Intellinetics(INLX) - 2024 Q1 - Quarterly Report

Cautionary Note Regarding Forward-Looking Statements The report contains forward-looking statements based on current plans, intentions, objectives, strategies, projections, and expectations, which are subject to substantial risks, uncertainties, and other factors beyond the company's control - The report contains forward-looking statements based on current plans, intentions, objectives, strategies, projections, and expectations, which are subject to substantial risks, uncertainties, and other factors beyond the company's control[8][9] - Key areas of forward-looking statements include the effects of economic conditions, future financial performance (revenues, net income, cash flow), integration of acquisitions, product development, market position, capital resources, and competitive landscape[10] - Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the report date, and the company undertakes no obligation to update or revise them[11][12] Part I – Financial Information This section presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements This section presents Intellinetics, Inc.'s unaudited condensed consolidated financial statements and detailed notes for Q1 2024 and 2023 Condensed Consolidated Balance Sheets This statement provides a snapshot of the company's assets, liabilities, and stockholders' equity at specific points in time Condensed Consolidated Balance Sheets (Unaudited) | ASSETS (in $) | March 31, 2024 | December 31, 2023 | | :-------------------------------- | :------------- | :---------------- | | Cash | 1,184,944 | 1,215,248 | | Accounts receivable, net | 1,931,342 | 1,850,375 | | Total current assets | 5,029,106 | 5,004,375 | | Property and equipment, net | 880,740 | 924,257 | | Intangible assets, net | 3,781,761 | 3,909,338 | | Goodwill | 5,789,821 | 5,789,821 | | Total assets | 18,916,186 | 19,026,260 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Accounts payable | 278,486 | 194,454 | | Deferred revenues | 2,583,207 | 2,927,808 | | Total current liabilities | 4,851,104 | 4,386,782 | | Notes payable - net of current portion | 1,438,032 | 2,209,242 | | Total liabilities | 8,896,347 | 9,275,539 | | Total stockholders' equity | 10,019,839 | 9,750,721 | | Total liabilities and stockholders' equity | 18,916,186 | 19,026,260 | - Total assets decreased slightly from $19.03 million at December 31, 2023, to $18.92 million at March 31, 2024[16] - Total stockholders' equity increased from $9.75 million to $10.02 million, while total liabilities decreased from $9.28 million to $8.90 million[16] Condensed Consolidated Statements of Operations This statement details the company's revenues, expenses, and net income or loss over a specific period Condensed Consolidated Statements of Operations (Unaudited) | (in $) | For the Three Months Ended March 31, 2024 | For the Three Months Ended March 31, 2023 | | :-------------------------------- | :---------------------------------------- | :---------------------------------------- | | Total revenues | 4,507,084 | 4,186,833 | | Total cost of revenues | 1,607,440 | 1,540,994 | | Gross profit | 2,899,644 | 2,645,839 | | Total operating expenses | 2,934,124 | 2,361,840 | | (Loss) income from operations | (34,480) | 283,999 | | Interest expense, net | (140,234) | (171,436) | | Net (loss) income | (174,714) | 112,563 | | Basic net (loss) income per share | (0.04) | 0.03 | | Diluted net (loss) income per share | (0.04) | 0.03 | - Total revenues increased by 7.6% year-over-year, from $4.19 million in Q1 2023 to $4.51 million in Q1 2024[18] - The company reported a net loss of $174,714 in Q1 2024, compared to a net income of $112,563 in Q1 2023, resulting in a basic and diluted net loss per share of $0.04[18] Condensed Consolidated Statement of Stockholders' Equity This statement outlines changes in the company's equity accounts, including common stock, additional paid-in capital, and accumulated deficit Condensed Consolidated Statement of Stockholders' Equity (Unaudited) | (in $) | Common Stock (Shares) | Common Stock (Amount) | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders' Equity | | :----------------------- | :-------------------- | :-------------------- | :------------------------- | :------------------ | :------------------------- | | Balance, December 31, 2023 | 4,113,621 | 4,114 | 30,841,630 | (21,095,023) | 9,750,721 | | Stock Option Compensation | - | - | 115,456 | - | 115,456 | | Restricted Share Issuance | - | - | 328,376 | - | 328,376 | | Net Loss | - | - | - | (174,714) | (174,714) | | Balance, March 31, 2024 | 4,113,621 | 4,114 | 31,285,462 | (21,269,737) | 10,019,839 | - Total stockholders' equity increased from $9.75 million at December 31, 2023, to $10.02 million at March 31, 2024, despite a net loss, primarily due to stock option compensation and restricted share issuance[20] Condensed Consolidated Statements of Cash Flows This statement reports the cash generated and used by the company across operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (Unaudited) | (in $) | For the Three Months Ended March 31, 2024 | For the Three Months Ended March 