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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the Quarterly Period Ended
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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:
(Exact name of registrant as specified in its charter)
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(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
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| (Address of Principal Executive Offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
(Former name and former address, if changed since the last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
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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.
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).
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 | ☐ |
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☐ | Smaller reporting company |
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| Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No
As of May [11], 2024, there were shares of the issuer’s common stock outstanding, each with a par value of $0.001 per share.
INTELLINETICS, INC.
Form 10-Q
March 31, 2024
TABLE OF CONTENTS
| 2 |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q and the documents incorporated into this report by reference contain forward-looking statements. In addition, from time to time we may make additional forward-looking statements in presentations, at conferences, in press releases, in other reports and filings and otherwise. Forward-looking statements are all statements other than statements of historical facts, including statements that refer to plans, intentions, objectives, goals, targets, strategies, hopes, beliefs, projections, prospects, expectations or other characterizations of future events or performance, and assumptions underlying the foregoing. The words “may,” “could,” “should,” “would,” “will,” “project,” “intend,” “continue,” “believe,” “anticipate,” “estimate,” “forecast,” “expect,” “plan,” “potential,” “opportunity,” “scheduled,” “goal,” “target,” and “future,” variations of such words, and other comparable terminology and similar expressions and references to future periods are often, but not always, used to identify forward-looking statements. Examples of forward-looking statements include, among other things, statements about the following:
| ● | the effects on our business, financial condition, and results of operations of current and future economic, business, market and regulatory conditions, including the current global inflation, economic downturn, and other economic and market conditions, and their effects on our customers and their capital spending and ability to finance purchases of our products, services, technologies and systems; | |
| ● | our prospects, including our future business, revenues, recurring revenues, expenses, net income, earnings per share, margins, profitability, cash flow, cash position, liquidity, financial condition and results of operations, backlog of orders and revenue, our targeted growth rate, our goals for future revenues and earnings, and our expectations about realizing the revenues in our backlog and in our sales pipeline; | |
| ● | our expectation that the shift from an offline to online world will continue to benefit our business; | |
| ● | our ability to integrate our recent acquisitions and any future acquisitions, grow their businesses and obtain the expected financial and operational benefits from those businesses; | |
| ● | the effects of fluctuations in sales on our business, revenues, expenses, net income, earnings per share, margins, profitability, cash flow, capital expenditures, liquidity, financial condition and results of operations; | |
| ● | our products, services, technologies and systems, including their quality and performance in absolute terms and as compared to competitive alternatives, their benefits to our customers and their ability to meet our customers’ requirements, and our ability to successfully develop and market new products, services, technologies and systems; | |
| ● | our markets, including our market position and our market share; | |
| ● | our ability to successfully develop, operate, grow and diversify our operations and businesses; | |
| ● | our business plans, strategies, goals and objectives, and our ability to successfully achieve them; | |
| ● | the sufficiency of our capital resources, including our cash and cash equivalents, funds generated from operations, availability credit and financing arrangements and other capital resources, to meet our future working capital, capital expenditure, lease and debt service and business growth needs; | |
| ● | the value of our assets and businesses, including the revenues, profits and cash flow they are capable of delivering in the future; | |
| ● | the amount and timing of revenue recognition from customer contracts with commitments for performance obligations, including our estimate of the remaining amount of commitments and when we expect to recognize revenues; | |
| ● | industry trends and customer preferences and the demand for our products, services, technologies and systems; and | |
| ● | the nature and intensity of our competition, and our ability to successfully compete in our markets. |
Any forward-looking statements we make are based on our current plans, intentions, objectives, strategies, projections and expectations, as well as assumptions made by and information currently available to management. Forward-looking statements are not guarantees of future performance or events, but are subject to and qualified by substantial risks, uncertainties and other factors, which are difficult to predict and are often beyond our control. Forward-looking statements will be affected by assumptions and expectations we might make that do not materialize or that prove to be incorrect and by known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those expressed, anticipated or implied by such forward-looking statements. These risks, uncertainties and other factors include, but are not limited to, those described in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed on March 28, 2024, as well as other risks, uncertainties and factors discussed elsewhere in this Quarterly Report, in documents that we include as exhibits to or incorporate by reference in this report, and in other reports and documents we from time to time file with or furnish to the Securities and Exchange Commission (the “SEC”). In light of these risks and uncertainties, you are cautioned not to place undue reliance on any forward-looking statements that we make.
Any forward-looking statements contained in this report speak only as of the date of this report, and any other forward-looking statements we make from time to time in the future speak only as of the date they are made. We undertake no duty or obligation to update or revise any forward-looking statement or to publicly disclose any update or revision for any reason, whether as a result of changes in our expectations or the underlying assumptions, the receipt of new information, the occurrence of future or unanticipated events, circumstances or conditions or otherwise.
As used in this Quarterly Report, unless the context indicates otherwise:
| ● | the terms “Intellinetics,” “Company,” “the company” “us,” “we,” “our,” and similar terms refer to Intellinetics, Inc., a Nevada corporation, and its subsidiaries; | |
| ● | “Intellinetics Ohio” refers to Intellinetics, Inc., an Ohio corporation and a wholly-owned subsidiary of Intellinetics; and | |
| ● | “Graphic Sciences” refers to Graphic Sciences, Inc., a Michigan corporation and a wholly-owned subsidiary of Intellinetics. |
| 3 |
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTELLINETICS, INC. and SUBSIDIARIES
Condensed Consolidated Balance Sheets
| (unaudited) | ||||||||
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ |
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$ |
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||||
| Accounts receivable, net |
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| Accounts receivable, unbilled |
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| Parts and supplies, net |
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| Contract assets |
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| Prepaid expenses and other current assets |
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| Total current assets |
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| Property and equipment, net |
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| Right of use assets, operating |
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| Right of use assets, finance |
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| Intangible assets, net |
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| Goodwill |
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| Other assets |
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| Total assets | $ |
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$ |
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| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ |
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$ |
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| Accrued compensation |
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| Accrued expenses |
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| Lease liabilities, operating - current |
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| Lease liabilities, finance - current |
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| Deferred revenues |
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| Notes payable - current |
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| Total current liabilities |
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| Long-term liabilities: | ||||||||
| Notes payable - net of current portion |
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| Notes payable - related party |
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| Lease liabilities, operating - net of current portion |
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| Lease liabilities, finance - net of current portion |
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| Total long-term liabilities |
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| Total liabilities |
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| Stockholders’ equity: | ||||||||
| Common stock, $ par value, shares authorized; shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively |
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| Additional paid-in capital |
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| Accumulated deficit |
(
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) |
(
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| Total stockholders’ equity |
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| Total liabilities and stockholders’ equity | $ |
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$ |
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See Notes to these condensed consolidated financial statements
| 4 |
INTELLINETICS, INC. and SUBSIDIARIES
Condensed Consolidated Statements of Operations
(unaudited)
| For the Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Revenues: | ||||||||
| Sale of software | $ |
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$ |
