Revenue Performance - Revenues for Q2 2024 were $4,641,593, representing a year-over-year growth of 9.0%[81] - Revenues for the six-month period 2024 totaled $9,148,677, reflecting an 8.3% increase compared to the same period in 2023[83] - Revenues increased by $383,163, or 9.0%, in Q2 2024 and by $703,414, or 8.3%, in the six-month period 2024, driven by software as a service and professional services[92] - Software as a Service revenues rose by $122,673, or 9.6%, in Q2 2024 and by $289,394, or 11.5%, in the six-month period 2024, primarily due to new cloud-based solution sales[93] - Professional services revenues increased by $364,042, or 15.8%, in Q2 2024 and by $544,431, or 11.8%, in the six-month period 2024, with a strong pipeline in Document Conversion[94] Operating Expenses - Operating expenses (excluding cost of revenues) for the six-month period 2024 were $5,764,997, an increase of 23.8% year over year[83] - Operating expenses totaled $2,830,873 in Q2 2024, an increase from $2,294,045 in Q2 2023, with general and administrative expenses rising by $463,857[106] - General and administrative expenses increased by $463,857, or 29.7%, in Q2 2024 compared to Q2 2023, and by $1,037,739, or 33.3%, in the six-month period 2024 compared to 2023[107] - Sales and marketing expenses rose by $38,136, or 7.7%, in Q2 2024 compared to Q2 2023, and increased by $246, or 0.0%, in the six-month period 2024 over 2023[108] - Depreciation and amortization increased by $34,835, or 14.5%, in Q2 2024 compared to Q2 2023, and by $71,127, or 15.2%, in the six-month period 2024 compared to 2023[109] Profitability - Net loss for the six-month period 2024 was $99,664, compared to a net income of $248,297 for the same period in 2023[85] - Gross profit margin improved to 64.7% in Q2 2024 from 60.8% in Q2 2023 and to 64.5% in the six-month period 2024 from 62.0% in the six-month period 2023[102] - Professional services gross margins increased to 49.5% in Q2 2024 from 43.1% in Q2 2023, reflecting stabilization of wages and price increases[104] Cash Flow and Financing - Operating cash generated in Q2 2024 was $1,107,089, compared to cash used of $125,274 in Q2 2023[82] - Net cash provided by operating activities was $1,718,855 in the six-month period 2024, compared to a net cash used of $299,631 in the same period of 2023[118] - Net cash used in investing activities was $398,766 in the six-month period 2024, compared to $291,101 in the same period of 2023[119] - Net cash used by financing activities was $825,000 in repayment of notes payable during the six-month period 2024, compared to $700,000 in earnout liability payments in the same period of 2023[120] - As of June 30, 2024, the company had approximately $1.7 million in cash and cash equivalents and a net working capital of $0.5 million[112] Employee and Market Outlook - As of June 30, 2024, the company employed 189 individuals, an increase from 170 employees a year prior[85] - The company anticipates continued growth driven by the demand for SaaS solutions amid economic recovery[86] - The inflationary environment has led to increased labor costs, which the company has mitigated through customer renewal rate adjustments[86] - The company anticipates potential pricing renegotiations with its largest customer, which may adversely impact future professional services revenues[94] - The company secured a renewal contract with its largest customer, with an estimated net rate increase of approximately 21% effective from October 1, 2023[113] Debt and Indebtedness - Outstanding long-term indebtedness as of June 30, 2024, consisted of the 2022 Notes with an aggregate outstanding principal balance of $2,139,500[116]

Revenue Performance - Total revenue for Q2 2024 was $4,641,593, representing a 9.0% increase compared to $4,258,430 in Q2 2023[4] - SaaS revenue increased by 9.6% year-over-year, driven by the commercialization of the IPAS solution, which doubled its live reference accounts to four[2] - Professional services revenue rose 15.8% compared to the same period in 2023, marking a record revenue quarter for Q2 2024[5] - Year-to-date revenues for the first half of 2024 were $9,148,677, an 8.3% increase from $8,445,263 in the same period of 2023[6] - Recurring revenue grew 6.6% and represented 57% of total revenue in Q2 2024[4] - Recurring revenue for Q2 2024 was $2,629,821, up 6.6% from $2,467,066 in Q2 2023[15] - Software as a service revenue for Q2 2024 was $1,400,591, a rise of 9.6% from $1,277,918 in Q2 2023[16] - Professional services revenue increased to $2,662,358 in Q2 2024, up 15.9% from $2,298,316 in Q2 2023[16] Profitability and Income - Net income for Q2 2024 was $75,050, or $0.02 per share, down from $135,734, or $0.03 per share, in Q2 2023[5] - Net income for Q2 2024 was $75,050, compared to a net income of $135,734 in Q2 2023, reflecting a decrease of approximately 44.7%[16] - Adjusted EBITDA for Q2 2024 increased by 7.1% to $698,217, compared to $651,646 in Q2 2023[5] - Adjusted EBITDA for Q2 2024 was $1,371,579, compared to $1,281,525 in Q2 2023, indicating a growth of 7.0%[16] - Management expects revenue growth for the fiscal year 2024 but has revised expectations for Adjusted EBITDA to decline modestly compared to 2023 due to increased investments[7] Expenses and Liabilities - Total operating expenses increased by 23.4% to $2,830,873, driven by higher non-cash depreciation and planned investments in sales and marketing[5] - General and administrative expenses increased to $2,025,796 in Q2 2024, compared to $1,561,939 in Q2 2023, reflecting a rise of 29.6%[16] - Interest expense decreased to $97,056 in Q2 2024 from $160,654 in Q2 2023, a reduction of 39.5%[16] - Total liabilities decreased to $8,516,362 from $9,275,539, a reduction of approximately 8.19%[17] - Total long-term liabilities decreased to $3,855,825 from $4,888,757, a decrease of approximately 21.06%[17] Cash Flow and Assets - Cash provided by operating activities was $1,718,855, a turnaround from $(299,631) in the prior year[18] - Cash at the end of the period rose to $1,680,669 from $1,130,487, marking an increase of about 48.54%[18] - Total current assets increased to $5,183,690 from $5,004,375, representing a growth of approximately 3.57%[17] - Accounts receivable, net decreased to $1,449,188 from $1,850,375, a decline of approximately 21.66%[17] - Stockholders' equity increased to $10,346,362 from $9,750,721, reflecting an increase of about 6.11%[17] Debt Management - The company plans to prepay an additional $800,000 of long-term debt before the end of August 2024, reducing debt principal to approximately $1.3 million[4] Shareholder Information - The weighted average number of common shares outstanding increased to 4,229,518 in Q2 2024 from 4,073,757 in Q2 2023[16] - The company reported a basic net income per share of $0.02 for Q2 2024, down from $0.03 in Q2 2023[16] Share-Based Compensation - Share-based compensation increased significantly to $695,305 from $233,617, an increase of approximately 197.06%[18] Capital Expenditures - Capitalization of internal use software was $(198,051), slightly lower than $(208,417) in the previous year[18]

Financial Data and Key Metrics Changes - Total revenue for Q1 2024 increased by 7.7% to $4.5 million compared to $4.2 million in Q1 2023 [51] - Operating expenses rose by 24.2% to $2.9 million for Q1 2024, primarily due to investments in structure and timing of equity compensation expenses [10] - Loss per share was $0.04, compared to earnings per share of $0.03 last year, while adjusted EBITDA for the quarter was $673,000, slightly up from $630,000 in the same period last year [11][34] - SaaS revenue as a percentage of consolidated revenue increased to 31% in Q1 2024, up from approximately 29% in Q1 2023 [47] Business Line Data and Key Metrics Changes - Subscription software revenue, which includes SaaS and software maintenance services, increased to $1.76 million for the quarter, with SaaS growing by 13.5% [51] - Professional services revenue increased by 7.8% to $2.5 million for the quarter, maintaining 55% of total revenue [33] - The document conversion segment continues to generate positive contribution margin, although its non-recurring revenue is becoming less relevant [6][30] Market Data and Key Metrics Changes - The company signed nine new customers for its IPAS solution, with an expected combined annual revenue of $500,000, and anticipates doubling the customer count in the coming quarters [8][31] - The K-12 market has seen significant growth, with 597 districts generating substantial SaaS revenue, more than doubling the presence since the Yellow Folder acquisition [50] Company Strategy and Development Direction - The company is accelerating investment in marketing its SaaS offerings, focusing on maximizing promotional activities around SaaS rather than non-recurring revenue streams [5][7] - The management aims to evolve into a fully SaaS-centric company, with a goal of making recurring revenue the majority of total revenue [49] - The company plans to prepay additional debt, aiming for no net debt by the end of 2024, which reflects a focus on financial health [12] Management Comments on Operating Environment and Future Outlook - Management expressed optimism regarding the strong response to the IPAS solution and the growing pipeline of opportunities [28] - The company anticipates that the organic growth opportunities may become less consistent over time, particularly in the document conversion business [30][36] - Management reiterated expectations for revenue growth year-over-year for fiscal year 2024, despite potential revenue reductions from a major customer [54] Other Important Information - Total liabilities were reported at $8.8 million, including $2.6 million in deferred revenues and $2.46 million in debt principal as of March 31 [35] - The company is increasing its sales and marketing efforts, including hiring additional sales representatives and enhancing tradeshow activities [52] Q&A Session Summary Question: What is the total number of sales reps and their structure? - The company added one sales rep, and they are structured to support both the IPAS team and K-12 operations [57][58] Question: Is the incremental spend on support or implementation staff? - Yes, the company is investing in support staff to ensure effective implementation and customer satisfaction [65][66]

[Cautionary Note Regarding Forward-Looking Statements](index=4&type=section&id=CAUTIONARY%20NOTE%20REGARDING%20FORWARD-LOOKING%20STATEMENTS) The report contains forward-looking statements based on current plans, intentions, objectives, strategies, projections, and expectations, which are subject to substantial risks, uncertainties, and other factors beyond the company's control - The report contains forward-looking statements based on current plans, intentions, objectives, strategies, projections, and expectations, which are subject to substantial risks, uncertainties, and other factors beyond the company's control[8](index=8&type=chunk)[9](index=9&type=chunk) - Key areas of forward-looking statements include the effects of economic conditions, future financial performance (revenues, net income, cash flow), integration of acquisitions, product development, market position, capital resources, and competitive landscape[10](index=10&type=chunk) - Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the report date, and the company undertakes no obligation to update or revise them[11](index=11&type=chunk)[12](index=12&type=chunk) [Part I – Financial Information](index=6&type=section&id=PART%20I%20FINANCIAL%20INFORMATION) This section presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations [Item 1. Financial Statements](index=6&type=section&id=ITEM%201.%20Financial%20Statements) This section presents Intellinetics, Inc.'s unaudited condensed consolidated financial statements and detailed notes for Q1 2024 and 2023 [Condensed Consolidated Balance Sheets](index=6&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This statement provides a snapshot of the company's assets, liabilities, and stockholders' equity at specific points in time Condensed Consolidated Balance Sheets (Unaudited) | ASSETS (in $) | March 31, 2024 | December 31, 2023 | | :-------------------------------- | :------------- | :---------------- | | Cash | 1,184,944 | 1,215,248 | | Accounts receivable, net | 1,931,342 | 1,850,375 | | Total current assets | 5,029,106 | 5,004,375 | | Property and equipment, net | 880,740 | 924,257 | | Intangible assets, net | 3,781,761 | 3,909,338 | | Goodwill | 5,789,821 | 5,789,821 | | Total assets | 18,916,186 | 19,026,260 | | **LIABILITIES AND STOCKHOLDERS' EQUITY** | | | | Accounts payable | 278,486 | 194,454 | | Deferred revenues | 2,583,207 | 2,927,808 | | Total current liabilities | 4,851,104 | 4,386,782 | | Notes payable - net of current portion | 1,438,032 | 2,209,242 | | Total liabilities | 8,896,347 | 9,275,539 | | Total stockholders' equity | 10,019,839 | 9,750,721 | | Total liabilities and stockholders' equity | 18,916,186 | 19,026,260 | - Total assets decreased slightly from **$19.03 million** at December 31, 2023, to **$18.92 million** at March 31, 2024[16](index=16&type=chunk) - Total stockholders' equity increased from **$9.75 million** to **$10.02 million**, while total liabilities decreased from **$9.28 million** to **$8.90 million**[16](index=16&type=chunk) [Condensed Consolidated Statements of Operations](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) This statement details the company's revenues, expenses, and net income or loss over a specific period Condensed Consolidated Statements of Operations (Unaudited) | (in $) | For the Three Months Ended March 31, 2024 | For the Three Months Ended March 31, 2023 | | :-------------------------------- | :---------------------------------------- | :---------------------------------------- | | Total revenues | 4,507,084 | 4,186,833 | | Total cost of revenues | 1,607,440 | 1,540,994 | | Gross profit | 2,899,644 | 2,645,839 | | Total operating expenses | 2,934,124 | 2,361,840 | | (Loss) income from operations | (34,480) | 283,999 | | Interest expense, net | (140,234) | (171,436) | | Net (loss) income | (174,714) | 112,563 | | Basic net (loss) income per share | (0.04) | 0.03 | | Diluted net (loss) income per share | (0.04) | 0.03 | - Total revenues increased by **7.6%** year-over-year, from **$4.19 million** in Q1 2023 to **$4.51 million** in Q1 2024[18](index=18&type=chunk) - The company reported a **net loss of $174,714** in Q1 2024, compared to a **net income of $112,563** in Q1 2023, resulting in a basic and diluted net loss per share of **$0.04**[18](index=18&type=chunk) [Condensed Consolidated Statement of Stockholders' Equity](index=8&type=section&id=Condensed%20Consolidated%20Statement%20of%20Stockholders'%20Equity) This statement outlines changes in the company's equity accounts, including common stock, additional paid-in capital, and accumulated deficit Condensed Consolidated Statement of Stockholders' Equity (Unaudited) | (in $) | Common Stock (Shares) | Common Stock (Amount) | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders' Equity | | :----------------------- | :-------------------- | :-------------------- | :------------------------- | :------------------ | :------------------------- | | Balance, December 31, 2023 | 4,113,621 | 4,114 | 30,841,630 | (21,095,023) | 9,750,721 | | Stock Option Compensation | - | - | 115,456 | - | 115,456 | | Restricted Share Issuance | - | - | 328,376 | - | 328,376 | | Net Loss | - | - | - | (174,714) | (174,714) | | Balance, March 31, 2024 | 4,113,621 | 4,114 | 31,285,462 | (21,269,737) | 10,019,839 | - Total stockholders' equity increased from **$9.75 million** at December 31, 2023, to **$10.02 million** at March 31, 2024, despite a net loss, primarily due to stock option compensation and restricted share issuance[20](index=20&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This statement reports the cash generated and used by the company across operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (Unaudited) | (in $) | For the Three Months Ended March 31, 2024 | For the Three Months Ended March 31, 2023 | | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Net (loss) income | (174,714) | 112,563 | | Net cash provided by (used in) operating activities | 611,766 | (174,357) | | Net cash used in investing activities | (127,932) | (134,569) | | Net cash used in financing activities | (514,138) | (968,417) | | Net decrease in cash | (30,304) | (1,277,343) | | Cash - beginning of period | 1,215,248 | 2,696,481 | | Cash - end of period | 1,184,944 | 1,419,138 | - Net cash provided by operating activities significantly improved, moving from a **use of $174,357** in Q1 2023 to a **provision of $611,766** in Q1 2024[22](index=22&type=chunk) - Cash at the end of the period decreased slightly to **$1.18 million** in Q1 2024 from **$1.22 million** at the beginning of the period, but this represents a much smaller decrease compared to Q1 2023[22](index=22&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) These notes provide additional information and explanations for the figures presented in the condensed consolidated financial statements [1. Business Organization and Nature of Operations](index=10&type=section&id=1.