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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 June 30, 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 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 August 9, 2024, there were 4,230,806 shares of the issuer’s common stock outstanding, each with a par value of $0.001 per
share.
INTELLINETICS,
INC.
Form
10-Q
June
30, 2024
TABLE
OF CONTENTS
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, and those described in Part II, Item 1A, “Risk Factors,”
of our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2024, filed on May 14, 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) | | |
| |
| |
June 30, | | |
December 31, | |
| |
2024 | | |
2023 | |
| |
| | |
| |
ASSETS | |
| | |
| |
Current assets: | |
| | | |
| | |
Cash | |
$ | 1,680,669 | | |
$ | 1,215,248 | |
Accounts receivable, net | |
| 1,449,188 | | |
| 1,850,375 | |
Accounts receivable, unbilled | |
| 1,483,313 | | |
| 1,320,837 | |
Parts and supplies, net | |
| 93,926 | | |
| 110,272 | |
Contract assets | |
| 141,214 | | |
| 140,165 | |
Prepaid expenses and other current assets | |
| 335,380 | | |
| 367,478 | |
Total current assets | |
| 5,183,690 | | |
| 5,004,375 | |
| |
| | | |
| | |
Property and equipment, net | |
| 999,276 | | |
| 924,257 | |
Right of use assets, operating | |
| 2,276,171 | | |
| 2,532,928 | |
Right of use assets, finance | |
| 274,112 | | |
| 219,777 | |
Intangible assets, net | |
| 3,654,183 | | |
| 3,909,338 | |
Goodwill | |
| 5,789,821 | | |
| 5,789,821 | |
Other assets | |
| 685,471 | | |
| 645,764 | |
Total assets | |
$ | 18,862,724 | | |
$ | 19,026,260 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | | |
| | |
| |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable | |
$ | 340,298 | | |
$ | 194,454 | |
Accrued compensation | |
| 540,237 | | |
| 337,884 | |
Accrued expenses | |
| 160,947 | | |
| 164,103 | |
Lease liabilities, operating - current | |
| 797,870 | | |
| 712,607 | |
Lease liabilities, finance - current | |
| 66,000 | | |
| 49,926 | |
Deferred revenues | |
| 2,755,185 | | |
| 2,927,808 | |
Total current liabilities | |
| 4,660,537 | | |
| 4,386,782 | |
| |
| | | |
| | |
Long-term liabilities: | |
| | | |
| | |
Notes payable | |
| 1,467,312 | | |
| 2,209,242 | |
Notes payable - related party | |
| 572,063 | | |
| 560,602 | |
Lease liabilities, operating - net of current portion | |
| 1,596,960 | | |
| 1,942,970 | |
Lease liabilities, finance - net of current portion | |
| 219,490 | | |
| 175,943 | |
Total long-term liabilities | |
| 3,855,825 | | |
| 4,888,757 | |
Total liabilities | |
| 8,516,362 | | |
| 9,275,539 | |
| |
| | | |
| | |
Stockholders’ equity: | |
| | | |
| | |
Common stock, $0.001 par value, 25,000,000 shares authorized; 4,230,806 and
4,113,621 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively | |
| 4,231 | | |
| 4,114 | |
Additional paid-in capital | |
| 31,536,818 | | |
| 30,841,630 | |
Accumulated deficit | |
| (21,194,687 | ) | |
| (21,095,023 | ) |
Total stockholders’ equity | |
| 10,346,362 | | |
| 9,750,721 | |
Total liabilities and stockholders’ equity | |
$ | 18,862,724 | | |
$ | 19,026,260 | |
See
Notes to these condensed consolidated financial statements
INTELLINETICS,
INC. and SUBSIDIARIES
Condensed
Consolidated Statements of Operations
(unaudited)
| |
2024 | | |
2023 | | |
2024 | | |
2023 | |
| |
For the Three Months Ended June 30, | | |
For the Six Months Ended June 30, | |
| |
2024 | | |
2023 | | |
2024 | | |
2023 | |
| |
| | |
| | |
| | |
| |
Revenues: | |
| | | |
| | | |
| | | |
| | |
Sale of software | |
$ | 14,933 | | |
$ | 63,646 | | |
$ | 20,712 | | |
$ | 78,939 | |
Software as a service | |
| 1,400,591 | | |
| 1,277,918 | | |
| 2,805,744 | | |
| 2,516,350 | |
Software maintenance services | |
| 353,966 | | |
| 349,139 | | |
| 711,949 | | |
| 698,681 | |
Professional services | |
| 2,662,358 | | |
| 2,298,316 | | |
| 5,142,036 | | |
| 4,597,605 | |
Storage and retrieval services | |
| 209,745 | | |
| 269,411 | | |
| 468,236 | | |
| 553,688 | |
Total revenues | |
| 4,641,593 | | |
| 4,258,430 | | |
| 9,148,677 | | |
| 8,445,263 | |
| |
| | | |
| | | |
| | | |
| | |
Cost of revenues: | |
| | | |
| | | |
| | | |
| | |
Sale of software | |
| 1,125 | | |
| 7,344 | | |
| 6,190 | | |
| 15,525 | |
Software as a service | |
| 217,586 | | |
| 258,382 | | |
| 433,578 | | |
| 479,022 | |
Software maintenance services | |
| 13,364 | | |
| 15,117 | | |
| 29,074 | | |
| 31,833 | |
Professional services | |
| 1,344,541 | | |
| 1,307,341 | | |
| 2,628,604 | | |
| 2,494,457 | |
Storage and retrieval services | |
| 61,998 | | |
| 79,813 | | |
| 148,608 | | |
| 188,154 | |
Total cost of revenues | |
| 1,638,614 | | |
| 1,667,997 | | |
| 3,246,054 | | |
| 3,208,991 | |
| |
| | | |
| | | |
| | | |
| | |
Gross profit | |
| 3,002,979 | | |
| 2,590,433 | | |
| 5,902,623 | | |
| 5,236,272 | |
| |
| | | |
| | | |
| | | |
| | |
Operating expenses: | |
| | | |
| | | |
| | | |
| | |
General and administrative | |
| 2,025,796 | | |
| 1,561,939 | | |
| 4,154,289 | | |
| 3,116,550 | |
Sales and marketing | |
| 530,439 | | |
| 492,303 | | |
| 1,072,060 | | |
| 1,071,814 | |
Depreciation and amortization | |
| 274,638 | | |
| 239,803 | | |
| 538,648 | | |
| 467,521 | |
| |
| | | |
| | | |
| | | |
| | |
Total operating expenses | |
| 2,830,873 | | |
| 2,294,045 | | |
| 5,764,997 | | |
| 4,655,885 | |
| |
| | | |
| | | |
| | | |
| | |
Income from operations | |
| 172,106 | | |
| 296,388 | | |
| 137,626 | | |
| 580,387 | |
| |
| | | |
| | | |
| | | |
| | |
Interest expense, net | |
| (97,056 | ) | |
| (160,654 | ) | |
| (237,290 | ) | |
| (332,090 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss) | |
$ | 75,050 | | |
$ | 135,734 | | |
$ | (99,664 | ) | |
$ | 248,297 | |
| |
| | | |
| | | |
| | | |
| | |
Basic net income (loss) per share: | |
$ | 0.02 | | |
$ | 0.03 | | |
$ | (0.02 | ) | |
$ | 0.06 | |
Diluted net income (loss) per share: | |
$ | 0.02 | | |
$ | 0.03 | | |
$ | (0.02 | ) | |
$ | 0.06 | |
| |
| | | |
| | | |
| | | |
| | |
Weighted average number of common shares outstanding - basic | |
| 4,229,518 | | |
| 4,073,757 | | |
| 4,171,570 | | |
| 4,073,757 | |
Weighted average number of common shares outstanding - diluted | |
