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 ...

[CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS](index=4&type=section&id=CAUTIONARY%20NOTE%20REGARDING%20FORWARD-LOOKING%20STATEMENTS) Forward-looking statements are subject to risks and uncertainties, potentially causing actual results to differ - This report contains forward-looking statements based on current plans and expectations, which are subject to **substantial risks, uncertainties, and other factors** that could cause actual results to differ materially Investors are cautioned **not to place undue reliance** on these statements[8](index=8&type=chunk)[9](index=9&type=chunk)[11](index=11&type=chunk) - Examples of forward-looking statements include those concerning **economic conditions, future financial performance (revenues, net income, EPS, cash flow), integration of acquisitions, product development, market position, business strategies, capital resources, and competition**[10](index=10&type=chunk) [Definitions](index=5&type=section&id=Definitions) This section defines key terms including 'Intellinetics,' 'Company,' and its wholly-owned subsidiaries - The terms **'Intellinetics,' 'Company,' 'us,' 'we,' 'our,' and similar terms** refer to Intellinetics, Inc., a Nevada corporation, and its subsidiaries **'Intellinetics Ohio'** refers to Intellinetics, Inc., an Ohio corporation and a wholly-owned subsidiary **'Graphic Sciences'** refers to Graphic Sciences, Inc., a Michigan corporation and a wholly-owned subsidiary[13](index=13&type=chunk) PART I – FINANCIAL INFORMATION [ITEM 1. Financial Statements](index=6&type=section&id=ITEM%201.%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements of Intellinetics, Inc. and its subsidiaries for the periods ended June 30, 2023, and December 31, 2022, including balance sheets, statements of operations, stockholders' equity, and cash flows, along with detailed notes explaining significant accounting policies, business combinations, intangible assets, debt, leases, and other financial disclosures [Condensed Consolidated Balance Sheets](index=6&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This section provides a snapshot of the company's assets, liabilities, and equity at specific dates Condensed Consolidated Balance Sheets (Selected Items) | Item | June 30, 2023 | December 31, 2022 | Change (Absolute) | Change (%) | | :-------------------------------- | :-------------- | :---------------- | :---------------- | :--------- | | Total current assets | $4,001,898 | $4,893,039 | $(891,141) | -18.21% | | Total assets | $18,587,086 | $19,943,142 | $(1,356,056) | -6.80% | | Total current liabilities | $4,391,182 | $6,002,482 | $(1,611,300) | -26.84% | | Total liabilities | $9,536,370 | $11,374,340 | $(1,837,970) | -16.16% | | Total stockholders' equity | $9,050,716 | $8,568,802 | $481,914 | 5.62% | - Cash decreased significantly from **$2,696,481** at December 31, 2022, to **$1,130,487** at June 30, 2023[16](index=16&type=chunk) - Deferred revenues decreased from **$2,754,064** at December 31, 2022, to **$2,067,744** at June 30, 2023[16](index=16&type=chunk) [Condensed Consolidated Statements of Operations](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) This section details the company's revenues, costs, and net income or loss over specific periods Condensed Consolidated Statements of Operations (Selected Items) | Item | 3 Months Ended June 30, 2023 | 3 Months Ended June 30, 2022 | Change (Absolute) | Change (%) | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | Change (Absolute) | Change (%) | | :------------------------------ | :----------------------------- | :----------------------------- | :---------------- | :--------- | :----------------------------- | :----------------------------- | :---------------- | :--------- | | Total revenues | $4,258,430 | $3,415,643 | $842,787 | 24.68% | $8,445,263 | $6,119,155 | $2,326,108 | 38.02% | | Total cost of revenues | $1,667,997 | $1,226,625 | $441,372 | 35.98% | $3,208,991 | $2,298,300 | $910,691 | 39.62% | | Gross profit | $2,590,433 | $2,189,018 | $401,415 | 18.34% | $5,236,272 | $3,820,855 | $1,415,417 | 37.04% | | Income (loss) from operations | $296,388 | $(133,699) | $430,087 | 321.67% | $580,387 | $(41,224) | $621,611 | 1507.89% | | Net income (loss) | $135,734 | $(374,167) | $509,901 | 136.28% | $248,297 | $(394,293) | $642,590 | 162.97% | | Basic net income (loss) per share | $0.03 | $(0.09) | $0.12 | 133.33% | $0.06 | $(0.11) | $0.17 | 154.55% | | Diluted net income (loss) per share | $0.03 | $(0.09) | $0.12 | 133.33% | $0.06 | $(0.11) | $0.17 | 154.55% | - Software as a service revenue increased by **10%** for the three months ended June 30, 2023, and by **58%** for the six months ended June 30, 2023, compared to the respective prior periods[18](index=18&type=chunk) - Professional services revenue increased by **41%** for the three months ended June 30, 2023, and by **43%** for the six months ended June 30, 2023, compared to the respective prior periods[18](index=18&type=chunk) [Condensed Consolidated Statement of Stockholders' Equity](index=8&type=section&id=Condensed%20Consolidated%20Statement%20of%20Stockholders'%20Equity) This section outlines changes in the company's equity, including net income and stock-based compensation Condensed Consolidated Statement of Stockholders' Equity (Selected Items) | Item | June 30, 2023 | June 30, 2022 | Change (Absolute) | Change (%) | | :-------------------------- | :-------------- | :-------------- | :---------------- | :--------- | | Total Stockholders' Equity | $9,050,716 | $7,912,484 | $1,138,232 | 14.38% | | Accumulated Deficit | $(21,365,992) | $(22,032,609) | $666,617 | -3.03% | - The company reported net income of **$135,734** for the three months ended June 30, 2023, and **$248,297** for the six months ended June 30, 2023, contributing to a reduction in the accumulated deficit[20](index=20&type=chunk) - Stock option compensation recognized was **$115,455** for the three months and **$233,617** for the six months ended June 30, 2023[20](index=20&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=10&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This section reports on cash generated and used by operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (Selected Items) | Item | 6 Months Ended June 30, 2023 | 6 Months Ended June 30, 2022 | Change (Absolute) | Change (%) | | :-------------------------------------- | :----------------------------- | :----------------------------- | :---------------- | :--------- | | Net