%20Business%20Organization%20and%20Nature%20of%20Operations) This section describes Intellinetics, Inc.'s operational structure and its core business activities in digital transformation - Intellinetics, Inc. operates through two wholly-owned subsidiaries: Intellinetics Ohio and Graphic Sciences, providing digital transformation products and services[24](index=24&type=chunk) - The company's two reporting segments are Document Management (software platform for document capture and management) and Document Conversion (paper-to-digital conversion, storage, and retrieval services)[25](index=25&type=chunk) [2. Basis of Presentation](index=10&type=section&id=2.%20Basis%20of%20Presentation) This section outlines the accounting principles and standards used in preparing the unaudited condensed consolidated financial statements - The unaudited condensed consolidated financial statements are prepared in accordance with GAAP, including normal recurring adjustments, and should be read in conjunction with the Annual Report on Form 10-K for the fiscal year ended December 31, 2023[26](index=26&type=chunk)[27](index=27&type=chunk)[28](index=28&type=chunk) [3. Summary of Significant Accounting Policies](index=10&type=section&id=3.%20Summary%20of%20Significant%20Accounting%20Policies) This section details the key accounting policies and methods applied in the preparation of the financial statements - The company consolidates all subsidiaries where it holds a controlling interest, eliminating significant intercompany balances and transactions[29](index=29&type=chunk) - The allowance for credit losses for trade receivables was **$109,515** at March 31, 2024, a decrease from **$124,103** at December 31, 2023, reflecting a reduction charged to operating results[33](index=33&type=chunk)[34](index=34&type=chunk) - Revenue is categorized into software, SaaS, software maintenance, professional services, and storage/retrieval, with the majority from professional services, followed by software maintenance and SaaS[35](index=35&type=chunk) - Deferred revenue, representing amounts billed but not yet recognized, decreased from **$2.93 million** at December 31, 2023, to **$2.58 million** at March 31, 2024[38](index=38&type=chunk)[40](index=40&type=chunk) - Software development costs for internal use software of **$109,621** were capitalized in Q1 2024, amortized over three years, while expensed software development costs were **$159,731**[42](index=42&type=chunk)[43](index=43&type=chunk) - The company maintains a **100% valuation allowance** on deferred tax assets due to uncertainty of realizing future taxable income, with federal net operating loss carryforwards of approximately **$15.5 million** as of March 31, 2024[52](index=52&type=chunk)[54](index=54&type=chunk) Segment Revenues and Gross Profit (Unaudited) | Segment (in $) | 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 | [4. Intangible Assets, Net](index=17&type=section&id=4.%20Intangible%20Assets%2C%20Net) This section details the company's intangible assets, including trade names, proprietary technology, and customer relationships Intangible Assets, Net (in $) | Category | March 31, 2024 (Net) | December 31, 2023 (Net) | | :-------------------- | :------------------- | :-------------------- | | Trade names | 212,808 | 220,233 | | Proprietary technology | 688,800 | 710,325 | | Customer relationships | 2,880,153 | 2,978,780 | | Total | 3,781,761 | 3,909,338 | - Intangible assets, net, decreased from **$3.91 million** at December 31, 2023, to **$3.78 million** at March 31, 2024, primarily due to amortization[61](index=61&type=chunk) - Amortization expense for the three months ended March 31, 2024, was **$127,577**[61](index=61&type=chunk) [5. Fair Value Measurements](index=17&type=section&id=5.%20Fair%20Value%20Measurements) This section discusses the company's fair value measurements, specifically regarding earnout liabilities - The company paid its final earnout liability of **$700,000** in January 2023, with no remaining earnout liabilities as of March 31, 2023[63](index=63&type=chunk) [6. Property and Equipment](index=17&type=section&id=6.%20Property%20and%20Equipment) This section provides details on the company's property and equipment, including computer hardware, leasehold improvements, and depreciation Property and Equipment, Net (in $) | Category | March 31, 2024 | December 31, 2023 | | :-------------------------------- | :------------- | :---------------- | | Computer hardware and purchased software | 1,455,334 | 1,437,023 | | Leasehold improvements | 395,919 | 395,919 | | Furniture and fixtures | 324,296 | 324,296 | | Less: accumulated depreciation | (1,294,809) | (1,232,981) | | Property and equipment, net | 880,740 | 924,257 | - Net property and equipment decreased from **$924,257** at December 31, 2023, to **$880,740** at March 31, 2024[64](index=64&type=chunk) - Total depreciation expense for Q1 2024 was **$61,828**, consistent with **$61,939** in Q1 2023[64](index=64&type=chunk) [7. Notes Payable](index=18&type=section&id=7.%20Notes%20Payable) This section details the company's notes payable to unrelated parties, including principal amounts and future payment obligations Notes Payable to Unrelated Parties (in $) | Category | March 31, 2024 | December 31, 2023 | | :-------------------------------- | :------------- | :---------------- | | Notes payable – "2022 Unrelated Notes" | 1,864,500 | 2,364,500 | | Less unamortized debt issuance costs | (101,468) | (155,258) | | Less current portion | (325,000) | - | | Long-term portion of notes payable | 1,438,032 | 2,209,242 | - The long-term portion of notes payable to unrelated parties decreased from **$2.21 million** at December 31, 2023, to **$1.44 million** at March 31, 2024, reflecting a **$500,000** principal prepayment[65](index=65&type=chunk) - Future minimum principal payments for unrelated notes include **$325,000** due in 2025 and **$1.54 million** due in 2026[65](index=65&type=chunk) [8. Notes Payable - Related Parties](index=19&type=section&id=8.%20Notes%20Payable%20-%20Related%20Parties) This section details the company's notes payable to related parties, including principal amounts and interest expense Notes Payable to Related Parties (in $) | Category | March 31, 2024 | December 31, 2023 | | :-------------------------------- | :------------- | :---------------- | | Notes payable – "2022 Related Note" | 600,000 | 600,000 | | Less unamortized debt issuance costs | (32,593) | (39,398) | | Long-term portion of notes payable | 567,407 | 560,602 | - The long-term portion of notes payable to related parties remained stable at approximately **$567,407** at March 31, 2024, with the full principal of **$600,000** due in 2026[67](index=67&type=chunk) - Interest expense for related party notes was **$24,805** in Q1 2024, slightly down from **$25,879** in Q1 2023[68](index=68&type=chunk) [9. Commitments and Contingencies](index=19&type=section&id=9.%20Commitments%20and%20Contingencies) This section outlines the company's legal proceedings, claims, litigation, and future minimum lease payment obligations - The company is involved in ordinary course legal proceedings, claims, and litigation, but currently believes no current matter is expected to have a material adverse impact on its financial position or operations[69](index=69&type=chunk) Future Minimum Lease Payments (in $) | For the twelve months ending March 31, | Finance Leases | Operating Leases | | :------------------------------------- | :------------- | :--------------- | | 2025 | 89,954 | 951,885 | | 2026 | 89,954 | 950,991 | | 2027 | 71,204 | 578,184 | | 2028 | 63,855 | 358,282 | | 2029 | 39,194 | 76,821 | | Thereafter | 1,883 | - | | Less Imputed Interest | (55,024) | (333,209) | | Total | 301,020 | 2,582,954 | - Total operating lease expense for Q1 2024 was **$234,439**, slightly down from **$237,449** in Q1 2023[73](index=73&type=chunk) [10. Stockholders' Equity](index=22&type=section&id=10.%20Stockholders'%20Equity) This section details the company's common stock, outstanding shares, and shares reserved for warrants and equity incentive plans - As of March 31, 2024, there were **4,113,621 shares** of common stock issued and outstanding, with additional shares reserved for warrants and equity incentive plans[74](index=74&type=chunk) Outstanding Warrants as of March 31, 2024 | Warrants Outstanding | Exercise Price ($) | Expiry Date | | :------------------- | :----------------- | :---------- | | 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](index=23&type=section&id=11.%20Stock-Based%20Compensation) This section outlines the company's stock-based compensation expenses related to restricted stock grants and stock options - On March 19, 2024, **127,500 shares** of restricted common stock were granted to employees, resulting in **$397,901** of stock compensation expense for Q1 2024[78](index=78&type=chunk) - Stock-based compensation for options was **$115,456** in Q1 2024, with **$432,525** of total unrecognized compensation costs related to stock options as of March 31, 2024[81](index=81&type=chunk)[82](index=82&type=chunk) [12. Concentrations](index=24&type=section&id=12.%20Concentrations) This section highlights significant customer and revenue concentrations, particularly with the State of Michigan and government contracts - The State of Michigan, the largest customer, accounted for **48% of total revenues** in Q1 2024 (up from 34% in Q1 2023) and **60% of gross accounts receivable** as of March 31, 2024[83](index=83&type=chunk)[85](index=85&type=chunk) - Government contracts, including K-12 education, represented approximately **86% of net revenues** in Q1 2024, an increase from 72% in Q1 2023[84](index=84&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=25&type=section&id=ITEM%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section discusses Intellinetics' Q1 2024 financial condition and results, covering revenue growth, economic impacts, expenses, liquidity, and cash flows [Company Overview](index=25&type=section&id=Company%20Overview) This section provides an overview of Intellinetics' business model, operational segments, and key growth strategies - Intellinetics is a document services and software solutions company focused on digital transformation and process automation for small-to-medium businesses and governmental sectors[88](index=88&type=chunk) - The company operates through Document Management (software platform) and Document Conversion (paper-to-digital, storage, retrieval) segments, with a growing emphasis on the SaaS model[88](index=88&type=chunk)[89](index=89&type=chunk) - Key growth strategies include investing in market penetration, optimizing pricing, increasing sales force effectiveness, and improving lead generation[90](index=90&type=chunk) [Executive Overview of Results](index=26&type=section&id=Executive%20Overview%20of%20Results) This section provides a high-level summary of the company's financial performance for Q1 2024, including revenue, operating loss, and cash flow - Revenues increased by **$320,251**, or **7.6%** year-over-year, primarily due to growth in software as a service and professional services[93](index=93&type=chunk)[97](index=97&type=chunk) - The company reported a **loss from operations of $34,480** in Q1 2024, compared to **income from operations of $283,999** in Q1 2023, largely impacted by a **$397,901** stock compensation expense[93](index=93&type=chunk)[97](index=97&type=chunk) - Net cash provided by operating activities was **$611,766** in Q1 2024, a significant improvement from **$174,357 used** in Q1 2023[97](index=97&type=chunk) - Employee count increased to **180** (including 36 part-time) as of March 31, 2024, from **167** as of March 31, 2023[97](index=97&type=chunk) [Financial Impact of Current Economic Conditions](index=26&type=section&id=Financial%20Impact%20of%20Current%20Economic%20Conditions) This section assesses the impact of current economic conditions, such as inflation and supply chain disruptions, on the company's financial performance - Increased employee wages due to inflation slightly decreased profit margins in Q1 2024, but the company is mitigating this by increasing customer renewal rates[95](index=95&type=chunk) - Global supply chain disruptions have had minimal impact, and customer demand has not diminished due to adverse economic conditions as of the report date[96](index=96&type=chunk) [Results of Operations](index=27&type=section&id=Results%20of%20Operations) This section provides a detailed analysis of the company's revenues, costs of revenues, gross profits, and operating expenses [Revenues](index=27&type=section&id=Revenues) This section analyzes the company's revenue streams by source, highlighting growth in SaaS and professional services Revenues by Source (in $) | Revenue Source | Three months ended March 31, 2024 | Three