UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the Quarterly Period Ended
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____________________to _________________________
Commission
file number:
(Exact name of registrant as specified in its charter)
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
| (Address of Principal Executive Offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
(Former name and former address, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b- 2 of the Exchange Act.
| Large accelerated filer | ☐ | (Do not check if a smaller reporting company) | Accelerated filer | ☐ |
| ☐ | Smaller reporting company | |||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐
As of November 10, 2023, there were shares of the issuer’s common stock outstanding, each with a par value of $0.001 per share.
INTELLINETICS, INC.
Form 10-Q
September 30, 2023
TABLE OF CONTENTS
| 2 |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q and the documents incorporated into this report by reference contain forward-looking statements. In addition, from time to time we may make additional forward-looking statements in presentations, at conferences, in press releases, in other reports and filings and otherwise. Forward-looking statements are all statements other than statements of historical facts, including statements that refer to plans, intentions, objectives, goals, targets, strategies, hopes, beliefs, projections, prospects, expectations or other characterizations of future events or performance, and assumptions underlying the foregoing. The words “may,” “could,” “should,” “would,” “will,” “project,” “intend,” “continue,” “believe,” “anticipate,” “estimate,” “forecast,” “expect,” “plan,” “potential,” “opportunity,” “scheduled,” “goal,” “target,” and “future,” variations of such words, and other comparable terminology and similar expressions and references to future periods are often, but not always, used to identify forward-looking statements. Examples of forward-looking statements include, among other things, statements about the following:
| ● | the effects on our business, financial condition, and results of operations of current and future economic, business, market and regulatory conditions, including the current global inflation, economic downturn, and other economic and market conditions, and their effects on our customers and their capital spending and ability to finance purchases of our products, services, technologies and systems; | |
| ● | our prospects, including our future business, revenues, recurring revenues, expenses, net income, earnings per share, margins, profitability, cash flow, cash position, liquidity, financial condition and results of operations, backlog of orders and revenue, our targeted growth rate, our goals for future revenues and earnings, and our expectations about realizing the revenues in our backlog and in our sales pipeline; | |
| ● | our expectation that the shift from an offline to online world will continue to benefit our business; | |
| ● | our ability to integrate our recent acquisitions and any future acquisitions, grow their businesses and obtain the expected financial and operational benefits from those businesses; | |
| ● | the effects of fluctuations in sales on our business, revenues, expenses, net income, earnings per share, margins, profitability, cash flow, capital expenditures, liquidity, financial condition and results of operations; | |
| ● | our products, services, technologies and systems, including their quality and performance in absolute terms and as compared to competitive alternatives, their benefits to our customers and their ability to meet our customers’ requirements, and our ability to successfully develop and market new products, services, technologies and systems; | |
| ● | our markets, including our market position and our market share; | |
| ● | our ability to successfully develop, operate, grow and diversify our operations and businesses; | |
| ● | our business plans, strategies, goals and objectives, and our ability to successfully achieve them; | |
| ● | the sufficiency of our capital resources, including our cash and cash equivalents, funds generated from operations, availability credit and financing arrangements and other capital resources, to meet our future working capital, capital expenditure, lease and debt service and business growth needs; | |
| ● | the value of our assets and businesses, including the revenues, profits and cash flow they are capable of delivering in the future; | |
| ● | the amount and timing of revenue recognition from customer contracts with commitments for performance obligations, including our estimate of the remaining amount of commitments and when we expect to recognize revenues; | |
| ● | industry trends and customer preferences and the demand for our products, services, technologies and systems; and | |
| ● | the nature and intensity of our competition, and our ability to successfully compete in our markets. |
Any forward-looking statements we make are based on our current plans, intentions, objectives, strategies, projections and expectations, as well as assumptions made by and information currently available to management. Forward-looking statements are not guarantees of future performance or events, but are subject to and qualified by substantial risks, uncertainties and other factors, which are difficult to predict and are often beyond our control. Forward-looking statements will be affected by assumptions and expectations we might make that do not materialize or that prove to be incorrect and by known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those expressed, anticipated or implied by such forward-looking statements. These risks, uncertainties and other factors include, but are not limited to, those described in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed on March 27, 2023, as well as other risks, uncertainties and factors discussed elsewhere in this Quarterly Report, in documents that we include as exhibits to or incorporate by reference in this report, and in other reports and documents we from time to time file with or furnish to the Securities and Exchange Commission (the “SEC”). In light of these risks and uncertainties, you are cautioned not to place undue reliance on any forward-looking statements that we make.
Any forward-looking statements contained in this report speak only as of the date of this report, and any other forward-looking statements we make from time to time in the future speak only as of the date they are made. We undertake no duty or obligation to update or revise any forward-looking statement or to publicly disclose any update or revision for any reason, whether as a result of changes in our expectations or the underlying assumptions, the receipt of new information, the occurrence of future or unanticipated events, circumstances or conditions or otherwise.