| 4,722,063 | | |
| 4,073,757 | | |
| 4,171,570 | | |
| 4,073,757 | |
See
Notes to these condensed consolidated financial statements
INTELLINETICS,
INC. and SUBSIDIARIES
Condensed
Consolidated Statement of Stockholders’ Equity
For
the Three and Six Months Ended June 30, 2024 and 2023
(unaudited)
| |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Total | |
| |
Common Stock | | |
Additional Paid-in | | |
Accumulated | | |
| |
| |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Total | |
| |
| | |
| | |
| | |
| | |
| |
Balance, March 31, 2023 | |
| 4,073,757 | | |
$ | 4,074 | | |
$ | 30,297,179 | | |
$ | (21,501,726 | ) | |
$ | 8,799,527 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Stock Option Compensation | |
| - | | |
| - | | |
| 115,455 | | |
| - | | |
| 115,455 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Net Income | |
| - | | |
| - | | |
| - | | |
| 135,734 | | |
| 135,734 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Balance, June 30, 2023 | |
| 4,073,757 | | |
$ | 4,074 | | |
$ | 30,412,634 | | |
$ | (21,365,992 | ) | |
$ | 9,050,716 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Balance, March 31, 2024 | |
| 4,113,621 | | |
$ | 4,114 | | |
$ | 31,285,462 | | |
$ | (21,269,737 | ) | |
$ | 10,019,839 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Stock Option Compensation | |
| - | | |
| - | | |
| 115,456 | | |
| - | | |
| 115,456 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Restricted Share Issuance | |
| 117,185 | | |
| 117 | | |
| 135,900 | | |
| - | | |
| 136,017 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Net Income | |
| - | | |
| - | | |
| - | | |
| 75,050 | | |
| 75,050 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Balance, June 30, 2024 | |
| 4,230,806 | | |
$ | 4,231 | | |
$ | 31,536,818 | | |
$ | (21,194,687 | ) | |
$ | 10,346,362 | |
| |
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 | |
| - | | |
| - | | |
| 233,617 | | |
| - | | |
| 233,617 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Net Income | |
| - | | |
| - | | |
| - | | |
| 248,297 | | |
| 248,297 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Balance, June 30, 2023 | |
| 4,073,757 | | |
$ | 4,074 | | |
$ | 30,412,634 | | |
$ | (21,365,992 | ) | |
$ | 9,050,716 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
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 | |
| - | | |
| - | | |
| 230,912 | | |
| - | | |
| 230,912 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Restricted Share Issuance | |
| 117,185 | | |
| 117 | | |
| 464,276 | | |
| - | | |
| 464,393 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Net Loss | |
| - | | |
| - | | |
| - | | |
| (99,664 | ) | |
| (99,664 | ) |
Net Income
Loss | |
| - | | |
| - | | |
| - | | |
| (99,664 | ) | |
| (99,664 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Balance, June 30, 2024 | |
| 4,230,806 | | |
$ | 4,231 | | |
$ | 31,536,818 | | |
$ | (21,194,687 | ) | |
$ | 10,346,362 | |
Balance | |
| 4,230,806 | | |
$ | 4,231 | | |
$ | 31,536,818 | | |
$ | (21,194,687 | ) | |
$ | 10,346,362 | |
See
Notes to these condensed consolidated financial statements
INTELLINETICS,
INC. and SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
(unaudited)
| |
2024 | | |
2023 | |
| |
For the Six Months Ended June 30, | |
| |
2024 | | |
2023 | |
| |
| | |
| |
Cash flows from operating activities: | |
| | | |
| | |
Net (loss) income | |
$ | (99,664 | ) | |
$ | 248,297 | |
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 538,648 | | |
| 467,521 | |
Bad debt (recovery) expense | |
| (143 | ) | |
| 27,528 | |
Loss on disposal of fixed assets | |
| 547 | | |
| - | |
Amortization of deferred financing costs | |
| 94,531 | | |
| 95,152 | |
Amortization of debt discount | |
| - | | |
| 17,778 | |
Amortization of right of use assets, financing | |
| 34,954 | | |
| 14,959 | |
Share based compensation | |
| 695,305 | | |
| 233,617 | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| 401,330 | | |
| (233,431 | ) |
Accounts receivable, unbilled | |
| (162,476 | ) | |
| (441,603 | ) |
Parts and supplies | |
| 16,346 | | |
| 652 | |
Prepaid expenses and other current assets | |
| 31,049 | | |
| (27,999 | ) |
Accounts payable and accrued expenses | |
| 345,041 | | |
| (22,062 | ) |
Operating lease assets and liabilities, net | |
| (3,990 | ) | |
| 6,280 | |
Deferred revenues | |
| (172,623 | ) | |
| (686,320 | ) |
Total adjustments | |
| 1,818,519 | | |
| (547,928 | ) |
Net cash provided by (used in) operating activities | |
| 1,718,855 | | |
| (299,631 | ) |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Capitalization of internal use software | |
| (198,051 | ) | |
| (208,417 | ) |
Purchases of property and equipment | |
| (200,715 | ) | |
| (82,684 | ) |
Net cash used in investing activities | |
| (398,766 | ) | |
| (291,101 | ) |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Payment of earnout liabilities | |
| - | | |
| (700,000 | ) |
Principal payments on financing lease liability | |
| (29,668 | ) | |
| (12,312 | ) |
Repayment of notes payable | |
| (825,000 | ) | |
| (262,950 | ) |
Net cash used in financing activities | |
| (854,668 | ) | |
| (975,262 | ) |
| |
| | | |
| | |
Net increase (decrease) in cash | |
| 465,421 | | |
| (1,565,994 | ) |
Cash - beginning of period | |
| 1,215,248 | | |
| 2,696,481 | |
Cash - end of period | |
$ | 1,680,669 | | |
$ | 1,130,487 | |
| |
| | | |
| | |
Supplemental disclosure of cash flow information: | |
| | | |
| | |
Cash paid during the period for interest | |
$ | 160,813 | | |
$ | 226,570 | |
Cash paid during the period for income taxes | |
$ | 12,999 | | |
$ | 7,708 | |
| |
| | | |
| | |
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
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 estimates a current
estimated credit losses (“CECL”) for accounts receivable and accounts receivable-unbilled. The CECL for receivables
are estimated based on the receivable aging category, credit risk of specific customers, past collection history, and management’s
evaluation of collectability. 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 June 30, 2024 and December 31, 2023, our allowance for credit losses was $120,365 and $124,103,
respectively.
