Form 10-Q - Quarterly report [Sections 13 or 15(d)]

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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 September 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 November 11, 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

September 30, 2024

TABLE OF CONTENTS

		Page No.
PART I

FINANCIAL INFORMATION		4

ITEM 1.	Financial Statements.	4

	Condensed Consolidated Balance Sheets as of September 30, 2024 (Unaudited) and December 31, 2023	4

	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2024 and 2023 (Unaudited)	5

	Condensed Consolidated Statement of Stockholders’ Equity for the three and nine months ended September 30, 2024 and 2023 (Unaudited)	6

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2024 and 2023 (Unaudited)	7

	Notes to Condensed Consolidated Financial Statements (Unaudited)	8

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	22

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk.	32

ITEM 4.	Controls and Procedures.	32

PART II

OTHER INFORMATION		33

ITEM 1.	Legal Proceedings.	33

ITEM 1A.	Risk Factors.	33

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	33

ITEM 3.	Defaults Upon Senior Securities.	33

ITEM 4.	Mine Safety Disclosures.	33

ITEM 5.	Other Information.	33

ITEM 6.	Exhibits.	33

SIGNATURES		34

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;
	●	“Graphic Sciences” refers to Graphic Sciences, Inc., a Michigan corporation and a wholly-owned subsidiary of Intellinetics;
	●	“Yellow Folder” refers to Yellow Folder, LLC, a Texas limited liability company, the assets of which were acquired by Intellinetics; and
	●	“CEO Image” refers to CEO Imaging Systems, Inc., a Michigan corporation, the assets of which were acquired by Intellinetics.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

INTELLINETICS, INC. and SUBSIDIARIES

Condensed Consolidated Balance Sheets

	(unaudited)
	September 30,			December 31,
	2024			2023
ASSETS

Current assets:
Cash	$	2,501,729		$	1,215,248
Accounts receivable, net		1,259,491			1,850,375
Accounts receivable, unbilled		1,149,237			1,320,837
Parts and supplies, net		89,029			110,272
Contract assets		135,053			140,165
Prepaid expenses and other current assets		380,086			367,478
Total current assets		5,514,625			5,004,375

Property and equipment, net		1,122,488			924,257
Right of use assets, operating		2,126,213			2,532,928
Right of use assets, finance		255,926			219,777
Intangible assets, net		3,526,606			3,909,338
Goodwill		5,789,821			5,789,821
Other assets		698,706			645,764
Total assets	$	19,034,385		$	19,026,260

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	432,300		$	194,454
Accrued compensation		760,075			337,884
Accrued expenses		132,751			164,103
Lease liabilities, operating - current		829,265			712,607
Lease liabilities, finance - current		67,610			49,926
Deferred revenues		3,468,109			2,927,808
Total current liabilities		5,690,110			4,386,782

Long-term liabilities:
Notes payable		775,587			2,209,242
Notes payable - related party		511,348			560,602
Notes payable		511,348			560,602
Lease liabilities, operating - net of current portion		1,411,832			1,942,970
Lease liabilities, finance - net of current portion		201,971			175,943
Total long-term liabilities		2,900,738			4,888,757
Total liabilities		8,590,848			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 September 30, 2024 and December 31, 2023, respectively		4,231			4,114
Additional paid-in capital		32,026,843			30,841,630
Accumulated deficit		(21,587,537	)		(21,095,023	)
Total stockholders’ equity		10,443,537			9,750,721
Total liabilities and stockholders’ equity	$	19,034,385		$	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 September 30,						For the Nine Months Ended September 30,
	2024			2023			2024			2023

Revenues:
Sale of software	$	13,334		$	9,422		$	34,046		$	88,361
Software as a service		1,403,942			1,293,745			4,209,686			3,810,095
Software maintenance services		352,066			353,010			1,064,015			1,051,691
Professional services		2,600,230			2,333,090			7,742,266			6,930,695
Storage and retrieval services		220,053			259,162			688,289			812,850
Total revenues		4,589,625			4,248,429			13,738,302			12,693,692

Cost of revenues:
Sale of software		1,137			5,889			7,327			21,414
Software as a service		228,923			200,104			662,501			679,126
Software maintenance services		13,743			13,165			42,817			44,998
Professional services		1,431,241			1,338,526			4,059,845			3,832,983
Storage and retrieval services		108,727			85,154			257,335			273,308
Total cost of revenues		1,783,771			1,642,838			5,029,825			4,851,829

Gross profit		2,805,854			2,605,591			8,708,477			7,841,863

Operating expenses:
General and administrative		2,113,842			1,516,009			6,268,131			4,632,559
Sales and marketing		702,500			496,289			1,774,560			1,568,103
Depreciation and amortization		287,723			247,738			826,371			715,259

Total operating expenses		3,104,065			2,260,036			8,869,062			6,915,921

(Loss) income from operations		(298,211	)		345,555			(160,585	)		925,942

Interest expense, net		(94,639	)		(136,224	)		(331,929	)		(468,314	)

Net (loss) income	$	(392,850	)	$	209,331		$	(492,514	)	$	457,628

Basic net (loss) income per share:	$	(0.09	)	$	0.05		$	(0.12	)	$	0.11
Diluted (loss) net income per share:	$	(0.09	)	$	0.05		$	(0.12	)	$	0.10

Weighted average number of common shares outstanding - basic		4,230,806			4,073,757			4,191,459			4,073,757
Weighted average number of common shares outstanding - diluted		4,230,806			4,387,515			4,191,459			4,389,145

See Notes to these condensed consolidated financial statements

INTELLINETICS, INC. and SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity

For the Three and Nine Months Ended September 30, 2024 and 2023

(unaudited)

