Intellinetics(INLX) - 2023 Q3 - Quarterly Report

General Information Provides filing details, share count, and cautionary statements for this quarterly report Filing Details 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][2] - Reporting Period: For the Quarterly Period Ended September 30, 2023[2] - Registrant: Intellinetics, Inc, a Nevada corporation[2] - Registrant Status: Smaller reporting company[4] 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 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] - Par value per share: $0.001[5] Cautionary Note Regarding Forward-Looking Statements 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] - 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][10] - The company undertakes no duty or obligation to update or revise any forward-looking statement[12] PART I FINANCIAL INFORMATION Presents the company's unaudited financial statements and management's analysis of financial performance and condition ITEM 1. Financial Statements This section presents the unaudited condensed consolidated financial statements and accompanying notes Condensed Consolidated Balance Sheets 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 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 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 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] - Cash paid during the period for income taxes: $8,344 (2023) vs $11,050 (2022)[22] Notes to Condensed Consolidated Financial Statements Provides detailed disclosures supporting the amounts in the primary financial statements 1. Business Organization and Nature of Operations 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] - The company provides digital transformation products and services through two segments: Document Management (software platform) and Document Conversion (paper-to-digital services)[27] 2. Basis of Presentation 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] - Operating results for interim periods are not necessarily indicative of results for the full fiscal year or any future period[30] 3. Summary of Significant Accounting Policies 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] - 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][47] - Allowance for credit losses: $114,235 as of September 30, 2023, compared to $88,331 as of December 31, 2022[35] - Deferred revenue, primarily from maintenance and software-as-a-service agreements, was $3,132,125 as of September 30, 2023[39][41] - 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] - Capitalized internal use software costs for the nine months ended September 30, 2023, were $348,051, amortized over three years[44][45] - Expensed software development costs for the nine months ended September 30, 2023, were $392,576[46] - A 100% valuation allowance has been established on deferred tax assets due to the uncertainty of realizing future taxable income[52] 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 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][62] - The acquisition resulted in the recognition of $3,466,934 in goodwill[62] - Yellow Folder contributed $2,707,764 in total revenues and $452,443 in net income for the nine months ended September 30, 2023[67] 5. Intangible Assets Provides a breakdown of intangible assets and related amortization expense - Amortization expense for the nine months ended September 30, 2023, was $382,731[68] - Future amortization expense for the twelve months ending September 30, 2024, is estimated at $510,308[69] 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 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][71] - Earnout liabilities were $700,000 as of December 31, 2022[71] 7. Property and Equipment 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] 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 Summarizes outstanding debt obligations to unrelated third parties - Future minimum principal payments of $2,364,500 are due in 2025[74] - Interest expense for the nine months ended September 30, 2023, was $412,494[76] 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 Summarizes outstanding debt obligations to related parties - Interest expense for the nine months ended September 30, 2023, was $77,638[79] 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 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] 11. Commitments and Contingencies 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] - Weighted average remaining lease term: Finance leases 4.4 years, Operating leases 3.8 years (as of September 30, 2023)[85] 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 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] - 255,958 shares of common stock were reserved for issuance upon the exercise of outstanding warrants[86] - Warrants outstanding as of September 30, 2023, have exercise prices ranging from $4.00 to $15.00 and expire on March 30, 2027[88] 13. Stock-Based Compensation 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] - 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] - 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] 14. Concentrations 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] - Government contracts, including K-12 education, represented approximately 79% of net revenues for the nine months ended September 30, 2023[96] - Accounts receivable concentrations from the two largest customers were 29% and 4% of gross accounts receivable as of September 30, 2023[97] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial results, highlighting revenue growth, segment performance, and liquidity Company Overview 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] - The company operates through two reporting segments: Document Management (software platform, SaaS) and Document Conversion (paper-to-digital conversion, storage, and retrieval)[100] - The Software as a Service (SaaS) model is a key revenue growth strategy, with products hosted on Amazon Web Services, Expedient, and Evocative[101][102] Executive Overview of Results 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] - Strong professional services performance, driven by increased Document Conversion project work, led to 33% growth for the nine-month period 2023[105] - Softer demand for transactional storage and retrieval services from a significant customer in the home mortgage lending industry partially offset growth[105] - 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] 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 