months ended March 31, 2023 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | 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 | - Total revenues increased by **7.6%** year-over-year, primarily driven by a **13.5% growth** in Software as a Service (SaaS) and a **7.8% increase** in professional services[98](index=98&type=chunk) - SaaS revenues grew by **$166,721** due to new cloud-based solution sales and expanded services for existing customers[99](index=99&type=chunk) - Professional services revenues increased by **$180,389**, mainly from the Document Conversion segment, but future revenues are at risk due to potential renegotiation of pricing with the largest customer[100](index=100&type=chunk) [Costs of Revenues and Gross Profits](index=29&type=section&id=Costs%20of%20Revenues%20and%20Gross%20Profits) This section examines the costs associated with revenue generation and the resulting gross profit margins across different service categories Cost of Revenues by Source (in $) | Cost of Revenues | Three months ended March 31, 2024 | Three months ended March 31, 2023 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | 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 | - Total cost of revenues increased by **4.3%** year-over-year to **$1.61 million**[102](index=102&type=chunk) - Overall gross profit percentage increased to **64.3%** in Q1 2024 from **63.2%** in Q1 2023, driven by the higher mix of SaaS revenue and strong Document Management margins, partially offset by margin erosion in Document Conversion[103](index=103&type=chunk) - Cost of SaaS decreased by **2.1%** due to support efficiencies, leading to an increased gross margin of **84.6%** for SaaS[104](index=104&type=chunk) - Cost of professional services increased by **8.2%** due to increased staffing and wage increases in the Document Conversion segment, resulting in a slight decrease in consolidated professional services gross margin to **48.2%**[105](index=105&type=chunk) [Operating Expenses](index=31&type=section&id=Operating%20Expenses) This section analyzes changes in general and administrative, sales and marketing, and depreciation and amortization expenses Operating Expenses (in $) | Operating Expenses | Three months ended March 31, 2024 | Three months ended March 31, 2023 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | 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 | - Total operating expenses increased by **24.2%** year-over-year to **$2.93 million**[106](index=106&type=chunk) - General and administrative expenses increased by **36.9%**, primarily due to a **$397,901** restricted stock award grant and investments in scaling operations (development, finance, SOC2 process, ERP system upgrade) and wage increases[107](index=107&type=chunk) - Sales and marketing expenses decreased by **6.5%** due to an open position and normal fluctuations in commissions[108](index=108&type=chunk) - Depreciation and amortization increased by **15.9%** due to increased amortization of capitalized software costs[109](index=109&type=chunk) [Other Items of Income and Expense](index=32&type=section&id=Other%20Items%20of%20Income%20and%20Expense) This section focuses on non-operating income and expense items, specifically detailing changes in net interest expense - Net interest expense decreased by **18.2%** to **$140,234** in Q1 2024, primarily due to reduced interest from principal repayments of the 2020 Notes[110](index=110&type=chunk) [Liquidity and Capital Resources](index=33&type=section&id=Liquidity%20and%20Capital%20Resources) This section assesses the company's ability to meet its short-term and long-term financial obligations, including cash position, working capital, and debt obligations - As of March 31, 2024, the company had **$1.2 million** in cash and cash equivalents, **$0.2 million** in net working capital, and an accumulated deficit of **$21.3 million**[112](index=112&type=chunk) - Liquidity was improved by a renewed contract with the largest customer (estimated **21% net rate increase**) and an extension of maturity dates for **$1.5 million** of Unrelated Notes and **$0.6 million** of Related Notes to December 31, 2025[113](index=113&type=chunk) - The largest customer may renegotiate pricing, which could adversely impact future revenues, cash flows, and liquidity[113](index=113&type=chunk) - Current debt obligations include **$0.3 million** due by March 30, 2025, and **$2.1 million** due by December 31, 2025; operating cash flow alone may be insufficient to meet 2025 obligations, but the company is confident in its ability to seek additional financing or refinancing[114](index=114&type=chunk) - Net cash provided by operating activities was **$611,766** in Q1 2024, a significant improvement from cash used in Q1 2023[121](index=121&type=chunk) - Net cash used in financing activities was **$514,138** in Q1 2024, primarily for repayment of notes payable (**$500,000**) and finance lease liabilities[123](index=123&type=chunk) [Critical Accounting Policies and Estimates](index=34&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) This section confirms that no material changes occurred in the company's critical accounting policies and estimates during Q1 2024 - The preparation of financial statements requires estimates and assumptions, but there were no material changes to critical accounting policies and estimates during Q1 2024[124](index=124&type=chunk)[125](index=125&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk.](index=34&type=section&id=ITEM%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk.) This item is not applicable to Intellinetics, Inc. as it is a smaller reporting company - This section is not applicable to smaller reporting companies[126](index=126&type=chunk) [Item 4. Controls and Procedures.](index=34&type=section&id=ITEM%204.%20Controls%20and%20Procedures.) Management concluded the company's disclosure controls and procedures were effective as of March 31, 2024, with no material changes in internal control over financial reporting - As of March 31, 2024, the company's disclosure controls and procedures were deemed effective to provide reasonable assurance that required information is recorded, processed, summarized, and reported timely[128](index=128&type=chunk) - No material changes in internal control over financial reporting occurred during the first quarter of 2024[130](index=130&type=chunk)[131](index=131&type=chunk) [Part II – Other Information](index=36&type=section&id=PART%20II%20OTHER%20INFORMATION) This section provides additional information on legal proceedings, risk factors, equity sales, defaults, and other disclosures [Item 1. Legal Proceedings.](index=36&type=section&id=ITEM%201.%20Legal%20Proceedings.) The company reported no material legal proceedings during the period - There are no legal proceedings to report[133](index=133&type=chunk) [Item 1A. Risk Factors.](index=36&type=section&id=ITEM%201A.%20Risk%20Factors.) No material changes to risk factors were reported, except for a new significant risk regarding potential pricing renegotiation with the largest customer - No material changes to risk factors were reported, except for a new risk concerning the largest customer potentially renegotiating pricing on a significant portion of work[134](index=134&type=chunk)[135](index=135&type=chunk) - Such a renegotiation could take effect in Q4 2024 and, if resulting in a pricing reduction, could materially and adversely affect the company's business, operating results, and cash flows, despite potential mitigation efforts[135](index=135&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.](index=36&type=section&id=ITEM%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds.) The company reported no unregistered sales of equity securities or use of proceeds during the period - There were no unregistered sales of equity securities or use of proceeds[136](index=136&type=chunk) [Item 3. Defaults Upon Senior Securities.](index=36&type=section&id=ITEM%203.%20Defaults%20Upon%20Senior%20Securities.) The company reported no defaults upon senior securities during the period - There were no defaults upon senior securities[137](index=137&type=chunk) [Item 4. Mine Safety Disclosures.](index=36&type=section&id=ITEM%204.%20Mine%20Safety%20Disclosures.) This item is not applicable to the company - This section is not applicable[138](index=138&type=chunk) [Item 5. Other Information.](index=36&type=section&id=ITEM%205.%20Other%20Information.) No Rule 10b5-1 or non-Rule 10b5-1 trading arrangements were adopted, modified, or terminated by directors or Section 16 officers during Q1 2024 - No Rule 10b5-1 or non-Rule 10b5-1 trading arrangements were adopted, modified, or terminated by directors or Section 16 officers during Q1 2024[139](index=139&type=chunk) [Item 6. Exhibits.](index=36&type=section&id=ITEM%206.%20Exhibits.) This section lists all exhibits filed as part of the Quarterly Report on Form 10-Q, including certifications, XBRL documents, and taxonomy extensions - The report includes certifications from the Principal Executive Officer and Principal Financial Officer (Exhibits 31.1, 31.2, 32.1, 32.2) and various Inline XBRL documents (Exhibits 101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[141](index=141&type=chunk)[142](index=142&type=chunk) [Signatures](index=38&type=section&id=SIGNATURES) This section includes the official signatures of the company's President, CEO, and CFO, certifying the report's accuracy - The report was signed by James F. DeSocio, President and Chief Executive Officer, and Joseph D. Spain, Chief Financial Officer, on May 14, 2024[144](index=144&type=chunk)[145](index=145&type=chunk)

Exhibit 99.1 Intellinetics Grows 2024 First Quarter Revenues 7.7%, Grows SaaS Revenue 13.5% COLUMBUS, OH – May 14, 2024 – Intellinetics, Inc. (NYSE American: INLX), a digital transformation solutions provider, announced financial results for the three months ended March 31, 2024, the first quarter of 2024. 2024 First Quarter Financial Highlights | | | For the Quarter ended March 31, | | | | --- | --- | --- | --- | --- | | | 2024 | | 2023 | | | Revenues: | | | | | | Sale of software | $ | 5,779 | $ | 15,293 ...

Financial Data and Key Metrics Changes - For the year ended December 31, 2023, the company grew revenue more than 20% and increased SaaS revenue by nearly 28% [10] - Net income for Q4 was $62,000 compared to net income of $201,000 for the same period last year [19] - Full year net income was $519,000 compared to $24,000 in 2022, with earnings per share of $0.13 compared to $0.01 per share last year [41] Business Line Data and Key Metrics Changes - Professional services revenue increased 4.7% to $2.2 million for the quarter from $2.1 million for the same period last year [17] - SaaS maintenance and BPO professional services all grew, with SaaS revenue growing faster than operating expenses, enabling consistent profitability [15] - Total revenue for 2023 increased 20.5% to $16.9 million as compared to $14 million last year, with SaaS revenue increasing 27.8% [32] Market Data and Key Metrics Changes - The K-12 operations now have 591 K-12 districts generating significant SaaS revenue, which more than doubles the presence in this vertical market since the acquisition of Yellow Folder in April 2022 [26] - The company closed 353 contracts in 2023, with an estimated total contract value of $7.7 million [26] Company Strategy and Development Direction - The company plans to invest in its IPAS solution and expand cross-selling efforts in 2024, viewing it as a significant growth catalyst [3][12] - The 2024 budget includes an incremental $400,000 of spend towards accelerating IPAS, focusing on additional sales headcount and enhancing the delivery team [14] - The company aims to double its SaaS revenue over the next four to five years through the IPAS offering [34] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's strong momentum and stable baseline with consistent profitability and cash generation [3] - The company expects to grow revenues and adjusted EBITDA on a year-over-year basis for the fiscal year 2024 [42] - Management highlighted the importance of making early adopters of IPAS happy to set the stage for wholesale adoption in select ERP ecosystems [43] Other Important Information - Consolidated gross margin increased 98 basis points to 64.9% for Q4 this year compared to 63.9% last year, driven by a better revenue mix [17] - Operating expenses increased 17% to $2.5 million for Q4 2023 compared to $2.2 million in 2022, largely due to equity compensation expenses [18] Q&A Session Summary Question: Can you talk about deal size compared to your base offerings? - The average sale size for the K-12 offering is between $3,000 to $8,000, while the IPAS offering deals are north of $35,000 on annual recurring revenue [45] Question: Are you migrating within Constellation into different verticals? - The plan is to pursue both existing Constellation customers and new verticals, with a focus on expanding the customer base [46] Question: Do you still anticipate new districts coming online at a pace of 15 to 20 districts a quarter? - Yes, the company continues to expect that pace [48]

Revenue Growth - Total revenue for 2023 was $16,886,381, representing a 20.5% increase compared to $14,016,928 in 2022[10] - SaaS revenue grew by 28% year-over-year, reaching $5,133,215 in 2023, up from $4,017,409 in 2022[4] - The acquisition of Yellow Folder contributed $3,613,764 in revenue for 2023, up from $2,460,474 in 2022[10] - Total revenues for the twelve months ended December 31, 2023, reached $16,886,381, up from $14,016,928 in 2022, indicating a growth of approximately 20.5%[27] - Software as a service revenue increased to $5,133,215 in 2023 from $4,017,409 in 2022, reflecting a growth of about 27.8%[27] - Recurring revenues for the three months ended December 31, 2023, totaled $2,646,580, compared to $2,413,747 in 2022, marking an increase of approximately 9.7%[22] Net Income and Profitability - Net income for 2023 was $519,266, or $0.13 per basic share, compared to $24,027, or $0.01 per basic share in 2022[10] - Net income for the twelve months ended December 31, 2023, was $519,266, compared to $24,027 in 2022, representing a significant increase[27] - Basic net income per share for 2023 was $0.13, up from $0.01 in 2022, indicating a substantial improvement[27] - The company reported a gross profit of $10,563,955 for the twelve months ended December 31, 2023, compared to $8,909,158 in 2022, an increase of about 18.5%[27] Expenses and Financial Health - Total operating expenses for 2023 increased by 17.0% to $9,456,486, compared to $8,081,837 in 2022[10] - Adjusted EBITDA increased by 13.7% to $2,744,649 in 2023, compared to $2,413,901 in 2022[10] - Depreciation and amortization expenses rose to $974,527 in 2023 from $722,197 in 2022, indicating a 35% increase[29] - Bad debt expense increased to $77,211 in 2023 from $42,129 in 2022, reflecting a rise of approximately 83%[29] Cash Flow and Liquidity - The company’s cash balance decreased to $1,215,248 as of December 31, 2023, from $2,696,481 in 2022, indicating a decline in liquidity[25] - Net cash provided by operating activities decreased to $784,659 in 2023 from $1,988,778 in 2022, a decline of approximately 60%[29] - Net cash used in investing activities was $548,077 in 2023, down from $6,960,594 in 2022, showing a reduction of about 92%[29] - Net cash used in financing activities was $1,717,815 in 2023, compared to a net cash provided of $5,915,667 in 2022, indicating a shift of approximately $7.6 billion[29] - Cash at the end of the period decreased to $1,215,248 in 2023 from $2,696,481 in 2022, a decline of about 55%[29] Debt and Future Outlook - The company ended 2023 with less than $1.8 million in debt, net of cash[5] - The company plans to prepay $500,000 of long-term debt and expects to have no net debt by the end of 2024[12] - Management expects revenue and EBITDA growth on a year-over-year basis for fiscal year 2024[11] Assets and Liabilities - Total current assets decreased to $5,004,375 as of December 31, 2023, from $4,893,039 in 2022[25] - Total liabilities decreased to $9,275,539 as of December 31, 2023, compared to $11,374,340 in 2022, showing a reduction of approximately 18.4%[25] - Accounts receivable showed a significant change, with a decrease of $806,503 in 2023 compared to an increase of $81,227 in 2022[29] - Deferred revenues decreased to $173,744 in 2023 from $486,885 in 2022, a decline of about 64%[29] - Cash paid during the period for interest was $418,790 in 2023, down from $496,805 in 2022, a decrease of approximately 16%[29] Product Development - The IntelliCloud™ Payables Automation System (IPAS) was commercially launched, with two customers live and seven more signed[5]