	Shares		Amount		Capital		Deficit			Total
	Common Stock				Additional Paid-in		Accumulated
	Shares		Amount		Capital		Deficit			Total

Balance, June 30, 2023		4,073,757	$	4,074	$	30,412,634	$	(21,365,992	)	$	9,050,716

Stock option compensation		-		-		115,456		-			115,456

Net income		-		-		-		209,331			209,331

Balance, September 30, 2023		4,073,757	$	4,074	$	30,528,090	$	(21,156,661	)	$	9,375,503

Balance, June 30, 2024		4,230,806	$	4,231	$	31,536,818	$	(21,194,687	)	$	10,346,362

Stock option compensation		-		-		354,006		-			354,006

Restricted share issuance		-		-		136,019		-			136,019

Net loss		-		-		-		(392,850	)		(392,850	)

Balance, September 30, 2024		4,230,806	$	4,231	$	32,026,843	$	(21,587,537	)	$	10,443,537

	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		-		-		349,073		-			349,073

Net income		-		-		-		457,628			457,628

Balance, September 30, 2023		4,073,757	$	4,074	$	30,528,090	$	(21,156,661	)	$	9,375,503

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		-		-		584,918		-			584,918

Restricted share issuance		117,185		117		600,295		-			600,412

Net loss		-		-		-		(492,514	)		(492,514	)
Net (loss) income		-		-		-		(492,514	)		(492,514	)

Balance, September 30, 2024		4,230,806	$	4,231	$	32,026,843	$	(21,587,537	)	$	10,443,537
Balance		4,230,806	$	4,231	$	32,026,843	$	(21,587,537	)	$	10,443,537

See Notes to these condensed consolidated financial statements

INTELLINETICS, INC. and SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited)

	2024			2023
	For the Nine Months Ended September 30,
	2024			2023

Cash flows from operating activities:
Net (loss) income	$	(492,514	)	$	457,628
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		826,371			715,259
Bad debt (recovery) expense		(3,780	)		59,485
Loss on disposal of fixed assets		547			-
Amortization of deferred financing costs		142,091			138,234
Amortization of debt discount		-			22,044
Amortization of right of use assets, financing		53,140			28,181
Share based compensation		1,185,330			349,073
Changes in operating assets and liabilities:
Accounts receivable		594,664			(262,627	)
Accounts receivable, unbilled		171,600			(681,390	)
Parts and supplies		21,243			(21,949	)
Prepaid expenses and other current assets		(7,496	)		(71,609	)
Accounts payable and accrued expenses		628,685			13,251
Operating lease assets and liabilities, net		(7,765	)		4,673
Deferred revenues		540,301			378,061
Total adjustments		4,144,931			670,686
Net cash provided by operating activities		3,652,417			1,128,314

Cash flows from investing activities:
Capitalization of internal use software		(302,396	)		(348,051	)
Purchases of property and equipment		(392,963	)		(84,002	)
Net cash used in investing activities		(695,359	)		(432,053	)

Cash flows from financing activities:
Payment of earnout liabilities		-			(700,000	)
Principal payments on financing lease liability		(45,577	)		(23,167	)
Repayment of notes payable		(1,307,169	)		(980,450	)
Repayment of notes payable - related parties		(317,831	)		-
Net cash used in financing activities		(1,670,577	)		(1,703,617	)

Net increase (decrease) in cash		1,286,481			(1,007,356	)
Cash - beginning of period		1,215,248			2,696,481
Cash - end of period	$	2,501,729		$	1,689,125

Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	218,461		$	329,855
Cash paid during the period for income taxes		19,077			8,344

Supplemental disclosure of non-cash financing activities:
Right-of-use asset obtained in exchange for finance lease liability	$	89,289		$	107,610

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 Ohio” and 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 assets acquired in April 2022 and the 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 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 September 30, 2024 and December 31, 2023, our allowance for credit losses was $116,728 and $124,103, respectively.

Changes in the allowance for credit losses for the periods ended September 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	)
As of June 30, 2024		(120,365	)
(Provisions) Reductions charged to operating results		3,637
Accounts write-offs	$	31,941
As of September 30, 2024	$	(116,728	)

	Trade Receivables
As of December 31, 2022	$	(88,331	)
(Provisions) Reductions charged to operating results		(20,649	)
Accounts write-offs		1,640
As of March 31, 2023		(107,340	)
(Provisions) Reductions charged to operating results		(6,878	)
As of June 30, 2023		(114,219	)
(Provisions) Reductions charged to operating results		(31,957	)
Accounts write-offs		31,941
As of September 30, 2023	$	(114,235	)

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 tables present changes in our contract assets during the nine months ended September 30, 2024 and 2023:

	Balance at										Balance at
	Beginning							Payments			End of
	of Period			Billings				Received			Period
Nine months ended September 30, 2024
Accounts receivable	$	1,850,375	4,523,087	$	14,580,399	110,761	(115,873	$	(15,171,283	)	$	1,259,491

Nine months ended September 30, 2023
Accounts receivable	$	1,121,083		$	12,405,093			$	(12,201,951	)	$	1,324,225

	Balance at Beginning of Period		Revenue Recognized in Advance of Billings		Billings			Balance at End of Period
Nine months ended September 30, 2024
Accounts receivable, unbilled	$	1,320,837	$	4,523,087	$	(4,694,687	)	$	1,149,237

Nine months ended September 30, 2023
Accounts receivable, unbilled	$	596,410	$	3,892,301	$	(3,210,911	)	$	1,277,800

	Balance at Beginning of Period		Commissions Paid		Commissions Recognized			Balance at End of Period
Nine months ended September 30, 2024
Other contract assets	$	140,165	$	110,761	$	(115,873	)	$	135,053