cash (used in) provided by operating activities | $(299,631) | $72,649 | $(372,280) | -512.45% | | Net cash used in investing activities | $(291,101) | $(6,652,673) | $6,361,572 | -95.62% | | Net cash (used in) provided by financing activities | $(975,262) | $6,940,583 | $(7,915,845) | -114.05% | | Net (decrease) increase in cash | $(1,565,994) | $360,559 | $(1,926,553) | -534.37% | | Cash - end of period | $1,130,487 | $2,113,189 | $(982,702) | -46.51% | - Net cash used in operating activities was **$(299,631)** for the six months ended June 30, 2023, a significant decrease from **$72,649** provided in the prior year, primarily due to changes in operating assets and liabilities[23](index=23&type=chunk)[143](index=143&type=chunk) - Investing activities used significantly less cash in 2023 (**$291,101**) compared to 2022 (**$6,652,673**), as the prior year included a large cash payment for the Yellow Folder acquisition[23](index=23&type=chunk)[144](index=144&type=chunk) - Financing activities shifted from providing **$6,940,583** in 2022 (due to stock issuance and new borrowings) to using **$975,262** in 2023, primarily for earnout liability payments and note repayments[23](index=23&type=chunk)[146](index=146&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=12&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed explanations and disclosures supporting the condensed financial statements [1. Business Organization and Nature of Operations](index=12&type=section&id=1.%20Business%20Organization%20and%20Nature%20of%20Operations) This note describes the company's structure, subsidiaries, and core business segments - Intellinetics, Inc (Nevada) operates through **two wholly-owned subsidiaries**: Intellinetics, Inc (Ohio) and Graphic Sciences, Inc (Michigan)[27](index=27&type=chunk) - The company provides digital transformation products and services through **two segments: Document Management** (software platform, including Yellow Folder acquisition) and **Document Conversion** (paper-to-digital conversion, storage, and retrieval, primarily Graphic Sciences acquisition)[28](index=28&type=chunk) - Solutions are sold **directly to end-users and through resellers**, creating value by making business-critical documents easy to find, access, secure, and compliant[28](index=28&type=chunk) [2. Basis of Presentation](index=12&type=section&id=2.%20Basis%20of%20Presentation) This note explains the accounting principles and assumptions used in preparing the financial statements - The unaudited condensed consolidated financial statements are prepared in accordance with **United States generally accepted accounting principles (GAAP)**, including all necessary normal recurring adjustments for interim periods[29](index=29&type=chunk)[30](index=30&type=chunk) - Operating results for the interim periods presented are **not necessarily indicative of the results that may be expected for the full fiscal year or any other future period**[31](index=31&type=chunk) [3. Summary of Significant Accounting Policies](index=12&type=section&id=3.%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines key accounting policies, including consolidation, revenue recognition, and asset valuation - The company **consolidates accounts of all subsidiaries where it holds a controlling interest**, eliminating all significant intercompany balances and transactions[32](index=32&type=chunk) - An allowance for credit losses is maintained for customer receivables, which was **$114,219** at June 30, 2023, up from **$88,331** at December 31, 2022[34](index=34&type=chunk) - Deferred revenue represents amounts billed for which revenue has not yet been recognized, typically related to maintenance and software-as-a-service agreements, with **approximately 97%** expected to be recognized over the next 12 months[36](index=36&type=chunk)[37](index=37&type=chunk) - Software development costs are **expensed before technological feasibility is reached**; internal-use software purchase and implementation costs are **capitalized once in the development stage** Capitalized internal-use software costs were **$208,417** for the six months ended June 30, 2023[40](index=40&type=chunk)[41](index=41&type=chunk) - The company adopted ASU No 2016-13 'Credit Losses' in the first quarter of 2023, resulting in an initial reduction in the allowance for doubtful accounts of **$11,662**[44](index=44&type=chunk) - A **100% valuation allowance** has been established on deferred tax assets at June 30, 2023, and December 31, 2022, due to the uncertainty of realizing future taxable income[49](index=49&type=chunk) - Performance is assessed and resources are allocated based on **two operating segments: Document Management and Document Conversion**, with performance evaluated based on gross profits[51](index=51&type=chunk) [4. Business Combinations](index=17&type=section&id=4.%20Business%20Combinations) This note details the Yellow Folder acquisition, including its financial impact and purchase price allocation - On April 1, 2022, Intellinetics acquired **substantially all of the assets of Yellow Folder, LLC**, to expand market share in the digital transformation industry and due to synergies of product lines and services[57](index=57&type=chunk) Yellow Folder Acquisition - Purchase Price Allocation | Item | Amount | | :------------------------------------------ | :------------- | | Purchase price | $6,383,269 | | Goodwill recognized | $3,466,934 | Yellow Folder Revenue and Net Income Contribution | Period | Total Revenues | Net Income | | :----------------------- | :------------- | :----------- | | 3 Months Ended June 30, 2023 | $864,331 | $85,408 | | 6 Months Ended June 30, 2023 | $1,738,893 | $271,111 | | 3 Months Ended June 30, 2022 | $790,368 | $196,559 | | 6 Months Ended June 30, 2022 | $790,368 | $196,559 | [5. Intangible Assets, Net](index=18&type=section&id=5.%20Intangible%20Assets,%20Net) This note details the company's intangible assets, their carrying values, and amortization expense Intangible Assets, Net | Item | June 30, 2023 | December 31, 2022 | | :---------------------- | :-------------- | :---------------- | | Trade names | $235,083 | $249,933 | | Proprietary technology | $753,375 | $796,425 | | Customer relationships | $3,176,034 | $3,373,288 | | Total Intangible Assets, Net | $4,164,492 | $4,419,646 | - Amortization expense for intangible assets amounted to **$127,577** for the three months and **$255,154** for the six months ended June 30, 2023[64](index=64&type=chunk) Future Amortization Expense for Intangible Assets | Period | Amount | | :---------------------------- | :------------- | | For the Twelve Months Ending June 30, 2024 | $510,308 | | Thereafter | $2,071,378 | | Total | $4,164,492 | [6. Fair Value Measurements](index=19&type=section&id=6.