Part I [Item 1. Business](index=6&type=section&id=Item%201.%20Business) Intellinetics provides digital transformation solutions through Document Management and Document Conversion segments, leveraging SaaS and serving regulated markets - Intellinetics operates through two reporting segments: Document Management (software platform, including Yellow Folder acquisition) and Document Conversion (paper-to-digital conversion, storage, retrieval services)[21](index=21&type=chunk)[232](index=232&type=chunk) - The Software as a Service (SaaS) model is increasingly popular and a key ingredient in the company's revenue growth strategy, especially with increased remote workforce deployment[22](index=22&type=chunk)[145](index=145&type=chunk) - The Document Management segment's government contracts (including K-12 education) represented approximately **84% of its net revenues in 2023** and **77% in 2022**[34](index=34&type=chunk) - The Document Conversion segment has significant customer concentration with the State of Michigan, accounting for approximately **62% of its net revenues** and **35% of total consolidated revenues in 2023**[37](index=37&type=chunk) Employee Category | Employee Category | Number of Employees (as of March 23, 2024) | | :---------------- | :--------------------------------------- | | Total Employees | 182 | | Full-time | 152 | | Part-time | 30 | | Graphic Sciences | 133 (115 full-time, 18 part-time) | | Intellinetics Ohio| 49 (37 full-time, 12 part-time) | | Admin/Management | 22 | | Software Sales/Support/Dev | 36 | | Document Services/Storage | 124 | [Item 1A. Risk Factors](index=13&type=section&id=Item%201A.%20Risk%20Factors) The company faces various economic, operational, and financial risks, including competition and data security, which could materially affect its business and operating results - General inflation and increases in minimum wage and labor costs have affected and may continue to adversely affect the business, financial condition, and results of operations, slightly decreasing profit margins in 2023[63](index=63&type=chunk)[150](index=150&type=chunk) - The markets for the company's products are intensely competitive, subject to rapid technological change, and the convergence of technologies (e.g., AI) has introduced unforeseen competitors[68](index=68&type=chunk) - The company's success depends on its ability to design, develop, test, market, license, and support new technologically-advanced products and enhancements on a timely basis, especially in response to rapid advancements in AI tools[74](index=74&type=chunk) - The company has significant customer concentration, with its two largest clients accounting for approximately **35%** and **5% of total revenues in 2023**, and government contracts (including K-12 education) representing about **80% of net revenues**[88](index=88&type=chunk)[339](index=339&type=chunk)[340](index=340&type=chunk) - Security breaches, unauthorized access, or disruptions could result in loss of confidential information, damage to reputation, early contract termination, litigation, and regulatory investigations, especially given the handling of sensitive customer data[93](index=93&type=chunk)[96](index=96&type=chunk) [Item 1B. Unresolved Staff Comments](index=26&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments - Not applicable[120](index=120&type=chunk) [Item 1C. Cybersecurity](index=26&type=section&id=Item%201C.%20Cybersecurity) Intellinetics manages cybersecurity risks using the NIST framework, implementing comprehensive controls, training, and monitoring, with no material incidents reported to date - Cybersecurity risk management leverages the National Institute of Standards and Technology (NIST) framework, conforming to SP800-53 r5 Information Security controls framework[122](index=122&type=chunk) - Measures include internal reporting, annual and ongoing cybersecurity awareness training for employees, mechanisms to detect and monitor unusual network activity, and threat detection, containment, incident response, and backup recovery tools[123](index=123&type=chunk) - Cybersecurity program reviews are conducted at least quarterly by the Chief Financial Officer and Chief Technology Officer, with material risks reported to the Board of Directors[124](index=124&type=chunk) - As of the report date, the company has not experienced a cybersecurity incident that resulted in a material adverse impact to its business or operations[126](index=126&type=chunk) [Item 2. Properties](index=26&type=section&id=Item%202.%20Properties) The company leases multiple office and production facilities in Ohio and Michigan for its Document Conversion and Document Management operations, including significant storage space - The company leases **6,000 sq ft** for its corporate headquarters and Document Conversion/Management operations in Columbus, Ohio, with a lease expiring December 31, 2028[127](index=127&type=chunk) - Main Document Conversion operations are housed in a **36,000 sq ft** facility in Madison Heights, Michigan, with **20,000 sq ft** for records storage, lease expiring August 31, 2026[128](index=128&type=chunk) - An additional **37,000 sq ft** building in Sterling Heights, Michigan, is leased for Document Conversion, primarily for document storage, lease expiring April 30, 2028[129](index=129&type=chunk) - The company owns and operates specialized equipment for scanning images and converting microfilm to digital images or microfiche for its Document Conversion segment[133](index=133&type=chunk) [Item 3. Legal Proceedings](index=27&type=section&id=Item%203.%20Legal%20Proceedings) The company is not currently involved in any material legal proceedings - The company is not currently involved in any legal proceedings that are believed to be material[134](index=134&type=chunk) [Item 4. Mine Safety Disclosure](index=27&type=section&id=Item%204.%20Mine%20Safety%20Disclosure) The company is not subject to mine safety disclosure requirements - Not applicable[135](index=135&type=chunk) Part II [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=27&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Intellinetics common stock trades on NYSE American, with no dividends paid or anticipated, and no unregistered securities issued or equity repurchases in Fiscal Year 2023 - Common stock trades on the NYSE American under the symbol "**INLX**" since September 9, 2022[136](index=136&type=chunk) - As of March 23, 2024, there were **76 stockholders of record**[137](index=137&type=chunk) - No dividends were paid on common stock in the two most recent fiscal years, and none are anticipated in the foreseeable future, with plans to retain earnings for business development[138](index=138&type=chunk)[109](index=109&type=chunk) - No unregistered securities issuances in Fiscal Year 2023 not previously disclosed, and no issuer purchases of securities[139](index=139&type=chunk)[140](index=140&type=chunk) [Item 6. [Reserved]](index=28&type=section&id=Item%206.%20%5BReserved%5D) This item is reserved and contains no information - This item is reserved[141](index=141&type=chunk) [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=28&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section reviews Intellinetics' 2023 financial performance and operational strategies, highlighting **21% revenue growth**, improved net income, and sufficient liquidity, significantly impacted by the Yellow Folder acquisition - The acquisition of Yellow Folder on April 1, 2022, was the biggest factor in changes to results of operations, with 2023 including a full year of Yellow Folder operations compared to three quarters in 2022[148](index=148&type=chunk) - The company's strategy for Document Management focuses on increasing cloud-based software revenues, while for Document Conversion, it aims to grow core services and leverage software products for digital transformation solutions[147](index=147&type=chunk) - Employee wages, the largest expense, increased due to inflation, slightly decreasing profit margins in 2023, but the company mitigated this through customer renewal rate increases[150](index=150&type=chunk) [Company Overview](index=28&type=section&id=Company%20Overview_MD%26A) Intellinetics provides digital transformation and process automation solutions through Document Management and Document Conversion segments, with SaaS as a key growth driver, significantly impacted by the Yellow Folder acquisition - Intellinetics is a document services and software solutions company serving SMB and governmental sectors with digital transformation and process automation initiatives[143](index=143&type=chunk) - The April 1, 2022, acquisition of Yellow Folder significantly impacted financial and business operations[143](index=143&type=chunk) - The company's digital transformation products and services are provided through two segments: Document Management and Document Conversion[144](index=144&type=chunk) - Licensing software via the 'software as a service' (SaaS) or 'cloud-based' model is increasingly popular and a key revenue growth strategy[145](index=145&type=chunk) [How We Evaluate our Business Performance and Opportunities](index=29&type=section&id=How%20We%20Evaluate%20our%20Business%20Performance%20and%20Opportunities) The company evaluates performance by focusing on cloud-based software growth, core service expansion, reseller sales, project profitability, sales cycles, and potential accretive acquisitions - For Document Management, the strategy is to focus on cloud-based delivery, assessing increases in cloud-based software revenues relative to prior periods and other revenue sources[147](index=147&type=chunk) - For Document Conversion, the strategy is to maintain and grow core conversion, storage, and retrieval business, while leveraging software products for total digital transformation solutions[147](index=147&type=chunk) - The company monitors sales through resellers versus direct sales, and evaluates customer engagements based on profit margins and potential for new product/service feature development[147](index=147&type=chunk) - Software sales cycles average **1-3 months**, with large projects lasting **4-6 months**, while document conversion services often have very short sales cycles but can have a backlog of work orders[147](index=147&type=chunk) - The company continuously monitors potential acquisitions of complementary solutions and expertise that are consistent with its core business and expected to be accretive to financial performance[147](index=147&type=chunk) [Executive Overview of Results](index=30&type=section&id=Executive%20Overview%20of%20Results) 2023 results show **21% revenue growth** to **$16.89 million** and significantly increased net income to **$0.52 million**, driven by the Yellow Folder acquisition and strong professional services, despite inflationary labor costs - The biggest factor in 2023 results was the Yellow Folder acquisition (full year in 2023 vs. three quarters in 2022) and record professional services revenue from Document Conversion[148](index=148&type=chunk) Key Financial Results (Consolidated) for 2023 vs. 2022 | Metric | 2023 (USD) | 2022 (USD) | Change (%) | | :-------------------------------- | :--------- | :--------- | :--------- | | Revenues | 16,886,381 | 14,016,928 | 21% | | Cost of Revenues | 6,322,426 | 5,107,770 | 24% | | Operating Expenses (excl. CoR) | 9,456,486 | 8,081,837 | 17% | | Income from Operations | 1,107,469 | 827,321 | 34% | | Net Income | 519,266 | 24,027 | 2061% | | Basic Net Income per Share | 0.13 | 0.01 | 1200% | | Diluted Net Income per Share | 0.11 | 0.01 | 1000% | | Net Cash Provided by Operating Activities | 784,659 | 1,988,778 | -61% | | Capital Expenditures | 548,077 | 577,325 | -5% | | Employees (as of Dec 31) | 171 | 161 | 6% | - Increased labor costs due to wage inflation slightly decreased profit margins over 2022, but the company mitigates this by increasing customer renewal rates[150](index=150&type=chunk) [Reportable Segments](index=30&type=section&id=Reportable%20Segments_MD%26A) The company operates and reports financial performance through its two segments: Document Management and Document Conversion - The company has two reportable segments: Document Management and Document Conversion[152](index=152&type=chunk) [Results of Operations](index=30&type=section&id=Results%20of%20Operations) Total revenues grew **21%** to **$16.89 million** in 2023, driven by Yellow Folder and professional services, with a slight decrease in gross profit percentage to **62.6%** due to revenue mix Revenues by Reportable Segment (2023 vs. 2022) | Segment | 2023 (USD) | 2022 (USD) | Change (USD) | Change (%) | | :------------------ | :--------- | :--------- | :----------- | :--------- | | Document Management | 7,298,264 | 5,999,726 | 1,298,538 | 21.6% | | Document Conversion | 9,588,117 | 8,017,202 | 1,570,915 | 19.6% | | **Total Revenues** | **16,886,381** | **14,016,928** | **2,869,453** | **20.5%** | Revenues by Source (2023 vs. 2022) | Revenue Source | 2023 (USD) | 2022 (USD) | Change (USD) | Change (%) | | :---------------------- | :--------- | :--------- | :----------- | :--------- | | Sale of software | 100,260 | 159,084 | (58,824) | -37% | | Software as a service | 5,133,215 | 4,017,409 | 1,115,806 | 28% | | Software maintenance services | 1,407,064 | 1,387,885 | 19,179 | 1% | | Professional services | 