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| Software as a service |
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| Software maintenance services |
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| Professional services |
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| Storage and retrieval services |
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| Total revenues |
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| Cost of revenues: | ||||||||
| Sale of software |
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| Software as a service |
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| Software maintenance services |
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| Professional services |
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| Storage and retrieval services |
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| Total cost of revenues |
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| Gross profit |
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| Operating expenses: | ||||||||
| General and administrative |
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| Sales and marketing |
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| Depreciation and amortization |
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| Total operating expenses |
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| (Loss) income from operations |
(
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) |
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| Interest expense, net |
(
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) |
(
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) | ||||
| Net (loss) income | $ |
(
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) | $ |
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| Basic net (loss) income per share: | $ |
(
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) | $ |
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| Diluted net (loss) income per share: | $ |
(
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) | $ |
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| Weighted average number of common shares outstanding - basic |
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| Weighted average number of common shares outstanding - diluted |
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See Notes to these condensed consolidated financial statements
| 5 |
INTELLINETICS, INC. and SUBSIDIARIES
Condensed Consolidated Statement of Stockholders’ Equity
For the Three Months Ended March 31, 2024 and 2023
(unaudited)
| Common Stock | Additional Paid-in | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
| Balance, December 31, 2022 |
|
$ |
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$ |
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$ |
(
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) | $ |
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||||||||||
| Stock Option Compensation | - |
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| Net Income | - |
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|||||||||||||||||
| Balance, March 31, 2023 |
|
$ |
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$ |
|
$ |
(
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) | $ |
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||||||||||
| Balance, December 31, 2023 |
|
$ |
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$ |
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$ |
(
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) | $ |
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||||||||||
| Stock Option Compensation | - |
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| Restricted Share Issuance |
- |
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| Net Loss | - |
(
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) |
(
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) | |||||||||||||||
| Balance, March 31, 2024 |
|
$ |
|
$ |
|
$ |
(
|
) | $ |
|
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See Notes to these condensed consolidated financial statements
| 6 |
INTELLINETICS, INC. and SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)
| For the Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Cash flows from operating activities: | ||||||||
| Net (loss) income | $ |
(
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) | $ |
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| Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization |
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| Bad debt (recovery) expense |
(
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| Amortization of deferred financing costs |
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| Amortization of debt discount |
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| Amortization of right of use assets, financing |
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| Share based compensation |
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| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable |
(
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) |
(
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) | ||||
| Accounts receivable, unbilled |
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(
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) | |||||
| Parts and supplies |
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(
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) | |||||
| Prepaid expenses and other current assets |
(
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(
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) | ||||
| Accounts payable and accrued expenses |
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| Operating lease assets and liabilities, net |
(
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) |
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| Deferred revenues |
(
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) |
(
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) | ||||
| Total adjustments |
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(
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) | |||||
| Net cash provided by (used in) operating activities |
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(
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) | |||||
| Cash flows from investing activities: | ||||||||
| Capitalization of internal use software |
(
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) |
(
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) | ||||
| Purchases of property and equipment |
(
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) |
(
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) | ||||
| Net cash used in investing activities |
(
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) |
(
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) | ||||
| Cash flows from financing activities: | ||||||||
| Payment of earnout liabilities |
(
|
) | ||||||
| Principal payments on financing lease liability |
(
|
) |
(
|
) | ||||
| Repayment of notes payable |
(
|
) |
(
|
) | ||||
| Net cash used in financing activities |
(
|
) |
(
|
) | ||||
| Net decrease in cash |
(
|
) |
(
|
) | ||||
| Cash - beginning of period |
|
|
||||||
| Cash - end of period | $ |
|
$ |
|
||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid during the period for interest | $ |
|
$ |
|
||||
| Cash paid during the period for income taxes | $ |
|
$ |
|
||||
| Supplemental disclosure of non-cash financing activities: | ||||||||
| Right-of-use asset obtained in exchange for finance lease liability | $ |
|
$ | |||||
See Notes to these condensed consolidated financial statements
| 7 |
INTELLINETICS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Business Organization and Nature of Operations
Intellinetics, Inc., formerly known as GlobalWise Investments, Inc., is a Nevada corporation incorporated in 1997, with two wholly-owned subsidiaries: Intellinetics, Inc., an Ohio corporation (“Intellinetics Ohio”), and Graphic Sciences, Inc., a Michigan corporation (“Graphic Sciences”). Intellinetics Ohio was incorporated in 1996, and on February 10, 2012, Intellinetics Ohio became our sole operating subsidiary as a result of a reverse merger and recapitalization. On March 2, 2020, we purchased all the outstanding capital stock of Graphic Sciences.
Our
digital transformation products and services are provided through
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”).
The financial statements presented in this Quarterly Report on Form 10-Q are unaudited. However, in the opinion of management, these unaudited condensed consolidated financial statements include all adjustments, consisting solely of normal recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows for the periods presented in conformity with GAAP applicable to interim periods. The financial data and other financial information disclosed in these notes to the accompanying condensed consolidated financial statements are also unaudited. As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to applicable rules and regulations thereunder.
Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the full fiscal year ending December 31, 2024 or any other future period.
These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed with the SEC filed on March 28, 2024.
3. Summary of Significant Accounting Policies
Principles of Consolidation
The
condensed consolidated financial statements accompanying these notes include the accounts of Intellinetics and the accounts of all its
subsidiaries in which it holds a controlling interest. Under GAAP, consolidation is generally required for investments of more than
| 8 |
Concentrations of Credit Risk
We maintain our cash with high credit quality financial institutions. At times, our cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation insurance limit.
We do not generally require collateral or other security to support customer receivables; however, we may require customers to provide retainers, up-front deposits or irrevocable letters-of-credit when considered necessary to mitigate credit risks. The Company recognizes current estimated credit losses (“CECL”) for accounts receivable and accounts receivable-unbilled. The CECL for trade receivables are estimated based on the trade receivable aging category, credit risk of specific customers, past collection history, and management’s evaluation of accounts receivable. Provisions for CECL are classified within selling, general and administrative costs.
Upon the adoption of FASB ASU No. 2016-13 (CECL model) effective January 1, 2023, Intellinetics, Inc. has revised its methodology for estimating expected credit losses on financial instruments, specifically trade receivables. This new model requires the recognition of lifetime expected credit losses at each reporting date, considering past events, current conditions, and reasonable forecasts. In assessing the credit quality of our portfolio, management utilizes a provision matrix that classifies trade receivables by customer type and age of receivable. Government and education sector receivables carry a low risk, while a higher risk is attributed to the remaining receivables as their aging progresses. For receivables with questionable collectability, a specific reserve is assigned. The estimated credit losses are a reflection of these factors, with the matrix applying percentages to the receivables based on their risk profile, adjusted for current and expected future conditions.