%20Fair%20Value%20Measurements) This note discusses the fair value of financial instruments, particularly earnout liabilities - The company paid its final earnout liability in January 2023, resulting in **no remaining earnout liabilities** as of June 30, 2023[66](index=66&type=chunk) Changes in Fair Value of Earnout Liabilities | Item | June 30, 2023 | June 30, 2022 | | :-------------------------- | :-------------- | :-------------- | | Fair value at December 31, 2022/2021 | $700,000 | $1,630,681 | | Payments | $(700,000) | $(1,018,333) | | Change in fair value | $0 | $116,505 | | Fair value at June 30, 2023/2022 | $0 | $728,853 | [7. Property and Equipment](index=19&type=section&id=7.%20Property%20and%20Equipment) This note details the company's property and equipment, including depreciation expense Property and Equipment, Net | Item | June 30, 2023 | December 31, 2022 | | :-------------------------- | :-------------- | :---------------- | | Computer hardware and purchased software | $1,661,438 | $1,595,652 | | Leasehold improvements | $395,919 | $395,918 | | Furniture and fixtures | $71,325 | $71,325 | | Less: accumulated depreciation | $(1,103,906) | $(994,189) | | Property and equipment, net | $1,024,776 | $1,068,706 | - Total depreciation expense on property and equipment was **$64,675** for the three months and **$126,614** for the six months ended June 30, 2023[68](index=68&type=chunk) [8. Notes Payable – Unrelated Parties](index=19&type=section&id=8.%20Notes%20Payable%20%E2%80%93%20Unrelated%20Parties) This note outlines the company's debt obligations to unrelated parties and associated interest expenses Notes Payable to Unrelated Parties | Item | June 30, 2023 | December 31, 2022 | | :-------------------------------- | :-------------- | :---------------- | | 2022 Unrelated Notes | $2,364,500 | $2,364,500 | | 2020 Notes | $717,500 | $980,450 | | Total notes payable | $3,082,000 | $3,344,950 | | Long-term portion of notes payable | $2,147,139 | $2,085,035 | - Future minimum principal payments of the Notes Payable to Unrelated Parties include **$717,500** due in 2024 and **$2,364,500** due in 2025[70](index=70&type=chunk) - Interest expense for these notes, including amortization of debt issuance costs and debt discount, was **$136,136** for the three months and **$287,741** for the six months ended June 30, 2023[72](index=72&type=chunk) [9. Notes Payable - Related Parties](index=21&type=section&id=9.%20Notes%20Payable%20-%20Related%20Parties) This note details the company's debt obligations to related parties and their terms Notes Payable to Related Parties | Item | June 30, 2023 | December 31, 2022 | | :-------------------------------- | :-------------- | :---------------- | | Notes payable – '2022 Related Note' | $600,000 | $600,000 | | Long-term portion of notes payable | $544,843 | $529,084 | - The 2022 Related Note has a **12%** interest rate, with principal due on March 30, 2025[74](index=74&type=chunk)[77](index=77&type=chunk) - Interest expense for notes payable – related parties was **$25,880** for the three months and **$51,759** for the six months ended June 30, 2023[75](index=75&type=chunk) [10. Deferred Compensation](index=21&type=section&id=10.%20Deferred%20Compensation) This note describes the status of accrued incentive cash compensation for company founders - Accrued incentive cash compensation for one of the company's founders was fully paid as of December 31, 2022, with **$50,414** paid during the six months ended June 30, 2022[76](index=76&type=chunk) [11. Commitments and Contingencies](index=22&type=section&id=11.%20Commitments%20and%20Contingencies) This note outlines the company's operating lease commitments and other potential liabilities - The company has various operating leases for office spaces and vehicles, with lease expiry dates ranging from month-to-month to September 30, 2028[80](index=80&type=chunk) Future Minimum Lease Payments | Period | Finance Lease | Operating Leases | | :---------------------------- | :-------------- | :--------------- | | For the twelve months ending June 30, 2024 | $41,259 | $930,559 | | Total (net of imputed interest/short-term) | $174,183 | $3,018,555 | - Operating lease expense was **$238,864** for the three months and **$476,312** for the six months ended June 30, 2023[81](index=81&type=chunk) [12. Stockholders' Equity](index=24&type=section&id=12.%20Stockholders'%20Equity) This note provides details on common stock, outstanding warrants, and equity incentive plans - As of June 30, 2023, there were **4,073,757 shares** of common stock issued and outstanding, with **255,958 shares** reserved for outstanding warrants and **497,330 shares** reserved under the 2015 Equity Incentive Plan[82](index=82&type=chunk) Outstanding Warrants as of June 30, 2023 | Warrants Outstanding | Exercise Price | Warranty Expiry | | :------------------- | :------------- | :-------------- | | 124,258 | $4.62 | March 30, 2027 | | 95,500 | $4.00 | March 30, 2027 | | 16,000 | $9.00 | March 30, 2027 | | 17,200 | $12.50 | March 30, 2027 | | 3,000 | $15.00 | March 30, 2027 | [13. Stock-Based Compensation](index=24&type=section&id=13.%20Stock-Based%20Compensation) This note details the company's stock-based compensation plans and associated expenses - Stock compensation of **$57,500** was recorded for **8,097 restricted common shares** issued to directors on January 6, 2022[86](index=86&type=chunk) - No stock option grants were made during the six months ended June 30, 2023 On April 14, 2022, **220,587 stock options** were granted to employees with a total fair value of **$1,152,470**[87](index=87&type=chunk) - Stock-based compensation for options was **$115,456** for the three months and **$233,618** for the six months ended June 30, 2023[88](index=88&type=chunk) - As of June 30, 2023, total unrecognized compensation costs related to stock options were **$778,893**, expected to be recognized over a weighted-average period of two years[89](index=89&type=chunk) [14. Concentrations](index=25&type=section&id=14.