9,167,428 | 7,357,937 | 1,809,491 | 25% | | Storage and retrieval services | 1,078,414 | 1,094,613 | (16,199) | -1% | | **Total Revenues** | **16,886,381** | **14,016,928** | **2,869,453** | **20.5%** | Gross Profit by Revenue Source (2023 vs. 2022) | Revenue Source | 2023 Gross Profit (USD) | 2022 Gross Profit (USD) | 2023 Gross Profit % | 2022 Gross Profit % | | :---------------------- | :---------------------- | :---------------------- | :------------------ | :------------------ | | Sale of software | 74,524 | 94,507 | 74.3% | 59.4% | | Software as a service | 4,244,080 | 3,315,976 | 82.7% | 82.5% | | Software maintenance services | 1,347,691 | 1,308,147 | 95.8% | 94.3% | | Professional services | 4,174,602 | 3,449,732 | 45.5% | 46.9% | | Storage and retrieval services | 723,058 | 740,796 | 67.0% | 67.7% | | **Total Gross Profit** | **10,563,955** | **8,909,158** | **62.6%** | **63.6%** | [Operating Expenses](index=36&type=section&id=Operating%20Expenses) Total operating expenses increased **17%** to **$9.46 million** in 2023, primarily due to higher general and administrative costs from Yellow Folder integration and uplisting, and increased depreciation and amortization Operating Expenses (2023 vs. 2022) | Operating Expense | 2023 (USD) | 2022 (USD) | Change (USD) | Change (%) | | :-------------------------- | :--------- | :--------- | :----------- | :--------- | | General and administrative | 6,455,088 | 4,945,214 | 1,509,874 | 31% | | Change in fair value of earnout liabilities | - | 87,652 | (87,652) | -100% | | Transaction costs | - | 355,281 | (355,281) | -100% | | Sales and marketing | 2,026,871 | 1,971,493 | 55,378 | 3% | | Depreciation and amortization | 974,527 | 722,197 | 252,330 | 35% | | **Total Operating Expenses**| **9,456,486** | **8,081,837** | **1,371,649** | **17%** | - General and administrative expenses increased by **31%** primarily due to a full year of Yellow Folder expenses, stock compensation, NetSuite investment, and costs associated with uplisting to NYSE American[173](index=173&type=chunk) - Depreciation and amortization increased by **35%** due to increased amortization on capitalizable software and a full year of amortization of new intangible assets from the Yellow Folder acquisition[177](index=177&type=chunk) [Other Items of Income and Expense](index=38&type=section&id=Other%20Items%20of%20Income%20and%20Expense) Net interest expense decreased **27%** to **$588,203** in 2023, driven by 2020 Notes repayments, partially offset by a full year of 2022 Notes interest Interest Expense, Net (2023 vs. 2022) | Metric | 2023 (USD) | 2022 (USD) | Change (USD) | Change (%) | | :------------------ | :--------- | :--------- | :----------- | :--------- | | Interest expense, net | (588,203) | (803,294) | 215,091 | -27% | - The decrease in interest expense was driven by partial principal repayments and final payment of the 2020 Notes, partially offset by a full year of the 2022 Notes[179](index=179&type=chunk) [Liquidity and Capital Resources](index=38&type=section&id=Liquidity%20and%20Capital%20Resources) The company's liquidity improved in 2023, with **$1.2 million** cash and **$0.6 million** net working capital deficit, supported by contract renewals and financing, and capital resources are projected to be sufficient for the next 12 months Key Liquidity Metrics (as of December 31, 2023 vs. 2022) | Metric | 2023 (USD) | 2022 (USD) | | :---------------------- | :--------- | :--------- | | Cash and cash equivalents | 1,215,248 | 2,696,481 | | Net working capital deficit | (600,000) | (1,109,443) | | Accumulated deficit | (21,095,023) | (21,614,289) | - Liquidity and cash flows significantly improved in 2023 and 2022 due to a renewed State of Michigan contract (**21% rate increase**), the Yellow Folder acquisition, and proceeds from stock issuance and promissory notes[181](index=181&type=chunk) - As of December 31, 2023, existing debt includes approximately **$0.8 million** due March 30, 2025, and **$2.1 million** due December 31, 2025, with some 2022 Notes maturity dates extended to December 31, 2025[182](index=182&type=chunk)[310](index=310&type=chunk)[315](index=315&type=chunk) - Net cash provided by operating activities was **$784,659** in 2023, a decrease from **$1,988,778** in 2022[190](index=190&type=chunk) - The company believes its capital resources, including cash, operating funds, and potential financing, will be sufficient to meet anticipated cash needs for at least the next **12 months**[184](index=184&type=chunk) [Critical Accounting Policies and Estimates](index=39&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) This section details critical accounting policies and estimates, including Revenue Recognition, Business Acquisition, Goodwill and Intangibles, Accounts Receivable, Deferred Revenues, Software Costs, and Stock-Based Compensation, which involve significant judgment and assumptions - Critical accounting policies and estimates include Revenue Recognition, Business Acquisition, Goodwill and Intangibles (including Contingent Liability—Earnout), Accounts Receivable (Unbilled), Deferred Revenues, Accounting for Costs of Computer Software to be Sold, Leased or Marketed and Accounting for Internal Use Software, and Accounting Stock-Based Compensation[195](index=195&type=chunk)[199](index=199&type=chunk) - Revenue recognition follows a five-step model (ASC 606), recognizing revenue when performance obligations are satisfied, allocating transaction price to distinct obligations based on standalone selling price[195](index=195&type=chunk)[196](index=196&type=chunk) - Business acquisitions involve allocating purchase price to acquired assets and liabilities at fair value, with earnout liabilities estimated based on future projections and valuation techniques[201](index=201&type=chunk)[273](index=273&type=chunk) - Goodwill is not amortized but tested for impairment annually; intangible assets have finite lives and are amortized on a straight-line basis[202](index=202&type=chunk)[268](index=268&type=chunk) - Software development costs are expensed before technological feasibility is reached and capitalized thereafter for external-use software, while internal-use software costs are capitalized once the application reaches the development stage[206](index=206&type=chunk)[207](index=207&type=chunk)[278](index=278&type=chunk)[279](index=279&type=chunk) - Stock-based compensation is measured at fair value on the grant date, with stock option awards valued using the Black-Scholes-Merton option pricing model and recognized over the service period[209](index=209&type=chunk)[210](index=210&type=chunk)[276](index=276&type=chunk)[277](index=277&type=chunk) [Item 7A. Quantitative and Qualitative Disclosures About Market Risk](index=42&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This item is not applicable to smaller reporting companies - Not applicable to smaller reporting companies[211](index=211&type=chunk) [Item 8. Financial Statements and Supplementary Data](index=42&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the audited consolidated financial statements for 2023 and 2022, including balance sheets, income statements, equity, cash flows, and comprehensive notes, along with the independent auditor's report - The consolidated financial statements for Intellinetics, Inc. and Subsidiaries for the years ended December 31, 2023 and 2022, are presented in conformity with GAAP[216](index=216&type=chunk) Consolidated Financial Statements Included | Statement | Page Number | | :-------------------------------------------------- | :---------- | | Report of Independent Registered Public Accounting Firm | F-1 (Page 43) | | Consolidated Balance Sheets | F-2 (Page 44) | | Consolidated Statements of Income | F-3 (Page 45) | | Consolidated Statements of Stockholders' Equity | F-4 (Page 46) | | Consolidated Statements of Cash Flows | F-5 (Page 47) | | Notes to Consolidated Financial Statements | F-6 (Page 49) | Consolidated Balance Sheet Highlights (as of December 31) | Metric | 2023 (USD) | 2022 (USD) | | :-------------------------- | :--------- | :--------- | | Total Assets | 19,026,260 | 19,943,142 | | Total Liabilities | 9,275,539 | 11,374,340 | | Total Stockholders' Equity | 9,750,721 | 8,568,802 | Consolidated Statements of Income Highlights (for the Twelve Months Ended December 31) | Metric | 2023 (USD) | 2022 (USD) | | :-------------------------- | :--------- | :--------- | | Total Revenues | 16,886,381 | 14,016,928 | | Gross Profit | 10,563,955 | 8,909,158 | | Income from Operations | 1,107,469 | 827,321 | | Net Income | 519,266 | 24,027 | | Basic Net Income per Share | 0.13 | 0.01 | | Diluted Net Income per Share| 0.11 | 0.01 | Consolidated Statements of Cash Flows Highlights (for the Twelve Months Ended December 31) | Metric | 2023 (USD) | 2022 (USD) | | :-------------------------------- | :--------- | :--------- | | Net cash provided by operating activities | 784,659 | 1,988,778 | | Net cash used in investing activities | (548,077) | (6,960,594)| | Net cash (used in) provided by financing activities | (1,717,815)| 5,915,667 | | Cash - end of period | 1,215,248 | 2,696,481 | [Report of Independent Registered Public Accounting Firm](index=43&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) GBQ Partners LLC issued an unqualified opinion on the consolidated financial statements for 2023 and 2022, affirming fair presentation in conformity with GAAP and PCAOB standards - GBQ Partners LLC issued an unqualified opinion on the consolidated financial statements for 2023 and 2022[216](index=216&type=chunk) - The audit was conducted in accordance with PCAOB standards, and no critical audit matters were identified[218](index=218&type=chunk)[220](index=220&type=chunk) [Consolidated Balance Sheets](index=44&type=section&id=Consolidated%20Balance%20Sheets) Total assets decreased to **$19.03 million** in 2023, while total liabilities decreased to **$9.28 million** due to reduced current liabilities, and stockholders' equity increased to **$9.75 million** Consolidated Balance Sheet Summary (as of December 31) | Asset/Liability/Equity | 2023 (USD) | 2022 (USD) | | :-------------------------- | :--------- | :--------- | | Cash | 1,215,248 | 2,696,481 | | Total Current Assets | 5,004,375 | 4,893,039 | | Total Assets | 19,026,260 | 19,943,142 | | Total Current Liabilities | 4,386,782 | 6,002,482 | | Total Long-Term Liabilities | 4,888,757 | 5,371,858 | | Total Liabilities | 9,275,539 | 11,374,340 | | Total Stockholders' Equity | 9,750,721 | 8,568,802 | - Earnout liabilities (current) were eliminated in 2023, down from **$700,000** in 2022, and current notes payable were reduced to zero from **$936,966**[223](index=223&type=chunk) [Consolidated Statements of Income](index=45&type=section&id=Consolidated%20Statements%20of%20Income) Net income significantly increased to **$519,266** in 2023 from **$24,027** in 2022, with total revenues growing **21%** to **$16.89 million**, driven by SaaS and professional services Consolidated Statements of Income (for the Twelve Months Ended December 31) | Metric | 2023 (USD) | 2022 (USD) | | :-------------------------- | :--------- | :--------- | | Total Revenues | 16,886,381 | 14,016,928 | | Total Cost of Revenues | 6,322,426 | 5,107,770 | | Gross Profit | 10,563,955 | 8,909,158 | | Total Operating Expenses | 9,456,486 | 8,081,837 | | Income from Operations | 1,107,469 | 827,321 | | Interest expense, net | (588,203) | (803,294) | | Net Income | 519,266 | 24,027 | | Basic net income per share | 0.13 | 0.01 | | Diluted net income per share| 0.11 | 0.01 | - Net income increased significantly from **$24,027** in 2022 to **$519,266** in 2023[225](index=225&type=chunk) - The absence of 'Change in fair value of earnout liabilities' and 'Transaction costs' in 2023, which were **$87,652** and **$355,281** respectively in 2022, contributed to improved operating results[225](index=225&type=chunk) [Consolidated Statements of Stockholders' Equity](index=46&type=section&id=Consolidated%20Statements%20of%20Stockholders%27%20Equity) Total stockholders' equity increased to **$9,750,721** in 2023, primarily due to **$519,266** net income and **$464,529** stock option compensation Consolidated Statements of Stockholders' Equity (for the Twelve Months Ended December 31) | Metric | Balance, Dec 31, 2021 (USD) | Balance, Dec 31, 2022 (USD) | Balance, Dec 31, 2023 (USD) | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Common Stock Shares | 2,823,072 | 4,073,757 | 4,113,621 | | Common Stock Amount | 2,823 | 4,074 | 4,114 | | Additional Paid-in Capital | 24,297,229 | 30,179,017 | 30,841,630 | | Accumulated Deficit | (21,638,316) | (21,614,289) | (21,095,023) | | **Total Stockholders' Equity**| **2,661,736** | **8,568,802** | **9,750,721** | - Net income of **$519,266** and stock option compensation of **$464,529** were key contributors to the increase in stockholders' equity in 2023[227](index=227&type=chunk) [Consolidated Statements of Cash Flows](index=47&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Net cash from operating activities decreased to **$784,659** in 2023, while investing activities used less cash due to the absence of the Yellow Folder acquisition, and financing activities used **$1.72 million** for debt and earnout payments Consolidated Statements of Cash Flows (for the Twelve Months Ended December 31) | Cash Flow Activity | 2023 (USD) | 2022 (USD) | | :-------------------------------- | :--------- | :--------- | | Net cash provided by operating activities | 784,659 | 1,988,778 | | Net cash used in investing activities | (548,077) | (6,960,594)| | Net cash (used in) provided by financing activities | (1,717,815)| 5,915,667 | | Net (decrease) increase in cash | (1,481,233)| 943,851 | | Cash - end of period | 1,215,248 | 2,696,481 | - Cash paid to acquire business (Yellow Folder) was **$6,383,269** in 2022, with no such payments in 2023[229](index=229&type=chunk) - Financing activities in 2023 included **$700,000** in earnout liability payments and **$980,450** in repayment of notes payable[192](index=192&type=chunk)[229](index=229&type=chunk) [Notes to Consolidated Financial Statements](index=49&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) These notes provide detailed information on accounting policies, business acquisitions, intangible assets, debt, equity, and other financial details, supporting the consolidated financial statements - The Yellow Folder acquisition on April 1, 2022, involved a purchase price of **$6,383,269**, resulting in **$3,466,934** in goodwill[295](index=295&type=chunk) Intangible Assets, Net (as of December 31) | Asset | Estimated Useful Life | 2023 Net (USD) | 2022 Net (USD) | | :-------------------- | :-------------------- | :------------- | :------------- | | Trade names | 10 years | 220,233 | 249,933 | | Proprietary technology| 10 years | 710,325 | 796,425 | | Customer relationships| 5-15 years | 2,978,780 | 3,373,288 | | **Total** | | **3,909,338** | **4,419,646** | - Earnout liabilities were fully paid in 2023, with a fair value of **$700,000** at January 1, 2023, and zero at December 31, 2023[305](index=305&type=chunk) Notes Payable to Unrelated Parties (as of December 31) | Note Type | 2023 (USD) | 2022 (USD) | | :------------------ | :--------- | :--------- | | 2022 Unrelated Notes| 2,364,500 | 2,364,500 | | 2020 Notes | - | 980,450 | | **Total Notes Payable** | **2,364,500** | **3,344,950** | - On March 13, 2024, the maturity date for **$1,519,500** of the 2022 Unrelated Notes and all **$600,000** of the 2022 Related Notes was extended to December 31, 2025[310](index=310&type=chunk)[315](index=315&type=chunk)[349](index=349&type=chunk) - As of December 31, 2023, **4,113,621 shares** of common stock were issued and outstanding, with **255,958 shares** reserved for warrants and **497,330** for the 2015 Equity Incentive Plan[323](index=323&type=chunk) - Stock-based compensation for options was **$464,529** in 2023 and **$363,950** in 2022, with **$547,981** of unrecognized compensation costs remaining as of December 31, 2023[336](index=336&type=chunk)[337](index=337&type=chunk) [Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=74&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) There have been no changes in or disagreements with accountants regarding accounting and financial disclosure - None[350](index=350&type=chunk) [Item 9A. Controls and Procedures](index=74&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with no material weaknesses identified - Disclosure controls and procedures were evaluated as effective as of December 31, 2023[352](index=352&type=chunk)[357](index=357&type=chunk) - Management concluded that the company maintained effective internal control over financial reporting as of December 31, 2023, based on the COSO framework (2013)[354](index=354&type=chunk)[357](index=357&type=chunk) - No material weaknesses were identified in internal control over financial reporting[355](index=355&type=chunk)[357](index=357&type=chunk) - No changes in internal control over financial reporting occurred during the fourth fiscal quarter of 2023 that materially affected it[359](index=359&type=chunk) [Item 9B. Other Information](index=75&type=section&id=Item%209B.