 16 director or officer adopted, modified, or terminated a “Rule 10b5-1 trading arrangement” (as defined in Item 408 of Regulation S-K of the Exchange Act).

 

There were no “non-Rule 10b5-1 trading arrangements” (as defined in Item 408 of Regulation S-K of the Exchange Act) adopted, modified, or terminated during the fiscal quarter ended March 31, 2024, by our directors and Section 16 officers.

 

ITEM 6. EXHIBITS.

 

The following is a list of exhibits filed as part of this Quarterly Report on Form 10-Q.

 

Exhibit No.		Description of Exhibit
31.1*		Certification of Principal Executive Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
31.2*		Certification of Principal Financial Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
32.1*		Certification of Principal Executive Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
32.2*		Certification of Principal Financial Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
101.INS*		Inline XBRL Instance Document (The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.).
101.SCH*		XBRL Taxonomy Schema.
101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase.
101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase.
101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase.
101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase.
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

* Filed herewith.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

INTELLINETICS, INC.
Dated:	May 14, 2024
By:	/s/ James F. DeSocio
	James F. DeSocio
	President and Chief Executive Officer
Dated: May 14, 2024
By:	/s/ Joseph D. Spain
	Joseph D. Spain
	Chief Financial Officer