U.S. Securities and Exchange Commission

Washington, D.C. 20549

SCHEDULE 14C INFORMATION

Information Statement Pursuant to Section 14(c) of the

Securities Exchange Act of 1934

Check the appropriate box:

INTELLINETICS, INC.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

Intellinetics, Inc.

2190 Dividend Dr.

Columbus, Ohio 43228

INFORMATION STATEMENT

WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.

Effective February 27, 2020

To Our Stockholders:

Intellinetics, Inc., a Nevada corporation (the “Company” or “Intellinetics” or “us” or “we”) is furnishing this Information Statement to notify stockholders that on February 27, 2020, and on March 1, 2020, the Company received written consents, in lieu of a meeting, from the holders of a majority of the then outstanding shares of common stock, par value $0.001 per share (“Common Stock”). Acting by written consent of stockholders that were the record owners of 10,344,307 shares of Common Stock representing 53% of the voting power outstanding as of February 27, 2020, and as of March 1, 2020 (the “Majority Stockholders”), the stockholders approved the following amendments to our Articles of Incorporation, as amended (“Articles”):

1. An amendment to our Articles to effect a reverse stock split of all of the outstanding shares of our Common Stock, at a ratio of 1-for-50 (the “Reverse Split”), to be effective as soon as possible pending regulatory approvals.

2. Amendments to our Articles to increase the number of shares of Common Stock authorized for issuance from 75,000,000 shares to a total of 160,000,000 shares until such time as the Reverse Split was effected, and upon the effectiveness of the Reverse Split, to reduce the number of shares of Common Stock authorized for issuance to 25,000,000 shares (such amendments, collectively, the “Authorized Share Amendments”).

On February 12, 2020, the Board of Directors of the Company (the “Board”) authorized the Reverse Split and a change in the number of shares of Common Stock authorized for issuance from 75,000,000 to 25,000,000. On February 27, 2020, the Majority Stockholders approved the Reverse Split and the reduction of the authorized number of shares of Common Stock to 25,000,000 by written consent in lieu of a meeting, in accordance with Nevada law. Subsequently on March 1, 2020, the Board and the Majority Stockholders approved (i) a delay in effecting the Reverse Split until regulatory approvals had been given, and (ii) an increase in the number of authorized number of shares of Common Stock to a total of 160,000,000 shares, until such time as the Reverse Split was effected. Accordingly, no meeting has been or will be held and your consent is not required and is not being solicited in connection with the approval of the Reverse Split and Authorized Share Amendments.

Pursuant to the consent in writing by the Majority Stockholders and the unanimous approval by the Board, the Authorized Share Amendments were filed with the Secretary of State of Nevada to reflect the foregoing actions on February 27, 2020, March 2, 2020, and March 3, 2020. The Board believes the Reverse Split and Authorized Share Amendments were necessary and advisable in order to complete various corporate actions, including the acquisition of Graphic Sciences, Inc., a Michigan corporation, the conversion of all of the Company’s outstanding convertible promissory notes, the closing of a private offering of the Company’s Common Stock and promissory notes, and the maintenance of the Company’s capital raising ability and its flexibility in today’s competitive and rapidly changing environment. Accordingly, the Board has determined that the Reverse Split and Authorized Share Amendments were in the best interests of the Company, better positioning the Company to attract potential opportunities and enhance stockholder value.

No action is required by you. The accompanying Information Statement is furnished only to inform our stockholders of the actions described above in accordance with Rule 14c-2 promulgated under the Securities Exchange Act of 1934, as amended.

On February 27, 2020, the record date for determining the stockholders entitled to vote on or consent to the actions described herein, the Company was authorized to issue 75,000,000 shares of its Common Stock, of which 19,346,307 shares of its Common Stock were issued and outstanding. The Common Stock constituted the sole outstanding class of voting securities of Intellinetics, Inc. Each share of Common Stock entitled the holder thereof to one vote on all matters submitted to stockholders. This information statement is being first mailed to such stockholders on or about May 14, 2020.

By Order of the Board of Directors:

APPROVAL OF AN AMENDMENT TO OUR ARTICLES OF INCORPORATION
TO EFFECTUATE A REVERSE STOCK SPLIT AND

CHANGE THE AUTHORIZED NUMBER OF SHARES OF COMMON STOCK

The Board received written consents from the Majority Stockholders to a proposal, which the Board had unanimously approved, to amend the Company’s Articles, adopting the Charter Amendments to: (i) implement the Reverse Split in the ratio of one-for-fifty, (ii) change the number of shares of Common Stock authorized for issuance to 25,000,000 on a post-Reverse Split basis, and (iii) temporarily increase the number of shares of Common Stock authorized for issuance to 160,000,000 until such time as the Reverse Split takes effect (collectively, the “Charter Amendments”).

Reasons for the Reverse Split and Charter Amendments

The Board believes that the Reverse Split and Charter Amendments were necessary and advisable in order to (a) effectuate the acquisition of Graphic Sciences, Inc., a Michigan corporation (the “GSI Acquisition”), the conversion of all of the Company’s outstanding convertible promissory notes (the “Note Conversion”), and a private offering of the Company’s Common Stock and promissory notes (the “Securities Offering”), (b) generally improve the liquidity and marketability of the Company’s Common Stock, and (c) respond to future opportunities which may arise to raise additional capital, based upon future developments in the business affairs of the Company, the market and the economy.

In order to effectuate the GSI Acquisition, Securities Offering, and Note Conversion, the Company issued 126,229,300 additional shares of Common Stock on a pre-Reverse Split basis. Previously, the number of shares of Common Stock authorized by the Company’s Articles was 75,000,000 shares of Common Stock. Of the 75,000,000 authorized shares of Common Stock, 19,346,307 shares were issued and outstanding as of January 24, 2020, and 38,448,784 shares were reserved for issuance for (i) the exercise of warrants, (ii) the conversion of convertible notes outstanding (including conversion of any accrued interest on such notes as of January 24, 2020), and (iii) the 2015 Intellinetics Inc. Equity Incentive Plan. Thus, either a Reverse Split or increase in authorized shares, or both, were required in order to effectuate the GSI Acquisition, Securities Offering, and Note Conversion.