Nine months ended September 30, 2023
Other contract assets	$	80,378	$	157,265	$	(99,581	)	$	138,062

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 97% of the remaining performance obligations over the next 12 months, with the remainder recognized thereafter. As of September 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 $91,193. 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 nine months ended September 30, 2024 and 2023:

	Balance at							Balance at
	Beginning				Recognized			End of
	of Period		Billings		Revenue			Period
Nine months ended September 30, 2024
Contract liabilities: Deferred revenue	$	2,927,808	$	6,185,445	$	(5,645,144	)	$	3,468,109

Nine months ended September 30, 2023
Contract liabilities: Deferred revenue	$	2,754,064	$	5,997,723	$	(5,619,662	)	$	3,132,125

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 $104,345 and $302,396 were capitalized during the three and nine months ended September 30, 2024. Such costs in the amount of $139,633 and $348,051 were capitalized during the three and nine months ended September 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 September 30, 2024 and December 31, 2023, our condensed consolidated balance sheets included $683,922 and $630,979, respectively, in other long-term assets.

For the three and nine months ended September 30, 2024 and 2023, our expensed software development costs were $179,813 and $510,366, respectively, and $120,830 and $392,576, 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 nine months ended September 30, 2024 and 2023 amounted to $17,019 and $32,422, respectively, and $7,853 and $20,096, respectively.

Earnings (Loss) Per Share

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

We have outstanding warrants and stock options which have not been included in the calculation of diluted net loss per share for the three and nine months ended September 30, 2024 because to do so would be anti-dilutive. As such, the numerator and the denominator used in computing both basic and diluted net loss per share for those periods 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 September 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:

	September 30, 2024			December 31, 2023
Deferred tax assets
Reserves and accruals not currently deductible for tax purposes	$	222,621		$	69,676
Amortizable assets		122,794			109,612
Net operating loss carryforwards		4,207,127			4,771,762
Deferred tax assets, gross		4,552,542			4,951,050
Deferred tax liabilities
Amortizable assets		(190,360	)		(197,579	)
Property and equipment		(214,446	)		(214,698	)
Net deferred tax assets		4,147,736			4,538,773
Valuation allowance		(4,147,736	)		(4,538,773	)
Deferred tax assets, net	$	-		$	-

As of September 30, 2024 and December 31, 2023, we had federal net operating loss carry forwards of approximately $13,795,749 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 September 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 September 30,				For the nine months ended September 30,
	2024		2023		2024		2023
Revenues
Document Management	$	1,913,116	$	1,871,395	$	5,592,624	$	5,549,194
Document Conversion		2,676,509		2,377,034		8,145,678		7,144,498
Total revenues	$	4,589,625	$	4,248,429	$	13,738,302	$	12,693,692

Gross profit
Document Management	$	1,645,355	$	1,590,314	$	4,820,785	$	4,639,866
Document Conversion		1,160,499		1,015,277		3,887,692		3,201,997
Total gross profit	$	2,805,854	$	2,605,591	$	8,708,477	$	7,841,863

Capital additions, net
Document Management	$	276,419	$	140,952	$	491,459	$	353,202
Document Conversion		20,174		-		203,900		78,851
Total capital additions, net	$	296,593	$	140,952	$	695,359	$	432,053

	September 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

	September 30, 2024		December 31, 2023
Total assets
Document Management	$	9,764,609	$	10,104,004
Document Conversion		9,269,776		8,922,256
Total assets	$	19,034,385	$	19,026,260

Statement of Cash Flows

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

4. Intangible Assets

At September 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	$	(99,042	)	$	197,958
Proprietary technology	10 years		861,000		(215,250	)		645,750
Customer relationships	5-15 years		4,091,000		(1,408,102	)		2,682,898
		$	5,249,000	$	(1,722,394	)	$	3,526,606

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 nine months ended September 30, 2024 and September 30, 2023, amounted to $127,577 and $382,732, respectively, and $127,577 and $382,731, respectively. The following table represents future amortization expense for intangible assets subject to amortization.

For the Twelve Months Ending September 30,	Amount
2025	$	499,391
2026		391,941
2027		326,108
2028		314,223
2029		305,733
Thereafter		1,689,210
Intangible assets	$	3,526,606

5. Fair Value Measurements

We made the final payment of our earnout liability relating to our acquisition of Graphic Sciences in the amount of $700,000 in January 2023. As of September 30, 2024, we have no earnout liabilities.

6. Property and Equipment

Property and equipment are comprised of the following:

Schedule of Property and Equipment

	September 30, 2024			December 31, 2023
Computer hardware and purchased software	$	1,825,425		$	1,437,023
Leasehold improvements		395,919			395,919
Furniture and fixtures		324,296			324,296
Property and equipment, gross		2,545,640			2,157,238
Less: accumulated depreciation		(1,423,152	)		(1,232,981	)
Property and equipment, net	$	1,122,488		$	924,257

Total depreciation expense on our property and equipment for the three and nine months ended September 30, 2024 and 2023 amounted to $69,036 and $194,185, respectively, and $64,590 and $191,204, respectively.

7. Notes Payable – Unrelated Parties

Summary of Notes Payable to Unrelated Parties

The tables below summarize all notes payable at September 30, 2024 and December 31, 2023, respectively, other than the related party notes disclosed in Note 8 “Notes Payable - Related Parties.”