Changes
in the allowance for credit losses for the periods ended June 30, 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 | |
As of March 31, 2024 | |
$ | (109,515 | ) |
(Provisions) Reductions charged to operating results | |
$ | (10,850 | ) |
Accounts write-offs | |
$ | 0 | |
As of June 30, 2024 | |
$ | (120,365 | ) |
| |
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 | ) |
(Provisions) Reductions charged to operating results | |
$ | (5,786 | ) |
Accounts write-offs | |
$ | 0 | |
As of June 30, 2023 | |
$ | (114,219 | ) |
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 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 on March 28, 2024.
Contract
balances
The
following table present changes in our contract assets during the six months ended June 30, 2024 and 2023:
Schedule
of Changes in Contract Assets and Liabilities
| |
Balance at
Beginning of
Period | | |
Billings | | |
Payments Received | | |
Balance at
End of Period | |
Six months ended June 30, 2024 | |
| | | |
| | | |
| | | |
| | |
Accounts receivable | |
$ | 1,850,375 | | |
$ | 8,889,383 | - | - |
$ | (9,290,570 | ) | |
$ | 1,449,188 | |
| |
| | | |
| | | |
| | | |
| | |
Six months ended June 30, 2023 | |
| | | |
| | | |
| | | |
| | |
Accounts receivable | |
$ | 1,121,083 | | |
$ | 7,342,400 | | |
$ | (7,136,497 | ) | |
$ | 1,326,986 | |
| |
Balance at
Beginning of
Period | | |
Revenue
Recognized in
Advance of
Billings | | |
Billings | | |
Balance at
End of Period | |
Six months ended June 30, 2024 | |
| | | |
| | | |
| | | |
| | |
Accounts receivable, unbilled | |
$ | 1,320,837 | | |
$ | 2,972,740 | | |
$ | (2,810,264 | ) | |
$ | 1,483,313 | |
| |
| | | |
| | | |
| | | |
| | |
Six months ended June 30, 2023 | |
| | | |
| | | |
| | | |
| | |
Accounts receivable, unbilled | |
$ | 596,410 | | |
$ | 2,703,932 | | |
$ | (2,262,329 | ) | |
$ | 1,038,013 | |
| |
Balance at
Beginning of
Period | | |
Commissions
Paid | | |
Commissions
Recognized | | |
Balance at
End of Period | |
Six months ended June 30, 2024 | |
| | | |
| | | |
| | | |
| | |
Other contract assets | |
$ | 140,165 | | |
$ | 48,483 | | |
$ | (47,434 | ) | |
$ | 141,214 | |
| |
| | | |
| | | |
| | | |
| | |
Six months ended June 30, 2023 | |
| | | |
| | | |
| | | |
| | |
Other contract assets | |
$ | 80,378 | | |
$ | 80,077 | | |
$ | (63,985 | ) | |
$ | 96,470 | |
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 June 30, 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 $35,657. 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.
The
following table presents changes in our contract liabilities during the six months ended June 30, 2024 and 2023:
| |
Balance at | | |
| | |
| | |
Balance at | |
| |
Beginning | | |
| | |
Recognized | | |
End of | |
| |
of Period | | |
Billings | | |
Revenue | | |
Period | |
Six months ended June 30, 2024 | |
| | | |
| | | |
| | | |
| | |
Contract liabilities: Deferred revenue | |
$ | 2,927,808 | | |
$ | 3,953,386 | | |
$ | (4,126,009 | ) | |
$ | 2,755,185 | |
| |
| | | |
| | | |
| | | |
| | |
Six months ended June 30, 2023 | |
| | | |
| | | |
| | | |
| | |
Contract liabilities: Deferred revenue | |
$ | 2,754,064 | | |
$ | 3,522,274 | | |
$ | (4,208,594 | ) | |
$ | 2,067,744 | |
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 $88,430 and $198,051 were capitalized during the three and six months ended June 30, 2024.
Such costs in the amount of $96,209 and $208,417 were capitalized during the three and six months ended June 30, 2023.
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 June 30, 2024 and December 31, 2023, our condensed consolidated balance sheets included
$670,686 and $630,979, respectively, in other long-term assets.
For
the three and six months ended June 30, 2024 and 2023, our expensed software development costs were $170,822 and $330,553, respectively,
and $140,003 and $271,746, 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 and six months ended June 30, 2024 and 2023 amounted to
$9,426 and $15,403, respectively, and $6,123 and $12,243, 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.
For the first quarter 2024, certain options and warrants were in-the-money
and others were not. For other periods presented, the six months ended June 30, 2024 and the three and six months ended 2023, we
have outstanding warrants and stock options which have not been included in the calculation of diluted net loss per share because to do so would be anti-dilutive. The six months ended June 30, 2024 reported a net loss. For the first
quarter and six months 2023, no options and warrants were in-the-money. Therefore, for the six months ended June 30,2024 and the three and six months
ended June 30, 2023, 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 June 30, 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
| |
June 30, 2024 | | |
December 31, 2023 | |
Deferred tax assets | |
| | | |
| | |
Reserves and accruals not currently deductible for tax purposes | |
$ | 105,879 | | |
$ | 69,676 | |
Amortizable assets | |
| 133,544 | | |
| 109,612 | |
Net operating loss carryforwards | |
| 4,649,089 | | |
| 4,771,762 | |
Deferred tax assets, gross | |
| 4,888,512 | | |
| 4,951,050 | |
Deferred tax liabilities | |
| | | |
| | |
Amortizable assets | |
| (209,249 | ) | |
| (197,579 | ) |
Property and equipment | |
| (214,390 | ) | |
| (214,698 | ) |
Net deferred tax assets | |
| 4,464,873 | | |
| 4,538,773 | |
Valuation allowance | |
| (4,464,873 | ) | |
| (4,538,773 | ) |
Deferred tax assets,
net | |
$ | - | | |
$ | - | |
As
of June 30, 2024 and December 31, 2023, we had federal net operating loss carry forwards of approximately $15,477,000 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 June 30, 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
| |
2024 | | |
2023 | | |
2024 | | |
2023 | |
| |
For the three months ended June 30, | | |
For the six months ended June 30, | |
| |
2024 | | |
2023 | | |
2024 | | |
2023 | |
Revenues | |
| | |
| | |
| | |
| |
Document Management | |
$ | 1,859,088 | | |
$ | 1,879,369 | | |
$ | 3,679,508 | | |
$ | 3,705,103 | |
Document Conversion | |
| 2,782,505 | | |
| 2,379,061 | | |
| 5,469,169 | | |
| 4,740,160 | |
Total revenues | |
$ | 4,641,593 | | |
$ | 4,258,430 | | |
$ | 9,148,677 | | |
$ | 8,445,263 | |
| |
| | | |
| | | |
| | | |
| | |
Gross profit | |
| | | |
| | | |
| | | |
| | |
Document Management | |
$ | 1,618,537 | | |
$ | 1,536,385 | | |
$ | 3,175,430 | | |
$ | 3,053,746 | |
Document Conversion | |
| 1,384,442 | | |
| 1,054,048 | | |
| 2,727,193 | | |
| 2,182,526 | |
Total gross profit | |
$ | 3,002,979 | | |
$ | 2,590,433 | | |
$ | 5,902,623 | | |
$ | 5,236,272 | |
| |
| | | |
| | | |
| | | |
| | |
Capital additions, net | |
| | | |
| | | |
| | | |
| | |
Document Management | |
$ | 104,421 | | |
$ | 96,209 | | |
$ | 215,040 | | |
$ | 212,250 | |
Document Conversion | |
| 166,413 | | |
| 60,323 | | |
| 183,726 | | |
| 78,851 | |
Total capital additions, net | |
$ | 270,834 | | |
$ | 156,532 | | |
$ | 398,766 | | |
$ | 291,101 | |
| |
June 30, 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 | |
| |
June 30, 2024 | | |
December 31, 2023 | |
Total assets | |
| | | |
| | |
Document Management | |
$ | 9,594,575 | | |
$ | 10,104,004 | |
Document Conversion | |
| 9,268,149 | | |
| 8,922,256 | |
Total assets | |
$ | 18,862,724 | | |
$ | 19,026,260 | |
Statement
of Cash Flows
For
purposes of reporting cash flows, cash includes cash on hand and demand deposits held by banks.