The Board of Directors believes that the relatively low market price per share of the Company’s Common Stock before the Reverse Split had impaired the marketability of the Common Stock to institutional investors and members of the investing public. In theory, the number of shares outstanding should not, in and of itself, affect the marketability of the Common Stock, the nature of investors who purchase the Common Stock, or the Company’s reputation in the financial community. In practice, however, the Company believes many brokerage firms and institutional investors are reluctant to recommend lower-priced stocks to their clients or to hold them in their portfolios because they are perceived to be speculative in nature. This impairment of marketability may affect not only the liquidity and trading price of the Common Stock, but also the Company’s ability to raise additional capital through the sale of equity securities or securities convertible into equity securities. In addition, many brokerage houses have policies and practices that discourage individual brokers within those firms from dealing in lower-priced stocks. Some of those policies and practices involve time-consuming procedures that make the handling of lower-priced stock economically unattractive. The brokerage commission on a sale of lower-priced stock may also represent a higher percentage of the sale price than the brokerage commission on a higher-priced issue. Any reduction in brokerage commission resulting from a Reverse Split could be offset, however, in whole or in part, by increased brokerage commissions required to be paid by stockholders selling “odd lots” created by the Reverse Split.

The Board of Directors believed that the decrease in the number of shares of Common Stock outstanding resulting from the Reverse Split would increase the trading price of the outstanding shares and thus stimulate greater interest in the Common Stock by the financial community and the investing public, promote greater liquidity for the Company’s stockholders, and result in a bid price level for the Common Stock that may in the future permit it to obtain an exchange listing. The Board also believed that the Reverse Split would result in a price level for the Common Stock that would mitigate the reluctance, policies and practices of brokerage firms, and diminish the adverse impact of trading commissions and recommendation restrictions on the potential market for the Company’s Common Stock. Although any increase in the market price of the Common Stock resulting from the Reverse Split may be proportionately less than the decrease in the number of shares outstanding, the Board of Directors believes that the proposed Reverse Split should result in a market price for the shares that would be high enough to overcome the reluctance, policies and practices at brokerage houses and institutional investors referred to above and to diminish the adverse impact of correspondingly high trading commissions on the market for the Common Stock.

However, there is no assurance that the Reverse Split will achieve the desired results, that the price per share of the Common Stock after the Reverse Split will maintain a level that is proportionate with the decrease in the number of shares, that the Common Stock will achieve the desired additional marketability, or that any price increase can be sustained for a prolonged period of time. Also, it is possible that the liquidity of the Common Stock after the Reverse Split may be adversely affected by the reduced number of shares outstanding.

Reasons for the Change in Authorized Shares

As a result of and in conjunction with the Reverse Split, the Majority Stockholders also adopted and approved an amendment to our Articles of Incorporation in order to change the number of shares of Common Stock authorized for issuance to 25,000,000 shares on a post-Reverse Split basis. If the Reverse Split had been completed with no other changes, a total of 75,000,000 shares would have been authorized for issuance, and of those, only 3,113,374 shares would have been either issued and outstanding or reserved for issuance. As a result, we believe that 25,000,000 shares of Common Stock is an appropriate number of authorized shares, which will allow flexibility to use our Common Stock for corporate purposes in the future, including public or private offerings to raise capital, equity-based agreements designed to attract talent, strategic relationships, and for other strategic and general business and financial purposes. In addition, the Majority Stockholders adopted and approved an amendment to our Articles of Incorporation in order to temporarily increase the number of shares of Common Stock authorized for issuance to 160,000,000 shares until such time as the Reverse Split was processed by OTC Capital Markets.

Principal Effects of the Charter Amendments

The increase in the number of authorized shares of Common Stock to 160,000,000 shares became effective on March 2, 2020. The amendments to our Articles effecting the Reverse Split and reduction of the Common Stock to 25,000,000 authorized shares were filed with the Secretary of State with the State of Nevada on March 3, 2020, and were processed by the OTC Capital Markets on March 20 (the “Effective Date”). Upon the Effective Date, each fifty shares of Common Stock then issued and outstanding (“Pre-Split Common Stock”) automatically, without any action on the part of the holders of such Common Stock, were converted into one share of Common Stock (“Post-Reverse Split Common Stock”), subject to the cash payment for fractional shares discussed below. From and after the Effective Date of the Reverse Split, certificates representing shares of Pre-Split Common Stock are deemed to represent only the number of whole shares of Post-Reverse Split Common Stock into which the shares of Pre-Split Common Stock were converted and the right to receive cash in lieu of any fractional share of Post-Reverse Split Common Stock.

Based upon the 145,575,607 shares of Common Stock outstanding at the close of business on March 19, the Reverse Split reduced the number of outstanding shares of Common Stock to 2,810,865 shares, or by 98%. The Reverse Split did not affect the par value of the Common Stock, which was and will remain $0.001 per share. Except for changes resulting from the Reverse Split as described herein, the rights and privileges of holders of shares of Common Stock remain unchanged, and the Reverse Split does not result in any change of the relative equity interest in the Company or the voting power or the rights and privileges of the holders of Common Stock.

After the Reverse Split, each outstanding option or warrant to purchase shares of Common Stock automatically became an option or warrant, as the case may be, to purchase 2% (or 1/50^th) of the number of shares subject to the option or warrant immediately prior to the Reverse Split at an exercise price which is 50 times the exercise price of the option or warrant immediately prior to the Reverse Split, subject to adjustment as a result of the elimination of fractional shares. The aggregate number of shares of Common Stock reserved for issuance upon the exercise of outstanding warrants and options decreased from approximately 38,448,784 shares of Common Stock to approximately 768,975 shares of Common Stock, subject to adjustment as a result of the elimination of fractional shares. The Company has obtained a new CUSIP number for the Common Stock effective at the time of the Reverse Split.

Because one effect of the Charter Amendments is to decrease the number of shares of Common Stock outstanding without any increase in the par value of the Common Stock, the Company’s stated capital is reduced, but the aggregate capital in excess of par value attributable to the outstanding Common Stock is correspondingly increased. Under Nevada law, the Board has the authority, subject to certain limitations, to transfer some or all of such capital in excess of par value from capital to surplus. The Board of Directors has no plans to make such a transfer of capital at this time.

Exchange Of Certificates

As soon as practicable after the Effective Date, stockholders had the option, but were not required, to exchange their certificates representing shares of Pre-Split Common Stock (“Pre-Split Certificates”) for certificates representing the number of whole shares of Post-Reverse Split Common Stock (“Post-Reverse Split Certificates”) into which the shares of Pre-Split Common Stock have been converted as a result of the Reverse Split. After the Effective Date, each stockholder received a letter of transmittal from the Company’s transfer agent, Standard Registrar and Transfer (the “Exchange Agent”), who will act as the Exchange Agent in the exchange of stock certificates, containing the necessary materials and instructions. In order to receive Post-Reverse Split Certificates, stockholders must surrender their Pre-Split Certificates pursuant to the Exchange Agent’s instructions, together with properly executed and completed letters of transmittal and such evidence of ownership of such shares as the Company or the Exchange Agent may require, plus the applicable exchange fees. Pre-Split Certificates not presented for surrender after the Effective Date will be exchanged for Post-Reverse Split Certificates the first time they are presented for transfer. From and after the Effective Date, each Pre-Split Certificate will, until surrendered in exchange as described above, be deemed for all corporate purposes after the Effective Date to evidence ownership of the whole number of shares of Post-Reverse Split Common Stock into which the shares evidenced by such Pre-Split Certificate have been converted pursuant to the Reverse Split, plus the right to receive the cash payment in lieu of any fractional shares of Post-Reverse Split Common Stock described below.