During
the reporting period, the estimate of credit losses may change due to several factors including payment patterns of customers, changes
in customer creditworthiness, and broader economic conditions. Such changes are captured in the financial statements to ensure they accurately
reflect the company’s assessment of credit risk and expected losses at the end of each reporting period. Credit losses have been
within management’s expectations. At March 31, 2024 and December 31, 2023, our allowance for credit losses was $
Changes in the allowance for credit losses for the period ended March 31, 2024 and 2023 were as follows:
| Trade Receivables | ||||
| As of December 31, 2023 | $ |
(
|
) | |
| (Provisions) Reductions charged to operating results | $ |
|
||
| As of March 31, 2024 | $ |
(
|
) | |
| Trade Receivables | ||||
| As of December 31, 2022 | $ |
(
|
) | |
| (Provisions) Reductions charged to operating results | $ |
(
|
) | |
| Accounts write-offs | $ |
|
||
| As of March 31, 2023 | $ |
(
|
) | |
Revenue Recognition
We categorize revenue as software, software as a service, software maintenance services, professional services, and storage and retrieval services. We earn the majority of our revenue from the sale of professional services, followed by the sale of software maintenance services and software as a service. We apply our revenue recognition policies as required in accordance with ASC 606 based on the facts and circumstances of each category of revenue. More detail regarding each category of revenue is contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed with the SEC filed on March 28, 2024.
Contract balances
The following tables present changes in our contract assets during the three months ended March 31, 2024 and 2023:
|
Balance at
Beginning of Period |
Billings |
Payments
Received |
Balance at
End of Period |
|||||||||||||
| Three months ended March 31, 2024 | ||||||||||||||||
| Accounts receivable | $ |
|
$ |
|
$ |
(
|
) | $ |
|
|||||||
| Three months ended March 31, 2023 | ||||||||||||||||
| Accounts receivable | $ |
|
$ |
|
$ |
(
|
) | $ |
|
|||||||
|
Balance at
Beginning of Period |
Revenue
Recognized in Advance of Billings |
Billings |
Balance at
End of Period |
|||||||||||||
| Three months ended March 31, 2024 | ||||||||||||||||
| Accounts receivable, unbilled | $ |
|
$ |
|
$ |
(
|
) | $ |
|
|||||||
| Three months ended March 31, 2023 | ||||||||||||||||
| Accounts receivable, unbilled | $ |
|
$ |
|
$ |
(
|
) | $ |
|
|||||||
|
Balance at
Beginning of Period |
Commissions
Paid |
Commissions
Recognized |
Balance at
End of Period |
|||||||||||||
| Three months ended March 31, 2024 | ||||||||||||||||
| Other contract assets | $ |
|
$ |
|
$ |
(
|
) | $ |
|
|||||||
| Three months ended March 31, 2023 | ||||||||||||||||
| Other contract assets | $ |
|
$ |
|
$ |
(
|
) | $ |
|
|||||||
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.
| 9 |
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
The following table presents changes in our contract liabilities during the three months ended March 31, 2024 and 2023:
|
Balance at
Beginning of Period |
Billings |
Recognized
Revenue |
Balance at
End of Period |
|||||||||||||
| Three months ended March 31, 2024 | ||||||||||||||||
| Contract liabilities: deferred revenue | $ |
|
$ |
|
$ |
(
|
) | $ |
|
|||||||
| Three months ended March 31, 2023 | ||||||||||||||||
| Contract liabilities: deferred revenue | $ |
|
$ |
|
$ |
(
|
) | $ |
|
|||||||
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 $
Capitalized
costs are stated at cost less accumulated amortization. Amortization is computed over the estimated useful lives of the related assets
on a straight-line basis, which is three years. At March 31, 2024 and December 31, 2023, our condensed consolidated balance sheets included
$
For
the three months ended March 31, 2024 and 2023, our expensed software development costs were $
| 10 |
Recently Issued Accounting Pronouncements Not Yet Effective
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This ASU improves financial reporting by requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”) and included with each reported measure of significant profit or loss on an annual and interim basis. This ASU also requires that a public entity disclose the title and position of the CODM and an explanation of how the CODM uses the reported measures of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources. The ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. This ASU is required to be applied retrospectively for all prior periods presented in the financial statements. We are evaluating the adoption impact of this ASU on our condensed consolidated financial statements and related disclosures but do not expect any material impact upon adoption.
In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures, which amends the guidance in ASC 740, Income Taxes. The ASU is intended to improve the transparency of income tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. It also includes certain other amendments to improve the effectiveness of income tax disclosures. The ASU’s amendments are effective for public business entities for annual periods beginning after December 15, 2024. Entities are permitted to early adopt the standard “for annual financial statements that have not yet been issued or made available for issuance.” We are currently evaluating the impact of this ASU but do not expect any material impact upon adoption.
There are no other accounting standards that have been issued but not yet adopted that we believe could have a material impact on our consolidated financial statements.
Advertising
We
expense the cost of advertising as incurred. Advertising expense for the three months ended March 31, 2024 and 2023 amounted to $
Basic income or loss per share is computed by dividing net income or loss by the weighted average number of shares of common stock outstanding during the period. Diluted income or loss per share is computed by dividing net income or loss by the diluted weighted average number of shares of common stock outstanding during the period. The diluted weighted average number of shares gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method. Diluted earnings per share exclude all diluted potential shares if their effect is anti-dilutive, including warrants or options which are out-of-the-money and for those periods with a net loss.
We have outstanding warrants and stock options which have not been included in the calculation of diluted net loss per share for the three months ended March 31, 2024 and 2023 because to do so would be anti-dilutive. For the first quarter 2024 and 2023, certain options and warrants were in-the-money and others were not. The three months ended March 31, 2024 reported a net loss, while the three months ended March 31, 2023 reported net income. For the first quarter 2024, the numerator and the denominator used in computing both basic and diluted net loss per share are the same.
Income Taxes
We file a consolidated federal income tax return with our subsidiaries. The provision for income taxes is computed by applying statutory rates to income before taxes.
We account for uncertainty in income taxes in our financial statements as required under ASC 740, “Income Taxes.” The standard prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The standard also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition accounting. Management determined there were no material uncertain positions taken by us in our tax returns.
Deferred
income taxes are recognized for the tax consequences in future years of temporary differences between the financial reporting and tax
bases of assets and liabilities as of each period-end based on enacted tax laws and statutory rates. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be realized. A
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below:
| March 31, 2024 | December 31, 2023 | |||||||
| Deferred tax assets | ||||||||
| Reserves and accruals not currently deductible for tax purposes | $ |
|
$ |
|
||||
| Amortizable assets |
|
|
||||||
| Net operating loss carryforwards |
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|
||||||
|
|
|
|||||||
| Deferred tax liabilities | ||||||||
| Amortizable assets |
(
|
) |
(
|
) | ||||
| Property and equipment |
(
|
) |
(
|
) | ||||
| Net Deferred tax assets |
|
|
||||||
| Valuation allowance |
(
|
) |
(
|
) | ||||
| $ | $ | |||||||
As
of March 31, 2024 and December 31, 2023, we had federal net operating loss carry forwards of approximately $
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.