31, 2023 | | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Net (loss) income | (174,714) | 112,563 | | Net cash provided by (used in) operating activities | 611,766 | (174,357) | | Net cash used in investing activities | (127,932) | (134,569) | | Net cash used in financing activities | (514,138) | (968,417) | | Net decrease in cash | (30,304) | (1,277,343) | | Cash - beginning of period | 1,215,248 | 2,696,481 | | Cash - end of period | 1,184,944 | 1,419,138 | - Net cash provided by operating activities significantly improved, moving from a use of $174,357 in Q1 2023 to a provision of $611,766 in Q1 2024[22] - Cash at the end of the period decreased slightly to $1.18 million in Q1 2024 from $1.22 million at the beginning of the period, but this represents a much smaller decrease compared to Q1 2023[22] Notes to Condensed Consolidated Financial Statements These notes provide additional information and explanations for the figures presented in the condensed consolidated financial statements 1. Business Organization and Nature of Operations This section describes Intellinetics, Inc.'s operational structure and its core business activities in digital transformation - Intellinetics, Inc. operates through two wholly-owned subsidiaries: Intellinetics Ohio and Graphic Sciences, providing digital transformation products and services[24] - The company's two reporting segments are Document Management (software platform for document capture and management) and Document Conversion (paper-to-digital conversion, storage, and retrieval services)[25] 2. Basis of Presentation This section outlines the accounting principles and standards used in preparing the unaudited condensed consolidated financial statements - The unaudited condensed consolidated financial statements are prepared in accordance with GAAP, including normal recurring adjustments, and should be read in conjunction with the Annual Report on Form 10-K for the fiscal year ended December 31, 2023[26][27][28] 3. Summary of Significant Accounting Policies This section details the key accounting policies and methods applied in the preparation of the financial statements - The company consolidates all subsidiaries where it holds a controlling interest, eliminating significant intercompany balances and transactions[29] - The allowance for credit losses for trade receivables was $109,515 at March 31, 2024, a decrease from $124,103 at December 31, 2023, reflecting a reduction charged to operating results[33][34] - Revenue is categorized into software, SaaS, software maintenance, professional services, and storage/retrieval, with the majority from professional services, followed by software maintenance and SaaS[35] - Deferred revenue, representing amounts billed but not yet recognized, decreased from $2.93 million at December 31, 2023, to $2.58 million at March 31, 2024[38][40] - Software development costs for internal use software of $109,621 were capitalized in Q1 2024, amortized over three years, while expensed software development costs were $159,731[42][43] - The company maintains a 100% valuation allowance on deferred tax assets due to uncertainty of realizing future taxable income, with federal net operating loss carryforwards of approximately $15.5 million as of March 31, 2024[52][54] Segment Revenues and Gross Profit (Unaudited) | Segment (in $) | Three months ended March 31, 2024 | Three months ended March 31, 2023 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Revenues: | | | | Document Management | 1,820,420 | 1,769,483 | | Document Conversion | 2,686,664 | 2,417,350 | | Total revenues | 4,507,084 | 4,186,833 | | Gross profit: | | | | Document Management | 1,556,893 | 1,483,108 | | Document Conversion | 1,342,751 | 1,162,731 | | Total gross profit | 2,899,644 | 2,645,839 | 4. Intangible Assets, Net This section details the company's intangible assets, including trade names, proprietary technology, and customer relationships Intangible Assets, Net (in $) | Category | March 31, 2024 (Net) | December 31, 2023 (Net) | | :-------------------- | :------------------- | :-------------------- | | Trade names | 212,808 | 220,233 | | Proprietary technology | 688,800 | 710,325 | | Customer relationships | 2,880,153 | 2,978,780 | | Total | 3,781,761 | 3,909,338 | - Intangible assets, net, decreased from $3.91 million at December 31, 2023, to $3.78 million at March 31, 2024, primarily due to amortization[61] - Amortization expense for the three months ended March 31, 2024, was $127,577[61] 5. Fair Value Measurements This section discusses the company's fair value measurements, specifically regarding earnout liabilities - The company paid its final earnout liability of $700,000 in January 2023, with no remaining earnout liabilities as of March 31, 2023[63] 6. Property and Equipment This section provides details on the company's property and equipment, including computer hardware, leasehold improvements, and depreciation Property and Equipment, Net (in $) | Category | March 31, 2024 | December 31, 2023 | | :-------------------------------- | :------------- | :---------------- | | Computer hardware and purchased software | 1,455,334 | 