As used in this Quarterly Report, unless the context indicates otherwise:
| ● | the terms “Intellinetics,” “Company,” “the company” “us,” “we,” “our,” and similar terms refer to Intellinetics, Inc., a Nevada corporation, and its subsidiaries; | |
| ● | “Intellinetics Ohio” refers to Intellinetics, Inc., an Ohio corporation and a wholly-owned subsidiary of Intellinetics; and | |
| ● | “Graphic Sciences” refers to Graphic Sciences, Inc., a Michigan corporation and a wholly-owned subsidiary of Intellinetics. |
| 3 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
INTELLINETICS, INC. and SUBSIDIARIES
Condensed Consolidated Balance Sheets
| (unaudited) | ||||||||
| September 30, 2023 | December 31, 2022 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Accounts receivable, unbilled | ||||||||
| Parts and supplies, net | ||||||||
| Contract assets | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Right of use assets, operating | ||||||||
| Right of use assets, finance | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued compensation | ||||||||
| Accrued expenses | ||||||||
| Lease liabilities, operating - current | ||||||||
| Lease liabilities, finance - current | ||||||||
| Deferred revenues | ||||||||
| Earnout liabilities - current | ||||||||
| Notes payable - current | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Notes payable - net of current portion | ||||||||
| Notes payable - related party | ||||||||
| Lease liabilities, operating - net of current portion | ||||||||
| Lease liabilities, finance - net of current portion | ||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Stockholders’ equity: | ||||||||
| Common stock, $ par value, shares authorized; shares issued and outstanding at September 30, 2023 and December 31, 2022 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See Notes to these condensed consolidated financial statements
| 4 |
INTELLINETICS, INC. and SUBSIDIARIES
Condensed Consolidated Statements of Operations
(unaudited)
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues: | ||||||||||||||||
| Sale of software | $ | $ | $ | $ | ||||||||||||
| Software as a service | ||||||||||||||||
| Software maintenance services | ||||||||||||||||
| Professional services | ||||||||||||||||
| Storage and retrieval services | ||||||||||||||||
| Total revenues | ||||||||||||||||
| Cost of revenues: | ||||||||||||||||
| Sale of software | ||||||||||||||||
| Software as a service | ||||||||||||||||
| Software maintenance services | ||||||||||||||||
| Professional services | ||||||||||||||||
| Storage and retrieval services | ||||||||||||||||
| Total cost of revenues | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Change in fair value of earnout liabilities | ||||||||||||||||
| Transaction costs | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income from operations | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) | $ | $ | $ | $ | ( | ) | ||||||||||
| Basic net income (loss) per share: | $ | $ | $ | $ | ( | ) | ||||||||||
| Diluted net income (loss) per share: | $ | $ | $ | $ | ( | ) | ||||||||||
| Weighted average number of common shares outstanding - basic | ||||||||||||||||
| Weighted average number of common shares outstanding - diluted | ||||||||||||||||
See Notes to these condensed consolidated financial statements
| 5 |
INTELLINETICS, INC. and SUBSIDIARIES
Condensed Consolidated Statement of Stockholders’ Equity
For the Three and Nine Months Ended September 30, 2023 and 2022
(unaudited)
| Common Stock | Additional Paid-in | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Stock Option Compensation | - | |||||||||||||||||||
| Net Income | - | |||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Stock Option Compensation | - | |||||||||||||||||||
| Net Income | - | |||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Common Stock | Additional Paid-in | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Stock Issued to Directors | ||||||||||||||||||||
| Stock Option Compensation | - | |||||||||||||||||||
| Stock Issued | ||||||||||||||||||||
| Equity Issuance Costs | - | ( | ) | ( | ) | |||||||||||||||
| Note Offer Warrants | - | |||||||||||||||||||
| Net Loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Stock Option Compensation | - | |||||||||||||||||||
| Net Income | - | |||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
See Notes to these condensed consolidated financial statements
| 6 |
INTELLINETICS, INC. and SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)
| For the Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Bad debt expense | ||||||||
| Amortization of deferred financing costs | ||||||||
| Amortization of debt discount | ||||||||
| Amortization of right of use assets, financing | ||||||||
| Stock issued for services | ||||||||
| Stock option compensation | ||||||||
| Change in fair value of earnout liabilities | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Accounts receivable, unbilled | ( | ) | ( | ) | ||||
| Parts and supplies | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ||||||||
| Operating lease assets and liabilities, net | ||||||||
| Deferred compensation | ( | ) | ||||||
| Deferred revenues | ||||||||
| Total adjustments | ||||||||
| Net cash provided by operating activities | ||||||||
| Cash flows from investing activities: | ||||||||
| Cash paid to acquire business, net | ( | ) | ||||||