Elimination Of Fractional Shares

No fractional shares of Post-Reverse Split Common Stock were issued. In lieu of receiving fractional shares, stockholders who would otherwise be entitled to receive fractional shares of Post-Reverse Split Common Stock, upon surrender of their Pre-Split Certificates, received a cash payment in lieu thereof equal to the fair market value of such fractional share. Holders of less shares of Common Stock than the number of shares of Pre-Split Common Stock which became converted into one share of Post-Reverse Split Common Stock as a result of the Reverse Split on the Effective Date no longer were stockholders of the Company. The fair market value of the Post-Reverse Split Common Stock was based on the last sale price of the Common Stock as reported by the OTCQB on the date immediately preceding the Effective Date, which was $0.08.

No Dissenter’s Rights

Under Nevada law, stockholders were not be entitled to dissenter’s rights with respect to the Charter Amendments, and the Company did not independently provide stockholders with any such right.

Exchange Act Rule 13e-3

The Charter Amendments were not intended to and did not have the effect of a “going private” transaction under Rule 13e-3.

Certain Federal Income Tax Consequences

The following is a summary of the material anticipated federal income tax consequences of the Charter Amendments to stockholders of the Company. This summary is based upon the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), and the applicable treasury regulations promulgated thereunder, judicial authority and administrative rulings and practice, all as in effect on the date hereof. Legislative, judicial or administrative rules and interpretations are subject to change, potentially on a retroactive basis, at any time and therefore could alter or modify the statements and conclusions set forth below. For the purpose of this discussion, it is assumed that the shares of Common Stock are held as capital assets by stockholders who are United States persons (i.e., citizens or residents of the United States or domestic corporations).

This summary does not purport to be complete and does not address all aspects of federal income taxation that may be relevant to a particular stockholder in light of such stockholder’s personal investment circumstances, stockholders holding Common Stock as security for borrowings or those stockholders subject to special treatment under the federal income tax laws (for example, life insurance companies, tax-exempt organizations, foreign corporations and nonresident alien individuals). The summary also does not discuss any consequences of the Charter Amendments under any state, local, foreign, gift or estate tax laws.

No ruling from the Internal Revenue Service or opinion of counsel will be obtained regarding the federal income tax consequences to the stockholders of the Company as a result of the Charter Amendment. ACCORDINGLY, EACH STOCKHOLDER IS ENCOURAGED TO CONSULT HIS/HER TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT TO SUCH STOCKHOLDER, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME TAX LAWS.

The Company believes that the Reverse Split is a tax-free recapitalization to the Company and its stockholders. If the Reverse Split qualifies as a recapitalization described in Section 368(A)(1)(E) of the Code, (i) no gain or loss will be recognized by the Company in connection with the Reverse Split; (ii) no gain or loss will be recognized by holders of Common Stock who exchange their shares of Pre-Split Common Stock for shares of Post-Reverse Split Common Stock, except that holders of Common Stock who receive cash in lieu of fractional shares will be treated as if the fractional shares were distributed to such holders of shares of Pre-Split Common Stock and then redeemed by the Company and will recognize gain or loss for federal income tax purposes on the redemption of the fractional shares equal to the difference, if any, between a holder’s basis in the fractional share and the amount of cash received, which gain or loss will be capital gain or loss and will be a long-term capital gain or loss if the fractional shares were held for more than one year; (iii) the tax basis of the shares of Post-Reverse Split Common Stock received by holders of shares of Pre-Split Common Stock will be the same as the tax basis of the shares of Pre-Split Common Stock exchanged therefor, less the tax basis allocated to fractional share interests; and (iv) the holding period of the shares of Post-Reverse Split Common Stock in the hands of holders of shares of Post-Reverse Split Common Stock will include the holding period of their shares of Pre-Split Common Stock exchanged therefor. The Company expects that less than 5% of the total fair market value of its Common Stock will be converted into cash in lieu of issuing fractional shares of Common Stock.

Interest of Certain Persons In or Opposition to Matters to be Acted Upon

No officer or director has any substantial interest in the Charter Amendments other than in their roles as an officer or director and their ownership of securities issued by the Company and as set forth below.

The Company retained Taglich Brothers, Inc. (the “Placement Agent”) as the Placement Agent for the Securities Offering and Note Conversion, and on an exclusive basis to render financial advisory and investment banking services to the Company in connection with the GSI Acquisition. Compensation for all the foregoing services consisted of a $300,000 success fee for the GSI Acquisition, 1,762,500 shares of Common Stock for the Note Exchange, and $440,000 in cash and warrants to purchase 4,775,000 shares of Common Stock exercisable at $0.08 per share for the Securities Offering. Robert Schroeder, a Director of the Company, is the Vice President of Investment Banking at the Placement Agent.

Householding

Regulations regarding the delivery of copies of information statements to stockholders permit us, banks, brokerage firms and other nominees to send one information statement to multiple stockholders who share the same address under certain circumstances. This practice is known as “householding.” Stockholders who hold their shares through a bank, broker or other nominee may have consented to reducing the number of copies of materials delivered to their address. In the event that a stockholder wishes to revoke a “householding” consent previously provided to a bank, broker or other nominee, the stockholder must contact the bank, broker or other nominee, as applicable, to revoke such consent. If a stockholder wishes to receive a separate information statement, we will promptly deliver a separate copy to such stockholder that contacts us by mail at Intellinetics, Inc., 2190 Dividend Dr., Columbus, Ohio 43228 or on our website at www.intellinetics.com. Any stockholders of record sharing an address who now receive multiple copies of our annual reports, proxy statements and information statements, and who wish to receive only one copy of these materials per household in the future should also contact Investor Relations by mail or telephone as instructed above. Any stockholders sharing an address whose shares of Common Stock are held by a bank, broker or other nominee who now receive multiple copies of our annual reports, proxy statements and information statements, and who wish to receive only one copy of these materials per household, should contact the bank, broker or other nominee to request that only one set of these materials be delivered in the future.

acquisition of graphic sciences, inc.

In accordance with our Articles and Bylaws and the laws of the State of Nevada, our stockholders were not entitled to vote to approve our acquisition of GSI. However, the following information pertaining to the acquisition of GSI is being furnished pursuant to Note A of Schedule 14A and Item 1 of Schedule 14C.

THE COMPANIES

Intellinetics, Inc.