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] - 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] - Global supply chain disruptions have had a minimal impact on the company[110] - Customer demand has not diminished due to adverse economic conditions as of the report date[110] Uncertainties, Trends, and Risks that can cause Fluctuations in our Operating Results 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] - Past results of operations should not be relied upon as an indication of future performance[111] Reportable Segments 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] - 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] Results of Operations Provides a detailed analysis of revenues, costs, and gross profits by source 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] 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 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][116] Software as a Service Revenues 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] - The nine-month increase was primarily due to the Yellow Folder acquisition, which contributed $909,088 (90% of the increase), and organic growth[117] Software Maintenance Services Revenues 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] - 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] Professional Services Revenues 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] - This increase was primarily the result of a strong recovery in the Document Conversion segment, driven by increased project work[119] - Document Conversion operations contributed $6,433,485 to professional services revenues for the nine-month period 2023[119] Storage and Retrieval Services Revenues 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] - 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] Costs of Revenues and Gross Profits 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] - 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] - The decrease in overall gross profit percentage was primarily driven by an increased mix of relatively lower-margin professional services revenue[124] 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 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] - Gross margin for software revenues increased to 75.8% for the nine-month period 2023 from 52.9% in 2022[125] Cost of Software as a Service 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] - Gross margin for SaaS remained stable at 84.5% in Q3 2023 and 82.2% for the nine-month period 2023[126] Cost of Software Maintenance Services 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] - Gross margin for software maintenance services increased to 96.3% in Q3 2023 and 95.7% for the nine-month period 2023[127] Cost of Professional Services 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] - Gross margins in professional services decreased to 42.6% in Q3 2023 and 44.7% for the nine-month period 2023[128] Cost of Storage and Retrieval Services 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] - Gross margins for storage and retrieval services decreased to 67.1% in Q3 2023 and 66.4% for the nine-month period 2023[129] Operating Expenses 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] 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 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] Change in Fair Value of Earnout Liabilities 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] - Fair value adjustments amounted to $144,999 for the nine-month period 2022[132] Transaction Costs 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] - Transaction costs of $355,281 were incurred during the nine-month period 2022, related to the Yellow Folder acquisition[113][134] Sales and Marketing Expenses 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] Depreciation and Amortization 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] - 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] Other Items of Income and Expense Details non-operating income and expenses, primarily interest expense Interest Expense, Net 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][137] - 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] Liquidity and Capital Resources 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] - 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] - 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][142] 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] Capital Expenditures 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] Cash Provided by Operating Activities 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] Cash Used by Investing Activities 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] Cash Used in and Provided by Financing Activities 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] - 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] Critical Accounting Policies and Estimates 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] - There were no material changes to the critical accounting policies and estimates during the third quarter 2023[151] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk This item is not applicable as the company qualifies as a smaller reporting company - This item is not applicable to smaller reporting companies[152] ITEM 4. Controls and Procedures 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][154] - No material changes in internal control over financial reporting occurred during the period covered by this Quarterly Report[156] PART II OTHER INFORMATION Covers legal proceedings, risk factors, and other required disclosures ITEM 1. Legal Proceedings The company reported no legal proceedings for the period - No legal proceedings were reported[159] ITEM 1A. Risk Factors 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] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] ITEM 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities for the period - No defaults upon senior securities were reported[162] ITEM 4. Mine Safety Disclosures This item is not applicable to the company - This item is not applicable[163] ITEM 5. Other Information The company reported no other information for the period - No other information was reported[164] ITEM 6. Exhibits 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] - 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] SIGNATURES Contains the official signatures of the company's executive officers Report Signatures 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] - Dated: November 14, 2023[170]