Reclassifications
Certain
amounts reported in prior filings of the condensed consolidated financial statements have been reclassified to conform to current presentation.
4.
Intangible Assets, Net
At
June 30, 2024, intangible assets consisted of the following:
Schedule
of Intangible Assets
| |
Estimated | |
| | |
Accumulated | | |
| |
| |
Useful Life | |
Costs | | |
Amortization | | |
Net | |
Trade names | |
10 years | |
$ | 297,000 | | |
$ | (91,617 | ) | |
$ | 205,383 | |
Proprietary technology | |
10 years | |
| 861,000 | | |
| (193,725 | ) | |
| 667,275 | |
Customer relationships | |
5-15 years | |
| 4,091,000 | | |
| (1,309,475 | ) | |
| 2,781,525 | |
| |
| |
$ | 5,249,000 | | |
$ | (1,594,817 | ) | |
$ | 3,654,183 | |
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 and six months ended June 30, 2024 and June 30, 2023, amounted to $127,578 and $255,155, respectively, and $127,577
and $255,154, respectively. 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 June 30, | |
Amount | |
2024 | |
$ | 505,941 | |
2025 | |
| 431,441 | |
2026 | |
| 326,108 | |
2027 | |
| 319,316 | |
2028 | |
| 305,733 | |
Thereafter | |
| 1,765,644 | |
Intangible
assets | |
$ | 3,654,183 | |
5.
Fair Value Measurements
We
paid our final earnout liability of $700,000 in January 2023 and as of June 30, 2024, there were no earnout liabilities remaining.
6.
Property and Equipment
Property
and equipment are comprised of the following:
Schedule
of Property and Equipment
| |
June 30, 2024 | | |
December 31, 2023 | |
Computer hardware and purchased software | |
$ | 1,633,177 | | |
$ | 1,437,023 | |
Leasehold improvements | |
| 395,919 | | |
| 395,919 | |
Furniture and fixtures | |
| 324,296 | | |
| 324,296 | |
Property and equipment, gross | |
| 2,353,392 | | |
| 2,157,238 | |
Less: accumulated depreciation | |
| (1,354,116 | ) | |
| (1,232,981 | ) |
Property and equipment, net | |
$ | 999,276 | | |
$ | 924,257 | |
Total
depreciation expense on our property and equipment for the three and six months ended June 30, 2024 and 2023 amounted to $63,321 and
$125,149, respectively, and $64,675 and $126,614, respectively.
7.
Notes Payable – Unrelated Parties
Summary
of Notes Payable to Unrelated Parties
The
tables below summarize all notes payable at June 30, 2024 and December 31, 2023, respectively, with the exception of related party notes
disclosed in Note 9 “Notes Payable - Related Parties.”
Schedule
of Notes Payable
| |
June 30, 2024 | | |
December 31, 2023 | |
Notes payable – “2022 Unrelated Notes” | |
$ | 1,539,500 | | |
$ | 2,364,500 | |
Less unamortized debt issuance costs | |
| (72,188 | ) | |
| (155,258 | ) |
Long-term portion of notes payable | |
$ | 1,467,312 | | |
$ | 2,209,242 | |
Subordinated Notes Payable | |
Issue Date | | |
Interest Rate | | |
Interest Due | | |
Principal Due | |
$ |
1,539,500 | |
| April 1, 2022 | | |
| 12 | % | |
| Quarterly | | |
| December 31, 2025 | |
Future
minimum principal payments of the Notes Payable to Unrelated Parties are $1,539,500 as of June 30, 2026. As of June 30, 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 June 30, 2024 and December 31, 2023, unamortized deferred financing costs and unamortized debt discount
were reflected within long term liabilities on the condensed consolidated balance sheets, netted with the corresponding 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 and six months ended June 30, 2024 and 2023 was $83,159 and $207,884, respectively, and $136,136
and $287,741, respectively.
8.
Notes Payable - Related Parties
Summary
of Notes Payable to Related Parties
The
tables below summarize all notes payable to related parties at June 30, 2024 and December 31, 2023:
Schedule
of Notes Payable
| |
June 30, 2024 | | |
December 31, 2023 | |
Notes payable – “2022 Related Note” | |
$ | 600,000 | | |
$ | 600,000 | |
| |
| | | |
| | |
Less unamortized debt issuance costs | |
| (27,937 | ) | |
| (39,398 | ) |
Long-term portion of notes payable | |
$ | 572,063 | | |
$ | 560,602 | |
Subordinated Notes Payable | |
Issue Date | | |
Interest Rate | | |
Interest Due | | |
Principal Due | |
2022 Related Note | |
| April 1, 2022 | | |
| 12 | % | |
| Quarterly | | |
| December 31, 2025 | |
Future
minimum principal payments of the 2022 Notes to related parties are $600,000 as of June 30, 2026. As of June 30, 2024 and December 31,
2023, accrued interest for these notes payable – related parties was $0. As of June 30, 2024 and December 31, 2023, unamortized
deferred financing costs and unamortized debt discount were reflected within long term liabilities on the condensed 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 and six months ended June 30, 2024 and 2023 was $22,656 and $47,461, and $25,880 and $51,759, 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.