The Company is a document management software and services provider. The Company’s offices are located at 2190 Dividend Dr., Columbus, Ohio 43228, and its telephone number is 614-921-8170. The Company was incorporated in Nevada in 1997. For additional information about the Company and its business, see “Where You Can Find More Information” on the last page of this Information Statement.

Graphic Sciences, Inc.

GSI is a document management company that provides indexing and scanning services, physical document storage, and retrieval services. GSI’s offices are located at 1551 E. Lincoln Ave., Madison Heights, MI 48071, and its telephone number is 248-549-6600.

Services Offered

GSI’s service offerings are as follows:

● Digital Scanning Services. These services include paper scanning, newspaper and microfilm scanning, microfiche scanning, aperture card scanning, drawing scanning, and book scanning. Most government files must be retained long term or permanently, making such clients a prime candidate for digital conversion. There are four production categories for these services, consisting of document prep, document scanning, microfilm scanning, and indexing.

● Microfilm and Microfiche. GSI provides microfilming/microfiche, converting scanned images to microfilm or microfiche, and microfilm/microfiche preservation and duplication.

● Box Storage Services. GSI provides physical document storage and retrieval services for its clients.

● Scanning Equipment, Software and Repair. GSI sells and services document image software, document scanners, and microfilm scanners, readers and printers. This is a smaller, slowly declining part of the company’s business.

Employees

GSI operates with 72 full-time employees, including 10 to 15 temps as needed. Labor rates are competitive, and a large portion of employees are lower-paid hourly workers. Document preparation personnel prepare client documents for scanning. GSI operates in two 10-hour shifts, Monday through Friday. Additional hours are possible if workload demands. GSI’s data entry group operates five days a week, 16 hours a day, with expansion as needed by specific projects. Many of GSI’s employees have been with them for many years. GSI’s information technology staff average 25 years of service each. The average length of employment company-wide is 12 years.

Facilities

GSI’s main facility is 36,000 square feet of leased space in Madison Heights. Records storage uses about 20,000 square feet, with the remainder of the space used for production, sales, and administration. In 2016, the company added a second 20,000 square foot building for document storage.

GSI owns and operates an extensive collection of the specialized equipment necessary for scanning images or converting microfilm to digital images. GSI’s digital scanning and image capture devices routinely operate five days per week, 16 hours per day. As needed, operations can be expanded up to 7 days per week, 24 hours per day.

GSI’s logistics department includes a fleet of six vehicles for pickup and delivery of client materials. GSI also has the ability to provide on-site capture operations for clients needing such services.

Customers

While GSI serves both governmental and private customers, governmental contracts generate a majority of its revenues. Over 75% of GSI’s revenues are generated by various municipalities within and subdivisions of the State of Michigan. All such customer relationships are governed by GSI’s contract with the State of Michigan, discussed below. GSI’s second most significant customer accounts for approximately 10% of its revenues.

The State of Michigan Contract

GSI’s contract with the State of Michigan is for five years from June 1, 2018 to May 30, 2023, with a provision for two extensions of one year each. The contract is issued to GSI through the Michigan Department of Management and Budget, Enterprise Procurement and managed through the Department of Management and Budget, Records Management Services Division (RMS).

The contract provides municipalities, governmental subdivisions, and local and state government agencies access to digital and micrographic conversion services. These entities have the option to perform these conversion services internally if they so choose. Typically, many elect to have these services outsourced to GSI.

All municipalities, subdivisions, and agencies are able to use the services and prices provided under this contract. For billing purposes, the work GSI performs is invoiced to RMS and the end user is invoiced through the State of Michigan accounting system. GSI does not invoice the end user directly, and GSI has a single point of contact for managing billing and receipt for all entities included within the State of Michigan. In effect, the state acts as a reseller of GSI’s services to the other agencies and charges a markup on the amount GSI charges to each municipality, subdivision, or agency.

Market Price and Dividends

Market Information

GSI’s capital stock consists of 3,000 shares of common stock. There has never been any established public trading market for GSI’s stock.

Holders

As of February 27, 2020, there were four (4) holders of GSI’s capital stock. No officers, directors, or other affiliates of the Company were holders of GSI’s capital stock.

Dividends

No dividends on GSI’s common stock were paid in either of the two most recent fiscal years.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following management’s discussion and analysis of financial conditions and results of operations of GSI for the fiscal twelve months ended September 30, 2019, and 2018, and the fiscal three months ended December 31, 2019 and 2018 should be read in conjunction with GSI’s financial statements and the notes to those financial statements that are included elsewhere in this Information Statement.

We caution you that any forward-looking statements included in this section are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based.

Company Overview

GSI, with locations in Madison Heights, Oak Park, and Traverse City, Michigan, is a closely held Michigan corporation whose principal business activities consist of providing document imaging services, document storage and retrieval, the sale and service of related document imaging equipment and software to customers located principally in Michigan, Ohio, and Indiana. Multi-year state and local government contracts account for the majority of GSI’s sales. GSI operates a business with sales that are highly concentrated in two customers: the State of Michigan and Quicken Loans.

How We Evaluate GSI’s Performance

The major qualitative and quantitative factors we consider in the evaluation of GSI’s operating results include the following:

Recent Developments

In March 2020, the World Health Organization declared the global novel coronavirus disease (COVID-19) outbreak a pandemic. As a result of the spread of COVID-19, economic uncertainties have arisen that are likely to negatively impact the results of operations. Currently, GSI has had to reduce its operations in the State of Michigan to only process those work orders deemed essential by the State of Michigan. However, the Company cannot reasonably estimate at this time the specific extent, duration or full impact that the COVID-19 pandemic will have on its financial condition and operations.

On March 2, 2020, 100% of the Company’s capital stock was sold for a purchase price of approximately $3,500,000 subject to a post-closing net working capital adjustment. In addition to the initial purchase price, three annual potential earn out payments of up to an aggregate of $2,500,000 will be receivable to the sellers over three years if certain gross profit levels are achieved.

Executive Overview of Results

Below are GSI’s key financial results for the fiscal year ended September 30, 2019 (consolidated unless otherwise noted):

Results of Operations

Revenues

GSI reported total revenues of $6,710,309 and $5,356,430 for the twelve months ended September 30, 2019 and 2018, respectively, representing an increase of $1,353,879 or 25%. GSI reported total revenues of $1,837,610 and $1,287,383 for the three months ended December 31, 2019 and 2018, respectively, representing an increase of $550,227 or 43%. The net increase in total revenues year-over-year is primarily attributable to the volume and complexity of work orders received by GSI’s existing customers, including an expansion in sales to its largest customer, the State of Michigan.