%20Concentrations) This note identifies significant customer and revenue concentrations for the company - The State of Michigan was the largest customer, accounting for **36%** of total revenues in Q2 2023 and **35%** in 6M 2023 Rocket Mortgage was the second largest, accounting for **5%** in Q2 2023 and **5%** in 6M 2023[90](index=90&type=chunk) - Government contracts, including K-12 education, represented approximately **79%** of net revenues in Q2 2023 and **76%** in 6M 2023[91](index=91&type=chunk) - Accounts receivable concentrations from the two largest customers were **37%** and **10%** of gross accounts receivable as of June 30, 2023[92](index=92&type=chunk) [ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=26&type=section&id=ITEM%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition and results of operations, highlighting key performance drivers, the impact of the Yellow Folder acquisition, current economic conditions, and segment-specific revenue and cost trends It also discusses liquidity, capital resources, and critical accounting policies [Company Overview](index=26&type=section&id=Company%20Overview) This section describes Intellinetics' business model, target markets, and core service offerings - Intellinetics is a document services and software solutions company serving small-to-medium businesses and governmental sectors with digital transformation and process automation initiatives[94](index=94&type=chunk) - The company's digital transformation products and services are provided through **two reporting segments: Document Management** (software platform, including Yellow Folder acquisition) and **Document Conversion** (paper-to-digital conversion, storage, and retrieval)[95](index=95&type=chunk) - The **Software as a Service (SaaS) model** has become increasingly popular and is a **key ingredient in the company's revenue growth strategy**, with products hosted on Amazon Web Services, Expedient, and Evocative[96](index=96&type=chunk) [Executive Overview of Results](index=27&type=section&id=Executive%20Overview%20of%20Results) This section summarizes key financial performance and the impact of the Yellow Folder acquisition - The acquisition of Yellow Folder on April 1, 2022, was the **biggest factor** in the changes in results for the six-month period 2023, as 2023 results include the full periods of Yellow Folder operations, while 2022 only included the second quarter results[101](index=101&type=chunk) - Strong professional services performance, **growing over 40%** for the six-month period 2023, was partially offset by lingering softer demand for the transactional portion of storage and retrieval services from a significant customer in the home mortgage lending industry[101](index=101&type=chunk) Key Financial Results (Consolidated) | Item | Q2 2023 | Q2 2022 | YoY Change (%) | 6M 2023 | 6M 2022 | YoY Change (%) | | :------------------------------ | :-------- | :-------- | :------------- | :-------- | :-------- | :------------- | | Revenues | $4,258,430 | $3,415,643 | 25% | $8,445,263 | $6,119,155 | 38% | | Cost of revenues | $1,667,997 | $1,226,625 | 36% | $3,208,991 | $2,298,300 | 40% | | Operating expenses (excl. CoR) | $2,294,045 | $2,322,717 | -1% | $4,655,885 | $3,862,079 | 21% | | Income (loss) from operations | $296,388 | $(133,699) | 322% | $580,387 | $(41,224) | 1508% | | Net income (loss) | $135,734 | $(374,167) | 136% | $248,297 | $(394,293) | 163% | | Basic/Diluted EPS | $0.03 | $(0.09) | 133% | $0.06 | $(0.11) | 155% | | Operating cash (used in)/provided by | $(125,274) | $(403,522) | 69% | $(299,631) | $72,649 | -512% | | Capital expenditures | $156,532 | $213,361 | -27% | $291,101 | $269,404 | 8% | | Employees (as of June 30) | 170 | 139 | 22% | | | | - Operating expenses for Q2 2023 decreased by **1%** year over year due to reduced transaction costs and no fair value adjustments for earnout liabilities, while 6M 2023 operating expenses increased by **21%** year over year[102](index=102&type=chunk)[108](index=108&type=chunk) [Financial Impact of Current Economic Conditions](index=28&type=section&id=Financial%20Impact%20of%20Current%20Economic%20Conditions) This section discusses how economic factors like inflation and supply chain issues affect company operations - Employee wages, the **largest expense**, have increased due to wage inflation, **slightly decreasing profit margins**, but the company mitigates this by appropriately increasing customer renewal rates[104](index=104&type=chunk) - General wage inflation resulted in a **slower hiring process**, particularly for the Document Conversion segment, which initially slowed project completion and reduced revenue in early 2022, but **staffing levels increased by the end of 6M 2023**[104](index=104&type=chunk)[108](index=108&type=chunk) - Global supply chain disruptions have had and are expected to continue to have a **minimal impact**, and **customer demand has not diminished** due to adverse economic conditions as of the report date[105](index=105&type=chunk) [Uncertainties, Trends, and Risks](index=28&type=section&id=Uncertainties,%20Trends,%20and%20Risks) This section highlights factors that may cause future operating results to fluctuate - Operating results have **fluctuated significantly** in the past and are **expected to continue to fluctuate** in the future due to a variety of factors, including economic conditions and other risks discussed in the Annual Report on Form 10-K[106](index=106&type=chunk) - Past results of operations should **not be relied upon as an indication of future performance**[106](index=106&type=chunk) [Reportable Segments](index=28&type=section&id=Reportable%20Segments) This section identifies the company's two primary operating segments: Document Management and Document Conversion - The company has **two reportable segments: Document Management** (cloud-based and premise-based content services software) and **Document Conversion** (scanning, indexing, conversion, and physical document storage and retrieval)[52](index=52&type=chunk)[53](index=53&type=chunk)[107](index=107&type=chunk) [Results of Operations](index=29&type=section&id=Results%20of%20Operations) This section provides a detailed analysis of the company's financial performance across revenue and cost categories [Revenues](index=29&type=section&id=Revenues) This section analyzes total revenues by segment and source, highlighting growth drivers Revenues by Segment | Segment | Q2 2023 | Q2 2022 | YoY Change (%) | 6M 2023 | 6M 2022 | YoY Change (%) | | :------------------ | :-------- | :-------- | :------------- | :-------- | :-------- | :------------- | | Document Management | $1,879,369 | $1,572,854 | 19.49% | $3,705,103 | $2,487,804 | 49.33% | | Document Conversion | $2,379,061 | $1,842,789 | 29.10% | $4,740,160 | $3,631,351 | 30.55% | | Total revenues | $4,258,430 | $3,415,643 | 24.68% | $8,445,263 | $6,119,155 | 38.02% | Revenues by Source | Revenue Source | Q2 2023 | Q2 2022 | YoY Change (%) | 6M 2023 | 6M 2022 | YoY Change (%) | | :-------------------------- | :-------- | :-------- | :------------- | :-------- | :-------- | :------------- | | Sale of software | $63,646 | $11,105 | 473.14% | $78,939 | $75,596 | 4.45% | | Software as a service | $1,277,918 | $1,158,456 | 10.31% | $2,516,350 | $1,589,677 | 58.29% | | Software maintenance services | $349,139 | $343,881 | 1.53% | $698,681 | $680,483 | 2.67% | | Professional services | $2,298,316 | $1,625,765 | 41.37% | $4,597,605 | $3,213,713 | 43.05% | | Storage and retrieval services | $269,411 | $276,436 | -2.54% | $553,688 | $559,686 | -1.07% | | Total revenues | $4,258,430 | $3,415,643 | 24.68% | $8,445,263 | $6,119,155 | 38.02% | - Total revenues increased by **25%** in Q2 2023 and **38%** in 6M 2023, primarily driven by strong professional services in the Document Conversion segment and the full six-month impact of the Yellow Folder acquisition in 2023[109](index=109&type=chunk) [Sale of Software Revenues](index=29&type=section&id=Sale%20of%20Software%20Revenues) This section discusses the trends and volatility in revenues derived from direct software sales - Revenues from the sale of software, reported as part of the Document Management segment, increased by **473%** in Q2 2023 compared to Q2 2022 due to timing of direct sales projects, but only increased by **4%** for 6M 2023[110](index=110&type=chunk)[111](index=111&type=chunk) - The volatility of this revenue line item is expected to continue as project timing is unpredictable and the frequency of on-premise software solution sales decreases over time[111](index=111&type=chunk) [Software as a Service Revenues](index=30&type=section&id=Software%20as%20a%20Service%20Revenues) This section analyzes SaaS revenue growth, including the impact of acquisitions and organic expansion - Software as a service (SaaS) revenues, reported as part of the Document Management segment, increased by **10%** in Q2 2023 and **58%** in 6M 2023[113](index=113&type=chunk) - The six-month period increase was primarily the result of the Yellow Folder acquisition, which contributed **$785,481** (**85%** of the increase), plus organic growth in cloud-based solutions, expanded data storage, user seats, and hosting fees for existing customers[113](index=113&type=chunk) [Software Maintenance Services Revenues](index=30&type=section&id=Software%20Maintenance%20Services%20Revenues) This section examines modest growth in software maintenance revenues due to service expansion and price adjustments - Software maintenance services revenues, reported as part of the Document Management segment, increased by **2%** in Q2 2023 and **3%** in 6M 2023[114](index=114&type=chunk) - This small increase was driven by expansion of services with existing customers and price increases, partially offset by normal attrition and certain customers migrating their premise solution to the cloud[114](index=114&type=chunk) [Professional Services Revenues](index=30&type=section&id=Professional%20Services%20Revenues) This section details the significant increase in professional services revenues, driven by Document Conversion recovery - Overall professional services revenues increased by **41%** in Q2 2023 and **43%** in 6M 2023[115](index=115&type=chunk) - This increase is primarily the result of a strong recovery in the Document Conversion segment in 6M 2023 from softer demand in early 2022, and includes a **$110,316** contribution from the Yellow Folder acquisition in Q1 2023[115](index=115&type=chunk) - Of professional services revenues, **$2,143,613** (Q2 2023) and **$4,254,336** (6M 2023) were derived from Document Conversion operations[115](index=115&type=chunk) [Storage and Retrieval Services Revenues](index=30&type=section&id=Storage%20and%20Retrieval%20Services%20Revenues) This section analyzes the decline in storage and retrieval revenues due to reduced customer volume - Revenues from storage and retrieval services, reported as part of the Document Conversion segment, decreased by **3%** in Q2 2023 and **1%** in 6M 2023[116](index=116&type=chunk) - This decrease was the result of a continued reduction in volume of work from the largest storage and retrieval customer, Rocket Mortgage, due to the significant slowdown in the home mortgage and refinancing industry, partially offset by Yellow Folder's revenue contribution in Q1 2023[116](index=116&type=chunk) [Costs of Revenues and Gross Profits](index=31&type=section&id=Costs%20of%20Revenues%20and%20Gross%20Profits) This section examines the trends in cost of revenues and gross profit margins by segment Cost of Revenues by Segment | Segment | Q2 2023 | Q2 2022 | YoY Change (%) | 6M 2023 | 6M 2022 | YoY Change (%) | | :------------------ | :-------- | :-------- | :------------- | :-------- | :-------- | :------------- | | Document Management | $342,984 | $246,509 | 39.14% | $651,357 | $474,981 | 37.13% | | Document Conversion | $1,325,013 | $980,116 | 35.19% | $2,557,634 | $1,823,319 | 40.28% | | Total cost of revenues | $1,667,997 | $1,226,625 | 35.98% | $3,208,991 | $2,298,300 | 39.62% | Gross Profit by Segment | Segment | Q2 2023 | Q2 2022 | YoY Change (%) | 6M 2023 | 6M 2022 | YoY Change (%) | | :------------------ | :-------- | :-------- | :------------- | :-------- | :-------- | :------------- | | Document Management | $1,536,385 | $1,326,345 | 15.84% | $3,053,746 | $2,012,823 | 51.72% | | Document Conversion | $1,054,048 | $862,673 | 22.18% | $2,182,526 | $1,808,032 | 20.71% | | Total gross profit | $2,590,433 | $2,189,018 | 18.34% | $5,236,272 | $3,820,855 | 37.04% | - Total cost of revenues increased by **36%** in Q2 2023 and **40%** in 6M 2023, driven by the six-month impact of Yellow Folder in Document Management and staffing ramp-up in Document Conversion[118](index=118&type=chunk) - Overall gross profit percentage decreased to **60.8%** in Q2 2023 (from **64.1%**) and **62.0%** in 6M 2023 (from **62.4%**), mainly due to the increased mix of lower-margin professional services revenue and slight erosion in software as a service margins[120](index=120&type=chunk) [Cost of Software Revenues](index=32&type=section&id=Cost%20of%20Software%20Revenues) This section analyzes the cost and