| 11 |
Information by operating segment is as follows:
|
Three months
ended March 31, 2024 |
Three months
ended March 31, 2023 |
|||||||
| Revenues | ||||||||
| Document Management | $ |
|
$ |
|
||||
| Document Conversion |
|
|
||||||
| Total revenues | $ |
|
$ |
|
||||
| Gross profit | ||||||||
| Document Management | $ |
|
$ |
|
||||
| Document Conversion |
|
|
||||||
| Total gross profit | $ |
|
$ |
|
||||
| Capital additions, net | ||||||||
| Document Management | $ |
|
$ |
|
||||
| Document Conversion |
|
|
||||||
| Total capital additions, net | $ |
|
$ |
|
||||
| March 31, 2024 | December 31, 2023 | |||||||
| Goodwill | ||||||||
| Document Management | $ |
|
$ |
|
||||
| Document Conversion |
|
|
||||||
| Total goodwill | $ |
|
$ |
|
||||
| March 31, 2024 | December 31, 2023 | |||||||
| Total assets | ||||||||
| Document Management | $ |
|
$ |
|
||||
| Document Conversion |
|
|
||||||
| Total assets | $ |
|
$ |
|
||||
Statement of Cash Flows
For purposes of reporting cash flows, cash includes cash on hand and demand deposits held by banks.
| 12 |
4. Intangible Assets, Net
At March 31, 2024, intangible assets consisted of the following:
| Estimated | Accumulated | |||||||||||||
| Useful Life | Costs | Amortization | Net | |||||||||||
| Trade names |
|
$ |
|
$ |
(
|
) | $ |
|
||||||
| Proprietary technology |
|
|
(
|
) |
|
|||||||||
| Customer relationships |
|
|
(
|
) |
|
|||||||||
| $ |
|
$ |
(
|
) | $ |
|
||||||||
At December 31, 2023, intangible assets consisted of the following:
| Estimated | Accumulated | |||||||||||||
| Useful Life | Costs | Amortization | Net | |||||||||||
| Trade names |
|
$ |
|
$ |
(
|
) | $ |
|
||||||
| Proprietary technology |
|
|
(
|
) |
|
|||||||||
| Customer relationships |
|
|
(
|
) |
|
|||||||||
| $ |
|
$ |
(
|
) | $ |
|
||||||||
Amortization
expense for the three months ended March 31, 2024 and 2023 amounted to $
| For the Twelve Months Ending March 31, | Amount | |||
| 2025 | $ |
|
||
| 2026 |
|
|||
| 2027 |
|
|||
| 2028 |
|
|||
| 2029 |
|
|||
| Thereafter |
|
|||
| $ |
|
|||
5. Fair Value Measurements
We
paid our final earnout liability of $
6. Property and Equipment
Property and equipment are comprised of the following:
| March 31, 2024 | December 31, 2023 | |||||||
| Computer hardware and purchased software | $ |
|
$ |
|
||||
| Leasehold improvements |
|
|
||||||
| Furniture and fixtures |
|
|
||||||
|
|
|
|||||||
| Less: accumulated depreciation |
(
|
) |
(
|
) | ||||
| Property and equipment, net | $ |
|
$ |
|
||||
Total
depreciation expense on our property and equipment for the three months ended March 31, 2024 and 2023 amounted to $
| 13 |
Summary of Notes Payable to Unrelated Parties
| March 31, 2024 | December 31, 2023 | |||||||
| Notes payable – “2022 Unrelated Notes” | $ |
|
$ |
|
||||
| Less unamortized debt issuance costs |
(
|
) |
(
|
) | ||||
| Less current portion |
(
|
) | ||||||
| Long-term portion of notes payable | $ |
|
$ |
|
||||
| Subordinated Notes Payable | Issue Date | Interest Rate | Interest Due | Principal Due | ||||||||
| $ | % | |||||||||||
| $ | % | |||||||||||
| As of March 31, | Amount | |||
| 2025 | $ |
|
||
| 2026 |
|
|||
| Total | $ |
|
||
As
of March 31, 2024 and December 31, 2023, accrued interest for these notes payable with the exception of the related party notes in Note
8, “Notes Payable - Related Parties,” was $
With respect to all notes outstanding (other than the notes to related parties), interest expense, including the amortization of debt issuance costs and debt discount for the three months ended March 31, 2024 and 2023 was $ and $ , respectively.
| 14 |
8. Notes Payable - Related Parties
Summary of Notes Payable to Related Parties
The table below summarizes all notes payable to related parties at March 31, 2024 and December 31, 2023:
| March 31, 2024 | December 31, 2023 | |||||||
| Notes payable – “2022 Related Note” | $ |
|
$ |
|
||||
| Less unamortized debt issuance costs |
(
|
) |
(
|
) | ||||
| Long-term portion of notes payable | $ |
|
$ |
|
||||
Future minimum principal payments of the 2022 Notes to related parties are as follows:
| As of March 31, | Amount | |||
| 2026 | $ |
|
||
| Total | $ |
|
||
As
of March 31, 2024 and December 31, 2023, accrued interest for these notes payable – related parties were $
With
respect to all notes payable – related parties outstanding, interest expense, including the amortization of debt issuance costs,
for the three months ended March 31, 2024 and 2023 and was $
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.
| 15 |
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.
| Location | Square Feet | Monthly Rent | Lease Expiry | |||||||
| Columbus, OH |
|
$ |
|
|
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| Madison Heights, MI |
|
$ |
|
|
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| Sterling Heights, MI |
|
$ |
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| Traverse City, MI |
|
$ |
|
|
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| Temporary space | ||||||||||
| Madison Heights, MI |
|
$ |
|
|
||||||
| Vehicles | ||||||||||
| various | n/a | $ |
|
|
||||||
The following table sets forth the future minimum lease payments under our leases:
| For the twelve months ending March 31, | Finance Leases | Operating Leases | ||||||
| 2025 | $ |
|
$ |
|
||||
| 2026 |
|
|
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| 2027 |
|
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| 2028 |
|
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| 2029 |
|
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||||||
| Thereafter |
|
|||||||
| Less Imputed Interest |
(
|
) |
(
|
) | ||||
| $ |
|
$ |
|
|||||
| 16 |
The following table summarizes the components of lease expense:
| For the three months ending March 31, | 2024 | 2023 | ||||||
| Finance lease expense: | ||||||||
| Amortization of ROU asset | $ |
|
$ |
|
||||
| Interest on lease liabilities |
|
|
||||||
| Operating lease expense |
|
|
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| Short-term lease expense |
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|
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The following tables set forth additional information pertaining to our leases:
| For the three months ending March 31, | 2024 | 2023 | ||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Financing cash flows from finance leases (interest) | $ |
|
$ |
|
||||
| Financing cash flows from finance leases (principal) |
|
|
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| Operating cash flows from operating leases |
|
|
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| ROU assets obtained in exchange for new finance lease liabilities |
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| Weighted average remaining lease term – finance leases |
|
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| Weighted average remaining lease term – operating leases |
|
|
||||||
| Weighted average discount rate – finance leases |
|
% |
|
% | ||||
| Weighted average discount rate – operating leases |
|
% |
|
% | ||||
| 17 |
10. Stockholders’ Equity
Common Stock
As of March 31, 2024, shares of common stock were issued and outstanding, shares of common stock were reserved for issuance upon the exercise of outstanding warrants, shares of common stock were reserved for issuance under our 2015 Equity Incentive Plan, as amended (the “2015 Plan”), and shares were reserved for issuance under our 2023 Non-Employee Director Compensation Plan.