Schedule of Notes Payable

	September 30, 2024			December 31, 2023
Notes payable – “2022 Unrelated Notes”	$	807,331		$	2,364,500
Less unamortized debt issuance costs		(31,744	)		(155,258	)
Long-term portion of notes payable	$	775,587		$	2,209,242

The principal terms of the 2022 Unrelated Notes, which are subordinated notes, as of September 30 are as follows:

Issue Date		Interest Rate				Interest Due		Principal Due
April 1, 2022			12	%		Quarterly		December 31, 2025

Future minimum principal payments of the Notes Payable to Unrelated Parties of $807,331 are due on December 31, 2025. As of September 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 September 30, 2024 and December 31, 2023, unamortized deferred financing costs were reflected within long term liabilities on the condensed consolidated balance sheets, netted with the corresponding notes payable balance.

In July 2024, a principal amount of $250,000 of the 2022 Unrelated Notes were sold by the unrelated noteholder to related parties at face value. See Note 8.

With respect to all notes outstanding (other than the notes to related parties), interest expense, including the amortization of debt issuance costs, for the three and nine months ended September 30, 2024 and 2023 was $76,681 and $284,565, respectively, and $124,753 and $412,494, respectively.

8. Notes Payable - Related Parties

Summary of Notes Payable to Related Parties

The tables below summarize all notes payable to related parties at September 30, 2024 and December 31, 2023:

Schedule of Notes Payable

	September 30, 2024			December 31, 2023
Notes payable – “2022 Related Notes”	$	532,169		$	600,000

Less unamortized debt issuance costs		(20,821	)		(39,398	)
Long-term portion of notes payable	$	511,348		$	560,602

The principal terms of the 2022 Related Notes, which are subordinated notes, as of September 30 are as follows:

Issue Date		Interest Rate				Interest Due		Principal Due
April 1, 2022			12	%		Quarterly		December 31, 2025

Future minimum principal payments of the 2022 Notes to related parties of $532,169 are due on December 31, 2025. As of September 30, 2024 and December 31, 2023, accrued interest for these notes payable – related parties was $0. As of September 30, 2024 and December 31, 2023, unamortized deferred financing costs were reflected within long term liabilities on the condensed consolidated balance sheets, netted with the corresponding notes payable balance.

In July 2024, a principal amount of $250,000 of the 2022 Unrelated Notes were sold by the unrelated noteholder to related parties at face value, comprised of $75,000 sold to Michael N. Taglich, a director of the company, $75,000 sold to Robert F. Taglich (each a more than 5% beneficial owner of the Company’s shares), and $100,000 sold to Nicholas Taglich and Juliana Taglich.

With respect to notes payable – related parties outstanding, interest expense, including the amortization of debt issuance costs, for the three and nine months ended September 30, 2024 and 2023 was $28,526 and $75,987, and $25,879 and $77,638, 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	$	44,930	August 31, 2026
Sterling Heights, MI		37,000	$	22,312	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	$	6,284	September 30, 2028

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

For the twelve months ending September 30,	Finance Leases			Operating Leases
2025	$	89,954		$	974,719
2026		85,902			892,644
2027		63,855			366,156
2028		68,064			238,947
2029		13,181			17,550
Less imputed interest		(51,375	)		(248,919	)
	$	269,581		$	2,241,097

The following table summarizes the components of lease expense:

Summary of Components of Lease Expense

For the three months ending September 30,	2024		2023
Finance lease expense:
Amortization of ROU asset	$	18,186	$	13,221
Interest on lease liabilities		6,580		5,036
Operating lease expense		239,189		238,864
Short-term lease expense		4,814		4,814

For the nine months ending September 30,	2024		2023
Finance lease expense:
Amortization of ROU asset	$	53,140	$	28,181
Interest on lease liabilities		20,006		11,462
Operating lease expense		708,666		715,176
Short-term lease expense		14,441		14,441

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

For the nine months ending September 30,	2024			2023
Cash paid for amounts included in the measurement of lease liabilities:
Financing cash flows from finance leases (interest)	$	20,006		$	11,462
Financing cash flows from finance leases (principal)		45,577			23,167
Operating cash flows from operating leases		582,486			531,567
ROU assets obtained in exchange for new finance lease liabilities		89,289			107,610
Weighted average remaining lease term – finance leases		3.8 years			4.4 years
Weighted average remaining lease term – operating leases		2.8 years			3.8 years
Weighted average discount rate – finance leases		9.72	%		8.88	%
Weighted average discount rate – operating leases		6.93	%		6.93	%

10. Stockholders’ Equity

Common Stock

As of September 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 Equity Incentive Plan, as amended (the “2015 Plan”), and our 2025 Equity Incentive Plans, as amended (the “2025 Plan”), and 110,136 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 private placement:

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

Amortization of the debt issuance costs for the Private Placement 2022 offering was recorded at $47,559 and $142,091 for the three and nine months ended September 30, 2024, and at $38,931 and $116,793 for the three and nine months ended September 30, 2023.

Warrants

The following sets forth the warrants to purchase our common stock that were outstanding as of September 30, 2024:

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 for payment of payroll taxes as part of a cashless grant, in accordance with the 2015 Plan, resulting in a net of 32,180 shares vested. Stock compensation of $136,019 and $669,937 was recorded on the issuance of the common stock for the three and nine months ended September 30, 2024 respectively.

Stock Options

On August 16, 2024, we granted non-employee directors stock options to purchase 36,000 shares at an exercise price of $8.78 per share, the fair market value of the shares on the grant date, under the 2023 Non-Employee Director Compensation Plan, with 100% vesting upon grant. The total fair value of $241,735 for these stock options was recognized upon grant. On September 4, 2024, we granted employees stock options to purchase 14,500 shares at an exercise price of $10.12 per share, the fair market value of the shares on the grant date, under the 2015 Plan, with annual vesting through 2027 based on service time. The total fair value of $118,347 for these stock options is being recognized over the vesting period. We did not make any stock option grants during the nine months ended September 30, 2023.