1,437,023 | | Leasehold improvements | 395,919 | 395,919 | | Furniture and fixtures | 324,296 | 324,296 | | Less: accumulated depreciation | (1,294,809) | (1,232,981) | | Property and equipment, net | 880,740 | 924,257 | - Net property and equipment decreased from $924,257 at December 31, 2023, to $880,740 at March 31, 2024[64] - Total depreciation expense for Q1 2024 was $61,828, consistent with $61,939 in Q1 2023[64] 7. Notes Payable This section details the company's notes payable to unrelated parties, including principal amounts and future payment obligations Notes Payable to Unrelated Parties (in $) | Category | March 31, 2024 | December 31, 2023 | | :-------------------------------- | :------------- | :---------------- | | Notes payable – "2022 Unrelated Notes" | 1,864,500 | 2,364,500 | | Less unamortized debt issuance costs | (101,468) | (155,258) | | Less current portion | (325,000) | - | | Long-term portion of notes payable | 1,438,032 | 2,209,242 | - The long-term portion of notes payable to unrelated parties decreased from $2.21 million at December 31, 2023, to $1.44 million at March 31, 2024, reflecting a $500,000 principal prepayment[65] - Future minimum principal payments for unrelated notes include $325,000 due in 2025 and $1.54 million due in 2026[65] 8. Notes Payable - Related Parties This section details the company's notes payable to related parties, including principal amounts and interest expense Notes Payable to Related Parties (in $) | Category | March 31, 2024 | December 31, 2023 | | :-------------------------------- | :------------- | :---------------- | | Notes payable – "2022 Related Note" | 600,000 | 600,000 | | Less unamortized debt issuance costs | (32,593) | (39,398) | | Long-term portion of notes payable | 567,407 | 560,602 | - The long-term portion of notes payable to related parties remained stable at approximately $567,407 at March 31, 2024, with the full principal of $600,000 due in 2026[67] - Interest expense for related party notes was $24,805 in Q1 2024, slightly down from $25,879 in Q1 2023[68] 9. Commitments and Contingencies This section outlines the company's legal proceedings, claims, litigation, and future minimum lease payment obligations - The company is involved in ordinary course legal proceedings, claims, and litigation, but currently believes no current matter is expected to have a material adverse impact on its financial position or operations[69] Future Minimum Lease Payments (in $) | For the twelve months ending March 31, | Finance Leases | Operating Leases | | :------------------------------------- | :------------- | :--------------- | | 2025 | 89,954 | 951,885 | | 2026 | 89,954 | 950,991 | | 2027 | 71,204 | 578,184 | | 2028 | 63,855 | 358,282 | | 2029 | 39,194 | 76,821 | | Thereafter | 1,883 | - | | Less Imputed Interest | (55,024) | (333,209) | | Total | 301,020 | 2,582,954 | - Total operating lease expense for Q1 2024 was $234,439, slightly down from $237,449 in Q1 2023[73] 10. Stockholders' Equity This section details the company's common stock, outstanding shares, and shares reserved for warrants and equity incentive plans - As of March 31, 2024, there were 4,113,621 shares of common stock issued and outstanding, with additional shares reserved for warrants and equity incentive plans[74] Outstanding Warrants as of March 31, 2024 | Warrants Outstanding | Exercise Price ($) | Expiry Date | | :------------------- | :----------------- | :---------- | | 124,258 | 4.62 | March 30, 2027 | | 95,500 | 4.00 | March 30, 2027 | | 16,000 | 9.00 | March 30, 2027 | | 17,200 | 12.50 | March 30, 2027 | | 3,000 | 15.00 | March 30, 2027 | 11. Stock-Based Compensation This section outlines the company's stock-based compensation expenses related to restricted stock grants and stock options - On March 19, 2024, 127,500 shares of restricted common stock were granted to employees, resulting in $397,901 of stock compensation expense for Q1 2024[78] - Stock-based compensation for options was $115,456 in Q1 2024, with $432,525 of total unrecognized compensation costs related to stock options as of March 31, 2024[81][82] 12. Concentrations This section highlights significant customer and revenue concentrations, particularly with the State of Michigan and government contracts - The State of Michigan, the largest customer, accounted for 48% of total revenues in Q1 2024 (up from 34% in Q1 2023) and 60% of gross accounts receivable as of March 31, 2024[83][85] - Government contracts, including K-12 education, represented approximately 86% of net revenues in Q1 2024, an increase from 72% in Q1 2023[84] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section discusses Intellinetics' Q1 2024 financial condition and results, covering revenue growth, economic impacts, expenses, liquidity, and cash flows Company Overview This section provides an overview of Intellinetics' business model, operational segments, and key growth strategies - Intellinetics is a document services and software solutions company focused on digital transformation and process automation for small-to-medium businesses and governmental sectors[88] - The company operates through