Intellinetics(INLX) - 2022 Q3 - Quarterly Report

Part I Financial Statements This section presents Intellinetics, Inc.'s unaudited condensed consolidated financial statements and accompanying notes for the periods ended September 30, 2022 Condensed Consolidated Balance Sheets Total assets grew to $20.76 million by September 30, 2022, driven by the Yellow Folder acquisition, significantly impacting liabilities and equity Condensed Consolidated Balance Sheet Highlights (Unaudited) | Balance Sheet Items | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $5,644,352 | $3,684,268 | | Goodwill | $5,789,821 | $2,322,887 | | Intangible assets, net | $4,547,223 | $968,496 | | Total Assets | $20,759,637 | $11,962,132 | | Total Current Liabilities | $7,129,458 | $3,557,324 | | Total Liabilities | $12,510,618 | $9,300,396 | | Total Stockholders' Equity | $8,249,019 | $2,661,736 | Condensed Consolidated Statements of Operations Q3 2022 revenues rose 22% to $3.86 million with net income, while nine-month revenues grew 14% to $9.98 million, resulting in a net loss Q3 2022 vs Q3 2021 Operating Results (Unaudited) | Metric | Q3 2022 | Q3 2021 | | :--- | :--- | :--- | | Total Revenues | $3,859,627 | $3,171,362 | | Gross Profit | $2,506,185 | $1,915,721 | | Income from Operations | $458,003 | $409,467 | | Net Income | $217,536 | $296,437 | | Diluted EPS | $0.05 | $0.10 | Nine Months 2022 vs 2021 Operating Results (Unaudited) | Metric | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | | Total Revenues | $9,978,782 | $8,716,227 | | Gross Profit | $6,327,040 | $5,334,692 | | Income from Operations | $416,779 | $825,918 | | Net (Loss) Income | ($176,757) | $1,331,656 | | Diluted EPS | ($0.05) | $0.43 | Condensed Consolidated Statements of Cash Flows Operating cash flow provided $1.92 million for the nine months ended September 30, 2022, with significant cash used in investing for the Yellow Folder acquisition, offset by financing activities, increasing cash to $3.78 million Cash Flow Summary for the Nine Months Ended Sep 30 (Unaudited) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,924,734 | $1,408,249 | | Net cash used in investing activities | ($6,841,320) | ($532,151) | | Net cash provided by (used in) financing activities | $6,940,583 | ($954,733) | | Net increase (decrease) in cash | $2,023,997 | ($78,635) | | Cash - end of period | $3,776,627 | $1,829,247 | - The acquisition of Yellow Folder was a major cash event, with $6.38 million paid in cash for the business acquisition[23][24] Notes to Condensed Consolidated Financial Statements These notes detail accounting policies, business segments, the Yellow Folder acquisition's impact, revenue recognition, debt, and customer concentration - The company operates through two reporting segments: Document Management and Document Conversion. The Document Management segment was significantly expanded through the acquisition of Yellow Folder in April 2022[27] - On April 1, 2022, the company acquired substantially all assets of Yellow Folder for a cash purchase price of $6,383,269. This resulted in the recognition of $3,466,934 in goodwill and $3,888,000 in intangible assets[71][72][73] - The company has significant customer concentration. For the nine months ended September 30, 2022, the State of Michigan accounted for 37% of total revenues and Rocket Mortgage accounted for 7%[121] - To finance the Yellow Folder acquisition and for other corporate purposes, the company raised $8.7 million in a private placement on April 1, 2022, through the sale of common stock ($5.74 million) and 12% Subordinated Notes ($2.96 million)[109] Management's Discussion and Analysis (MD&A) Management attributes Q3 2022 revenue growth to the Yellow Folder acquisition, boosting SaaS revenue, while facing challenges in Document Conversion and increased operating expenses - The acquisition of Yellow Folder on April 1, 2022, was the most significant factor impacting financial results, contributing to revenue growth but also increasing operating and transaction costs[129][139] - The company faces headwinds from wage inflation and hiring challenges, which particularly affect the labor-intensive Document Conversion segment and its ability to generate revenue[136][139] - Excluding the Yellow Folder acquisition, underlying SaaS revenue grew 42% year-over-year for the nine-month period, demonstrating strong organic growth in this key strategic area[139] Results of Operations Q3 2022 revenues rose 22% to $3.86 million, driven by SaaS growth, improving gross profit margin to 65%, despite increased operating expenses Revenue by Source (Q3 2022 vs Q3 2021) | Revenue Source | Q3 2022 | Q3 2021 | % Change | | :--- | :--- | :--- | :--- | | Sale of software | $18,390 | $58,779 | -69% | | Software as a service | $1,211,407 | $352,192 | +244% | | Software maintenance services | $352,892 | $336,732 | +5% | | Professional services | $2,007,613 | $2,165,030 | -7% | | Storage and retrieval services | $269,325 | $258,629 | +4% | | Total revenues | $3,859,627 | $3,171,362 | +22% | - The increase in gross profit margin from 60% to 65% YoY in Q3 was principally driven by the increased mix of high-margin SaaS revenue from the Yellow Folder acquisition and strong overall margins in the Document Management segment[151] - Operating expenses for Q3 2022 increased by 36% YoY, primarily due to the addition of Yellow Folder's expenses, higher sales & marketing costs, and increased depreciation and amortization from acquired assets[140][159] Liquidity and Capital Resources As of September 30, 2022, the company had $3.8 million in cash, with management confident in sufficient liquidity for the next 12 months despite upcoming debt maturities - The company had approximately $3.8 million in cash and a working capital deficit of $1.5 million as of September 30, 2022[167] - A significant debt obligation of $2 million is due on February 28, 2023. Management believes it can refinance or otherwise modify these notes on acceptable terms[94][168] - Management believes that current capital resources, expected cash from operations, and potential financing options will be sufficient to meet anticipated cash needs for at least the next 12 months[170] Controls and Procedures Management deemed disclosure controls effective as of September 30, 2022, with no material changes to internal control over financial reporting during the quarter - As of September 30, 2022, the company's disclosure controls and procedures were deemed effective by management[182] - No material changes to the internal control over financial reporting occurred during the third quarter of 2022[184] Part II Other Information This section discloses no legal proceedings, unregistered equity sales, senior security defaults, or material changes to risk factors - The company reported no legal proceedings[187] - There were no material changes to the risk factors disclosed in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021[188] - There were no unregistered sales of equity securities or defaults upon senior securities during the reported period[189][190]