The weighted-average grant date fair value of options granted during the three and nine months ended September 30, 2024 was $7.13. The weighted average assumptions that were used in calculating such values during the nine months ended September 30, 2024, as well as the assumptions that were used in calculating such values, were based on estimates at the grant date in the table as follows:

	Grant Date August 16, 2024			Grant Date September 4, 2024
Risk-free interest rate		3.77	%		3.61	%
Weighted average expected term		5 years			6 years
Expected volatility		100.97	%		101.00	%
Expected dividend yield		0.00	%		0.00	%

A summary of stock option activity during the nine months ended September 30, 2024 and 2023 is as follows:

Schedule of Stock Options Activity

						Weighted-
				Weighted-		Average
				Average		Remaining		Aggregate
	Shares			Exercise		Contractual		Intrinsic
	Under Option			Price		Life		Value
Outstanding at January 1, 2024		357,887		$	5.69		8 years	$	-
Granted		50,500			9.16
Forfeited		(4,000	)		4.63				-
Outstanding at September 30, 2024		404,387		$	6.14		7 years	$	-

Exercisable at September 30, 2024		314,888		$	5.97		7 years	$	-

						Weighted-
				Weighted-		Average
				Average		Remaining		Aggregate
	Shares			Exercise		Contractual		Intrinsic
	Under Option			Price		Life		Value
Outstanding at January 1, 2023		365,447		$	5.89		8 years	$	19,200

Forfeited		(7,560	)		15.34				(19,200	)
Outstanding at September 30, 2023		357,887		$	5.69		8 years	$	-

Exercisable at September 30, 2023		186,594		$	5.60		7 years	$	-

During the three and nine months ended September 30, 2024 and 2023, stock-based compensation for options was $354,006 and $584,918, respectively, and $115,456 and $349,073, respectively.

As of September 30, 2024 and December 31, 2023, there were $319,148 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 two years. The total fair value of stock options that vested during the nine months ended September 30, 2024 and 2023 was $696,620 and $467,771, 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 September 30, 2024, our two largest customers, the State of Michigan and Applied Innovation, Inc., accounted for 35% and 12%, respectively, of our total revenues. During the three months ended September 30, 2023, our largest customer, the State of Michigan, accounted for 31% of our total revenues. During the nine months ended September 30, 2024 and 2023, our largest customer, the State of Michigan, accounted for 41% and 34%, respectively, of our total revenues.

For the three months ended September 30, 2024 and 2023, government contracts, including K-12 education, represented approximately 72% and 82%, respectively, of our net revenues. For the nine months ended September 30, 2024 and 2023, government contracts, including K-12 education, represented approximately 82% and 79%, respectively, of our net revenues. A significant portion of our sales to resellers represent ultimate sales to government or K-12 education.

As of September 30, 2024, accounts receivable concentration from our two largest customer was 37% and 26%, respectively, of our gross accounts receivable, compared to 62% for our largest customer as of December 31, 2023.

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 nine-month periods ended September 30, 2024 as the third quarter 2024 and the nine-month period 2024 respectively, and to the three and nine-month periods ended September 30, 2023 as the third quarter 2023 and the nine-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 nine-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 third quarter and nine-month period 2024 compared to the same periods in 2023 by $341,196, or 8.0%, and $1,044,610, or 8.2%, 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. Operating expenses for the nine-month period 2024 increased 28.2%, primarily driven by share based compensation. In the nine month period 2024, we recorded $669,937 in share based compensation expense related to our restricted stock awards to employees and $245,023 in new stock option grants in the third quarter to employees and directors. The balance of our operating expenses (excluding cost of revenues) increased 15.6% year over year, primarily driven by intentional investments in sales and marketing to accelerate revenue growth and investments in general and administrative to build structure in order to better scale, as well as expanding our development team to bring product enhancements to market more swiftly.

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

	●	Revenues were $4,589,625, representing revenue growth of 8.0% year over year.

	●	Cost of revenues was $1,783,771, an increase of 8.6% year over year.

	●	Operating expenses (excluding cost of revenues) were $3,104,065, an increase of 37.3% year over year. This amount includes share based compensation expense of $136,019 related to restricted stock awards to employees and $245,023 related to stock option grants to employees and directors in the third quarter 2024.

	●	Loss from operations was $298,211, compared to income from operations of $345,555 in third quarter 2023.

	●	Net loss was $392,850 with basic and diluted net loss per share of $0.09, compared to net income of $209,331 in third quarter 2023 with basic and diluted net income per share of $0.05.

	●	Operating cash provided was $1,933,562, compared to $1,427,945 in third quarter 2023.

	●	Investing activities, including both capitalization of internal use software and purchases of property and equipment, were $296,593, compared to $140,952 in third quarter 2023.

Below are our key financial results for the nine-month period 2024 (consolidated unless otherwise noted):

	●	Revenues were $13,738,302, representing revenue growth of 8.2% year over year.

	●	Cost of revenues was $5,029,825, an increase of 3.7% year over year.

	●	Operating expenses (excluding cost of revenues) were $8,869,062, an increase of 28.2% year over year. This amount includes share based compensation expense of $669,937 related to restricted stock awards to employees and $245,023 related to stock option grants to employees and directors the nine-month period 2024.

	●	Loss from operations was $160,585, compared to income from operations of $925,942 for the nine-month period 2023.

	●	Net loss was $492,514 with basic and diluted net loss per share of $0.12, compared to net income of $457,628 with basic and diluted net income per share of $0.11 and $0.10, respectively, for the nine-month period 2023.

	●	Net cash provided by operating activities was $3,652,417, compared to $1,128,314 for the nine-month period 2023.

	●	Investing activities, including both capitalization of internal use software and purchases of property and equipment, were $695,359, compared to $432,053 for the nine-month period 2023.