Operating
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 June 30, | |
Finance Leases | | |
Operating Leases | |
2025 | |
$ | 89,954 | | |
$ | 957,371 | |
2026 | |
| 89,954 | | |
| 936,852 | |
2027 | |
| 71,204 | | |
| 443,008 | |
2028 | |
| 63,855 | | |
| 311,010 | |
2029 | |
| 39,194 | | |
| 35,100 | |
Thereafter | |
| 1,883 | | |
| - | |
Less Imputed Interest | |
| (70,554 | ) | |
| (288,511 | ) |
| |
$ | 285,490 | | |
$ | 2,394,830 | |
The
following table summarizes the components of lease expense:
Summary
of Components of Lease Expense
For the three months ending June 30, | |
2024 | | |
2023 | |
Finance lease expense: | |
| | | |
| | |
Amortization of ROU asset | |
$ | 18,186 | | |
$ | 8,252 | |
Interest on lease liabilities | |
| 6,958 | | |
| 3,594 | |
Operating lease expense | |
| 235,039 | | |
| 238,864 | |
Short-term lease expense | |
| 4,814 | | |
| 4,814 | |
For the six months ending June 30, | |
2024 | | |
2023 | |
Finance lease expense: | |
| | | |
| | |
Amortization of ROU asset | |
$ | 34,954 | | |
$ | 14,959 | |
Interest on lease liabilities | |
| 13,426 | | |
| 6,426 | |
Operating lease expense | |
| 469,478 | | |
| 476,312 | |
Short-term lease expense | |
| 9,627 | | |
| 9,627 | |
The
following tables set forth additional information pertaining to our leases:
Schedule
of Additional Information Pertaining to Leases
For the six months ending June 30, | |
2024 | | |
2023 | |
Cash paid for amounts included in the measurement of lease liabilities: | |
| | | |
| | |
Financing cash flows from finance leases (interest) | |
$ | 13,426 | | |
$ | 6,426 | |
Financing cash flows from finance leases (principal) | |
| 29,668 | | |
| 12,312 | |
Operating cash flows from operating leases | |
| 380,661 | | |
| 348,284 | |
ROU assets obtained in exchange for new finance lease liabilities | |
| 89,289 | | |
| 30,879 | |
Weighted average remaining lease term – finance leases | |
| 4.1 years | | |
| 5.2 years | |
Weighted average remaining lease term – operating leases | |
| 3.1 years | | |
| 4.0 years | |
Weighted average discount rate – finance leases | |
| 9.73 | % | |
| 8.25 | % |
Weighted average discount rate – operating leases | |
| 6.95 | % | |
| 6.95 | % |
10.
Stockholders’ Equity
Common
Stock
As
of June 30, 2024, 4,230,806 shares of common stock were issued and outstanding, 255,958 shares of common stock were reserved for issuance
upon the exercise of outstanding warrants, 612,952 shares of common stock were reserved for issuance under our 2015 and 2025 Equity Incentive
Plans, as amended (the “2015 Plan” and “2025 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 $33,936 and $94,531 for the three and six months ended
June 30, 2024, and at $6,224 and $17,290 for the three and six months ended June 30, 2023.
Warrants
The
following sets forth the warrants to purchase our common stock that were outstanding as of June 30, 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. As of April 2, 2024, 10,315 shares, representing an amount of $69,525, were cancelled as part of a cashless grant, in accordance with the
2015 Plan, resulting in a net of 32,180 shares vested. Stock compensation of $136,018
and $533,919
was recorded on the issuance of the common stock for the three and six months ended June 30, 2024 respectively.
Stock
Options
We
did not make any stock option grants during the six months ended June 30, 2024 or 2023.
A
summary of stock option activity during the six months ended June 30, 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 | |
| (4,000 | ) | |
| 4.63 | | |
| | | |
| | |
Outstanding at June 30, 2024 | |
| 353,887 | | |
$ | 5.07 | | |
| 7 years | | |
$ | - | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable at June 30, 2024 | |
| 256,138 | | |
$ | 5.75 | | |
| 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 June 30, 2023 | |
| 360,447 | | |
$ | 5.92 | | |
| 8 years | | |
$ | 19,200 | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable at June 30, 2023 | |
| 165,654 | | |
$ | 6.32 | | |
| 7 years | | |
$ | 19,200 | |
During
the three and six months ended June 30, 2024 and 2023, stock-based compensation for options was $115,456 and $230,912, and $115,456 and
$233,618, respectively.
As
of June 30, 2024 and December 31, 2023, there were $317,069 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 six months ended June 30, 2024 and 2023 was $379,985
and $390,221, 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 June
30, 2024 and 2023, our largest customer, the State of Michigan, accounted for 41%
and 36%,
respectively, of our total revenues. During the six months ended June 30, 2024 and 2023, our largest customer, the State of Michigan,
accounted for 45%
and 35%,
respectively, of our total revenues.
For
the three months ended June 30, 2024 and 2023, government contracts, including K-12 education, represented approximately 87% and 79%,
respectively, of our net revenues. For the six months ended June 30, 2024 and 2023, government contracts, including K-12 education, represented
approximately 87% and 76%, respectively, of our net revenues. A significant portion of our sales to resellers represent ultimate sales
to government or K-12 education.
As
of June 30, 2024 and 2023, accounts receivable concentrations from our largest customer was 62%
of our gross accounts receivable for each period.
13.
Subsequent Events
Transfer
of 2022 Notes
Effective
July 19, 2024, a holder of our 2022 Unrelated Notes sold notes totaling $250,000 to related parties, including Robert F. Taglich and
Michael N. Taglich, each beneficial owners of more than 5% of our common stock. This results in a reclassification of $250,000
from unrelated notes to related notes. There was no fee or premium or discount on the transaction. Additionally, all loan
terms and the effective interest rate of the note remain unchanged. Robert F. Taglich and Michael N. Taglich are both principals of Taglich
Brothers, Inc., and Michael N. Taglich is chairman of the board of directors of Intellinetics.
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 and six-month periods ended June 30, 2024 as the second quarter 2024 and the six-month period 2024 respectively,
and to the three and six-month periods ended June 30, 2023 as the second quarter 2023 and the six-month period 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 six-month period 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 for the second quarter and six-month period 2024 by $383,163, or 9.0%, and $703,414, or 8.3%, respectively, 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, for the six-month period 2024 we recorded $533,919 in stock compensation expense related to our restricted
stock awards to employees, without which our operating expenses (excluding cost of revenues) would have increased 12.4% year over year,
instead of 23.8%.