| Capitalization of internal use software | ( | ) | ( | ) | ||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Payment of earnout liabilities | ( | ) | ( | ) | ||||
| Proceeds from issuance of common stock | ||||||||
| Offering costs paid on issuance of common stock and notes | ( | ) | ||||||
| Proceeds from notes payable | ||||||||
| Proceeds from notes payable - related parties | ||||||||
| Principal payments on financing lease liability | ( | ) | ||||||
| Repayment of notes payable | ( | ) | ||||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| Net (decrease) increase in cash | ( | ) | ||||||
| Cash - beginning of period | ||||||||
| Cash - end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid during the period for interest | $ | $ | ||||||
| Cash paid during the period for income taxes | $ | $ | ||||||
| Supplemental disclosure of non-cash financing activities: | ||||||||
| Discount on notes payable for warrants | $ | $ | ||||||
| Discount on notes payable - related parties for warrants | ||||||||
| Warrants issued and extended for common stock issuance costs | ||||||||
| Right-of-use asset obtained in exchange for finance lease liability | ||||||||
| Supplemental disclosure of non-cash investing activities relating to business acquisitions: | ||||||||
| Accounts receivable | $ | $ | ||||||
| Prepaid expenses | ||||||||
| Property and equipment | ||||||||
| Intangible assets | ||||||||
| Goodwill | ||||||||
| Accounts payable | ( | ) | ||||||
| Deferred revenues | ( | ) | ||||||
| Net assets acquired in acquisition | ||||||||
| Cash used in business acquisition | $ | $ | ||||||
See Notes to these condensed consolidated financial statements
| 7 |
INTELLINETICS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Business Organization and Nature of Operations
Intellinetics, Inc., formerly known as GlobalWise Investments, Inc., is a Nevada corporation incorporated in 1997, with two wholly-owned subsidiaries: Intellinetics, Inc., an Ohio corporation (“Intellinetics Ohio”), and Graphic Sciences, Inc., a Michigan corporation (“Graphic Sciences”). Intellinetics Ohio was incorporated in 1996, and on February 10, 2012, Intellinetics Ohio became our sole operating subsidiary as a result of a reverse merger and recapitalization. On March 2, 2020, we purchased all the outstanding capital stock of Graphic Sciences.
Our
digital transformation products and services are provided through
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”).
The financial statements presented in this Quarterly Report on Form 10-Q are unaudited. However, in the opinion of management, these unaudited condensed consolidated financial statements include all adjustments, consisting solely of normal recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows for the periods presented in conformity with GAAP applicable to interim periods. The financial data and other financial information disclosed in these notes to the accompanying condensed consolidated financial statements are also unaudited. As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to applicable rules and regulations thereunder.
Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the full fiscal year ending December 31, 2023 or any other future period.
These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the SEC filed on March 27, 2023.
3. Summary of Significant Accounting Policies
Principles of Consolidation
The
condensed consolidated financial statements accompanying these notes include the accounts of Intellinetics and the accounts of all its
subsidiaries in which it holds a controlling interest. Under GAAP, consolidation is generally required for investments of more than
| 8 |
Concentrations of Credit Risk
We maintain our cash with high credit quality financial institutions. At times, our cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation insurance limit.
We do not generally require collateral or other security to support customer receivables; however, we may require customers to provide retainers, up-front deposits or irrevocable letters-of-credit when considered necessary to mitigate credit risks. The Company recognizes current estimated credit losses (“CECL”) for accounts receivable and accounts receivable-unbilled. The CECL for trade receivables are estimated based on the trade receivable aging category, credit risk of specific customers, past collection history, and management’s evaluation of accounts receivable. Provisions for CECL are classified within selling, general and administrative costs.
Upon the adoption of FASB ASU No. 2016-13 (CECL model) effective January 1, 2023, Intellinetics, Inc. has revised its methodology for estimating expected credit losses on financial instruments, specifically trade receivables. This new model requires the recognition of lifetime expected credit losses at each reporting date, considering past events, current conditions, and reasonable forecasts. In assessing the credit quality of our portfolio, management utilizes a provision matrix that classifies trade receivables by customer type and age of receivable. Government and education sector receivables carry a low risk, while a higher risk is attributed to the remaining receivables as their aging progresses. For receivables with questionable collectability, a specific reserve is assigned. The estimated credit losses are a reflection of these factors, with the matrix applying percentages to the receivables based on their risk profile, adjusted for current and expected future conditions.