Document Management (software platform) and Document Conversion (paper-to-digital, storage, retrieval) segments, with a growing emphasis on the SaaS model[88][89] - Key growth strategies include investing in market penetration, optimizing pricing, increasing sales force effectiveness, and improving lead generation[90] Executive Overview of Results This section provides a high-level summary of the company's financial performance for Q1 2024, including revenue, operating loss, and cash flow - Revenues increased by $320,251, or 7.6% year-over-year, primarily due to growth in software as a service and professional services[93][97] - The company reported a loss from operations of $34,480 in Q1 2024, compared to income from operations of $283,999 in Q1 2023, largely impacted by a $397,901 stock compensation expense[93][97] - Net cash provided by operating activities was $611,766 in Q1 2024, a significant improvement from $174,357 used in Q1 2023[97] - Employee count increased to 180 (including 36 part-time) as of March 31, 2024, from 167 as of March 31, 2023[97] Financial Impact of Current Economic Conditions This section assesses the impact of current economic conditions, such as inflation and supply chain disruptions, on the company's financial performance - Increased employee wages due to inflation slightly decreased profit margins in Q1 2024, but the company is mitigating this by increasing customer renewal rates[95] - Global supply chain disruptions have had minimal impact, and customer demand has not diminished due to adverse economic conditions as of the report date[96] Results of Operations This section provides a detailed analysis of the company's revenues, costs of revenues, gross profits, and operating expenses Revenues This section analyzes the company's revenue streams by source, highlighting growth in SaaS and professional services Revenues by Source (in $) | Revenue Source | Three months ended March 31, 2024 | Three months ended March 31, 2023 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Sale of software | 5,779 | 15,293 | | Software as a service | 1,405,153 | 1,238,432 | | Software maintenance services | 357,983 | 349,542 | | Professional services | 2,479,678 | 2,299,289 | | Storage and retrieval services | 258,491 | 284,277 | | Total revenues | 4,507,084 | 4,186,833 | - Total revenues increased by 7.6% year-over-year, primarily driven by a 13.5% growth in Software as a Service (SaaS) and a 7.8% increase in professional services[98] - SaaS revenues grew by $166,721 due to new cloud-based solution sales and expanded services for existing customers[99] - Professional services revenues increased by $180,389, mainly from the Document Conversion segment, but future revenues are at risk due to potential renegotiation of pricing with the largest customer[100] Costs of Revenues and Gross Profits This section examines the costs associated with revenue generation and the resulting gross profit margins across different service categories Cost of Revenues by Source (in $) | Cost of Revenues | Three months ended March 31, 2024 | Three months ended March 31, 2023 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Sale of software | 5,065 | 8,181 | | Software as a service | 215,992 | 220,640 | | Software maintenance services | 15,710 | 16,716 | | Professional services | 1,284,063 | 1,187,116 | | Storage and retrieval services | 86,610 | 108,341 | | Total cost of revenues | 1,607,440 | 1,540,994 | - Total cost of revenues increased by 4.3% year-over-year to $1.61 million[102] - Overall gross profit percentage increased to 64.3% in Q1 2024 from 63.2% in Q1 2023, driven by the higher mix of SaaS revenue and strong Document Management margins, partially offset by margin erosion in Document Conversion[103] - Cost of SaaS decreased by 2.1% due to support efficiencies, leading to an increased gross margin of 84.6% for SaaS[104] - Cost of professional services increased by 8.2% due to increased staffing and wage increases in the Document Conversion segment, resulting in a slight decrease in consolidated professional services gross margin to 48.2%[105] Operating Expenses This section analyzes changes in general and administrative, sales and marketing, and depreciation and amortization expenses Operating Expenses (in $) | Operating Expenses | Three months ended March 31, 2024 | Three months ended March 31, 2023 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | General and administrative | 2,128,493 | 1,554,611 | | Sales and marketing | 541,621 | 579,511 | | Depreciation and amortization | 264,010 | 227,718 | | Total operating expenses | 2,934,124 | 2,361,840 | - Total operating expenses increased by 24.2% year-over-year to $2.93 million[106] - General and administrative expenses increased by 36.9%, primarily due to a $397,901 restricted stock award grant and investments in scaling operations (development, finance, SOC2 process, ERP system upgrade) and wage increases[107] - Sales and marketing expenses decreased by 6.5% due to an open position and normal fluctuations in commissions[108] - Depreciation and amortization increased by 15.9% due to increased amortization of capitalized