gross margin trends for software sales - Cost of software revenues decreased by **1%** in Q2 2023 and **54%** in 6M 2023, leading to a significant increase in gross margin for software revenues to **88.5%** (Q2 2023) and **80.3%** (6M 2023) due to favorable changes in the software solution mix[121](index=121&type=chunk) [Cost of Software as a Service](index=32&type=section&id=Cost%20of%20Software%20as%20a%20Service) This section details the cost and gross margin changes for software as a service offerings - Cost of software as a service (SaaS) increased by **35%** in Q2 2023 and **70%** in 6M 2023 due to increased staffing allocations[122](index=122&type=chunk) - Gross margin for SaaS decreased to **79.8%** in Q2 2023 (from **83.5%**) and **81.0%** in 6M 2023 (from **82.2%**)[122](index=122&type=chunk) [Cost of Software Maintenance Services](index=32&type=section&id=Cost%20of%20Software%20Maintenance%20Services) This section reviews the cost and gross margin performance of software maintenance services - Cost of software maintenance services decreased by **21%** in Q2 2023 and **15%** in 6M 2023, primarily due to reduced support activity[123](index=123&type=chunk) - Gross margin for software maintenance services increased to **95.7%** in Q2 2023 and **95.4%** in 6M 2023[123](index=123&type=chunk) [Cost of Professional Services](index=32&type=section&id=Cost%20of%20Professional%20Services) This section analyzes the cost and gross margin trends for professional services, including staffing impacts - Cost of professional services increased by **42%** in Q2 2023 and **41%** in 6M 2023, primarily due to growing the Document Conversion staff to meet the increasing backlog of orders[124](index=124&type=chunk) - Gross margins in professional services slightly decreased to **43.1%** in Q2 2023 (from **43.5%**) but increased to **45.7%** in 6M 2023 (from **45.0%**), with improvements in Document Management consulting efficiencies largely offsetting deterioration in Document Conversion due to staffing up and training new hires[124](index=124&type=chunk) [Cost of Storage and Retrieval Services](index=33&type=section&id=Cost%20of%20Storage%20and%20Retrieval%20Services) This section examines the cost and gross margin fluctuations for storage and retrieval services - Cost of storage and retrieval services decreased by **12%** in Q2 2023 due to a reduction in transaction events but increased by **6%** in 6M 2023 due to general wage inflation and fuel cost increases[125](index=125&type=chunk) - Gross margins for storage and retrieval services increased to **70.4%** in Q2 2023 (from **67.3%**) but decreased to **66%** in 6M 2023 (from **68.2%**)[125](index=125&type=chunk) [Operating Expenses](index=33&type=section&id=Operating%20Expenses) This section provides an overview of the company's operating expenses, including general, administrative, sales, and marketing [General and Administrative Expenses](index=33&type=section&id=General%20and%20Administrative%20Expenses) This section analyzes changes in general and administrative expenses, primarily due to acquisitions - General and administrative expenses increased by **24%** in Q2 2023 and **42%** in 6M 2023, principally related to the addition of Yellow Folder expenses for the full Q1 2023 period[127](index=127&type=chunk) - Document Management segment's G&A expenses increased to **$794,718** (Q2 2023) and **$1,597,846** (6M 2023) Document Conversion segment's G&A expenses increased to **$767,221** (Q2 2023) and **$1,518,704** (6M 2023)[127](index=127&type=chunk) [Change in Fair Value of Earnout Liabilities](index=33&type=section&id=Change%20in%20Fair%20Value%20of%20Earnout%20Liabilities) This section discusses the absence of earnout liability adjustments in the current period - **No changes** in fair value of earnout liabilities were recorded in 2023, as the final earnout liabilities were paid in January 2023[128](index=128&type=chunk) - Fair value adjustments amounted to **$52,301** in Q2 2022 and **$116,505** for 6M 2022, driven by updated assumptions reflecting improved performance of affected acquisitions[128](index=128&type=chunk) [Transaction Costs](index=34&type=section&id=Transaction%20Costs) This section notes the absence of transaction costs in the current reporting period - There were **no transaction costs** during Q2 2023 and 6M 2023[130](index=130&type=chunk) - Transaction costs during Q2 2022 and 6M 2022 were comprised of investment banker success fees, legal, and consulting fees in connection with the Yellow Folder acquisition[130](index=130&type=chunk) [Sales and Marketing Expenses](index=34&type=section&id=Sales%20and%20Marketing%20Expenses) This section analyzes the trends in sales and marketing expenses, influenced by acquisitions - Sales and marketing expenses decreased by **7%** in Q2 2023 but increased by **22%** in 6M 2023, primarily driven by the inclusion of Yellow Folder's sales and marketing expenses for the full six-month period in 2023[131](index=131&type=chunk) [Depreciation and Amortization](index=34&type=section&id=Depreciation%20and%20Amortization) This section details the increase in depreciation and amortization due to new intangible assets and capitalized software - Depreciation and amortization increased by **19%** in Q2 2023 and **47%** in 6M 2023, resulting from the amortization of new intangible assets related to the Yellow Folder acquisition and increased amortization of capitalized software costs[132](index=132&type=chunk) [Other Items of Income and Expense](index=34&type=section&id=Other%20Items%20of%20Income%20and%20Expense) This section covers non-operating income and expense items, such as interest expense [Interest Expense, Net](index=34&type=section&id=Interest%20Expense,%20Net) This section analyzes the changes in interest expense, primarily due to debt repayments - Interest expense decreased by **33%** in Q2 2023 and **6%** in 6M 2023, primarily due to partial principal repayment of the 2020 Notes on December 1, 2022, and February 28, 2023[133](index=133&type=chunk) [Liquidity and Capital Resources](index=34&type=section&id=Liquidity%20and%20Capital%20Resources) This section assesses the company's ability to meet financial obligations and fund operations [Indebtedness](index=35&type=section&id=Indebtedness) This section details the company's outstanding long-term debt and its plans for refinancing - As of June 30, 2023, outstanding long-term indebtedness included **$717,500** from 2020 Notes (due August 31, 2023) and **$2,964,500** from 