Below
are our key financial results for the second quarter 2024 (consolidated unless otherwise noted):
|
● |
Revenues
were $4,641,593, representing revenue growth of 9.0% year over year. |
|
|
|
|
● |
Cost
of revenues was $1,638,614, a decrease of 1.8% year over year. |
|
|
|
|
● |
Operating
expenses (excluding cost of revenues) were $2,830,873, an increase of 23.4% year over year. This amount includes a 2024 stock compensation
expense of $136,018 related to restricted stock awards to employees. |
|
|
|
|
● |
Income
from operations was $172,106, compared to $296,388 in second quarter 2023. |
|
|
|
|
● |
Net
income was $75,050 with basic and diluted net income per share of $0.02, compared to net income of $135,734 in second quarter 2023. |
|
● |
Operating
cash generated was $1,107,089, compared to operating cash used of $125,274 in second quarter 2023. |
|
|
|
|
● |
Investing
activities, including both capitalization of internal use software and purchases of property and equipment, were $270,834, compared
to $156,532 in second quarter 2023. |
Below
are our key financial results for the six-month period 2024 (consolidated unless otherwise noted):
|
● |
Revenues
were $9,148,677, representing revenue growth of 8.3% year over year. |
|
|
|
|
● |
Cost
of revenues was $3,246,054, an increase of 1.2% year over year. |
|
|
|
|
● |
Operating
expenses (excluding cost of revenues) were $5,764,997, an increase of 23.8% year over year. This amount includes a 2024 stock compensation
expense of $533,919 related to restricted stock awards to employees. |
|
● |
Income
from operations was $137,626, compared to $580,387 for the six-month period 2023. |
|
|
|
|
● |
Net
loss was $99,664 with basic and diluted net loss per share of $0.02, compared to net income of $248,297 with basic and diluted net
income per share of $0.06 for the six-month period 2023. |
|
● |
Net
cash provided by operating activities was $1,718,855, compared to net cash used by operating activities of $299,631 for the six-month
period 2023. |
|
|
|
|
● |
Investing
activities, including both capitalization of internal use software and purchases of property and equipment, were $398,766, compared
to $291,101 for the six-month period 2023. |
|
|
|
|
● |
As
of June 30, 2024, we had 189 employees, including 38 part-time employees, compared to 170 employees, including 26 part-time employees,
as of June 30, 2023. |
Financial
Impact of Current Economic Conditions
Our
overall performance depends on economic conditions, and our continuing growth will be due in part to continued recovery and
growth in the US economy and continued stability of state and local governmental spending in the US. Our performance will also continue
to be affected by the recent inflationary environment, increased interest rates, and slowing-to-modest global growth rates.
Employee
wages, our largest expense, have recently increased due to wage inflation. These increased labor costs have been mitigated by appropriately
increasing customer renewal rates whenever we have the contractual ability to do so, as well as improved margins from growth in the software
as a service revenue line. 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. Any macroeconomic downturn could affect our customers’ and potential
customers’ budgets for technology procurement. However, absent 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
Part I, Item IA, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, and
Part II, Item IA, “Risk Factors” of our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2024, 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:
| |
For the three months ended | | |
For the six months ended | |
| |
June 30, | | |
June 30, | |
| |
2024 | | |
2023 | | |
2024 | | |
2023 | |
Revenues by segment | |
| | | |
| | | |
| | | |
| | |
Document Management | |
$ | 1,859,088 | | |
$ | 1,879,369 | | |
$ | 3,679,508 | | |
$ | 3,705,103 | |
Document Conversion | |
| 2,782,505 | | |
| 2,379,061 | | |
| 5,469,169 | | |
| 4,740,160 | |
Total revenues | |
$ | 4,641,593 | | |
$ | 4,258,430 | | |
$ | 9,148,677 | | |
$ | 8,445,263 | |
| |
| | | |
| | | |
| | | |
| | |
Gross profit by segment | |
| | | |
| | | |
| | | |
| | |
Document Management | |
$ | 1,618,537 | | |
$ | 1,536,385 | | |
$ | 3,175,430 | | |
$ | 3,053,746 | |
Document Conversion | |
| 1,384,442 | | |
| 1,054,048 | | |
| 2,727,193 | | |
| 2,182,526 | |
Total gross profit | |
$ | 3,002,979 | | |
$ | 2,590,433 | | |
$ | 5,902,623 | | |
$ | 5,236,272 | |
The
following table sets forth our revenues by revenue source for the periods indicated:
| |
For the Three Months Ended | | |
For the Six Months Ended | |
| |
June 30, | | |
June 30, | |
| |
2024 | | |
2023 | | |
2024 | | |
2023 | |
| |
| | |
| | |
| | |
| |
Revenues: | |
| | | |
| | | |
| | | |
| | |
Sale of software | |
$ | 14,933 | | |
$ | 63,646 | | |
$ | 20,712 | | |
$ | 78,939 | |
Software as a service | |
| 1,400,591 | | |
| 1,277,918 | | |
| 2,805,744 | | |
| 2,516,350 | |
Software maintenance services | |
| 353,966 | | |
| 349,139 | | |
| 711,949 | | |
| 698,681 | |
Professional services | |
| 2,662,358 | | |
| 2,298,316 | | |
| 5,142,036 | | |
| 4,597,605 | |
Storage and retrieval services | |
| 209,745 | | |
| 269,411 | | |
| 468,236 | | |
| 553,688 | |
Total revenues | |
$ | 4,641,593 | | |
$ | 4,258,430 | | |
$ | 9,148,677 | | |
$ | 8,445,263 | |
The
following table sets forth our revenues by revenue source and segment for the periods indicated:
| |
For the Three Months Ended | | |
For the Six Months Ended | |
| |
June 30, | | |
June 30, | |
| |
2024 | | |
2023 | | |
2024 | | |
2023 | |
| |
| | |
| | |
| | |
| |
Document management segment revenues: | |
| | | |
| | | |
| | | |
| | |
Sale of software | |
$ | 14,933 | | |
$ | 63,646 | | |
$ | 20,712 | | |
$ | 78,939 | |
Software as a service | |
| 1,400,591 | | |
| 1,277,918 | | |
| 2,805,744 | | |
| 2,516,350 | |
Software maintenance services | |
| 353,966 | | |
| 349,139 | | |
| 711,949 | | |
| 698,681 | |
Professional services | |
| 89,598 | | |
| 188,666 | | |
| 141,103 | | |
| 411,133 | |
Total document management segment revenues | |
$ | 1,859,088 | | |
$ | 1,879,369 | | |
$ | 3,679,508 | | |
$ | 3,705,103 | |
| |
For the Three Months Ended | | |
For the Six Months Ended | |
| |
June 30, | | |
June 30, | |
| |
2024 | | |
2023 | | |
2024 | | |
2023 | |
| |
| | |
| | |
| | |
| |
Document conversion segment revenues: | |
| | | |
| | | |
| | | |
| | |
Professional services | |
$ | 2,572,760 | | |
$ | 2,109,650 | | |
$ | 5,000,933 | | |
$ | 4,186,472 | |
Storage and retrieval services | |
| 209,745 | | |
| 269,411 | | |
| 468,236 | | |
| 553,688 | |
Total document conversion segment revenues | |
$ | 2,782,505 | | |
$ | 2,379,061 | | |
$ | 5,469,169 | | |
$ | 4,740,160 | |
Revenues
were up for the second quarter and six-month period 2024 by $383,163, or 9.0%, and $703,414, or 8.3%, respectively, primarily driven
by software as a service and professional services in the Document Conversion segment more than offsetting expected weakness in storage
and retrieval and sales of direct premise software.