%20Other%20Information) This item is not applicable and contains no other information - Not applicable[360](index=360&type=chunk) [Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections](index=75&type=section&id=Item%209C.%20Disclosure%20Regarding%20Foreign%20Jurisdictions%20that%20Prevent%20Inspections) This item is not applicable and contains no disclosure regarding foreign jurisdictions that prevent inspections - Not applicable[360](index=360&type=chunk) Part III [Item 10. Directors, Executive Officers and Corporate Governance](index=75&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information on directors, executive officers, and corporate governance is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the definitive Proxy Statement for the 2024 Annual Meeting of Stockholders[361](index=361&type=chunk) [Item 11. Executive Compensation](index=75&type=section&id=Item%2011.%20Executive%20Compensation) Information on executive compensation is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the definitive Proxy Statement for the 2024 Annual Meeting of Stockholders[362](index=362&type=chunk) [Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=75&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information on security ownership of beneficial owners, management, and related stockholder matters is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the definitive Proxy Statement for the 2024 Annual Meeting of Stockholders[363](index=363&type=chunk) [Item 13. Certain Relationships and Related Transactions, and Director Independence](index=75&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the definitive Proxy Statement for the 2024 Annual Meeting of Stockholders[364](index=364&type=chunk) [Item 14. Principal Accounting Fees and Services](index=75&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) Information on principal accounting fees and services is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the definitive Proxy Statement for the 2024 Annual Meeting of Stockholders[365](index=365&type=chunk) Part IV [Item 15. Exhibits, Financial Statement Schedules](index=76&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section references the Index to Financial Statements and notes the omission of schedules, with exhibits filed or incorporated by reference - References the Index to Financial Statements beginning on Page F-1[366](index=366&type=chunk) - Financial Statement Schedules have been omitted because they are either not required or not applicable, or the information is included in the consolidated financial statements or notes[214](index=214&type=chunk)[367](index=367&type=chunk) - Exhibits listed on the accompanying Exhibit Index are filed or incorporated by reference as part of this report[368](index=368&type=chunk) [Signatures](index=77&type=section&id=Signatures) The report is duly signed by the company's principal executive and financial officers and directors, as required by the Securities Exchange Act of 1934 - The report is signed by James F. DeSocio, President, Chief Executive Officer, and Director, and Joseph D. Spain, Chief Financial Officer and Treasurer, along with other directors[370](index=370&type=chunk)[371](index=371&type=chunk)

General Information Provides filing details, share count, and cautionary statements for this quarterly report [Filing Details](index=1&type=section&id=Filing%20Details) This document is a Quarterly Report on Form 10-Q filed by Intellinetics, Inc for the period ended September 30, 2023 - Filing Type: Quarterly Report on Form 10-Q[1](index=1&type=chunk)[2](index=2&type=chunk) - Reporting Period: For the Quarterly Period Ended **September 30, 2023**[2](index=2&type=chunk) - Registrant: Intellinetics, Inc, a Nevada corporation[2](index=2&type=chunk) - Registrant Status: **Smaller reporting company**[4](index=4&type=chunk) Company Stock Information | Title of each class | Trading Symbol(s) | Name of each exchange on which registered | | :------------------ | :---------------- | :---------------------------------------- | | Common Stock, $0.001 par value | INLX | NYSE American | [Shares Outstanding](index=2&type=section&id=Shares%20Outstanding) As of November 10, 2023, the company had 4,073,757 shares of common stock outstanding - Shares of common stock outstanding: **4,073,757** as of November 10, 2023[5](index=5&type=chunk) - Par value per share: **$0.001**[5](index=5&type=chunk) [Cautionary Note Regarding Forward-Looking Statements](index=4&type=section&id=Cautionary%20Note%20Regarding%20Forward-Looking%20Statements) This report contains forward-looking statements subject to substantial risks and uncertainties - Forward-looking statements are based on current plans, intentions, objectives, strategies, projections, and expectations[9](index=9&type=chunk) - Statements are subject to substantial risks, uncertainties, and other factors, including economic conditions, acquisition integration, sales fluctuations, product development, market competition, and capital resources[9](index=9&type=chunk)[10](index=10&type=chunk) - The company undertakes no duty or obligation to update or revise any forward-looking statement[12](index=12&type=chunk) PART I FINANCIAL INFORMATION Presents the company's unaudited financial statements and management's analysis of financial performance and condition [ITEM 1. Financial Statements](index=4&type=section&id=ITEM%201.%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements and accompanying notes [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Details the company's assets, liabilities, and stockholders' equity as of September 30, 2023 Condensed Consolidated Balance Sheets (Unaudited) | ASSETS | September 30, 2023 | December 31, 2022 | | :-------------------------------- | :----------------- | :----------------- | | Cash | $1,689,125 | $2,696,481 | | Accounts receivable, net | $1,324,225 | $1,121,083 | | Total current assets | $4,863,773 | $4,893,039 | | Property and equipment, net | $961,504 | $1,068,706 | | Intangible assets, net | $4,036,915 | $4,419,646 | | Goodwill | $5,789,821 | $5,789,821 | | Total assets | $19,226,420 | $19,943,142 | | **LIABILITIES AND STOCKHOLDERS' EQUITY** | | | | Accounts payable | $249,359 | $370,300 | | Deferred revenues | $3,132,125 | $2,754,064 | | Total current liabilities | $4,804,701 | $6,002,482 | | Total long-term liabilities | $5,046,216 | $5,371,858 | | Total liabilities | $9,850,917 | $11,374,340 | | Total stockholders' equity | $9,375,503 | $8,568,802 | | Total liabilities and stockholders' equity | $19,226,420 | $19,943,142 | [Condensed Consolidated Statements of Operations](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Summarizes revenues, expenses, and net income for the three and nine months ended September 30, 2023 Condensed Consolidated Statements of Operations (Unaudited) - Three Months Ended September 30 | Metric | 2023 | 2022 | | :-------------------------- | :----------- | :----------- | | Total Revenues | $4,248,429 | $3,859,627 | | Total Cost of Revenues | $1,642,838 | $1,353,442 | | Gross Profit | $2,605,591 | $2,506,185 | | Total Operating Expenses | $2,260,036 | $2,048,182 | | Income from Operations | $345,555 | $458,003 | | Interest Expense | $(136,224) | $(240,467) | | Net Income (Loss) | $209,331 | $217,536 | | Basic Net Income (Loss) Per Share | $0.05 | $0.05 | | Diluted Net Income (Loss) Per Share | $0.05 | $0.05 | Condensed Consolidated Statements of Operations (Unaudited) - Nine Months Ended September 30 | Metric | 2023 | 2022 | | :-------------------------- | :----------- | :----------- | | Total Revenues | $12,693,692 | $9,978,782 | | Total Cost of Revenues | $4,851,829 | $3,651,742 | | Gross Profit | $7,841,863 | $6,327,040 | | Total Operating Expenses | $6,915,921 | $5,910,261 | | Income from Operations | $925,942 | $416,779 | | Interest Expense | $(468,314) | $(593,536) | | Net Income (Loss) | $457,628 | $(176,757) | | Basic Net Income (Loss) Per Share | $0.11 | $(0.05) | | Diluted Net Income (Loss) Per Share | $0.10 | $(0.05) | [Condensed Consolidated Statement of Stockholders' Equity](index=6&type=section&id=Condensed%20Consolidated%20Statement%20of%20Stockholders'%20Equity) Details the changes in stockholders' equity for the nine months ended September 30, 2023 and 2022 Condensed Consolidated Statement of Stockholders' Equity (Unaudited) - Nine Months Ended September 30, 2023 | Item | Amount | | :-------------------------- | :----------- | | Balance, December 31, 2022 | $8,568,802 | | Stock Option Compensation | $349,073 | | Net Income | $457,628 | | Balance, September 30, 2023 | $9,375,503 | Condensed Consolidated Statement of Stockholders' Equity (Unaudited) - Nine Months Ended September 30, 2022 | Item | Amount | | :-------------------------- | :----------- | | Balance, December 31, 2021 | $2,661,736 | | Stock Issued to Directors | $57,500 | | Stock Option Compensation | $244,951 | | Stock Issued | $5,740,758 | | Equity Issuance Costs | $(492,182) | | Note Offer Warrants | $213,013 | | Net Loss | $(176,757) | | Balance, September 30, 2022 | $8,249,019 | [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Summarizes the cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (Unaudited) - Nine Months Ended September 30 | Cash Flow Activity | 2023 | 2022 | | :----------------------------------- | :----------- | :----------- | | Net cash provided by operating activities | $1,128,314 | $1,924,734 | | Net cash used in investing activities | $(432,053) | $(6,841,320) | | Net cash (used in) provided by financing activities | $(1,703,617) | $6,940,583 | | Net (decrease) increase in cash | $(1,007,356) | $2,023,997 | | Cash - beginning of period | $2,696,481 | $1,752,630 | | Cash - end of period | $1,689,125 | $3,776,627 | - Cash paid during the period for interest: **$329,855** (2023) vs **$357,870** (2022)[22](index=22&type=chunk) - Cash paid during the period for income taxes: **$8,344** (2023) vs **$11,050** (2022)[22](index=22&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Provides detailed disclosures supporting the amounts in the primary financial statements [1. Business Organization and Nature of Operations](index=11&type=section&id=1.%20Business%20Organization%20and%20Nature%20of%20Operations) Describes the company's corporate structure and its two primary business segments - Intellinetics, Inc (Nevada) operates through two wholly-owned subsidiaries: Intellinetics, Inc (Ohio) and Graphic Sciences, Inc (Michigan)[26](index=26&type=chunk) - The company provides digital transformation products and services through two segments: **Document Management** (software platform) and **Document Conversion** (paper-to-digital services)[27](index=27&type=chunk) [2. Basis of Presentation](index=11&type=section&id=2.%20Basis%20of%20Presentation) Explains that the financial statements are prepared in accordance with US GAAP - The unaudited condensed consolidated financial statements are prepared in accordance with United States generally accepted accounting principles (GAAP)[28](index=28&type=chunk) - Operating results for interim periods are not necessarily indicative of results for the full fiscal year or any future period[30](index=30&type=chunk) [3. Summary of Significant Accounting Policies](index=11&type=section&id=3.%20Summary%20of%20Significant%20Accounting%20Policies) Outlines key accounting principles, including the adoption of the CECL model and revenue recognition policies - The condensed consolidated financial statements include the accounts of Intellinetics and its wholly-owned subsidiaries, with all significant intercompany balances and transactions eliminated[31](index=31&type=chunk) - The company adopted FASB ASU No 2016-13 (CECL model) effective **January 1, 2023**, for estimating expected credit losses on financial instruments, resulting in an initial **$11,662 reduction** in the allowance for doubtful accounts[34](index=34&type=chunk)[47](index=47&type=chunk) - Allowance for credit losses: **$114,235** as of September 30, 2023, compared to **$88,331** as of December 31, 2022[35](index=35&type=chunk) - Deferred revenue, primarily from maintenance and software-as-a-service agreements, was **$3,132,125** as of September 30, 2023[39](index=39&type=chunk)[41](index=41&type=chunk) - Approximately **99%** of remaining performance obligations for software as a service and software maintenance contracts are expected to be recognized over the next 12 months[40](index=40&type=chunk) - Capitalized internal use software costs for the nine months ended September 30, 2023, were **$348,051**, amortized over three years[44](index=44&type=chunk)[45](index=45&type=chunk) - Expensed software development costs for the nine months ended September 30, 2023, were **$392,576**[46](index=46&type=chunk) - A **100% valuation allowance** has been established on deferred tax assets due to the uncertainty of realizing future taxable income[52](index=52&type=chunk) Revenues by Operating Segment (Nine Months Ended September 30) | Segment | 2023 | 2022 | | :------------------ | :----------- | :----------- | | Document Management | $5,549,194 | $4,180,931 | | Document Conversion | $7,144,498 | $5,797,851 | | Total revenues | $12,693,692 | $9,978,782 | Gross Profit by Operating Segment (Nine Months Ended September 30) | Segment | 2023 | 2022 | | :------------------ | :----------- | :----------- | | Document Management | $4,639,866 | $3,488,947 | | Document Conversion | $3,201,997 | $2,838,093 | | Total gross profit | $7,841,863 | $6,327,040 | [4. Business Combinations](index=13&type=section&id=4.