2022 Notes (due March 30, 2025)[137](index=137&type=chunk)[145](index=145&type=chunk) - The company believes its balance sheet and financial statements **would support a full or partial refinancing or other appropriate modification** of the current promissory notes[137](index=137&type=chunk) [Capital Expenditures](index=35&type=section&id=Capital%20Expenditures) This section reports on the company's commitments for capital expenditures - There were **no material commitments** for capital expenditures at June 30, 2023[142](index=142&type=chunk) [Cash Used in and Provided by Operating Activities](index=35&type=section&id=Cash%20Used%20in%20and%20Provided%20by%20Operating%20Activities) This section analyzes cash flows from operating activities, highlighting changes from prior periods - Net cash used in operating activities during 6M 2023 was **$299,631**, primarily attributable to net income adjusted for non-cash expenses, an increase in operating assets, and a decrease in operating liabilities[143](index=143&type=chunk) - In contrast, net cash provided by operating activities during 6M 2022 was **$72,649**[143](index=143&type=chunk) [Cash Used by Investing Activities](index=35&type=section&id=Cash%20Used%20by%20Investing%20Activities) This section details cash flows from investing activities, including acquisition-related payments - Net cash used in investing activities in 6M 2023 was **$291,101**, including **$208,417** in capitalized software[144](index=144&type=chunk) - This is significantly lower than **$6,652,673** used in 6M 2022, which primarily included **$6,383,269** related to cash paid to acquire Yellow Folder[144](index=144&type=chunk) [Cash Used in and Provided by Financing Activities](index=36&type=section&id=Cash%20Used%20in%20and%20Provided%20by%20Financing%20Activities) This section analyzes cash flows from financing activities, including debt and equity transactions - Net cash used by financing activities during 6M 2023 amounted to **$975,262**, primarily for **$700,000** in earnout liability payments and **$262,950** in repayment of notes payable[146](index=146&type=chunk) - In contrast, net cash provided by financing activities during 6M 2022 amounted to **$6,940,583**, resulting from cash generated from the sale of common stock (**$5.7M**) and new borrowings (**$3.0M**), partially offset by issuance costs and earnout payments[146](index=146&type=chunk) [Critical Accounting Policies and Estimates](index=36&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) This section discusses significant accounting policies and estimates that require management judgment - The preparation of condensed consolidated financial statements **requires estimates and assumptions** that affect the reported amounts of assets, liabilities, revenue, and expenses, which are monitored for changes in facts and circumstances[147](index=147&type=chunk) - There were **no material changes** to the company's critical accounting policies and estimates during the second quarter of 2023[148](index=148&type=chunk) [ITEM 3. Quantitative and Qualitative Disclosures About Market Risk](index=36&type=section&id=ITEM%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) As a smaller reporting company, Intellinetics, Inc. is not required to provide quantitative and qualitative disclosures about market risk - **Not applicable** to smaller reporting companies[149](index=149&type=chunk) [ITEM 4. Controls and Procedures](index=36&type=section&id=ITEM%204.%20Controls%20and%20Procedures) This section addresses the effectiveness of the company's disclosure controls and procedures and reports on any changes in internal control over financial reporting [Evaluation of Disclosure Controls and Procedures](index=36&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) This section assesses the effectiveness of the company's disclosure controls and procedures - Management concluded that as of June 30, 2023, the company's disclosure controls and procedures were **effective** to provide reasonable assurance that required information is recorded, processed, summarized, and reported within specified time periods[151](index=151&type=chunk) - The design of disclosure controls and procedures **reflects resource constraints**, and management **applies judgment in evaluating the benefits of possible controls relative to their costs**[152](index=152&type=chunk) [Changes in Internal Control Over Financial Reporting](index=37&type=section&id=Changes%20in%20Internal%20Control%20Over%20Financial%20Reporting) This section reports on any material changes to the company's internal control over financial reporting - There were **no changes** in internal control over financial reporting that occurred during the period covered by this Quarterly Report that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[153](index=153&type=chunk) - The company **regularly reviews and makes appropriate changes** to its internal control over financial reporting to maintain and enhance effectiveness[154](index=154&type=chunk) PART II – OTHER INFORMATION [ITEM 1. Legal Proceedings](index=37&type=section&id=ITEM%201.%20Legal%20Proceedings) The company is not currently involved in any legal proceedings, claims, or litigation that are expected to have a material adverse impact on its financial position or operations - The company has **no reason to believe** the disposition of any current legal matter could reasonably be expected to have a material adverse impact on its financial position, results of operations, or business activities[78](index=78&type=chunk)[156](index=156&type=chunk) [ITEM 1A. Risk Factors](index=37&type=section&id=ITEM%201A.%20Risk%20Factors) There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 - There have been **no material changes** to the risk factors set forth in Part I, Item 1A, 'Risk Factors,' of the Annual Report on Form 10-K for the fiscal year ended December 31, 2022[157](index=157&type=chunk) [ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=37&type=section&id=ITEM%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company did not engage in any unregistered sales of equity securities or use of proceeds during the reporting period - **None**[158](index=158&type=chunk) [ITEM 3. Defaults Upon Senior Securities](index=37&type=section&id=ITEM%203.