During
the reporting period, the estimate of credit losses may change due to several factors including payment patterns of customers, changes
in customer creditworthiness, and broader economic conditions. Such changes are captured in the financial statements to ensure they accurately
reflect the company’s assessment of credit risk and expected losses at the end of each reporting period. Credit losses have been within
management’s expectations. At September 30, 2023 and December 31, 2022, our allowance for credit losses was $
Changes in the allowance for credit losses for the period ended Sep 30, 2023 were as follows:
| Trade Receivables | ||||
| As of December 31, 2022 | $ | ( | ) | |
| (Provisions) Reductions charged to operating results | $ | ( | ) | |
| Accounts write-offs | $ | |||
| As of March 31, 2023 | $ | ( | ) | |
| (Provisions) Reductions charged to operating results | $ | ( | ) | |
| Accounts write-offs | $ | |||
| As of June 30, 2023 | $ | ( | ) | |
| (Provisions) Reductions charged to operating results | $ | ( | ) | |
| Accounts write-offs | $ | |||
| As of September 30, 2023 | $ | ( | ) | |
Contract balances
The following table present changes in our contract assets during the nine months ended September 30, 2023 and 2022:
| Addition | ||||||||||||||||||||||
| Balance at | from | Balance at | ||||||||||||||||||||
| Beginning | acquisition | Recognized | End of | |||||||||||||||||||
| of Period | (Note 4) | Billings | Revenue | Period | ||||||||||||||||||
| Nine months ended September 30, 2023 | ||||||||||||||||||||||
| Accounts receivable | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||
| Nine months ended September 30, 2022 | ||||||||||||||||||||||
| Accounts receivable | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||
| Balance at Beginning of Period | Revenue Recognized in Advance of Billings | Billings | Balance at End of Period | |||||||||||||
| Nine months ended September 30, 2023 | ||||||||||||||||
| Accounts receivable, unbilled | $ | $ | $ | ( |
) | $ | ||||||||||
| Nine months ended September 30, 2022 | ||||||||||||||||
| Accounts receivable, unbilled | $ | $ | $ | ( |
) | $ | ||||||||||
| Balance
at Beginning of Period |
Commissions Paid | Commissions Recognized | Balance at End of Period | |||||||||||||
| Nine months ended September 30, 2023 | ||||||||||||||||
| Other contract assets | $ | $ | $ | ( |
) | $ | ||||||||||
| Nine months ended September 30, 2022 | ||||||||||||||||
| Other contract assets | $ | $ | $ | ( |
) | $ | ||||||||||
Deferred revenue
Amounts that have been invoiced are recognized in accounts receivable, deferred revenue or revenue, depending on whether the revenue recognition criteria have been met. Deferred revenue represents amounts billed for which revenue has not yet been recognized. Deferred revenues typically relate to maintenance and software-as-a-service agreements which have been paid for by customers prior to the performance of those services, and payments received for professional services and license arrangements and software-as-a-service performance obligations that have been deferred until fulfilled under our revenue recognition policy.
| 9 |
Remaining
performance obligations represent the transaction price from contracts for which work has not been performed or goods and services have
not been delivered. We expect to recognize revenue on approximately
The following table presents changes in our contract liabilities during the nine months ended September 30, 2023 and 2022:
| Addition | ||||||||||||||||||||
| Balance at | from | Balance at | ||||||||||||||||||
| Beginning | acquisition | Recognized | End of | |||||||||||||||||
| of Period | (Note 4) | Billings | Revenue | Period | ||||||||||||||||
| Nine months ended September 30, 2023 | ||||||||||||||||||||
| Contract liabilities: Deferred revenue | $ | $ | $ | $ | ( |
) | $ | |||||||||||||
| Nine months ended September 30, 2022 | ||||||||||||||||||||
| Contract liabilities: Deferred revenue | $ | $ | $ | $ | ( |
) | $ | |||||||||||||
Leases
We have made an accounting policy election to not record a right-of-use asset and lease liability for short-term leases, which are defined as leases with a lease term of 12 months or less. Instead, the lease payments are recognized as rent expense in the general and administrative expenses on the statement of operations.
Software Development Costs
We
design, develop, test, market, license, and support new software products and enhancements of current products. We continuously monitor
our software products and enhancements to remain compatible with standard platforms and file formats. In accordance with ASC 985-20 “Costs
of Software to be Sold, Leased or Otherwise Marketed,” we expense software development costs, including costs to develop software
products or the software component of products to be sold, leased, or marketed to external users, before technological feasibility is
reached. Once technological feasibility has been established, certain software development costs incurred during the application development
stage are eligible for capitalization. Based on our software development process, technical feasibility is established upon completion
of a working model. Technological feasibility is typically reached shortly before the release of such products. No such costs were capitalized
during the nine-month period 2023. Such costs in the amounts of $
In
accordance with ASC 350-40, “Internal-Use Software,” we capitalize purchase and implementation costs of internal use software.
Once an application has reached development stage, internal and external costs, if direct and incremental, are capitalized until the
software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing.
We also capitalize costs related to specific upgrades and enhancements when it is probable that the expenditure will result in additional
functionality. Such costs in the amount of $
Capitalized
costs are stated at cost less accumulated amortization. Amortization is computed over the estimated useful lives of the related assets
on a straight-line basis, which is three years. At September 30, 2023 and December 31, 2022, our condensed consolidated balance sheets
included $
For
the three and nine months ended September 30, 2023 and 2022, our expensed software development costs were $
| 10 |
Recently Issued Accounting Pronouncements
In
June 2016, the FASB issued ASU No. 2016-13 “Credit Losses - Measurement of Credit Losses on Financial Instruments.” ASU No.