Costs of Revenue

The cost of revenues during the twelve months ended September 30, 2019 and 2018 were $3,394,040 and $3,477,929, respectively, representing a slight decrease of $83,889, or 2%. The cost of revenues during the three months ended December 31, 2019 and 2018 were $1,021,316 and $944,601, respectively, representing an increase of $76,715, or 8%. The relative constancy in cost of revenue year-over-year is primarily the result of a relatively unchanged number of production employees and expenses.

Gross Margins

Overall gross margin for the twelve months ended September 30, 2019 and 2018 were 49% and 35%, respectively, representing an increase of 41%. Overall gross margin for the three months ended December 31, 2019 and 2018 were 44% and 27%, respectively, representing an increase of 17%. The increase in gross margin year-over-year is primarily a result of increased efficiency achieved when working on a higher volume of work orders.

Operating Expenses

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $2,273,511 during the twelve months ended September 30, 2019 as compared with $1,781,266 during the twelve months ended September 30, 2018, representing an increase of $492,245 or 28%. The increase in selling, general, and administrative expenses year-over-year was principally related to executive compensation. Selling, general and administrative expenses were $322,610 during the three months ended December 31, 2019 as compared with $268,254 during the three months ended December 31, 2018, representing an increase of $54,354 or 20%. The increase in selling, general, and administrative expenses year-over-year was principally related to professional fees.

Other Expense, Net

Other expense, net, was ($186,604) during the twelve months ended September 30, 2019 as compared with ($141,627) during the twelve months ended September 30, 2018, representing a decrease of $44,977 or 32%. The decrease year-over-year resulted primarily from a gain on lease termination. Other expense, net, was ($26,295) during the three months ended December 31, 2019 as compared with ($44,676) during the three months ended December 31, 2018, representing an increase of $18,381 or 41%.

Liquidity and Capital Resources

GSI has operated with a revolving line of credit and a convertible line of credit. As of September 30, 2019, GSI did not have an outstanding balance with respect to either line of credit.

GSI also operated by issuing notes payable to certain of its shareholders. As of September 30, 2019, GSI had an outstanding balance of $556,401 with respect to shareholder loans. All shareholder loans were paid in full by the Sellers at the time of the closing of the GSI Acquisition.

GSI had no debt as of March 2, 2020, and has not since acquired any.

Cash Provided by Operating Activities.

Net cash provided by or used in operating activities for the twelve months ended September 30, 2019 and 2018, was $673,925 and ($17,951), respectively. During the twelve months ended September 30, 2019, the net cash provided by operating activities was primarily attributable to net income adjusted for net non-cash items of $32,036. During the twelve months ended September 30, 2018, the net cash used in operating activities was primarily attributable to the net loss adjusted for net non-cash items of $25,141. Net cash provided by or used in operating activities for the three months ended December 31, 2019 and 2018, was $139,787 and ($169,862), respectively. During the three months ended December 31, 2019, the net cash provided by operating activities was primarily attributable to net income adjusted for net non-cash items of ($211,167). During the three months ended December 31, 2018, the net cash used in operating activities was primarily attributable to the net loss adjusted for net non-cash items of ($192,212).

Cash Provided/Used by Investing Activities.

Net cash used in investing activities for the twelve months ended September 30, 2019, and 2018 amounted to $91,781 and $13,031, respectively, and was related to the acquisition of property and equipment. Net cash used in investing activities for the three months ended December 31, 2019, and 2018 amounted to $11,923 and $8,511, respectively, and was related to the acquisition of property and equipment.

Capital Expenditures

There were no material commitments for capital expenditures as of September 30, 2019 or December 31, 2019.

Cash Provided/Used by Financing Activities.

Cash provided/used by financing activities consists of proceeds and repayment on GSI’s line of credit and shareholder notes, in addition to payments on capital lease obligations.

Net cash used by financing activities for the twelve months ended September 30, 2019 amounted to $629,730, resulting from payments on the line of credit, shareholder notes, and capital lease obligations. Net cash provided by financing activities for the twelve months ended December 31, 2018 amounted to $56,451, resulting from borrowings from GSI’s line of credit, in addition to smaller payments on shareholder notes and capital lease obligations.

Net cash used by financing activities for the three months ended December 31, 2019 amounted to $20,712 resulting from payments on the shareholder notes, and capital lease obligations. Net cash provided by financing activities for the three months ended December 31, 2018 amounted to $88,132, resulting from borrowings from GSI’s line of credit, in addition to smaller payments on the shareholder notes.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period. We regularly make estimates and assumptions that affect the reported amounts of assets and liabilities. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources.

The actual results experienced by GSI may differ materially and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, GSI’s future results of operations will be affected.

These critical accounting policies and estimates by our management are set forth in the Notes to the Condensed Financial Statements, Summary of Significant Accounting Policies.

Changes in and Disagreements with Accountants.

Prior to the GSI Acquisition, GSI was not a public reporting company, and it historically engaged Cohen & Company (“Cohen”) as its outside accounting firm. Cohen compiled GSI’s financial statements, but did not audit its financial statements. There were no disagreements between GSI and Cohen on any matter regarding accounting principles or practices during the fiscal years ended September 30, 2019 or 2018, or any subsequent interim period.

There were no reportable events (as that term is used in Item 304(a)(1)(v) of Regulation S-K) between GSI and Cohen occurring during GSI’s fiscal years ended September 30, 2019 or 2018 or any subsequent interim period preceding the date of the GSI Acquisition.

For purposes of the GSI Acquisition, GSI engaged GBQ Partners LLC, the independent registered public accounting firm of the Company, to audit the financial statements of GSI for the two fiscal years ended September 30, 2019 and 2018. There were no disagreements between GSI and GBQ Partners LLC with respect to the preparation of the audited financials.

Graphic Sciences, Inc. Financial Statements

Financial Statements

Graphic Sciences, Inc.

September 30, 2019 and 2018

Contents

To the Board of Directors and Shareholders

Graphic Sciences, Inc.

Madison Heights, Michigan

Independent Auditor’s Report

We have audited the accompanying financial statements of Graphic Sciences, Inc., which comprise the balance sheets as of September 30, 2019 and 2018, and the related statements of operations and accumulated earnings (deficit) and cash flows for the years then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Graphic Sciences, Inc. as of September 30, 2019 and 2018, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Columbus, Ohio

May 11, 2020

Graphic Sciences, INC.

Balance Sheets

September 30, 2019 and 2018

The accompanying notes are an integral part of the financial statements.

Graphic Sciences, INC.

Balance Sheets (continued)

September 30, 2019 and 2018

The accompanying notes are an integral part of the financial statements.

Graphic Sciences, INc.

Statements of Operations and Accumulated Earnings (Deficit)

For the Years Ended September 30, 2019 and 2018

The accompanying notes are an integral part of the financial statements.