%20Defaults%20Upon%20Senior%20Securities) The company has not defaulted on any senior securities during the reporting period - **None**[159](index=159&type=chunk) [ITEM 4. Mine Safety Disclosures](index=37&type=section&id=ITEM%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company's operations - **Not Applicable**[160](index=160&type=chunk) [ITEM 5. Other Information](index=37&type=section&id=ITEM%205.%20Other%20Information) The company entered into a renewal extension with its largest customer, the State of Michigan, effective October 1, 2023, through May 30, 2025, which includes an estimated net rate increase of approximately 21% - On August 3, 2023, the company entered into a **renewal extension** with its largest customer, the State of Michigan, effective October 1, 2023, through May 30, 2025[161](index=161&type=chunk) - The renewal contract contains an **estimated net rate increase of approximately 21%** compared to the current rates in effect for the contract period commencing June 1, 2018[161](index=161&type=chunk) [ITEM 6. Exhibits](index=37&type=section&id=ITEM%206.%20Exhibits) This section lists the exhibits filed as part of the Quarterly Report on Form 10-Q, including the contract change notice with the State of Michigan and various certifications - Exhibit 10.1 is the **Contract Change Notice No 2 and 3**, by and between Graphic Sciences, Inc and the State of Michigan Central Procurement Services, Department of Technology, Management, dated August 3, 2023[163](index=163&type=chunk) - Includes **certifications** of Principal Executive Officer and Principal Financial Officer pursuant to Sections 302 and 906 of The Sarbanes-Oxley Act of 2002[163](index=163&type=chunk) - Includes **Inline XBRL Instance Document and Taxonomy Schema**[165](index=165&type=chunk) [SIGNATURES](index=39&type=section&id=SIGNATURES) This section confirms the official signing of the report by the company's executive and financial officers - The report is **duly signed** on behalf of Intellinetics, Inc by its President and Chief Executive Officer, James F DeSocio, and Chief Financial Officer, Joseph D Spain, on August 14, 2023[168](index=168&type=chunk)

Intellinetics, Inc. (NYSE:INLX) Q1 2023 Earnings Conference Call May 15, 2023 4:30 PM ET Company Participants Tom Baumann – FNK IR Jim DeSocio – President and Chief Executive Officer Joe Spain – Chief Financial Officer Conference Call Participants Howard Halpern – Taglich Operator Good day, ladies and gentlemen, and welcome to the Intellinetics’ First Quarter 2023 Earnings Call. At this time all participants are in a listen-only mode and the floor will be opened for questions and comments following the pres ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2023 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________to _________________________ | Title of each class | Trading Symbol(s) | Name of each exchange on which registered | | --- | --- | --- | | C ...

Intellinetics, Inc. (NYSE:INLX) Q4 2022 Earnings Conference Call March 27, 2023 4:30 PM ET Company Participants Tom Baumann - IR Joe Spain - Chief Financial Officer Jim DeSocio - President and Chief Executive Officer Conference Call Participants Howard Halpern - Taglich Brothers Operator Hello and welcome to the Intellinetics Fourth Quarter and Full Year 2022 Earnings Conference Call and Webcast. [Operator Instructions]. A question-and-answer session will follow the formal presentation. As a reminder, this ...

Client Dependence - The company's two largest clients accounted for approximately 38% and 6% of total revenues for the year ended December 31, 2022, and 47% and 9% for 2021, indicating a significant reliance on a limited number of customers [86]. - Government contracts represented approximately 77% and 72% of net revenues for the years ended December 31, 2022, and 2021, respectively, highlighting the importance of government business [86]. Revenue Recognition and Financial Impact - Revenue recognition from subscription agreements occurs ratably over typically one-year terms, meaning a decline in new or renewed subscriptions may not be immediately reflected in current revenue [87]. - The company faces risks related to early termination and audits of government contracts, which could materially affect revenues [88]. - Global economic conditions, including anticipated recession and inflation, are likely to adversely affect the company's operating results and financial markets [108]. - Market fluctuations and external financial developments may adversely affect the company's ability to raise capital and access credit [109]. Compliance and Regulatory Risks - Compliance with federal securities laws results in higher expenses compared to privately held companies, impacting resource allocation for growth [89]. - The company must comply with NYSE American listing requirements, and failure to do so could result in delisting, limiting trading and capital-raising opportunities [100]. - The company is subject to FINRA sales practice requirements, which may limit shareholders' ability to buy and sell its stock [105]. Operational Risks - Security breaches could lead to loss of confidential information and significant liabilities, affecting the company's reputation and business [91]. - The company is subject to increased scrutiny and potential liabilities related to data privacy and security, which could impact operations [92]. - The company is vulnerable to disruptions at third-party data centers, which could lead to service interruptions and harm its business reputation [110]. - The company expects to experience interruptions in service and availability from time to time due to reliance on third-party data centers [110]. Financial Management and Shareholder Impact - Future financing may dilute existing shareholders' ownership if additional securities are issued [97]. - The common stock is expected to experience significant price volatility, which may lead to losses for stockholders [104]. - The company does not anticipate paying any cash dividends in the foreseeable future, as it plans to retain earnings for operational expansion [107]. Human Resources and Talent Management - Recruitment and retention of key personnel are critical for the company's success, with intense competition for top talent in the current labor market [115]. Intellectual Property and Competitive Position - The company faces risks related to the protection of its intellectual property, which is essential for maintaining its competitive position [118]. Infrastructure and Product Reliability - The company relies on the stability of infrastructure software, and weaknesses in this area could negatively impact product effectiveness and reliability [116].