%20Business%20Combinations) Details the acquisition of Yellow Folder, LLC and its financial impact - On April 1, 2022, Intellinetics acquired substantially all assets of Yellow Folder, LLC for **$6,383,269 in cash**[61](index=61&type=chunk)[62](index=62&type=chunk) - The acquisition resulted in the recognition of **$3,466,934 in goodwill**[62](index=62&type=chunk) - Yellow Folder contributed **$2,707,764 in total revenues** and **$452,443 in net income** for the nine months ended September 30, 2023[67](index=67&type=chunk) [5. Intangible Assets](index=14&type=section&id=5.%20Intangible%20Assets) Provides a breakdown of intangible assets and related amortization expense - Amortization expense for the nine months ended September 30, 2023, was **$382,731**[68](index=68&type=chunk) - Future amortization expense for the twelve months ending September 30, 2024, is estimated at **$510,308**[69](index=69&type=chunk) Intangible Assets, Net | Asset Type | September 30, 2023 | December 31, 2022 | | :-------------------- | :----------------- | :----------------- | | Trade names | $227,657 | $249,933 | | Proprietary technology | $731,850 | $796,425 | | Customer relationships | $3,077,408 | $3,373,288 | | Total | $4,036,915 | $4,419,646 | [6. Fair Value Measurements](index=15&type=section&id=6.%20Fair%20Value%20Measurements) Discusses the settlement of earnout liabilities related to past acquisitions - The final earnout liability was paid in January 2023, resulting in **no remaining earnout liabilities** as of September 30, 2023[70](index=70&type=chunk)[71](index=71&type=chunk) - Earnout liabilities were **$700,000** as of December 31, 2022[71](index=71&type=chunk) [7. Property and Equipment](index=15&type=section&id=7.%20Property%20and%20Equipment) Details the composition of property and equipment and related depreciation - Total depreciation expense for the nine months ended September 30, 2023, was **$191,204**[72](index=72&type=chunk) Property and Equipment, Net | Category | September 30, 2023 | December 31, 2022 | | :-------------------------------- | :----------------- | :----------------- | | Computer hardware and purchased software | $1,662,756 | $1,595,652 | | Leasehold improvements | $395,919 | $395,918 | | Furniture and fixtures | $71,325 | $71,325 | | Less: accumulated depreciation | $(1,168,496) | $(994,189) | | Property and equipment, net | $961,504 | $1,068,706 | [8. Notes Payable – Unrelated Parties](index=15&type=section&id=8.%20Notes%20Payable%20%E2%80%93%20Unrelated%20Parties) Summarizes outstanding debt obligations to unrelated third parties - Future minimum principal payments of **$2,364,500** are due in 2025[74](index=74&type=chunk) - Interest expense for the nine months ended September 30, 2023, was **$412,494**[76](index=76&type=chunk) Notes Payable to Unrelated Parties | Item | September 30, 2023 | December 31, 2022 | | :-------------------------- | :----------------- | :----------------- | | 2022 Unrelated Notes | $2,364,500 | $2,364,500 | | 2020 Notes | $0 | $980,450 | | Total notes payable | $2,364,500 | $3,344,950 | | Long-term portion of notes payable | $2,178,190 | $2,085,035 | [9. Notes Payable - Related Parties](index=16&type=section&id=9.%20Notes%20Payable%20-%20Related%20Parties) Summarizes outstanding debt obligations to related parties - Interest expense for the nine months ended September 30, 2023, was **$77,638**[79](index=79&type=chunk) Notes Payable to Related Parties | Item | September 30, 2023 | December 31, 2022 | | :-------------------------- | :----------------- | :----------------- | | Notes payable – "2022 Related Note" | $600,000 | $600,000 | | Long-term portion of notes payable | $552,723 | $529,084 | | Principal Due | March 30, 2025 | March 30, 2025 | [10. Deferred Compensation](index=16&type=section&id=10.%20Deferred%20Compensation) Confirms the full payment of accrued incentive compensation to a founder - Accrued incentive cash compensation for a founder was fully paid as of December 31, 2022, with **no deferred compensation liability remaining**[80](index=80&type=chunk) [11. Commitments and Contingencies](index=17&type=section&id=11.%20Commitments%20and%20Contingencies) Discloses legal status and future minimum lease payment obligations - No current legal proceedings are expected to have a material adverse impact on financial position or results of operations[82](index=82&type=chunk) - Weighted average remaining lease term: **Finance leases 4.4 years**, **Operating leases 3.8 years** (as of September 30, 2023)[85](index=85&type=chunk) Future Minimum Lease Payments (as of September 30) | Year | Finance Leases | Operating Leases | | :--- | :------------- | :--------------- | | 2024 | $67,358 | $916,353 | | 2025 | $67,358 | $892,047 | | 2026 | $63,306 | $855,585 | | 2027 | $49,500 | $353,662 | | 2028 | $37,228 | $238,947 | | Thereafter | $0 | $17,550 | [12. Stockholders' Equity](index=18&type=section&id=12.%20Stockholders'%20Equity) Details the company's common stock and outstanding warrants - As of September 30, 2023, **4,073,757 shares** of common stock were issued and outstanding[86](index=86&type=chunk) - **255,958 shares** of common stock were reserved for issuance upon the exercise of outstanding warrants[86](index=86&type=chunk) - Warrants outstanding as of September 30, 2023, have exercise prices ranging from **$4.00 to $15.00** and expire on March 30, 2027[88](index=88&type=chunk) [13. Stock-Based Compensation](index=18&type=section&id=13.%20Stock-Based%20Compensation) Reports on stock-based compensation expenses and unrecognized costs - Stock-based compensation for options for the nine months ended September 30, 2023, was **$349,073**, compared to **$244,951** in the prior year[93](index=93&type=chunk) - Total unrecognized compensation costs related to stock options were **$663,437** as of September 30, 2023, expected to be recognized over a weighted-average period of two years[94](index=94&type=chunk) - The total fair value of stock options that vested during the nine months ended September 30, 2023, was **$467,771**, significantly up from **$91,913** in 2022[94](index=94&type=chunk) [14. Concentrations](index=19&type=section&id=14.%20Concentrations) Discloses significant customer and revenue concentrations - The State of Michigan accounted for **34%** of total revenues for the nine months ended September 30, 2023[95](index=95&type=chunk) - Government contracts, including K-12 education, represented approximately **79%** of net revenues for the nine months ended September 30, 2023[96](index=96&type=chunk) - Accounts receivable concentrations from the two largest customers were **29% and 4%** of gross accounts receivable as of September 30, 2023[97](index=97&type=chunk) [ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=21&type=section&id=ITEM%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses financial results, highlighting revenue growth, segment performance, and liquidity [Company Overview](index=21&type=section&id=Company%20Overview) Describes the company's focus on digital transformation and its two operating segments - Intellinetics is a document services and software solutions company focused on digital transformation and process automation for small-to-medium businesses and governmental sectors[99](index=99&type=chunk) - The company operates through two reporting segments: **Document Management** (software platform, SaaS) and **Document Conversion** (paper-to-digital conversion, storage, and retrieval)[100](index=100&type=chunk) - The **Software as a Service (SaaS) model** is a key revenue growth strategy, with products hosted on Amazon Web Services, Expedient, and Evocative[101](index=101&type=chunk)[102](index=102&type=chunk) [Executive Overview of Results](index=22&type=section&id=Executive%20Overview%20of%20Results) Highlights key drivers of financial performance for the nine-month period - The acquisition of **Yellow Folder** on April 1, 2022, was the biggest factor in the changes in results of operations for the nine-month period 2023[105](index=105&type=chunk) - Strong professional services performance, driven by increased Document Conversion project work, led to **33% growth** for the nine-month period 2023[105](index=105&type=chunk) - Softer demand for transactional storage and retrieval services from a significant customer in the home mortgage lending industry partially offset growth[105](index=105&type=chunk) - Employee count increased to **165** (including 29 part-time) as of September 30, 2023, from **132** (including 14 part-time) as of September 30, 2022[113](index=113&type=chunk) Key Financial Results (Nine Months Ended September 30) | Metric | 2023 | 2022 | Change (%) | | :-------------------------- | :----------- | :----------- | :--------- | | Revenues | $12,693,692 | $9,978,782 | 27% | | Cost of Revenues | $4,851,829 | $3,651,742 | 33% | | Operating Expenses (excl. CoR) | $6,915,921 | $5,910,261 | 17% | | Income from Operations | $925,942 | $416,779 | 122% | | Net Income (Loss) | $457,628 | $(176,757) | N/A (swing to profit) | | Basic EPS | $0.11 | $(0.05) | N/A (swing to profit) | | Diluted EPS | $0.10 | $(0.05) | N/A (swing to profit) | [Financial Impact of Current Economic Conditions](index=23&type=section&id=Financial%20Impact%20of%20Current%20Economic%20Conditions) Discusses the effects of inflation, staffing, and supply chain issues on operations - Employee wage inflation has slightly decreased profit margins but is being mitigated by increasing customer renewal rates[109](index=109&type=chunk) - Hiring and staffing challenges in the Document Conversion segment in early 2022 have improved, with more staff by the end of the nine-month period 2023[109](index=109&type=chunk) - Global supply chain disruptions have had a **minimal impact** on the company[110](index=110&type=chunk) - Customer demand has not diminished due to adverse economic conditions as of the report date[110](index=110&type=chunk) [Uncertainties, Trends, and Risks that can cause Fluctuations in our Operating Results](index=23&type=section&id=Uncertainties,%20Trends,%20and%20Risks%20that%20can%20cause%20Fluctuations%20in%20our%20Operating%20Results) Warns that historical performance is not indicative of future results due to inherent fluctuations - Operating results have fluctuated significantly in the past and are expected to continue to fluctuate due to various factors and risks[111](index=111&type=chunk) - Past results of operations should not be relied upon as an indication of future performance[111](index=111&type=chunk) [Reportable Segments](index=23&type=section&id=Reportable%20Segments) Defines the company's two primary business segments and their target markets - The **Document Management Segment** provides cloud-based and premise-based content services software, serving highly regulated markets like healthcare and K-12 education[55](index=55&type=chunk) - The **Document Conversion Segment** offers services for scanning, indexing, converting paper to digital, and long-term physical document storage and retrieval for businesses and government[56](index=56&type=chunk) [Results of Operations](index=24&type=section&id=Results%20of%20Operations) Provides a detailed analysis of revenues, costs, and gross profits by source [Revenues](index=24&type=section&id=Revenues) Analyzes revenue performance by source, driven by professional services and the Yellow Folder acquisition - Total revenues increased by **10% to $4,248,429** in Q3 2023 and by **27% to $12,693,692** for the nine-month period 2023, primarily driven by strong professional services in the Document Conversion segment and the full inclusion of Yellow Folder revenues[114](index=114&type=chunk) Revenues by Source (Nine Months Ended September 30) | Revenue Source | 2023 | 2022 | Change (%) | | :-------------------------- | :----------- | :----------- | :--------- | | Sale of software | $88,361 | $93,986 | -6.0% | | Software as a service | $3,810,095 | $2,801,084 | 36.0% | | Software maintenance services | $1,051,691 | $1,033,375 | 1.8% | | Professional services | $6,930,695 | $5,221,326 | 32.7% | | Storage and retrieval services | $812,850 | $829,011 | -1.9% | | Total revenues | $12,693,692 | $9,978,782 | 27.2% | [Sale of Software Revenues](index=24&type=section&id=Sale%20of%20Software%20Revenues) Software sales declined due to unpredictable project timing and a shift away from on-premise solutions - Revenues from software sales decreased by **49%** to $9,422 in Q3 2023 and by **6%** to $88,361 for the nine-month period 2023, reflecting unpredictable project timing and a decreasing trend in on-premise software solution sales[115](index=115&type=chunk)[116](index=116&type=chunk) [Software as a Service Revenues](index=25&type=section&id=Software%20as%20a%20Service%20Revenues) SaaS revenues grew significantly, primarily due to the Yellow Folder acquisition - SaaS revenues increased by **7%** to $1,293,745 in Q3 2023 and by **36%** to $3,810,095 for the nine-month period 2023[117](index=117&type=chunk) - The nine-month increase was primarily due to the Yellow Folder acquisition, which contributed **$909,088 (90% of the increase)**, and organic growth[117](index=117&type=chunk) [Software Maintenance Services Revenues](index=25&type=section&id=Software%20Maintenance%20Services%20Revenues) Software maintenance revenues remained flat, with price increases offset by cloud migration - Software maintenance services revenues showed a minimal increase of **0%** to $353,010 in Q3 2023 and **2%** to $1,051,691 for the nine-month period 2023[118](index=118&type=chunk) - This small increase was driven by expansion with existing customers and price increases, partially offset by customer migration from premise solutions to cloud solutions[118](index=118&type=chunk) [Professional Services Revenues](index=25&type=section&id=Professional%20Services%20Revenues) Professional services revenues saw strong growth from a recovery in the Document Conversion segment - Professional services revenues increased by **16%** to $2,333,090 in Q3 2023 and by **33%** to $6,930,695 for the nine-month period 2023[119](index=119&type=chunk) - This increase was primarily the result of a strong recovery in the Document Conversion segment, driven by increased project work[119](index=119&type=chunk) - Document Conversion operations contributed **$6,433,485** to professional services revenues for the nine-month period 2023[119](index=119&type=chunk) [Storage and Retrieval Services