	●	As of September 30, 2024, we had 199 employees, including 32 part-time employees, compared to 165 employees, including 29 part-time employees, as of September 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 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 uncertainty in the inflationary environment and uncertainty in interest rates, as well as 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 is 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 filed on May 14, 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 nine months ended
	September 30,				September 30,
	2024		2023		2024		2023
Revenues by segment
Document Management	$	1,913,116	$	1,871,395	$	5,592,624	$	5,549,194
Document Conversion		2,676,509		2,377,034		8,145,678		7,144,498
Total revenues	$	4,589,625	$	4,248,429	$	13,738,302	$	12,693,692

Gross profit by segment
Document Management	$	1,645,355	$	1,590,314	$	4,820,785	$	4,639,866
Document Conversion		1,160,499		1,015,277		3,887,692		3,201,997
Total gross profit	$	2,805,854	$	2,605,591	$	8,708,477	$	7,841,863

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

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2024		2023		2024		2023

Revenues:
Sale of software	$	13,334	$	9,422	$	34,046	$	88,361
Software as a service		1,403,942		1,293,745		4,209,686		3,810,095
Software maintenance services		352,066		353,010		1,064,015		1,051,691
Professional services		2,600,230		2,333,090		7,742,266		6,930,695
Storage and retrieval services		220,053		259,162		688,289		812,850
Total revenues	$	4,589,625	$	4,248,429	$	13,738,302	$	12,693,692

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

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2024		2023		2024		2023

Document management segment revenues:
Sale of software	$	13,334	$	9,422	$	34,046	$	88,361
Software as a service		1,403,942		1,293,745		4,209,686		3,810,095
Software maintenance services		352,066		353,010		1,064,015		1,051,691
Professional services		143,774		215,218		284,877		599,047
Total document management segment revenues	$	1,913,116	$	1,871,395	$	5,592,624	$	5,549,194

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2024		2023		2024		2023

Document conversion segment revenues:
Professional services	$	2,456,456	$	2,117,872	$	7,457,389	$	6,331,648
Storage and retrieval services		220,053		259,162		688,289		812,850
Total document conversion segment revenues	$	2,676,509	$	2,377,034	$	8,145,678	$	7,144,498

Revenues were up for the third quarter and nine-month period 2024 by $341,196, or 8.0%, and $1,044,610, or 8.2%, respectively, primarily driven by software as a service and professional services in the Document Conversion segment more than offsetting weakness in storage and retrieval, which is expected to continue in the near term, and normal volatility in 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 $110,197, or 8.5%, in the third quarter 2024 compared to the third quarter 2023 and increased by $399,591, or 10.5% in the nine-month period 2024 compared to the nine-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. Those growth areas were partially offset by weakness in the YellowFolder growth in K-12, which was impacted by higher than normal churn rate in those 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 third quarter 2024 and nine-month period 2024, $2,456,456 and $7,457,389, respectively, were derived from our Document Conversion operations and $143,774 and $284,877, respectively, were derived from our Document Management operations. Our overall professional services revenues increased by $267,140, or 11.5%, in the third quarter 2024 compared to the third quarter 2023 and increased by $811,571, or 11.7%, in the nine-month period 2024 compared to the nine-month period 2023. This increase is the result of a significant project in our Document Conversion segment, along with realized price increases in late 2023, more than offsetting fewer projects in our Document Management segment, which can be more volatile with its significantly smaller volumes. However, we believe that our largest Document Conversion 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 next 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 nine months ended
	September 30,				September 30,
	2024		2023		2024		2023
Cost of revenues by segment
Document Management	$	267,761	$	281,081	$	771,839	$	909,328
Document Conversion		1,516,010		1,361,757		4,257,986		3,942,501
Total cost of revenues	$	1,783,771	$	1,642,838	$	5,029,825	$	4,851,829

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

	For the three months ended				For the nine months ended
	September 30,				September 30,
	2024		2023		2024		2023

Cost of revenues:
Sale of software	$	1,137	$	5,889	$	7,327	$	21,414
Software as a service		228,923		200,104		662,501		679,126
Software maintenance services		13,743		13,165		42,817		44,998
Professional services		1,431,241		1,338,526		4,059,845		3,832,983
Storage and retrieval services		108,727		85,154		257,335		273,308
Total cost of revenues	$	1,783,771	$	1,642,838	$	5,029,825	$	4,851,829

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 nine months ended
	September 30,				September 30,
	2024		2023		2024		2023

Document management segment cost of revenues:
Sale of software	$	1,137	$	5,889	$	7,327	$	21,414
Software as a service		228,923		200,104		662,501		679,126
Software maintenance services		13,743		13,165		42,817		44,998
Professional services		23,958		61,923		59,194		163,790
Total document management segment cost of revenues	$	267,761	$	281,081	$	771,839	$	909,328

	For the three months ended				For the nine months ended
	September 30,				September 30,
	2024		2023		2024		2023

Document conversion segment cost of revenues:
Professional services	$	1,407,283	$	1,276,603	$	4,000,651	$	3,669,193
Storage and retrieval services		108,727		85,154		257,335		273,308
Total document conversion segment cost of revenues	$	1,516,010	$	1,361,757	$	4,257,986	$	3,942,501

Our total cost of revenues during the third quarter 2024 increased by $140,933, or 8.6%, over third quarter 2023 and increased by $177,996, or 3.7%, during the nine-month period 2024 over the nine-month period 2023. Our cost of revenues for our Document Management segment decreased by $13,320, or 4.7%, in the third quarter 2024 compared to the third quarter 2023 and decreased $137,489, or 15.1%, in the nine-month period 2024 compared to the nine-month period 2023 following the reduced volume in sales of software and professional services in that segment. Our cost of revenues for our Document Conversion segment increased by $154,253, or 11.3%, in the third quarter 2024 compared to the third quarter 2023 and increased by $315,485, or 8.0%, during the nine-month period 2024 compared to the nine-month period 2023 due to the staffing ramp up to accommodate more work volume, as well as a higher cost project mix in the third quarter 2024.