2016-13 significantly changes how entities measure credit losses for most financial assets, including accounts receivable and held-to-maturity
marketable securities, by replacing today’s “incurred loss” approach with an “expected loss” model under
which allowances will be recognized based on expected rather than incurred losses. ASU No. 2016-13 became effective for us in the first
quarter of 2023. The adoption of ASU No. 2016-13 resulted in an initial reduction in the allowance for doubtful accounts of $
Advertising
We
expense the cost of advertising as incurred. Advertising expense for the three and nine months ended September 30, 2023 and 2022 amounted
to $
Basic income or loss per share is computed by dividing net income or loss by the weighted average number of shares of common stock outstanding during the period. Diluted income or loss per share is computed by dividing net income or loss by the diluted weighted average number of shares of common stock outstanding during the period. The diluted weighted average number of shares gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method. Diluted earnings per share exclude all diluted potential shares if their effect is anti-dilutive, including warrants or options which are out-of-the-money and for those periods with a net loss.
We have outstanding warrants and stock options which have not been included in the calculation of diluted net loss per share for the nine months ended September 30, 2022 because to do so would be anti-dilutive. As such, the numerator and the denominator used in computing both basic and diluted net loss per share for that period are the same.
Income Taxes
We file a consolidated federal income tax return with our subsidiaries. The provision for income taxes is computed by applying statutory rates to income before taxes.
Deferred income taxes are recognized for the tax consequences in future years of temporary differences between the financial reporting and tax bases of assets and liabilities as of each period-end based on enacted tax laws and statutory rates. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. A 100% valuation allowance has been established on deferred tax assets at September 30, 2023 and December 31, 2022, due to the uncertainty of our ability to realize future taxable income.
We account for uncertainty in income taxes in our financial statements as required under ASC 740, “Income Taxes.” The standard prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The standard also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition accounting. Management determined there were no material uncertain positions taken by us in our tax returns.
Segment Information
Operating segments are defined in the criteria established under ASC 280, “Segment Reporting,” as components of public entities that engage in business activities from which they may earn revenues and incur expenses for which separate financial information is available and which is evaluated regularly by our chief operating decision maker (“CODM”) in deciding how to assess performance and allocate resources. Our CODM assesses performance and allocates resources based on two operating segments: Document Management and Document Conversion. These segments contain individual business components that have been combined on the basis of common management, customers, solutions offered, service processes and other economic characteristics. We currently have immaterial intersegment sales. We evaluate the performance of our segments based on gross profits.
| 11 |
The Document Management Segment provides cloud-based and premise-based content services software. Its modular suite of solutions complements existing operating and accounting systems to serve a mission-critical role for organizations to make content secure, compliant, and process-ready. This segment conducts its primary operations in the United States. Markets served include highly regulated, risk and compliance-intensive markets in healthcare, K-12 education, public safety, other public sector, risk management, financial services, and others. Solutions are sold both directly to end-users and through resellers.
The Document Conversion Segment provides services for scanning and indexing, converting images from paper to digital, paper to microfilm, and microfiche to microfilm, as well as long-term physical document storage and retrieval. This segment conducts its primary operations in the United States. Markets served include businesses and federal, county, and municipal governments. Solutions are sold both directly to end-users and through a reseller distributor.
Information by operating segment is as follows:
| For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues | ||||||||||||||||
| Document Management | $ | $ | $ | $ | ||||||||||||
| Document Conversion | ||||||||||||||||
| Total revenues | $ | $ | $ | $ | ||||||||||||
| Gross profit | ||||||||||||||||
| Document Management | $ | $ | $ | $ | ||||||||||||
| Document Conversion | ||||||||||||||||
| Total gross profit | $ | $ | $ | $ | ||||||||||||
| Capital additions, net | ||||||||||||||||
| Document Management | $ | $ | $ | $ | ||||||||||||
| Document Conversion | ||||||||||||||||
| Total capital additions, net | $ | $ | $ | $ | ||||||||||||
| September 30, 2023 | December 31, 2022 | |||||||
| Goodwill | ||||||||
| Document Management | $ | $ | ||||||
| Document Conversion | ||||||||
| Total goodwill | $ | $ | ||||||
| September 30, 2023 | December 31, 2022 | |||||||
| Total assets | ||||||||
| Document Management | $ | $ | ||||||
| Document Conversion | ||||||||
| Total assets | $ | $ | ||||||
Statement of Cash Flows
For purposes of reporting cash flows, cash includes cash on hand and demand deposits held by banks.
| 12 |
Reclassifications
Certain amounts reported in prior filings of the condensed consolidated financial statements have been reclassified to conform to current presentation.
4. Business Combinations
On April 1, 2022, we entered into an asset purchase agreement to acquire substantially all of the assets of Yellow Folder. The acquisition was accounted for in accordance with GAAP and was made to expand our market share in the digital transformation industry and due to synergies of product lines and services between the Companies.