Graphic Sciences, INc.

Statements of Cash Flows

For the Years Ended September 30, 2019 and 2018

The accompanying notes are an integral part of the financial statements.

GRAPHIC SCIENCES, INC.

Notes to Financial Statements

For the Years Ended September 30, 2019 and 2018

Nature and Scope of Business

Graphic Sciences, Inc. (the Company), with locations in Madison Heights, Oak Park, and Traverse City, Michigan, is a closely held Michigan corporation whose principal business activities consist of providing document imaging services and the sale and service of related document imaging equipment and software to customers located principally in Michigan, Ohio, and Indiana.

Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Accounts Receivable and Credit Policies

Accounts receivable are uncollateralized customer obligations due under normal trade terms, and are stated at the amount the Company expects to collect from outstanding balances. There are no interest charges on unpaid balances.

The Company’s invoicing is done based on agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. Accounts receivable unbilled represent services performed but not billed as of the reporting date.

Management estimates an allowance for doubtful accounts based on specifically identified amounts that are believed to be uncollectible and an additional allowance based on certain percentages of the aged receivables, which are determined based on historical experience and a current assessment of the general financial conditions affecting the customer base. At September 30, 2019 and 2018, management believes all accounts to be collectible and therefore no allowance for doubtful accounts has been recorded.

Inventory – Parts and Supplies

Inventories are valued at the lower of cost or net realizable value. Costs are determined using the first-in, first-out method. Inventory consistent of parts and supplies used for scanning services. A provision for potentially obsolete or slow-moving inventory to is made based on inventory levels, future sales forecasted and management’s judgment of potentially obsolete inventory. The Company recorded an allowance of $30,000 and $12,000 at September 30, 2019 and 2018, respectively.

GRAPHIC SCIENCES, INC.

Notes to Financial Statements

For the Years Ended September 30, 2019 and 2018

Summary of Significant Accounting Policies (continued)

Property and Equipment

Property and equipment are carried at cost. Depreciation is calculated using the straight-line and declining balance methods over the estimated useful lives of the assets. Maintenance and repairs, which do not improve or extend the estimated useful lives of the respective assets, are expensed as incurred. Major improvements or betterments are capitalized. Assets purchased, but not placed in service, are capitalized and depreciation is not computed until the asset is placed in service. When property or equipment is sold or retired, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss is included in income. Estimated useful lives by major asset class are as follows:

Depreciation expense of property and equipment was approximately $124,600 and $97,200 for the years ended September 30, 2019 and 2018, respectively.

Revenue Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable, and collectability of the selling price is reasonably assured. Service contract payments received in advance are recorded as deferred revenue and are recognized over the term of the associated contract.

Shipping and Handling Costs

Shipping and handling costs are charged to cost of sales in the statements of operations and accumulated earnings (deficit).

Rent Expense

Rental expense for leases that contain a predetermined fixed escalation of the minimum rent is recognized on a straight-line basis over the term of the lease. The difference between the recognized rental expense and the amounts payable under the lease is recorded as prepaid or deferred rent on the accompanying balance sheets.

GRAPHIC SCIENCES, INC.

Notes to Financial Statements

For the Years Ended September 30, 2019 and 2018

Summary of Significant Accounting Policies (continued)

Income Taxes

The Company accounts for income taxes in accordance with U.S. GAAP. The accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues.

The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

Tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term “more likely than not” means a likelihood of more than 50%; the terms “examined” and “upon examination” also include resolution of the related appeals or litigation processes, if any. A tax position that meets the “more likely than not” recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the “more likely than not” recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment.

New Accounting Pronouncement

In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 clarifies the accounting principles for recognizing contract revenue between a vendor and a customer for the provision of goods and services. The update is effective for the Company for annual periods beginning after December 15, 2018. Management is in the process of determining the effect of this change on its accounting and financial statement disclosures.

In February 2016, FASB issued ASU 2016-02, Leases, a new standard for both lessees and lessors. Under its core principle, a lessee will recognize lease assets and liabilities on the balance sheet for nearly all lease arrangements. The new standard is effective for annual periods beginning after December 15, 2020. The Company has not yet determined the effect of the pronouncement on the financial statements.

Cash

The Company maintains cash at financial institutions which may exceed federally insured amounts at various times.

GRAPHIC SCIENCES, INC.

Notes to Financial Statements

For the Years Ended September 30, 2019 and 2018

Line of Credit

The Company has a Security Agreement (LSA) with a third party that provides credit facilities for 1) a revolving line of credit and 2) a convertible line of credit.

A description of each line is as follows:

Under the LSA, the credit facilities are collateralized by all Company assets and are guaranteed by certain shareholders. The LSA requires that the Company shall not incur additional principal indebtedness with another lender. The LSA also requires a monthly loan processing fee of 0.25% of the average monthly loan balance outstanding and a 0.15% underutilization fee.

Capital Lease Obligations

The Company leases certain equipment under a capital lease obligation that matures in 2023.

Future minimum payments due under the capital lease obligation and the present value of the future minimum lease payments as of September 30, 2019 are as follows:

GRAPHIC SCIENCES, INC.

Notes to Financial Statements

For the Years Ended September 30, 2019 and 2018

Notes Payable - Shareholders

The Company has promissory notes payable to its shareholders that are due on demand with interest payable monthly at an annual rate of 12.25%. These notes are subordinated to the Company’s external financing. Interest expense on these notes totaled approximately $68,000 for each the years ended September 30, 2019 and 2018. Accrued interest on these notes payable totaled approximately $291,000 and $357,000 at September 30, 2019 and 2018, respectively, and was included in accrued interest related party on the accompanying balance sheet. The debt is classified as long-term in the accompanying balance sheet.

Income Taxes

The tax effect of temporary differences related to the deferred taxes shown on the balance sheets are as follows at September 30:

Deferred tax assets are shown in other noncurrent assets on accompanying balance sheets.

Income tax expense differs from the amount expected by applying statutory rates to net income (loss) before taxes principally due to non-deductible expenses and the rates at which the deferred tax assets and liabilities are realized or expected to be realized.

Commitments

Operating Leases

The Company leases its operating facilities under three long-term operating leases expiring through August 2026, and transportation equipment under long-term operating lease agreements that expire through October 2022. The Company also periodically leases other office and storage space on a month-to-month basis.

GRAPHIC SCIENCES, INC.

Notes to Financial Statements

For the Years Ended September 30, 2019 and 2018

Commitments (continued)

Operating Leases (continued)

The Company is responsible for maintenance, taxes and other expenses associated with the leased property. Minimum annual rentals are as follows:

Total lease expense amounted to approximately $736,000 and $556,000 for the years ended September 30, 2019 and 2018, respectively.