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 $122,673, or 9.6%, in the second quarter 2024 compared to the second quarter 2023 and
increased by $289,394, or 11.5% in the six-month period 2024 compared to the six-month period 2023. This increase was primarily the result
of new cloud-based solution sales, primarily our IntelliCloud Payables Automation Solution, 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 professional services revenues during the second quarter 2024 and six-month period 2024, $2,572,760 and $5,000,933,
respectively, were derived from our Document Conversion operations and $89,598 and $141,103, respectively, were derived from our Document
Management operations. Our overall professional services revenues increased by $364,042, or 15.8%, in the second quarter 2024 compared
to the second quarter 2023 and increased by $544,431, or 11.8%, in the six-month period 2024 compared to the six-month period 2023. This
increase is the result of a 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 near the end of this year.
Costs
of Revenues and Gross Profits
The
following table sets forth our cost of revenues by reportable segment for the periods indicated:
| |
For the three months ended | | |
For the six months ended | |
| |
June 30, | | |
June 30, | |
| |
2024 | | |
2023 | | |
2024 | | |
2023 | |
Cost of revenues by segment | |
| | |
| | |
| | |
| |
Document Management | |
$ | 240,551 | | |
$ | 342,984 | | |
$ | 504,078 | | |
$ | 651,357 | |
Document Conversion | |
| 1,398,063 | | |
| 1,325,013 | | |
| 2,741,976 | | |
| 2,557,634 | |
Total cost of revenues | |
$ | 1,638,614 | | |
$ | 1,667,997 | | |
$ | 3,246,054 | | |
$ | 3,208,991 | |
The
following table sets forth our cost of revenues, by revenue source, for the periods indicated:
| |
For the three months ended | | |
For the six months ended | |
| |
June 30, | | |
June 30, | |
| |
2024 | | |
2023 | | |
2024 | | |
2023 | |
| |
| | |
| | |
| | |
| |
Cost of revenues: | |
| | | |
| | | |
| | | |
| | |
Sale of software | |
$ | 1,125 | | |
$ | 7,344 | | |
$ | 6,190 | | |
$ | 15,525 | |
Software as a service | |
| 217,586 | | |
| 258,382 | | |
| 433,578 | | |
| 479,022 | |
Software maintenance services | |
| 13,364 | | |
| 15,117 | | |
| 29,074 | | |
| 31,833 | |
Professional services | |
| 1,344,541 | | |
| 1,307,341 | | |
| 2,628,604 | | |
| 2,494,457 | |
Storage and retrieval services | |
| 61,998 | | |
| 79,813 | | |
| 148,608 | | |
| 188,154 | |
Total cost of revenues | |
$ | 1,638,614 | | |
$ | 1,667,997 | | |
$ | 3,246,054 | | |
$ | 3,208,991 | |
The
following table sets forth our cost of revenues, by revenue source and segment, for the periods indicated:
| |
For the three months ended | | |
For the six months ended | |
| |
June 30, | | |
June 30, | |
| |
2024 | | |
2023 | | |
2024 | | |
2023 | |
| |
| | |
| | |
| | |
| |
Document management segment cost of revenues: | |
| | | |
| | | |
| | | |
| | |
Sale of software | |
$ | 1,125 | | |
$ | 7,344 | | |
$ | 6,190 | | |
$ | 15,525 | |
Software as a service | |
| 217,586 | | |
| 258,382 | | |
| 433,578 | | |
| 479,022 | |
Software maintenance services | |
| 13,364 | | |
| 15,117 | | |
| 29,074 | | |
| 31,833 | |
Professional services | |
| 8,076 | | |
| 62,991 | | |
| 35,236 | | |
| 124,977 | |
Total document management segment cost of revenues | |
$ | 240,151 | | |
$ | 343,834 | | |
$ | 504,078 | | |
$ | 651,357 | |
| |
For the three months ended | | |
For the six months ended | |
| |
June 30, | | |
June 30, | |
| |
2024 | | |
2023 | | |
2024 | | |
2023 | |
| |
| | |
| | |
| | |
| |
Document conversion segment cost of revenues: | |
| | | |
| | | |
| | | |
| | |
Professional services | |
$ | 1,336,465 | | |
$ | 1,244,350 | | |
$ | 2,593,368 | | |
$ | 2,369,480 | |
Storage and retrieval services | |
| 61,998 | | |
| 79,813 | | |
| 148,608 | | |
| 188,154 | |
Total document conversion segment cost of revenues | |
$ | 1,398,463 | | |
$ | 1,324,163 | | |
$ | 2,741,976 | | |
$ | 2,557,634 | |
Our
total cost of revenues during the second quarter 2024 decreased by $29,383, or 1.8%, over second quarter 2023 and increased by $37,063,
or 1.2%, during the six-month period 2024 over the six-month period 2023. Our cost of revenues for our Document Management segment decreased
by $103,683, or 30.2%, in the second quarter 2024 compared to the second quarter 2023 and decreased $147,279, or 22.6%, in the six-month
period 2024 compared to the six-month period 2023 due to scale, efficiencies, and low support demands. Our cost of revenues for our Document
Conversion segment increased by $74,300, or 5.6%, in the second quarter 2024 compared to the second quarter 2023 and increased by $184,342,
or 7.2%, during the six-month period 2024 compared to the six-month period 2023 primarily due to the staffing ramp up to accommodate
more work volume.
| |
For the three months ended | | |
For the six months ended | |
| |
June 30, | | |
June 30, | |
| |
2024 | | |
2023 | | |
2024 | | |
2023 | |
| |
| | |
| | |
| | |
| |
Gross profit: | |
| | | |
| | | |
| | | |
| | |
Sale of software | |
$ | 13,808 | | |
$ | 56,302 | | |
$ | 14,522 | | |
$ | 63,414 | |
Software as a service | |
| 1,183,005 | | |
| 1,019,536 | | |
| 2,372,166 | | |
| 2,037,328 | |
Software maintenance services | |
| 340,602 | | |
| 334,022 | | |
| 682,875 | | |
| 666,848 | |
Professional services | |
| 1,317,817 | | |
| 990,975 | | |
| 2,513,432 | | |
| 2,103,148 | |
Storage and retrieval services | |
| 147,747 | | |
| 189,598 | | |
| 319,628 | | |
| 365,534 | |
Total gross profit | |
$ | 3,002,979 | | |
$ | 2,590,433 | | |
$ | 5,902,623 | | |
$ | 5,236,272 | |
| |
| | | |
| | | |
| | | |
| | |
Gross profit percentage: | |
| | | |
| | | |
| | | |
| | |
Sale of software | |
| 92.5 | % | |
| 88.5 | % | |
| 70.1 | % | |
| 80.3 | % |
Software as a service | |
| 84.5 | % | |
| 79.8 | % | |
| 84.5 | % | |
| 81.0 | % |
Software maintenance services | |
| 96.2 | % | |
| 95.7 | % | |
| 95.9 | % | |
| 95.4 | % |
Professional services | |
| 49.5 | % | |
| 43.1 | % | |
| 48.9 | % | |
| 45.7 | % |
Storage and retrieval services | |
| 70.4 | % | |
| 70.4 | % | |
| 68.3 | % | |
| 66.0 | % |
Total gross profit percentage | |
| 64.7 | % | |
| 60.8 | % | |
| 64.5 | % | |
| 62.0 | % |
Our
overall gross profit increased to 64.7% in the second quarter 2024 from 60.8% in the second quarter 2023 and increased to 64.5%
during the six-month period 2024 from 62.0% for the six-month period 2023. The mix of revenues by source was relatively stable; the
professional services gross profit margins benefited from stable wages, price increase impact year over year, and a favorable
comparison in the Document Conversion segment against weaker margin projects in 2023.