The purchase price has been preliminarily allocated to assets acquired and liabilities assumed based on the estimated fair value of such assets and liabilities at the date of acquisitions as follows:
| Assets acquired: | ||||
| Accounts receivable | $ | |||
| Prepaid expenses | ||||
| Property and equipment | ||||
| Intangible assets (see Note 5) | ||||
| Liabilities assumed: | ||||
| Accounts payable | ||||
| Deferred revenue | ||||
| Total identifiable net assets | ||||
| Purchase price | ||||
| Goodwill - Excess of purchase price over fair value of net assets acquired | $ | |||
The
purchase price of $
The following unaudited pro forma information presents a summary of the condensed consolidated results of operations for the Company as if the acquisition of Yellow Folder had occurred on January 1, 2022.
| For the three months ended | ||||||||
| (unaudited) | (unaudited) | |||||||
| September 30, 2023 | September 30, 2022 | |||||||
| Total revenues | $ | $ | ||||||
| Net income | $ | $ | ||||||
| Basic net income per share | $ | $ | ||||||
| Diluted net income per share | $ | $ | ||||||
| For the nine months ended | ||||||||
| (unaudited) | (unaudited) | |||||||
| September 30, 2023 | September 30, 2022 | |||||||
| Total revenues | $ | $ | ||||||
| Net (loss) income | $ | $ | ( | ) | ||||
| Basic net income (loss) per share | $ | $ | ( | ) | ||||
| Diluted net income (loss) per share | $ | ( | ) | |||||
| 13 |
The unaudited pro forma condensed consolidated results are based on our historical financial statements and those of Yellow Folder and do not necessarily indicate the results of operations that would have resulted had the acquisition actually been completed at the beginning of the applicable period presented. The pro forma financial information assumes that the companies were combined as of January 1, 2022.
The following tables present the amounts of revenue and earnings of Yellow Folder since the acquisition date included in the condensed consolidated income statement for the reporting periods.
| For the | For the | |||||||
| three months ended | nine months ended | |||||||
| September 30, 2023 | September 30, 2023 | |||||||
| Yellow Folder: | ||||||||
| Total revenues | $ | $ | ||||||
| Net income | $ | $ | ||||||
| For
the three months ended September 30, 2022 |
For
the nine months ended September 30, 2022 |
|||||||
| Yellow Folder: | ||||||||
| Total revenues | $ | $ | ||||||
| Net income | $ | $ | ||||||
5. Intangible Assets
At September 30, 2023, intangible assets consisted of the following:
| Estimated | Accumulated | |||||||||||||
| Useful Life | Costs | Amortization | Net | |||||||||||
| Trade names | $ | $ | ( | ) | $ | |||||||||
| Proprietary technology | ( | ) | ||||||||||||
| Customer relationships | ( | ) | ||||||||||||
| $ | $ | ( | ) | $ | ||||||||||
At December 31, 2022, intangible assets consisted of the following:
| Estimated | Accumulated | |||||||||||||
| Useful Life | Costs | Amortization | Net | |||||||||||
| Trade names | $ | $ | ( | ) | $ | |||||||||
| Proprietary technology | ( | ) | ||||||||||||
| Customer relationships | ( | ) | ||||||||||||
| $ | $ | ( | ) | $ | ||||||||||
Amortization
expense for the three and nine months ended September 30, 2023 and September 30, 2022, amounted to $
| For the Twelve Months Ending September 30, | Amount | |||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| $ | ||||
| 14 |
6. Fair Value Measurements
We
paid our final earnout liability in January 2023 and as of September 30, 2023, we have no earnout liabilities remaining. As of December
31, 2022 we had earnout liabilities related to one of our two 2020 acquisitions which were measured on a recurring basis and recorded
at fair value, measured using probability-weighted analysis and discounted using a rate that appropriately captures the risks associated
with the obligation. The inputs used to calculate the fair value of the earnout liabilities were considered to be Level 3 inputs due
to the lack of relevant market activity and significant management judgment.
The following table provides a summary of the changes in fair value of the earnout liabilities for the nine months ended September 30, 2023 and 2022:
| Nine months ended September 30, 2023 | ||||
| Fair value at December 31, 2022 | $ | |||
| Payments | ( |
) | ||
| Fair value at September 30, 2023 | $ | |||
| Nine months ended | ||||
| September 30, 2022 | ||||
| Fair value at December 31, 2021 | $ | |||
| Payment | ( |
) | ||
| Change in fair value | ||||
| Fair value at September 30, 2022 | $ | |||
The fair values of earnout liabilities amounts owed were recorded in current liabilities in our condensed consolidated balance sheet as of December 31, 2022. Changes in fair value are recorded in change in fair value of earnout liabilities in our condensed consolidated statements of operations.