Included in other accrued expenses, at September 30, 2018, is approximately $80,000, due to a related entity for payments due on an expired lease.

Retirement Plans

The Company has a 401(k) retirement plan covering all eligible employees. The Company may make discretionary matching or profit sharing contributions to the plan. The Company made no contributions to the plan for the years ended September 30, 2019 or 2018.

Concentration of Credit Risk

A limited number of the Company’s customers have individually large amounts due at any given balance sheet date. Any unanticipated change in one of those customers’ credit worthiness or other matters affecting the collectability of amounts due from such customers could have a materially adverse effect on the financial position, results of operations, and cash flows in the period in which such changes or events occur. The Company had one customer that accounted for approximately 73% and 63% of sales during the year ended September 30, 2019 and 2018, respectively. At September 30, 2019 and 2018, the Company had one customer who accounted for approximately 77% and 72% of accounts receivable.

Subsequent Events

In March 2020, the World Health Organization declared the global novel coronavirus disease (COVID-19) outbreak a pandemic. As a result of the spread of COVID-19, economic uncertainties have arisen that are likely to negatively impact the results of operations. However, the Company cannot reasonably estimate at this time the specific extent, duration or full impact that the COVID-19 pandemic will have on its financial condition and operations.

On March 2, 2020, 100% of the Company’s capital stock was sold for a purchase price of approximately $3,500,000 subject to a post-closing net working capital adjustment. In addition to the initial purchase price, three annual potential earn out payments of up to an aggregate of $2,500,000 will be receivable to the sellers over three years if certain gross profit levels are achieved.

Management has evaluated subsequent events through the date of the Independent Auditor’s Report, the date on which the financial statements were available to be issued.

Financial Statements (Unaudited)

Graphic Sciences, Inc.

December 31, 2019 and 2018

GRAPHIC SCIENCES, INC.

Balance Sheets

December 31, 2019 and September 30, 2019

The accompanying notes are an integral part of the financial statements.

GRAPHIC SCIENCES, INC.

Statement of Operations and Accumulated Earnings (Deficit)

Three Months Ended December 31, 2019 and 2018

(Unaudited)

The accompanying notes are an integral part of the financial statements.

GRAPHIC SCIENCES, INC.

Statement of Cash Flows

Three Months Ended December 31, 2019 and 2018

(Unaudited) 

The accompanying notes are an integral part of the financial statements.

GRAPHIC SCIENCES, INC.

Notes to Financial Statements (Unaudited)

Nature and Scope of Business

Graphic Sciences, Inc. (the Company), with locations in Madison Heights, Oak Park, and Traverse City, Michigan, is a closely held Michigan corporation whose principal business activities consist of providing document imaging services and the sale and service of related document imaging equipment and software to customers located principally in Michigan, Ohio, and Indiana.

Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Accounts Receivable and Credit Policies

Accounts receivable are uncollateralized customer obligations due under normal trade terms, and are stated at the amount the Company expects to collect from outstanding balances. There are no interest charges on unpaid balances.

The Company’s invoicing is done based on agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. Accounts receivable unbilled represent services performed but not billed as of the reporting date.

Management estimates an allowance for doubtful accounts based on specifically identified amounts that are believed to be uncollectible and an additional allowance based on certain percentages of the aged receivables, which are determined based on historical experience and a current assessment of the general financial conditions affecting the customer base. At December 31, 2019 and September 30, 2019, management believes all accounts to be collectible and therefore no allowance for doubtful accounts has been recorded.

Inventory – Parts and Supplies

Inventories are valued at the lower of cost or net realizable value. Costs are determined using the first-in, first-out method. Inventory consistent of parts and supplies used for scanning services. A provision for potentially obsolete or slow-moving inventory to is made based on inventory levels, future sales forecasted and management’s judgment of potentially obsolete inventory. The Company recorded an allowance of $34,500 and $30,000 at December 31, 2019 and September 30, 2019, respectively.

GRAPHIC SCIENCES, INC.

Notes to Financial Statements (Unaudited)

Summary of Significant Accounting Policies (continued)

Property and Equipment

Property and equipment are carried at cost. Depreciation is calculated using the straight-line and declining balance methods over the estimated useful lives of the assets. Maintenance and repairs, which do not improve or extend the estimated useful lives of the respective assets, are expensed as incurred. Major improvements or betterments are capitalized. Assets purchased, but not placed in service, are capitalized and depreciation is not computed until the asset is placed in service. When property or equipment is sold or retired, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss is included in income. Estimated useful lives by major asset class are as follows:

Depreciation expense was approximately $31,432 and $38,550 for the three month periods ended December 31, 2019 and 2018, respectively.

Revenue Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable, and collectability of the selling price is reasonably assured. Service contract payments received in advance are recorded as deferred revenue and are recognized over the term of the associated contract.

Shipping and Handling Costs

Shipping and handling costs are charged to cost of sales in the statements of operations and accumulated earnings (deficit).

Rent Expense

Rental expense for leases that contain a predetermined fixed escalation of the minimum rent is recognized on a straight-line basis over the term of the lease. The difference between the recognized rental expense and the amounts payable under the lease is recorded as a component of other accrued expenses within the accompanying balance sheets.

GRAPHIC SCIENCES, INC.

Notes to Financial Statements (Unaudited)

Summary of Significant Accounting Policies (continued)

Income Taxes

The Company accounts for income taxes in accordance with U.S. GAAP. The accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues.

The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

Tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term “more likely than not” means a likelihood of more than 50%; the terms “examined” and “upon examination” also include resolution of the related appeals or litigation processes, if any. A tax position that meets the “more likely than not” recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the “more likely than not” recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment.

New Accounting Pronouncement

In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 clarifies the accounting principles for recognizing contract revenue between a vendor and a customer for the provision of goods and services. The update is effective for the Company for annual periods beginning after December 15, 2018. Management is in the process of determining the effect of this change on its accounting and financial statement disclosures.

In February 2016, FASB issued ASU 2016-02, Leases, a new standard for both lessees and lessors. Under its core principle, a lessee will recognize lease assets and liabilities on the balance sheet for nearly all lease arrangements. The new standard is effective for annual periods beginning after December 15, 2020. The Company has not yet determined the effect of the pronouncement on the financial statements.

Cash

The Company maintains cash at financial institutions which may exceed federally insured amounts at various times.

GRAPHIC SCIENCES, INC.

Notes to Financial Statements (Unaudited)

Line of Credit

The Company has a Security Agreement (LSA) with a third party that provides credit facilities for 1) a revolving line of credit and 2) a convertible line of credit.