Revenues](index=25&type=section&id=Storage%20and%20Retrieval%20Services%20Revenues) Storage and retrieval revenues declined due to reduced volume from a major mortgage industry client - Storage and retrieval services revenues decreased by **4%** to $259,162 in Q3 2023 and by **2%** to $812,850 for the nine-month period 2023[120](index=120&type=chunk) - This decrease was due to a continued reduction in volume of work from Rocket Mortgage, impacted by the slowdown in the home mortgage and refinancing industry[120](index=120&type=chunk) [Costs of Revenues and Gross Profits](index=26&type=section&id=Costs%20of%20Revenues%20and%20Gross%20Profits) Overall gross profit margin decreased due to a higher mix of lower-margin professional services - Total cost of revenues increased by **21%** to $1,642,838 in Q3 2023 and by **33%** to $4,851,829 for the nine-month period 2023[122](index=122&type=chunk) - Overall gross profit percentage decreased to **61.3%** in Q3 2023 (from 64.9%) and to **61.8%** for the nine-month period 2023 (from 63.4%)[124](index=124&type=chunk) - The decrease in overall gross profit percentage was primarily driven by an increased mix of relatively lower-margin professional services revenue[124](index=124&type=chunk) Gross Profit Percentage by Revenue Source (Nine Months Ended September 30) | Revenue Source | 2023 Gross Profit % | 2022 Gross Profit % | | :-------------------------- | :------------------ | :------------------ | | Sale of software | 75.8% | 52.9% | | Software as a service | 82.2% | 82.5% | | Software maintenance services | 95.7% | 94.5% | | Professional services | 44.7% | 46.5% | | Storage and retrieval services | 66.4% | 67.9% | [Cost of Software Revenues](index=27&type=section&id=Cost%20of%20Software%20Revenues) Cost of software revenues decreased significantly, leading to a substantial margin improvement - Cost of software revenues decreased by **45%** in Q3 2023 and by **52%** for the nine-month period 2023 due to stronger margin projects[125](index=125&type=chunk) - Gross margin for software revenues increased to **75.8%** for the nine-month period 2023 from **52.9%** in 2022[125](index=125&type=chunk) [Cost of Software as a Service](index=27&type=section&id=Cost%20of%20Software%20as%20a%20Service) SaaS costs increased in line with revenue growth, maintaining stable gross margins - Cost of software as a service decreased by **4%** in Q3 2023 but increased by **39%** for the nine-month period 2023[126](index=126&type=chunk) - Gross margin for SaaS remained stable at **84.5%** in Q3 2023 and **82.2%** for the nine-month period 2023[126](index=126&type=chunk) [Cost of Software Maintenance Services](index=27&type=section&id=Cost%20of%20Software%20Maintenance%20Services) Costs for software maintenance decreased due to reduced support activity, boosting margins - Cost of software maintenance services decreased by **31%** in Q3 2023 and by **20%** for the nine-month period 2023 due to reduced support activity[127](index=127&type=chunk) - Gross margin for software maintenance services increased to **96.3%** in Q3 2023 and **95.7%** for the nine-month period 2023[127](index=127&type=chunk) [Cost of Professional Services](index=27&type=section&id=Cost%20of%20Professional%20Services) Professional services costs rose due to increased staffing to meet a growing order backlog - Cost of professional services increased by **30%** in Q3 2023 and by **37%** for the nine-month period 2023, primarily due to growing Document Conversion staff to meet increased order backlog[128](index=128&type=chunk) - Gross margins in professional services decreased to **42.6%** in Q3 2023 and **44.7%** for the nine-month period 2023[128](index=128&type=chunk) [Cost of Storage and Retrieval Services](index=28&type=section&id=Cost%20of%20Storage%20and%20Retrieval%20Services) Costs for storage and retrieval services were impacted by wage inflation and fuel costs - Cost of storage and retrieval services decreased by **3%** in Q3 2023 but increased by **3%** for the nine-month period 2023, with the nine-month increase attributed to general wage inflation and fuel cost increases[129](index=129&type=chunk) - Gross margins for storage and retrieval services decreased to **67.1%** in Q3 2023 and **66.4%** for the nine-month period 2023[129](index=129&type=chunk) [Operating Expenses](index=28&type=section&id=Operating%20Expenses) Details the components of operating expenses, which grew due to the Yellow Folder acquisition and scale-related costs - Total operating expenses increased by **10%** to $2,260,036 in Q3 2023 and by **17%** to $6,915,921 for the nine-month period 2023[130](index=130&type=chunk) Operating Expenses (Nine Months Ended September 30) | Operating Expense | 2023 | 2022 | Change (%) | | :-------------------------------- | :----------- | :----------- | :--------- | | General and administrative | $4,632,559 | $3,511,852 | 32.0% | | Change in fair value of earnout liabilities | $0 | $144,999 | -100.0% | | Transaction costs | $0 | $355,281 | -100.0% | | Sales and marketing | $1,568,103 | $1,374,059 | 14.1% | | Depreciation and amortization | $715,259 | $524,070 | 36.5% | | Total operating expenses | $6,915,921 | $5,910,261 | 17.0% | [General and Administrative Expenses](index=28&type=section&id=General%20and%20Administrative%20Expenses) G&A expenses increased due to the full inclusion of Yellow Folder and other scale-related costs - General and administrative expenses increased by **15%** in Q3 2023 and by **32%** for the nine-month period 2023, primarily due to the full inclusion of Yellow Folder expenses in 2023 and increased scale-related expenses (e.g, NYSE American uplisting, ERP system upgrade)[131](index=131&type=chunk) [Change in Fair Value of Earnout Liabilities](index=28&type=section&id=Change%20in%20Fair%20Value%20of%20Earnout%20Liabilities) No earnout liability adjustments were recorded in 2023 following final payments - No changes in fair value of earnout liabilities occurred in 2023, as the final earnout payments were made in January 2023[132](index=132&type=chunk) - Fair value adjustments amounted to **$144,999** for the nine-month period 2022[132](index=132&type=chunk) [Transaction Costs](index=29&type=section&id=Transaction%20Costs) No transaction costs were incurred in 2023, compared to costs for the Yellow Folder acquisition in 2022 - There were **no transaction costs** during the nine-month period 2023[134](index=134&type=chunk) - Transaction costs of **$355,281** were incurred during the nine-month period 2022, related to the Yellow Folder acquisition[113](index=113&type=chunk)[134](index=134&type=chunk) [Sales and Marketing Expenses](index=29&type=section&id=Sales%20and%20Marketing%20Expenses) Sales and marketing expenses rose due to the full-period inclusion of Yellow Folder operations - Sales and marketing expenses increased by **1%** in Q3 2023 and by **14%** for the nine-month period 2023, primarily due to the inclusion of Yellow Folder expenses for the full nine-month period in 2023[135](index=135&type=chunk) [Depreciation and Amortization](index=29&type=section&id=Depreciation%20and%20Amortization) Depreciation and amortization increased from capitalized software and acquisition-related intangible assets - Depreciation and amortization increased by **20%** in Q3 2023 and by **36%** for the nine-month period 2023[136](index=136&type=chunk) - This increase resulted from increased amortization of capitalized software costs and the additional quarter of amortization of new intangible assets related to the Yellow Folder acquisition[136](index=136&type=chunk) [Other Items of Income and Expense](index=29&type=section&id=Other%20Items%20of%20Income%20and%20Expense) Details non-operating income and expenses, primarily interest expense [Interest Expense, Net](index=29&type=section&id=Interest%20Expense,%20Net) Interest expense decreased following the partial and final repayment of the 2020 Notes - Interest expense decreased by **43%** to $(136,224) in Q3 2023 and by **21%** to $(468,314) for the nine-month period 2023[18](index=18&type=chunk)[137](index=137&type=chunk) - The decrease resulted from partial principal repayment of the 2020 Notes on December 1, 2022, and February 28, 2023, and final payment on August 31, 2023[137](index=137&type=chunk) [Liquidity and Capital Resources](index=29&type=section&id=Liquidity%20and%20Capital%20Resources) Management assesses the company's cash position, debt, and ability to fund future operations - As of September 30, 2023, the company had approximately **$1.7 million in cash** and cash equivalents, net working capital of **$0.1 million**, and an accumulated deficit of **$21.2 million**[138](index=138&type=chunk) - Significant actions improving liquidity include a renewed contract with the State of Michigan (estimated **21% net rate increase**), the Yellow Folder acquisition, **$5.7 million** from common stock private placement, and **$3.0 million** from 2022 Notes[139](index=139&type=chunk) - Existing debt of approximately **$3 million** is due March 30, 2025, and the company believes its capital resources will be sufficient for at least the next 12 months[140](index=140&type=chunk)[142](index=142&type=chunk) [Indebtedness](index=30&type=section&id=Indebtedness) Outlines the company's primary long-term debt obligations as of the reporting date - As of September 30, 2023, outstanding long-term indebtedness primarily consisted of the 2022 Notes with an aggregate outstanding principal balance of **$2,964,500**, due March 30, 2025[144](index=144&type=chunk) [Capital Expenditures](index=30&type=section&id=Capital%20Expenditures) Reports no material commitments for capital expenditures as of the period end - There were **no material commitments** for capital expenditures at September 30, 2023[145](index=145&type=chunk) [Cash Provided by Operating Activities](index=30&type=section&id=Cash%20Provided%20by%20Operating%20Activities) Cash from operations decreased compared to the prior year - Net cash provided by operating activities for the nine-month period 2023 was **$1,128,314**, a decrease from **$1,924,734** in the prior year[146](index=146&type=chunk) [Cash Used by Investing Activities](index=30&type=section&id=Cash%20Used%20by%20Investing%20Activities) Cash used in investing activities decreased sharply as the prior year included a major acquisition - Net cash used in investing activities for the nine-month period 2023 was **$432,053**, significantly lower than **$6,841,320** in 2022, as the prior year included the Yellow Folder acquisition[147](index=147&type=chunk) [Cash Used in and Provided by Financing Activities](index=31&type=section&id=Cash%20Used%20in%20and%20Provided%20by%20Financing%20Activities) Financing activities resulted in a cash outflow due to debt and earnout payments - Net cash used by financing activities for the nine-month period 2023 was **$1,703,617**, primarily due to **$700,000** in earnout liability payments and **$980,450** in repayment of notes payable[149](index=149&type=chunk) - In contrast, the nine-month period 2022 saw **$6,940,583 provided by financing activities**, mainly from the sale of common stock ($5,740,758) and new borrowings ($2,964,500)[149](index=149&type=chunk) [Critical Accounting Policies and Estimates](index=31&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) Confirms no material changes to critical accounting policies during the quarter - The preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect reported amounts[150](index=150&type=chunk) - There were **no material changes** to the critical accounting policies and estimates during the third quarter 2023[151](index=151&type=chunk) [ITEM 3. Quantitative and Qualitative Disclosures About Market Risk](index=31&type=section&id=ITEM%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This item is not applicable as the company qualifies as a smaller reporting company - This item is not applicable to smaller reporting companies[152](index=152&type=chunk) [ITEM 4. Controls and Procedures](index=31&type=section&id=ITEM%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal controls were effective - Disclosure controls and procedures were evaluated and concluded to be **effective** as of September 30, 2023[153](index=153&type=chunk)[154](index=154&type=chunk) - **No material changes** in internal control over financial reporting occurred during the period covered by this Quarterly Report[156](index=156&type=chunk) PART II OTHER INFORMATION Covers legal proceedings, risk factors, and other required disclosures [ITEM 1. Legal Proceedings](index=32&type=section&id=ITEM%201.%20Legal%20Proceedings) The company reported no legal proceedings for the period - No legal proceedings were reported[159](index=159&type=chunk) [ITEM 1A. Risk Factors](index=32&type=section&id=ITEM%201A.%20Risk%20Factors) There have been no material changes to previously disclosed risk factors - No material changes to the risk factors set forth in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022[160](index=160&type=chunk) [ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=32&type=section&id=ITEM%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities for the period - No unregistered sales of equity securities and use of proceeds were reported[161](index=161&type=chunk) [ITEM 3. Defaults Upon Senior Securities](index=32&type=section&id=ITEM%203.%20Defaults%20Upon%20Senior%20Securities) The company reported no defaults upon senior securities for the period - No defaults upon senior securities were reported[162](index=162&type=chunk) [ITEM 4. Mine Safety Disclosures](index=32&type=section&id=ITEM%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - This item is not applicable[163](index=163&type=chunk) [ITEM 5. Other Information](index=32&type=section&id=ITEM%205.%20Other%20Information) The company reported no other information for the period - No other information was reported[164](index=164&type=chunk) [ITEM 6. Exhibits](index=32&type=section&id=ITEM%206.%20Exhibits) This section lists all exhibits filed as part of the Quarterly Report - Exhibits include Contract Change Notice No 2 and 3 with the State of Michigan Central Procurement Services[166](index=166&type=chunk) - Certifications of Principal Executive Officer and Principal Financial Officer pursuant to Sections 302 and 906 of The Sarbanes-Oxley Act of 2002 are included[166](index=166&type=chunk) SIGNATURES Contains the official signatures of the company's executive officers [Report Signatures](index=33&type=section&id=Report%20Signatures) The report was duly signed on November 14, 2023, by the CEO and CFO - Report signed by James F DeSocio (President and Chief Executive Officer) and Joseph D Spain (Chief Financial Officer)[170](index=170&type=chunk) - Dated: **November 14, 2023**[170](index=170&type=chunk)

Intellinetics, Inc. (NYSE:INLX) Q2 2023 Earnings Conference Call August 14, 2023 4:30 PM ET Company Participants Tom Baumann - FNK IR James DeSocio - President & CEO Joseph Spain - CFO Conference Call Participants Operator Greetings, and welcome to Intellinetics Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now ...