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 second quarter 2024 decreased by $40,796, or 15.8%, from the second quarter 2023 and decreased by $45,444, or
9.5%, during the six-month period 2024 from the six-month period 2023. This decrease in the cost of SaaS was due to increased staffing
allocations in 2023, affecting that quarter and six-month period. Gross profit in 2024 returned to more historical levels, improving
slightly on those, where our gross margin in the second quarter 2024 increased to 84.5% compared to 79.8% in the second quarter 2023
and to 84.5% in the six-month period 2023 compared to 81.0% during the six-month period 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 and related third-party costs. Cost of professional services during the
second quarter 2024 increased by $37,200, or 2.8%, over the second quarter 2023 and increased in the six-month period 2024 by
$134,147, or 5.4%, over the six-month period 2023. The growth in cost of sales was less than the growth in revenues due to
stabilization of wages, price increases, and favorable project profitability year over year in our Document Conversion segment.
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. Our gross margins in
professional services increased to 49.5% in the second quarter 2024 compared to 43.1% in the second quarter 2023 and increased to
48.9% during the six-month period 2024 compared to 45.7% in the six-month period 2023.
Operating
Expenses
The
following table sets forth our operating expenses for the periods indicated:
| |
For the Three Months Ended | | |
For the Six Months Ended | |
| |
June 30, | | |
June 30, | |
| |
2024 | | |
2023 | | |
2024 | | |
2023 | |
| |
| | |
| | |
| | |
| |
Operating expenses: | |
| | | |
| | | |
| | | |
| | |
General and administrative | |
$ | 2,025,796 | | |
$ | 1,561,939 | | |
$ | 4,154,289 | | |
$ | 3,116,550 | |
Sales and marketing | |
| 530,439 | | |
| 492,303 | | |
| 1,072,060 | | |
| 1,071,814 | |
Depreciation and amortization | |
| 274,638 | | |
| 239,803 | | |
| 538,648 | | |
| 467,521 | |
| |
| | | |
| | | |
| | | |
| | |
Total operating expenses | |
$ | 2,830,873 | | |
$ | 2,294,045 | | |
$ | 5,764,997 | | |
$ | 4,655,885 | |
General
and Administrative Expenses
General
and administrative expenses during the second quarter 2024 increased by $463,857, or 29.7%, over the second quarter 2023, and
increased in the six-month period 2024 by $1,037,739, or 33.3%, over the six-month period 2023, primarily related to $136,018 and
$533,919 in expense related to our restricted stock award grant to employees in the second quarter and six-month period 2024,
respectively. Excluding the restricted stock award expense, total expenses increased by $503,820, or 16.2% in the six-month period
2024 over 2023, related to investments made in order to scale, such as development, finance, and our SOC2 process, as well as wage
increases. This was primarily reflected in our Document Management segment, in which, including the restricted stock grant expense,
our general and administrative expenses increased to $1,204,509 and $2,349,541 in the second quarter 2024 and the six-month period
2024, respectively, from $794,718 and $1,597,846 in the second quarter 2023 and the six-month period 2023, respectively. In our
Document Conversion segment, our general and administrative expenses increased to $821,287 in the second quarter 2024 compared to
$767,221 in the second quarter 2023, and increased to $1,804,748 in the six-month period 2024 compared to $1,518,704 in the
six-month period 2023.
Sales
and Marketing Expenses
Sales
and marketing expenses during the second quarter 2024 increased by $38,136, or 7.7%, from the second quarter 2023 and increased by $246,
or 0.0%, during the six-month period 2024 over the six-month period 2023. The second quarter increase more appropriately reflects our investments
in sales and marketing, including an open sales rep position filled.
Depreciation
and Amortization
Depreciation
and amortization during the second quarter 2024 increased by $34,835, or 14.5%, over the second quarter 2023 and increased by $71,127,
or 15.2%, during the six-month period 2024 over the six-month period 2023, primarily as a result of increased amortization of capitalized
software costs.
Other
Items of Income and Expense
Interest
Expense, Net
Interest
expense decreased by $63,598, or 39.6%, in the second quarter 2024 as compared to the second quarter 2023, and decreased by $94,800,
or 28.5% during the six-month period 2024 as compared to the six-month period 2023. The decrease resulted from reduced interest resulting
from principal repayments as follows: the 2020 Notes on February 28, 2023 and August 31, 2023, and the 2022 Notes principal repayment
of $500,000 on March 30, 2024. The 2022 Notes principal prepayment of $325,000 on June 30, 2024 had a negligible impact on interest expense
in the six-month period 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 $23.7 million
in cash through issuances of debt and equity securities, net of $2.8 million in debt repayments. As of June 30, 2024, we had approximately
$1.7 million in cash and cash equivalents, net working capital of $0.5 million, and an accumulated deficit of $21.2 million. In March
and June 2024, we prepaid $0.5 million and $0.35 million in principal of the 2022 Notes, respectively.
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 the remaining $1,539,500 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
for this customer, which could have an adverse impact on our overall revenues, cash flows, liquidity and capital
resources.
Our
existing debt as of June 30, 2024 is comprised of 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 continuing global inflation and generally slow economic
growth.
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 June 30, 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 $2,139,500 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 June 30, 2024.
Cash
Provided by and Used in Operating Activities
Net
cash provided by operating activities during the six-month period 2024 was $1,718,855, primarily attributable to the net income adjusted
for non-cash expenses of $1,363,842, a decrease in operating assets of $286,249 and an increase in operating liabilities of $168,428.
Net cash used in operating activities during the six-month period 2023 was 299,631, primarily attributable to the net income adjusted
for non-cash expenses of $856,555, an increase in operating assets of $702,381 and a decrease in operating liabilities of $702,102.
Cash
Used in Investing Activities
Net
cash used in investing activities in the six-month period 2024 was $398,766, including $198,051 in capitalized software. Net cash used
in investing activities in the six-month period 2023 was $291,101, including $208,417 in capitalized software.
Cash
Used in Financing Activities
Net
cash used by financing activities during the six-month period 2024 amounted to $825,000 in repayment of notes payable, and $29,668 in
the principal portion of a finance lease liability. Net cash used by financing activities during the six-month period 2023 amounted to
$700,000 in earnout liability payments, $262,950 in repayment of notes payable, and $12,312 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 second
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 June 30, 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 set forth in Part II, Item IA, “Risk Factors,” of our
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2024.
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 second fiscal quarter ended June 30, 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 June 30, 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.