A description of each line is as follows:

Under the LSA, the credit facilities are collateralized by all Company assets and are guaranteed by certain shareholders. The LSA requires that the Company shall not incur additional principal indebtedness with another lender. The LSA also requires a monthly loan processing fee of 0.25% of the average monthly loan balance outstanding and a 0.15% underutilization fee.

GRAPHIC SCIENCES, INC.

Notes to Financial Statements (Unaudited)

Capital Lease Obligations

The Company leases certain equipment under a capital lease obligation that matures in 2023.

Future minimum payments due under the capital lease obligation and the present value of the future minimum lease payments as of December 31, 2019 are as follows:

Notes Payable - Shareholders

The Company has promissory notes payable to its shareholders that are due on demand with interest payable monthly at an annual rate of 12.25%. These notes are subordinated to the Company’s external financing. Interest expense on these notes totaled approximately $17,000 for each the years ended December 31, 2019 and 2018. Accrued interest on these notes payable totaled approximately $248,000 and $370,000 at December 31, 2019 and 2018, respectively, and was included in accrued interest – shareholders on the accompanying balance sheet. The debt is classified as long-term as in the accompanying balance sheet.

Income Taxes

The tax effect of temporary differences related to the deferred taxes shown on the balance sheet (deferred tax assets are shown in other noncurrent assets on accompanying balance sheet) are as follows at December 31:

Income tax expense differs from the amount expected by applying statutory rates to net income (loss) before taxes principally due to accrued rent and the rates at which the deferred tax assets and liabilities are realized or expected to be realized.

Commitments

Operating Leases

The Company leases its operating facilities under three long-term operating leases expiring through August 2026, and transportation equipment under long-term operating lease agreements that expire through October 2022. The Company also periodically leases other office and storage space on a month-to-month basis.

GRAPHIC SCIENCES, INC.

Notes to Financial Statements (Unaudited)

Commitments (continued)

Operating Leases (continued)

The Company is responsible for maintenance, taxes and other expenses associated with the leased property. Minimum annual rentals are as follows:

Total lease expense amounted to approximately $185,000 and $164,000 for the three months ended December 31, 2019 and 2018, respectively.

Retirement Plans

The Company has a 401(k) retirement plan covering all eligible employees. The Company may make discretionary matching or profit sharing contributions to the plan. The Company made no contributions to the plan for the three months ended December 31, 2019 or 2018.

Concentration of Credit Risk

A limited number of the Company’s customers have individually large amounts due at any given balance sheet date. Any unanticipated change in one of those customers’ credit worthiness or other matters affecting the collectability of amounts due from such customers could have a materially adverse effect on the financial position, results of operations, and cash flows in the period in which such changes or events occur. The Company had one customer that accounted for approximately 77% and 65% of sales during the year ended December 31, 2019 and 2018, respectively. At December 31, 2019 and 2018, the Company had one customer who accounted for approximately 78% and 67% of accounts receivable.

Subsequent Events

In March 2020, the World Health Organization declared the global novel coronavirus disease (COVID-19) outbreak a pandemic. As a result of the spread of COVID-19, economic uncertainties have arisen that are likely to negatively impact the results of operations. However, the Company cannot reasonably estimate at this time the specific extent, duration or full impact that the COVID-19 pandemic will have on its financial condition and operations.

GRAPHIC SCIENCES, INC.

Notes to Financial Statements (Unaudited)

Subsequent Events (continued)

On March 2, 2020, 100% of the Company’s capital stock was sold for a purchase price of approximately $3,500,000 subject to a post-closing net working capital adjustment. In addition to the initial purchase price, three annual potential earn out payments of up to an aggregate of $2,500,000 will be receivable to the sellers over three years if certain gross profit levels are achieved.

Management has evaluated subsequent events through the date of the Independent Auditor’s Report, the date on which the financial statements were available to be issued.

Unaudited Pro Forma Condensed Combined Financial Statements

On March 2, 2020, Intellinetics, Inc. (“Intellinetics” or the “Company”) acquired all of the issued and outstanding capital stock of Graphic Sciences, Inc. (“GSI”). The consideration paid by the Company to the stockholders of GSI consisted of approximately $3.5 million in cash plus three annual potential earnout payments of up to an aggregate of $2.5 million, for a total potential purchase price of approximately $6 million.

The following unaudited pro forma condensed combined financial statements are presented for informational purposes only and should be read in conjunction with the:

The following unaudited pro forma condensed combined balance sheet presents Intellinetics’ historical financial position combined with GSI as if the acquisition had occurred on December 31, 2019 and includes adjustments which give effect to events that are directly attributable to the transaction and that are factually supportable. The unaudited pro forma condensed combined statement of income presents the combined results of Intellinetics’ operations with GSI as if the acquisition had occurred on January 1, 2019 and includes adjustments that are directly attributable to the acquisition, are expected to have a continuing impact on the combined results, and are factually supportable. The pro forma condensed combined financial statements are not necessarily indicative of what Intellinetics’ financial position or results of operations actually would have been had the Company completed the acquisition at the dates indicated. In addition, the unaudited pro forma condensed combined financial information does not purport to project the future financial position or operating results of the combined company.

Intellinetics and GSI have different fiscal years. The unaudited pro forma condensed combined balance sheet and statements of income have been prepared utilizing period ends that differ by less than 93 days, as permitted by Regulation S-X. The pro forma statement of income information is based on the following:

The pro forma balance sheet information is based on the following:

The Company has not completed a full, detailed valuation analysis necessary to determine the fair values of GSI’s identifiable assets acquired and liabilities assumed in the acquisition. However, a preliminary valuation analysis based upon assumptions used by management was performed as of December 31, 2019, the date of which the acquisition is deemed to have occurred for purposes of the pro forma balance sheet, related to its assets and liabilities, including intangible assets. The acquisition of GSI created goodwill as the acquisition consideration exceeded the fair value attributable to identifiable assets and liabilities. The unaudited pro forma combined balance sheet includes only preliminary estimates assuming the acquisition had occurred on December 31, 2019. The final valuation of amounts of assets acquired and liabilities assumed in the acquisition accounting will be based on their respective fair values as determined as of March 2, 2020, the date of acquisition, and may differ significantly from these preliminary estimates.

The pro forma financial statements do not include integration costs expected to result from the acquisition or the realization of any cost synergies or revenue synergies expected to result from the acquisition. The effects of the foregoing excluded items could, individually or in the aggregate, materially impact the pro forma financial statements.

The assumptions and estimates underlying the unaudited adjustments to the pro forma condensed combined financial statements are described in the accompanying notes, which should be read together with the pro forma condensed combined financial statements.

The unaudited pro forma condensed combined financial statements should be read together with the Company’s historical financial statements, which are included in the Company’s latest annual report on Form 10-K and GSI’s historical information included herein

INTELLINETICS, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

DECEMBER 31, 2019