The following table describes the shares and warrants issued as part of our 2022 and 2020 private placements:
| Issuance of Common Stock | Issue Date | Shares Issued | Price per share | Warrants Issued | Warrant Exercise Price | Warrant Fair Value | ||||||||||||||||
| Private Placement 2022 |
|
|
$ |
|
|
$ |
|
$ |
|
|||||||||||||
| Private Placement 2020 |
|
|
$ |
|
|
$ |
|
$ |
|
|||||||||||||
Amortization
of the debt issuance costs for the Private Placement 2022 offering was recorded at $
Warrants
The following sets forth the warrants to purchase our common stock that were outstanding as of March 31, 2024:
|
Warrants
Outstanding |
Warrant
Exercise Price |
Warranty
Expiry |
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$ |
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$ |
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$ |
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$ |
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|
|
$ |
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| 18 |
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
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:
shares vested on March 19, 2024;
shares vest on April 2, 2025, and
shares vest on April 2, 2026. Stock compensation of $
Stock Options
We did not make any stock option grants during the three months ended March 31, 2024 or 2023.
| Weighted- | ||||||||||||||
| Weighted- | Average | |||||||||||||
| Shares | Average | Remaining | Aggregate | |||||||||||
| Under | Exercise | Contractual | Intrinsic | |||||||||||
| Option | Price | Life | Value | |||||||||||
| Outstanding at January 1, 2024 |
|
$ |
|
years | $ | |||||||||
| Outstanding at March 31, 2024 |
|
$ |
|
years | $ | |||||||||
| Exercisable at March 31, 2024 |
|
$ |
|
years | $ | |||||||||
| 19 |
| Weighted- | ||||||||||||||
| Weighted- | Average | |||||||||||||
| Shares | Average | Remaining | Aggregate | |||||||||||
| Under | Exercise | Contractual | Intrinsic | |||||||||||
| Option | Price | Life | Value | |||||||||||
| Outstanding at January 1, 2023 |
|
$ |
|
years | $ |
|
||||||||
| Forfeited |
(
|
) |
|
|||||||||||
| Outstanding at March 31, 2023 |
|
$ |
|
years | $ |
|
||||||||
| Exercisable at March 31, 2023 |
|
$ |
|
years | $ |
|
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During the three months ended March 31, 2024 and 2023, stock-based compensation for options was $ and $ , respectively.
As of March 31, 2024 and December 31, 2023, there was $ and $ , respectively, of total unrecognized compensation costs related to stock options granted under our stock option agreements. The unrecognized compensation cost is expected to be recognized over a weighted-average period of one year. The total fair value of stock options that vested during the three months ended March 31, 2024 and 2023 was $ and $ , respectively.
12. Concentrations
Revenues
from a limited number of customers have accounted for a substantial percentage of our total revenues. During the three months ended March
31, 2024 and 2023, our largest customer, the State of Michigan, accounted for
For
the three months ended March 31, 2024 and 2023, government contracts, including K-12 education, represented approximately
As
of March 31, 2024, accounts receivable concentrations from our two largest customers were
| 20 |
| ITEM 2 | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis of our financial conditions and results of operations should be read together with our condensed consolidated financial statements and notes thereto included in Part I, Item 1, “ Financial Statements ,” of this Quarterly Report on Form 10-Q, and with the condensed consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. Historical results and percentage relationships among any amounts in the financial statements are not necessarily indicative of trends in operating results for any future periods. Any forward-looking statements in this discussion and analysis should be read in conjunction with the information set forth in “Note Regarding Forward-Looking Statements” elsewhere herein. In this Quarterly Report, we sometimes refer to the three month period ended March 31, 2024 as the first quarter 2024, and to the three month period ended March 31, 2023 as the first quarter 2023.
Company Overview
We are a document services and software solutions company serving both the small-to-medium business and governmental sectors with their digital transformation and process automation initiatives. Our digital transformation products and services are provided through two reporting segments: Document Management and Document Conversion. Our Document Management segment consists primarily of solutions involving our software platform, allowing customers to capture and manage their documents across operations such as scanned hard-copy documents and digital documents including those from Microsoft Office 365, digital images, audio, video and emails. Our Document Conversion segment provides assistance to customers as a part of their overall document strategy to convert documents from one medium to another, predominantly paper to digital, including migration to our software solutions, as well as micrographics conversions and long-term storage and retrieval services. Our solutions create value for customers by making it easy to connect business-critical documents to the people who need them by making those documents easy to find and access, while also being secure and compliant with the customers’ audit requirements. Solutions are sold both directly to end-users and through resellers.
Our customers use our software by one of two methods: purchasing our software and installing it onto their own equipment, which we refer to as a “premise” model, or licensing and accessing our platform via the Internet, which we refer to as a “software as a service” or “SaaS” model and also as a “cloud-based” model. Licensing of our software through our SaaS model has become increasingly popular among our customers, especially in light of the increased deployment of remote workforce policies, and is a key ingredient in our revenue growth strategy. Our SaaS products are hosted with Amazon Web Services, Expedient, and Corespace, providing our customers with reliable hosting services that we believe are consistent with industry best practices in data security and performance.
We operate a U.S.-based business with concentrated sales to the State of Michigan for our Document Conversion segment, complemented by our diverse set of document management software solutions and services. We hold or compete for leading positions regionally in select markets and attribute this leadership to several factors including the strength of our brand name and reputation, our comprehensive offering of innovative solutions, and the quality of our service support. Net growth in sales of software as a service in recent years reflects market demand for these solutions over traditional sales of on-premise software. We expect to continue to benefit from our select niche leadership market positions, innovative product offerings, growing customer base, and the impact of our sales and marketing programs. Examples of these programs include identifying and investing in growth and expanded market penetration opportunities, more effective products and services pricing strategies, demonstrating superior value to customers, increasing our sales force effectiveness through improved guidance and measurement, and continuing to optimize our lead generation and lead nurturing processes.
For further information about our consolidated revenue and earnings, please see our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report.
How We Evaluate our Business Performance and Opportunities
There has been no material change during the first quarter 2024 to the major qualitative and quantitative factors we consider in the evaluation of our operating results as set forth in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — How We Evaluate our Business Performance and Opportunities ” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
| 21 |
Executive Overview of Results
Revenues were up $320,251, or 7.6%, primarily driven by software as a service and professional services more than offsetting expected weakness in storage and retrieval and sales of direct premise software. In expenses, we recorded $397,901 in stock compensation expense related to our restricted stock awards to employees, without which our operating expenses (excluding cost of revenues) would have increased 7.4% year over year.