7. Property and Equipment
Property and equipment are comprised of the following:
| September 30, 2023 | December 31, 2022 | |||||||
| Computer hardware and purchased software | $ | $ | ||||||
| Leasehold improvements | ||||||||
| Furniture and fixtures | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Total
depreciation expense on our property and equipment for the three and nine months ended September 30, 2023 and 2022 amounted to $
8. Notes Payable – Unrelated Parties
Summary of Notes Payable to Unrelated Parties
The tables below summarize all notes payable at September 30, 2023 and December 31, 2022, respectively, with the exception of related party notes disclosed in Note 9 “Notes Payable - Related Parties.”
| September 30, 2023 | December 31, 2022 | |||||||
| 2022 Unrelated Notes | $ | $ | ||||||
| 2020 Notes | ||||||||
| Total notes payable | $ | $ | ||||||
| Less unamortized debt issuance costs | ( | ) | ( | ) | ||||
| Less unamortized debt discount | ( | ) | ||||||
| Less current portion | ( | ) | ||||||
| Long-term portion of notes payable | $ | $ | ||||||
| Subordinated Notes Payable | Issue Date | Interest Rate | Interest Due | Principal Due | ||||||
| 2022 Unrelated Notes | % | |||||||||
Future minimum principal payments of the Notes Payable to Unrelated Parties are as follows:
| As of September 30, | Amount | |||
| 2025 | $ | |||
| Total | $ | |||
As
of September 30, 2023 and December 31, 2022, accrued interest for these notes payable with the exception of the related party notes in
Note 9, “Notes Payable - Related Parties,” was $
| 15 |
With
respect to all notes outstanding (other than the notes to related parties), interest expense, including the amortization of debt issuance
costs and debt discount, for the three and nine months ended September 30, 2023 and 2022 was $
We
recognized a debt discount of $
9. Notes Payable - Related Parties
Summary of Notes Payable to Related Parties
The tables below summarize all notes payable to related parties at September 30, 2023 and December 31, 2022:
| September 30, 2023 | December 31, 2022 | |||||||
| Notes payable – “2022 Related Note” | $ | $ | ||||||
| Less unamortized debt issuance costs | ( |
) | ( |
) | ||||
| Long-term portion of notes payable | $ | $ | ||||||
| Subordinated Notes Payable | Issue Date | Interest Rate | Interest Due | Principal Due | ||||||
| 2022 Related Note | % | |||||||||
Future minimum principal payments of the 2022 Notes to related parties are as follows:
| As of September 30, | Amount | |||
| 2025 | $ | |||
| Total | $ | |||
As
of September 30, 2023 and December 31, 2022, accrued interest for these notes payable – related parties was $
With
respect to all notes payable – related parties outstanding, interest expense, including the amortization of debt issuance costs,
for the three and nine months ended September 30, 2023 and 2022 was $
10. Deferred Compensation
Pursuant
to an employment agreement, we had accrued incentive cash compensation for one of our founders which was fully paid as of December 31,
2022. During the three and nine months ended September 30, 2022, we paid $
| 16 |
11. Commitments and Contingencies
From time to time we are involved in legal proceedings, claims and litigation related to employee claims, contractual disputes and taxes in the ordinary course of business. Although we cannot predict the outcome of such matters, currently we have no reason to believe the disposition of any current matter could reasonably be expected to have a material adverse impact on our financial position, results of operations or the ability to carry on any of our business activities.
Operating Leases
For each of the below listed leases, management has determined it will utilize the base rental period and have not considered any renewal periods.
| Location | Square Feet | Monthly Rent | Lease Expiry | |||||||
| Columbus, OH | $ | |||||||||
| Madison Heights, MI | $ | |||||||||
| Sterling Heights, MI | $ | |||||||||
| Traverse City, MI | $ | |||||||||
| Temporary space | ||||||||||
| Madison Heights, MI | $ | |||||||||
| Vehicles | ||||||||||
| various | n/a | $ | ||||||||
The following table sets forth the future minimum lease payments under our leases:
| For the twelve months ending September 30, | Finance Leases | Operating Leases | ||||||
| 2024 | $ | $ | ||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| Thereafter | ||||||||
| Less Imputed Interest | ( |
) | ( |
) | ||||
| Less Short-term lease payments | - | ( |
) | |||||
| $ | $ | |||||||
| 17 |
The following table summarizes the components of lease expense:
| For the three months ending September 30, | 2023 | 2022 | ||||||
| Finance lease expense: | ||||||||
| Amortization of ROU asset | $ | $ | ||||||
| Interest on lease liabilities | ||||||||
| Operating lease expense | ||||||||
| Short-term lease expense | ||||||||
| For the nine months ending September 30, | 2023 | 2022 | ||||||
| Finance lease expense: | ||||||||
| Amortization of ROU asset | $ | $ | ||||||
| Interest on lease liabilities | ||||||||
| Operating lease expense | ||||||||
| Short-term lease expense | ||||||||
The following tables set forth additional information pertaining to our leases:
| For the nine months ending September 30, | 2023 | 2022 | ||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Financing cash flows from finance leases (interest) | $ | $ | ||||||
| Financing cash flows from finance leases (principal) | ||||||||
| Operating cash flows from operating leases | ||||||||
| Weighted average remaining lease term – finance leases | - | |||||||
| Weighted average remaining lease term – operating leases | ||||||||
| Weighted average discount rate – finance leases | % | |||||||
| Weighted average discount rate – operating leases | % | % | ||||||
| September 30, 2023 | December 31, 2022 | |||||||
| Operating leases: | ||||||||
| Right-of-use assets, operating | $ | $ | ||||||
| Lease liabilities, operating – current | ||||||||
| Lease liabilities, operating – net of current | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
| Finance leases: | ||||||||
| Right-of-use asset, finance | $ | $ | ||||||
| Accumulated amortization | ( |
) | ( |
) | ||||
| Right-of-use asset, finance, net | $ | $ | ||||||
| Lease liabilities, finance – current | $ | $ | ||||||
| Lease liabilities, finance – net of current | ||||||||
| Total finance lease liability | $ | $ | ||||||
| 18 |
12. Stockholders’ Equity
Common Stock
As of September 30, 2023, shares of common stock were issued and outstanding, shares of common stock were reserved for issuance upon the exercise of outstanding warrants, and shares of common stock were reserved for issuance under our 2015 Equity Incentive Plan, as amended (the “2015 Plan”).