	For the three months ended						For the nine months ended
	September 30,						September 30,
	2024			2023			2024			2023

Gross profit:
Sale of software	$	12,197		$	3,533		$	26,719		$	66,947
Software as a service		1,175,019			1,093,641			3,547,185			3,130,969
Software maintenance services		338,323			339,845			1,021,198			1,006,693
Professional services		1,168,989			994,564			3,682,421			3,097,712
Storage and retrieval services		111,326			174,008			430,954			539,542
Total gross profit	$	2,805,854		$	2,605,591		$	8,708,477		$	7,841,863

Gross profit percentage:
Sale of software		91.5	%		37.5	%		78.5	%		75.8	%
Software as a service		83.7	%		84.5	%		84.3	%		82.2	%
Software maintenance services		96.1	%		96.3	%		96.0	%		95.7	%
Professional services		45.0	%		42.6	%		47.6	%		44.7	%
Storage and retrieval services		50.6	%		67.1	%		62.6	%		66.4	%
Total gross profit percentage		61.1	%		61.3	%		63.4	%		61.8	%

Our overall gross profit decreased to 61.1% in the third quarter 2024 from 61.3% in the third quarter 2023, and increased to 63.4% for the nine-month period 2024 from 61.8% for the nine-month period 2023. The revenue mix between segments did not shift significantly, leading to stability in margins. Price increases in the Document Conversion segment offset a less profitable project mix in professional services within that segment, and margins were further bolstered by a strong performance leading to a more profitable project mix in Document Management professional services.

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 third quarter 2024 increased by $28,819, or 14.4%, from the third quarter 2023 and decreased by $16,625, or 2.4%, during the nine-month period 2024 over the nine-month period 2023. While our cost to support SaaS is generally stable and consistent, in the third quarter 2024 we hired two additional personnel, a help desk support and an implementations project manager, in order to meet growing demand. Our gross margin in the third quarter 2024 decreased to 83.7% compared to 84.5% in the third quarter 2023 and increased to 84.3% in the nine-month period 2024 compared to 82.2% during the nine-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 third quarter 2024 increased by $92,715, or 6.9%, over the third quarter 2023 and increased in the nine-month period 2024 by $226,862, or 5.9%, over the nine-month period 2023, primarily due to growing the Document Conversion staff to process the growing revenues. Our gross margins in professional services increased to 45.0% in the third quarter 2024 compared to 42.6% in the third quarter 2023 and increased to 47.6% during the nine-month period 2024 compared to 44.7% in the nine-month period 2023. Price increases in the Document Conversion segment offset a less profitable project mix in professional services within that segment in the third quarter 2024, and was strengthened by an overall solid project mix in the segment for the nine month period 2024. Gross margins related to professional services projects may vary widely, depending upon the nature of the digital conversion or consulting project and the amount of labor it takes to complete a project.

Operating Expenses

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

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2024		2023		2024		2023

Operating expenses:
General and administrative	$	2,113,842	$	1,516,009	$	6,268,131	$	4,632,559
Sales and marketing		702,500		496,289		1,774,560		1,568,103
Depreciation and amortization		287,723		247,738		826,371		715,259

Total operating expenses	$	3,104,065	$	2,260,036	$	8,869,062	$	6,915,921

General and Administrative Expenses

General and administrative expenses during the third quarter 2024 increased by $597,833, or 39.4%, over the third quarter 2023, and increased in the nine-month period 2024 by $1,635,572, or 35.3%, over the nine-month period 2023, primarily related to new share based compensation expense of $381,041 and $914,960, respectively, attributable to awards of restricted stock and stock options during 2024. The nine-month period 2024 amount of $914,960 of share based compensation expense for 2024 stock awards is comprised of $669,937 related to restricted stock awards to employees and $245,023 related to stock option grants to employees and directors, as described in the following table:

	For the Nine Months Ended
	September 30,
	2024			2023
Share based compensation expense components:
Stock options granted 2020 and 2022	$	339,895		$	349,073
Stock options granted third quarter 2024		245,023			-
Restricted stock awards granted 2024		669,937			-
Total share based compensation expense		1,254,855			349,073
Less amount related to cashless exercise		(69,525	)		-
Share based compensation equity impact	$	1,185,330		$	349,073

Excluding the share based compensation expense, total general and administrative expenses increased by $216,792, or 14.3% in the third quarter 2024 over 2023 and $1,038,181, or 15.0% in the nine-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. These increases in investments were reflected in both our reportable segments. Our Document Management segment, which includes the share based compensation expense, reported a general and administrative expenses of $1,189,789 and $3,539,330 in the third quarter 2024 and the nine-month period 2024, respectively, from $794,177 and $2,392,023 in the third quarter 2023 and the nine-month period 2023, respectively. In our Document Conversion segment, our general and administrative expenses increased to $924,053 and $2,728,801, and $721,832 and $2,240,536, in the third quarter and nine-month period 2024 and 2023, respectively.

Sales and Marketing Expenses

Sales and marketing expenses during the third quarter 2024 increased by $206,211, or 41.6%, over the third quarter 2023 and increased by $206,457, or 13.2%, during the nine-month period 2024 compared to the nine-month period 2023. The increases were primarily driven by the expansion of our sales team as part of our investments intended to accelerate our sales. Additionally, these increases resulted from an increased focus on our marketing efforts, such as an increase in our marketing expense on select campaigns and increased travel and trade show materials and attendance.