Below are our key financial results for the first quarter 2024 (consolidated unless otherwise noted):
| ● | Revenues were $4,507,084, representing revenue growth of 7.6% year over year. | |
| ● | Cost of revenues was $1,607,440, an increase of 4.3% year over year. | |
| ● | Operating expenses (excluding cost of revenues) were $2,934,124, an increase of 24.2% year over year. This amount includes a 2024 stock compensation expense of $397,901 related to restricted stock awards to employees. | |
| ● | Loss from operations was $34,480, compared to income from operations $283,999 in the first quarter 2023. | |
| ● | Net loss was $174,714 with basic and diluted net loss per share of $0.04, compared to net income of $112,563 with basic and diluted net income per share of $0.03 in the first quarter 2023. | |
| ● | Q1 2024 included $397,901 of stock compensation expense related to our restricted stock awards to employees. | |
| ● | Net cash provided by operating activities was $611,766, compared to $174,357 used in operations in the first quarter 2023. | |
| ● | Capital expenditures were $127,932 including capitalized software costs of $109,621, compared to $134,569 in the first quarter 2023, including capitalized software costs of $112,208. | |
| ● | As of March 31, 2024, we had 180 employees, including 36 part-time employees, compared to 167 employees as of March 31, 2023. |
Financial Impact of Current Economic Conditions
Our overall performance depends on economic conditions, including the current inflationary environment, increased interest rates, and slowing global growth rates.
Employee wages, our largest expense, have recently increased due to wage inflation. These increased labor costs have slightly decreased our profit margin over 2023 and continuing into the first quarter of 2024, but we continue to mitigate this by appropriately increasing customer renewal rates whenever we have the contractual ability to do so. We anticipate that the inflationary effect on our wages has stabilized.
Other volatility, particularly from global supply chain disruptions, has had and are expected to continue to have a minimal impact on us as we consume relatively little in raw materials. A global recession may affect our customers’ and potential customers’ budgets for technology procurement, but as of the date of this report, we have not experienced diminished customer demand due to adverse economic conditions. Absent global economic disruptions, and based on the current trend of our business operations and our continued focus on strategic initiatives to grow our customer base, we believe in the strength of our brand and that our focus on our strategic priorities will deliver consistent growth.
Uncertainties, Trends, and Risks that can cause Fluctuations in our Operating Results
Our operating results have fluctuated significantly in the past and are expected to continue to fluctuate in the future due to a variety of factors, in addition to economic conditions, that are discussed in Part II, Item 7, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations - Uncertainties, Trends, and Risks that can cause Fluctuations in our Operating Results ” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. Due to all these factors and the other risks discussed in Part II, Item 1 of this Quarterly Report, and Part I, Item IA, “ Risk Factors ” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, our past results of operations should not be relied upon as an indication of our future performance. Comparisons of our operating results with prior periods is not necessarily meaningful or indicative of future performance.
| 22 |
Reportable Segments
We have two reportable segments: Document Management and Document Conversion. These reportable segments are discussed above under “Company Overview.”
Results of Operations
Revenues
The following table sets forth our revenues by reportable segment for the periods indicated:
|
Three months
ended March 31, 2024 |
Three months
ended March 31, 2023 |
|||||||
| Revenues | ||||||||
| Document Management | $ | 1,820,420 | $ | 1,769,483 | ||||
| Document Conversion | 2,686,664 | 2,417,350 | ||||||
| Total revenues | $ | 4,507,084 | $ | 4,186,833 | ||||
| Gross profit | ||||||||
| Document Management | $ | 1,556,893 | $ | 1,483,108 | ||||
| Document Conversion | 1,342,751 | 1,162,731 | ||||||
| Total gross profit | $ | 2,899,644 | $ | 2,645,839 | ||||
The following table sets forth our revenues by revenue source for the periods indicated:
|
Three months
ended March 31, 2024 |
Three months
ended March 31, 2023 |
|||||||
| Revenues by revenue source | ||||||||
| Sale of software | $ | 5,779 | $ | 15,293 | ||||
| Software as a service | 1,405,153 | 1,238,432 | ||||||
| Software maintenance services | 357,983 | 349,542 | ||||||
| Professional services | 2,479,678 | 2,299,289 | ||||||
| Storage and retrieval services | 258,491 | 284,277 | ||||||
| Total revenues | $ | 4,507,084 | $ | 4,186,833 | ||||
The following tables sets forth our revenues by revenue source and segment for the periods indicated:
|
Three months
ended March 31, 2024 |
Three months
ended March 31, 2023 |
|||||||
| Document management segment revenues: | ||||||||
| Sale of software | $ | 5,779 | $ | 15,293 | ||||
| Software as a service | 1,405,153 | 1,238,432 | ||||||
| Software maintenance services | 357,983 | 349,542 | ||||||
| Professional services | 51,505 | 166,216 | ||||||
| Total document management segment revenues | $ | 1,820,420 | $ | 1,769,483 | ||||
|
Three months
ended March 31, 2024 |
Three months
ended March 31, 2023 |
|||||||
| Document conversion segment revenues: | ||||||||
| Professional services | $ | 2,428,173 | $ | 2,133,073 | ||||
| Storage and retrieval services | 258,491 | 284,277 | ||||||
| Total document conversion segment revenues | $ | 2,686,664 | $ | 2,417,350 | ||||
Our total revenues in the first quarter 2024 increased by $320,251, or 7.6%, over our first quarter 2023 revenues, driven primarily by software as a service, which grew 13.5% year over year for the first quarter 2024. Our strong professional services, which grew 7.8%, also contributed. Growth was partially offset by continued softer demand for the transactional portion of our storage and retrieval services from a significant customer in the home mortgage lending industry, which decreased 9.1% year over year.
Software as a Service Revenues
We provide access to our software solutions as a service, accessible through the internet. Our customers typically enter into our software as a service agreement for periods of one year or more. Under these agreements, we generally provide access to the applicable software, data storage and related customer assistance and support. Revenues from the sale of software as a service, which are reported as part of our Document Management segment increased by $166,721, or 13.5% in the first quarter 2024 compared to 2023. This increase was primarily the result of new cloud-based solution sales, as well as expanded data storage, user seats, and hosting fees for existing customers.
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Professional Services Revenues
Professional services revenues primarily consist of revenues from document scanning and conversion services, plus consulting, discovery, training, and advisory services to assist customers with document management needs. These revenues include arrangements that do not involve the sale of software. Of our $2,479,678 in professional services revenues during the first quarter 2024, $2,428,173 was derived from our Document Conversion operations and $51,505 was derived from our Document Management operations. Our overall professional services revenues increased by $180,389, or 7.8%, in the first quarter 2024 compared to 2023. This increase is the result of as strong pipeline in our Document Conversion segment, along with realized price increases in late 2023. However, we believe that our largest customer intends to renegotiate, and accordingly reduce, our pricing on a significant portion of our work for this customer, which could have a significant adverse impact on our future professional services revenues as well as our overall revenues, margins, net income and cash flows beginning later this year.