software costs[109] Other Items of Income and Expense This section focuses on non-operating income and expense items, specifically detailing changes in net interest expense - Net interest expense decreased by 18.2% to $140,234 in Q1 2024, primarily due to reduced interest from principal repayments of the 2020 Notes[110] Liquidity and Capital Resources This section assesses the company's ability to meet its short-term and long-term financial obligations, including cash position, working capital, and debt obligations - As of March 31, 2024, the company had $1.2 million in cash and cash equivalents, $0.2 million in net working capital, and an accumulated deficit of $21.3 million[112] - Liquidity was improved by a renewed contract with the largest customer (estimated 21% net rate increase) and an extension of maturity dates for $1.5 million of Unrelated Notes and $0.6 million of Related Notes to December 31, 2025[113] - The largest customer may renegotiate pricing, which could adversely impact future revenues, cash flows, and liquidity[113] - Current debt obligations include $0.3 million due by March 30, 2025, and $2.1 million due by December 31, 2025; operating cash flow alone may be insufficient to meet 2025 obligations, but the company is confident in its ability to seek additional financing or refinancing[114] - Net cash provided by operating activities was $611,766 in Q1 2024, a significant improvement from cash used in Q1 2023[121] - Net cash used in financing activities was $514,138 in Q1 2024, primarily for repayment of notes payable ($500,000) and finance lease liabilities[123] Critical Accounting Policies and Estimates This section confirms that no material changes occurred in the company's critical accounting policies and estimates during Q1 2024 - The preparation of financial statements requires estimates and assumptions, but there were no material changes to critical accounting policies and estimates during Q1 2024[124][125] Item 3. Quantitative and Qualitative Disclosures About Market Risk. This item is not applicable to Intellinetics, Inc. as it is a smaller reporting company - This section is not applicable to smaller reporting companies[126] Item 4. Controls and Procedures. Management concluded the company's disclosure controls and procedures were effective as of March 31, 2024, with no material changes in internal control over financial reporting - As of March 31, 2024, the company's disclosure controls and procedures were deemed effective to provide reasonable assurance that required information is recorded, processed, summarized, and reported timely[128] - No material changes in internal control over financial reporting occurred during the first quarter of 2024[130][131] Part II – Other Information This section provides additional information on legal proceedings, risk factors, equity sales, defaults, and other disclosures Item 1. Legal Proceedings. The company reported no material legal proceedings during the period - There are no legal proceedings to report[133] Item 1A. Risk Factors. No material changes to risk factors were reported, except for a new significant risk regarding potential pricing renegotiation with the largest customer - No material changes to risk factors were reported, except for a new risk concerning the largest customer potentially renegotiating pricing on a significant portion of work[134][135] - Such a renegotiation could take effect in Q4 2024 and, if resulting in a pricing reduction, could materially and adversely affect the company's business, operating results, and cash flows, despite potential mitigation efforts[135] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. The company reported no unregistered sales of equity securities or use of proceeds during the period - There were no unregistered sales of equity securities or use of proceeds[136] Item 3. Defaults Upon Senior Securities. The company reported no defaults upon senior securities during the period - There were no defaults upon senior securities[137] Item 4. Mine Safety Disclosures. This item is not applicable to the company - This section is not applicable[138] Item 5. Other Information. No Rule 10b5-1 or non-Rule 10b5-1 trading arrangements were adopted, modified, or terminated by directors or Section 16 officers during Q1 2024 - No Rule 10b5-1 or non-Rule 10b5-1 trading arrangements were adopted, modified, or terminated by directors or Section 16 officers during Q1 2024[139] Item 6. Exhibits. This section lists all exhibits filed as part of the Quarterly Report on Form 10-Q, including certifications, XBRL documents, and taxonomy extensions - The report includes certifications from the Principal Executive Officer and Principal Financial Officer (Exhibits 31.1, 31.2, 32.1, 32.2) and various Inline XBRL documents (Exhibits 101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[141][142] Signatures This section includes the official signatures of the company's President, CEO, and CFO, certifying the report's accuracy - The report was signed by James F. DeSocio, President and Chief Executive Officer, and Joseph D. Spain, Chief Financial Officer, on May 14, 2024[144][145]