Depreciation and Amortization

Depreciation and amortization during the third quarter 2024 increased by $39,985, or 16.1%, over the third quarter 2023 and increased by $111,112, or 15.5%, during the nine-month period 2024 over the nine-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 $41,585, or 30.5%, in the third quarter 2024 as compared to the third quarter 2023, and decreased by $136,385, or 29.1% during the nine-month period 2024 as compared to nine-month period 2023. The decrease resulted from reduced interest resulting from principal repayments as follows: the 2020 Notes principal payments of $263,000 on February 28, 2023 and $717,500 on August 31, 2023, and the 2022 Notes principal repayments of $500,000 on March 30, 2024, $325,000 on June 30, 2024 and $800,000 on August 30, 2024. The reduced interest on lower principal balances year over year was partially offset by accelerating amortization of debt issue costs corresponding with the prepaid notes principal.

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 $22.9 million in cash through issuances of debt and equity securities, net of $3.6 million in debt repayments. In March, June and August 2024, we prepaid an aggregate of $1.65 million of the principal balances 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 $807,331 in 2022 Unrelated Notes and $532,169 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.

At September 30, 2024, we had $2.5 million in cash and cash equivalents, working capital deficit of $0.2 million, and long-term debt relating to our notes payable of approximately $1.3 million due December 31, 2025. 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 flow needs for at least the next 12 months, including to satisfy our expected working capital needs and our capital and debt service commitments over that period.

However, our future cash resources and capital requirements may vary materially from those now planned. For example, from time to time we evaluate opportunities to expand our current or to develop new products and services and technology or to acquire or invest in complementary businesses, which could increase our capital needs. 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 uncertainty regarding inflation and economic growth, the impact of contract renegotiations with our largest customer, the timing of sales, the success of our new business partners expanding our product and service lines, the mix of products and services, unanticipated events over which we have no control increasing our operating costs or reducing our revenues beyond our current expectations, and other factors discussed in this Quarterly Report.

We believe we could seek additional debt or equity financing on acceptable terms. While we are confident in our ability to satisfy our current debt requirements, we also believe that our capital resources, business operations and financial results would allow us to seek a full or partial refinancing or other appropriate modification of the current notes payable, such as an extension or conversion to equity, if we deem necessary or desirable. However, our ability to obtain additional capital, or to modify our existing debt arrangements, when needed or desired, will depend on many factors, including general economic and market conditions, our operating performance and investor and lender sentiment, and thus cannot be assured.

Indebtedness

As of September 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 $1,339,500 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 September 30, 2024.

Cash Provided by Operating Activities

Net cash provided by operating activities during the nine-month period 2024 was $3,652,417, primarily attributable to the net income adjusted for non-cash expenses of $2,203,699, a decrease in operating assets of $780,011 and an increase in operating liabilities of $1,161,221. Net cash provided by operating activities during the nine-month period 2023 was $1,128,314, primarily attributable to the net income adjusted for non-cash expenses of $1,312,276, an increase in operating assets of $1,037,575 and an increase in operating liabilities of $395,985.

Cash Used by Investing Activities

Net cash used in investing activities in the nine-month period 2024 was $695,359, including $302,396 in capitalized software and $203,900 in servers to replace end-of-life Yellow Folder software as a service servers. Net cash used in investing activities in the nine-month period 2023 was $432,053, including $348,051 in capitalized software.

Cash Used in and Provided by Financing Activities

Net cash used by financing activities during the nine-month period 2024 amounted to $1,625,000 in repayment of notes payable and $45,577 in the principal portion of a finance lease liability. Net cash used by financing activities during the nine-month period 2023 amounted to $700,000 in earnout liability payments, $980,450 in repayment of notes payable, and $23,167 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 have been no material changes to our critical accounting policies and estimates since our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

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 Quarterly Report.

Based on this evaluation, we concluded that, as of September 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, filed on May 14, 2024.

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

On August 16, 2024, we granted non-employee directors stock options to purchase 36,000 shares at an exercise price of $8.78 per share, the fair market value of the shares on the grant date, under the 2023 Non-Employee Director Compensation Plan. The grant of options was not subject to vesting, and was made in reliance on the exemption from registration available in Section 4(a)(2) of the Securities Act for transactions by an issuer not involving any public offering.

On September 4, 2024, we granted employees stock options to purchase 14,500 shares at an exercise price of $10.12 per share, the fair market value of the shares on the grant date, under the 2015 Plan, with annual vesting through 2027 based on service time. The grant of options was made in reliance on the exemption from registration available in Section 4(a)(2) of the Securities Act for transactions by an issuer not involving any public offering.

Other than as set forth above, there have been no securities sold by the registrant during the period covered by this Quarterly Report on Form 10-Q.

ITEM 3. DEFAULT UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not Applicable.

ITEM 5. OTHER INFORMATION.

During the fiscal quarter ended September 30, 2024, no 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); or
	●	Adopted, modified, or terminated a “non-Rule 10b5-1 trading arrangement” (as defined in Item 408 of Regulation S-K of the Exchange Act).

ITEM 6. EXHIBITS.

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

		Incorporation by reference
Exhibit No.	Description of Exhibit	Form	Date	Exhibit

31.1*	Certification of Principal Executive Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.

31.2*	Certification of Principal Financial Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.

32.1*	Certification of Principal Executive Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.

32.2*	Certification of Principal Financial Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.

101.INS*	Inline XBRL Instance Document (The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.).

101.SCH*	Inline XBRL Taxonomy Schema.

101.CAL*	Inline XBRL Taxonomy Extension Calculation Linkbase.

101.DEF*	Inline XBRL Taxonomy Extension Definition Linkbase.

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