Costs of Revenues and Gross Profits
The following table sets forth our cost of revenues by reportable segment for the periods indicated:
|
Three months
ended March 31, 2024 |
Three months
ended March 31, 2023 |
|||||||
| Cost of revenues by segment | ||||||||
| Document Management | $ | 263,527 | $ | 286,375 | ||||
| Document Conversion | 1,343,913 | 1,254,619 | ||||||
| Total cost of revenues | $ | 1,607,440 | $ | 1,540,994 | ||||
The following table sets forth our cost of revenues, by revenue source, for the periods indicated:
|
Three months
ended March 31, 2024 |
Three months
ended March 31, 2023 |
|||||||
| Cost of revenues: | ||||||||
| Sale of software | $ | 5,065 | $ | 8,181 | ||||
| Software as a service | 215,992 | 220,640 | ||||||
| Software maintenance services | 15,710 | 16,716 | ||||||
| Professional services | 1,284,063 | 1,187,116 | ||||||
| Storage and retrieval services | 86,610 | 108,341 | ||||||
| Total cost of revenues | $ | 1,607,440 | $ | 1,540,994 | ||||
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The following tables sets forth our cost of revenues by revenue source and segment for the periods indicated:
|
Three months
ended March 31, 2024 |
Three months
ended March 31, 2023 |
|||||||
| Document management segment cost of revenues: | ||||||||
| Sale of software | $ | 5,065 | $ | 8,181 | ||||
| Software as a service | 215,992 | 220,640 | ||||||
| Software maintenance services | 15,710 | 16,716 | ||||||
| Professional services | 27,160 | 61,986 | ||||||
| Total document management segment cost of revenues | $ | 263,927 | $ | 307,523 | ||||
|
Three months
ended March 31, 2024 |
Three months
ended March 31, 2023 |
|||||||
| Document conversion segment cost of revenues: | ||||||||
| Professional services | $ | 1,256,903 | $ | 1,125,130 | ||||
| Storage and retrieval services | 86,610 | 108,341 | ||||||
| Total document conversion segment cost of revenues | $ | 1,343,513 | $ | 1,233,471 | ||||
Our total cost of revenues during the first quarter 2024 increased by $66,446 or 4.3%, over 2023. Our cost of revenues for our Document Management segment decreased by $43,586, or 14.2%, primarily due to scale and efficiencies. Our cost of revenues for our Document Conversion segment increased by $110,042, or 8.9%, in the first quarter 2024 compared to 2023 primarily due to the increased demand, resulting in higher revenues and more labor to complete projects, as well as wage increases.
|
For the three months ended
March 31, |
||||||||
| 2024 | 2023 | |||||||
| Gross profit: | ||||||||
| Sale of software | $ | 714 | $ | 7,112 | ||||
| Software as a service | 1,189,161 | 1,017,792 | ||||||
| Software maintenance services | 342,273 | 332,826 | ||||||
| Professional services | 1,195,615 | 1,112,173 | ||||||
| Storage and retrieval services | 171,881 | 175,936 | ||||||
| Total gross profit | $ | 2,899,644 | $ | 2,645,839 | ||||
| Gross profit percentage: | ||||||||
| Sale of software | 12.4 | % | 46.5 | % | ||||
| Software as a service | 84.6 | % | 82.2 | % | ||||
| Software maintenance services | 95.6 | % | 95.2 | % | ||||
| Professional services | 48.2 | % | 48.4 | % | ||||
| Storage and retrieval services | 66.5 | % | 61.9 | % | ||||
| Total gross profit percentage | 64.3 | % | 63.2 | % | ||||
Our overall gross profit increased to 64.3% in the first quarter 2024 from 63.2% in 2023. The increase in the mix of software as a service revenue was the principal driver of the increase, due to the addition of Yellow Folder and overall strong margins in the Document Management segment, partially offset by margin erosion in the Document Conversion segment, driven by reduced margins in the storage and retrieval services, as well as wage increases.
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Cost of Software as a Service
Cost of software as a service, or SaaS, consists primarily of technical support personnel, hosting services, and related costs. Cost of software as a service during the first quarter 2024 decreased by $4,648, or 2.1%, from the first quarter 2023. This decrease in the cost of SaaS was the result of efficiencies in support, including reduced support call volume, as well as some benefits from scale. Our gross margin in the first quarter increased to 84.6% compared to 82.2% in 2023.
Cost of Professional Services
Cost of professional services consists primarily of compensation for employees performing the document conversion services, compensation of our software engineers and implementation consultants when working on billable customer projects, and related third-party costs. Cost of professional services increased in the first quarter 2024 by $96,947, or 8.2%, over 2023, primarily due to increased staffing levels in our Document Conversion segment, to support our corresponding increased revenues, as well as wage increases. Consolidated, our gross margin for professional services decreased to 48.2% during the first quarter 2024 compared to 48.4% in 2023. Gross margins related to consulting services in Document Management and digital transformation services in Document Conversion may vary widely, depending upon the nature of the project and the amount of labor required to complete a project.
Operating Expenses
The following table sets forth our operating expenses for the periods indicated:
|
Three months
ended March 31, 2024 |
Three months
ended March 31, 2023 |
|||||||
| Operating expenses: | ||||||||
| General and administrative | $ | 2,128,493 | $ | 1,554,611 | ||||
| Sales and marketing | 541,621 | 579,511 | ||||||
| Depreciation and amortization | 264,010 | 227,718 | ||||||
| Total operating expenses | $ | 2,934,124 | $ | 2,361,840 | ||||
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General and Administrative Expenses
General and administrative expenses increased in the first quarter 2024 $573,882 or 36.9%, primarily related to $397,901 in expense related to our restricted stock award grant to employees first quarter 2024. Excluding the restricted stock award expense, total expenses increased by $175,981, or 11.3%, over 2023, related to investments in order to scale, such as development, finance, and our SOC2 process, as well as wage increases and infrastructure investments such as our internal ERP system upgrade from QuickBooks to NetSuite. These increases were reflected in both our Document Management segment, in which our general and administrative expenses increased to $1,145,031 in first quarter 2024 from $800,729 in 2023, and also in our Document Conversion segment, in which our general and administrative expenses increased to $983,462 in first quarter 2024 from $753,882 in 2023.
Sales and Marketing Expenses
Sales and marketing expenses during the first quarter 2024 decreased by $37,890, or 6.5%, from the first quarter 2023, principally related to an open position, as well as normal fluctuations in commissions expense.
Depreciation and Amortization
Depreciation and amortization during the first quarter 2024 increased by $36,292, or 15.9%, over the first quarter 2023 primarily as a result of increased amortization of capitalized software costs.
Other Items of Income and Expense
Interest Expense, Net
Interest expense was $140,234 during the first quarter 2024, net of $9,296 of interest income, as compared with $171,436 during the first quarter 2023, representing a decrease of $31,202 or 18.2%. The decrease resulted from reduced interest resulting from principal repayment of the 2020 Notes on February 28, 2023 and August 31, 2023. The 2022 Notes principal prepayment of $500,000 on March 30, 2024 had a negligible impact on interest expense in the first quarter 2024.
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Liquidity and Capital Resources
We have financed our operations primarily through a combination of cash on hand, cash generated from operations, borrowings from third parties and related parties, and proceeds from private sales of equity. Since 2012, we have raised a net total of approximately $24.0 million in cash through issuances of debt and equity securities, net of $2.5 million in debt repayments. As of March 31, 2024, we had approximately $1.2 million in cash and cash equivalents, net working capital of $0.2 million, and an accumulated deficit of $21.3 million. In March 2024, we prepaid $0.5 million in principal of the 2022 Notes.