The following table describes the shares and warrants issued as part of our 2022 and 2020 private placements:
| Issuance of Common Stock | Issue Date | Shares Issued | Price per share | Warrants Issued | Warrant Exercise Price | Warrant Fair Value | ||||||||||||||||
| Private Placement 2022 | $ | $ | $ | |||||||||||||||||||
| Private Placement 2020 | $ | $ | $ | |||||||||||||||||||
Amortization
of the debt issuance costs for the Private Placement 2020 offering was recorded at $
Warrants
The following sets forth the warrants to purchase our common stock that were outstanding as of September 30, 2023:
| Warrants Outstanding | Warrant
Exercise Price |
Warranty Expiry | ||||
| $ | ||||||
| $ | ||||||
| $ | ||||||
| $ | ||||||
| $ | ||||||
The estimated value of the warrants issued during the nine months ended September 30, 2022, as well as the assumptions that were used in calculating such values, were based on estimates at the issuance date in the table below.
| Warrants Issued | ||||
| April 1, 2022 | ||||
| Risk-free interest rate | % | |||
| Weighted average expected term | ||||
| Expected volatility | % | |||
| Expected dividend yield | % | |||
From time to time, we issue stock options and restricted stock as compensation for services rendered by our directors and employees.
Restricted Stock
On January 6, 2022, we issued shares of restricted common stock to our directors as part of their annual compensation plan. The grants of restricted common stock were made outside the 2015 Plan and were not subject to vesting. Stock compensation of $ was recorded on the issuance of the common stock for the nine months ended September 30, 2022.
Stock Options
We did not make any stock option grants during the nine months ended September 30, 2023. On April 14, 2022, we granted employees stock options to purchase shares at an exercise price of $ per share in accordance with the 2015 Plan, with vesting continuing until 2025. The total fair value of $ for these stock options is being recognized over the requisite service period.
| 19 |
The weighted-average grant date fair value of options granted during the three and nine months ended September 30, 2022 was $5.22. The weighted average assumptions that were used in calculating such values during the nine months ended September 30, 2022, as well as the assumptions that were used in calculating such values, were based on estimates at the grant date in the table as follows:
| Grant Date | ||||
| April 1, 2022 | ||||
| Risk-free interest rate | % | |||
| Weighted average expected term | years | |||
| Expected volatility | % | |||
| Expected dividend yield | % | |||
| Weighted- | ||||||||||||||||
| Weighted- | Average | |||||||||||||||
| Average | Remaining | Aggregate | ||||||||||||||
| Shares | Exercise | Contractual | Intrinsic | |||||||||||||
| Under Option | Price | Life | Value | |||||||||||||
| Outstanding at January 1, 2023 | $ | years | $ | |||||||||||||
| Forfeited | ( |
) | ( |
) | ||||||||||||
| Outstanding at September 30, 2023 | $ | years | $ | |||||||||||||
| Exercisable at September 30, 2023 | $ | years | $ | |||||||||||||
| Weighted- | ||||||||||||||||
| Weighted- | Average | |||||||||||||||
| Average | Remaining | Aggregate | ||||||||||||||
| Shares | Exercise | Contractual | Intrinsic | |||||||||||||
| Under Option | Price | Life | Value | |||||||||||||
| Outstanding at January 1, 2022 | $ | years | $ | |||||||||||||
| Granted | ||||||||||||||||
| Outstanding at September 30, 2022 | $ | years | $ | |||||||||||||
| Exercisable at September 30, 2022 | $ | years | $ | |||||||||||||
During the three and nine months ended September 30, 2023 and 2022, stock-based compensation for options was $ and $, respectively, and $ and $, respectively.
As of September 30, 2023 and December 31, 2022, there were $ and $, respectively, of total unrecognized compensation costs related to stock options granted under our stock option agreements. The unrecognized compensation cost is expected to be recognized over a weighted-average period of . The total fair value of stock options that vested during the nine months ended September 30, 2023 and 2022 was $ and $, respectively.
14. Concentrations
Revenues
from a limited number of customers have accounted for a substantial percentage of our total revenues. During the three months ended September
30, 2023 and 2022, our largest customer, the State of Michigan, accounted for
For
the three months ended September 30, 2023 and 2022, government contracts, including K-12 education, represented approximately