In 2024 and 2023, we engaged in several actions that significantly improved our liquidity and cash flows, including (i) effective October 1, 2023 through September 30, 2024, securing a renewal contract with our largest customer, containing an estimated net rate increase for all non-fixed pricing projects of approximately 21%, compared to the current rates in effect for the contract period commencing June 1, 2018, and (ii) on March 13, 2024, we agreed with the note holders to amend the Unrelated Notes and Related Notes to extend the maturity date to December 31, 2025, for $1,519,500 of the remaining $2,364,500 in 2022 Unrelated Notes and all $600,000 of the 2022 Related Notes. However, we believe that our largest customer intends to renegotiate our pricing on a significant portion of our work this customer, which could have an adverse impact on our overall revenues, cash flows, liquidity and capital resources.
Our existing debt as of March 31, 2024 is comprised of approximately $0.3 million due March 30, 2025 and approximately $2.1 million due December 31, 2025. Our operating cash flow alone may be insufficient to meet the debt obligations in full in 2025. We believe we could seek additional debt or equity financing on acceptable terms. We believe that our balance sheet and financial statements would support a full or partial refinancing or other appropriate modification of the current promissory notes, such as an extension or conversion to equity. We are confident in our ability to prudently manage our current debt on terms acceptable to us.
Our ability to meet our capital needs in the short term will depend on many factors, including maintaining and enhancing our operating cash flow and successfully retaining and growing our client base in the midst of global inflation and general economic uncertainty.
Based on our current plans and assumptions, we believe our capital resources, including our cash and cash equivalents, along with funds expected to be generated from our operations and potential financing options, will be sufficient to meet our anticipated cash needs arising in the ordinary course of business for at least the next 12 months, including to satisfy our expected working capital needs and capital and debt service commitments.
Our ability to meet our capital needs further into the future will depend primarily on strategically managing the business and successfully retaining our client base.
Indebtedness
As of March 31, 2024, our outstanding long-term indebtedness consisted of the 2022 Notes issued to accredited investors on April 1, 2022, with an aggregate outstanding principal balance of $2,464,500 and accrued interest of $0.
See Note 7 and Note 8 to our condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report for further information on the 2022 notes.
Capital Expenditures
There were no material commitments for capital expenditures at March 31, 2024.
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Cash Provided by and Used in Operating Activities
Net cash provided by operating activities during the first quarter 2024 was $611,766, primarily attributable to the net income adjusted for non-cash expenses of $770,617, an increase in operating assets of $40,447 and a decrease in operating liabilities of $56,310. Net cash used in operating activities during the first quarter 2023 was $174,357, primarily attributable to the net income adjusted for non-cash expenses of $434,066, an increase in operating assets of $383,039 and a decrease in operating liabilities of $337,947, primarily deferred revenues of $571,788.
Cash Used in Investing Activities
Net cash used in investing activities in the first quarter 2024 was $127,932, including $109,621 related to capitalized internal use software. Net cash used in investing activities in the first quarter 2023 was $134,569, including $112,208 related to capitalized internal use software.
Cash Used in Financing Activities
Net cash used in financing activities during 2024 amounted to $500,000 in repayment of notes payable, and $14,138 in the principal portion of finance lease liabilities. Net cash used in financing activities during 2023 amounted to $700,000 in earnout liability payments, $262,950 in repayment of notes payable, and $5,467 in the principal portion of a finance lease liability.
Critical Accounting Policies and Estimates
The preparation of our condensed consolidated financial statements in accordance GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period. We monitor and analyze these items for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. The actual results experienced by us may differ materially from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected.
Our critical accounting policies and estimates are set forth in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. There were no material changes to our critical accounting policies and estimates during the first quarter 2024.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Not applicable to smaller reporting companies.
| ITEM 4. | CONTROLS AND PROCEDURES. |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) at the end of the period covered by this this Quarterly Report.
Based on this evaluation, we concluded that, as of March 31, 2024, our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls system, no matter how well designed and operated, can provide only reasonable assurance of achieving its desired objectives. In addition, the design of disclosure controls and procedures must reflect resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).
We regularly review our internal control over financial reporting and, from time to time, we have made changes as we deemed appropriate to maintain and enhance the effectiveness of our internal controls over financial reporting, although these changes do not have a material effect on our overall internal control.
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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 1A. RISK FACTORS.
Our business and operating results are subject to many risks, uncertainties and other factors. If any of these risks were to occur, our business, affairs, assets, financial condition, results of operations, cash flows and prospects could be materially and adversely affected. There have been no material changes to the risk factors set forth in Part I, Item 1A, “ Risk Factors ,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, except as follows:
Our largest customer may renegotiate the pricing on a significant portion of our work with the customer, which could materially and adversely affect our business, operating results and cash flows.
We believe that our largest customer, may seek a reduction on the pricing on a significant portion of our work with them, which could take effect beginning in the fourth quarter of 2024. While we have not received any formal or written notice from this customer as of the date of this Quarterly Report, in the event of any such renegotiation resulting in a reduction on the pricing of our work, we intend to take actions with respect to other work with this customer that could mitigate the overall effects of any such pricing reduction, although there is no assurance that we will be able to mitigate the effects of any pricing reduction or how effective any such mitigation will be. This customer may terminate any contract or any portion thereof without cause, so it has the ability to renegotiate pricing even outside any stated contract term. The loss of revenue from this customer due to any such pricing reduction could materially and adversely affect our business, operating results and cash flows.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not Applicable.
ITEM 5. OTHER INFORMATION.
During the first fiscal quarter ended March 31, 2024, no Section 16 director or officer adopted, modified, or terminated a “Rule 10b5-1 trading arrangement” (as defined in Item 408 of Regulation S-K of the Exchange Act).
There were no “non-Rule 10b5-1 trading arrangements” (as defined in Item 408 of Regulation S-K of the Exchange Act) adopted, modified, or terminated during the fiscal quarter ended March 31, 2024, by our directors and Section 16 officers.
ITEM 6. EXHIBITS.
The following is a list of exhibits filed as part of this Quarterly Report on Form 10-Q.
| Exhibit No. | Description of Exhibit | |
| 31.1* | Certification of Principal Executive Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002. | |
| 31.2* | Certification of Principal Financial Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002. | |
| 32.1* | Certification of Principal Executive Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. | |
| 32.2* | Certification of Principal Financial Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. | |
| 101.INS* | Inline XBRL Instance Document (The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.). | |
| 101.SCH* | XBRL Taxonomy Schema. | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase. | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase. | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase. | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase. | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| INTELLINETICS, INC. | ||
| Dated: | May 14, 2024 | |
| By: | /s/ James F. DeSocio | |
| James F. DeSocio | ||
| President and Chief Executive Officer | ||
| Dated: May 14, 2024 | ||
| By: | /s/ Joseph D. Spain | |
| Joseph D. Spain | ||
| Chief Financial Officer | ||
| 31 |