UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended SeptemberJune 30, 20172021
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____________________ to_____________________to _________________________
Commission file number:000-31671
INTELLINETICS, INC.
(Exact name of registrant as specified in its charter)
| Nevada | 87-0613716 | |
(State or Other Jurisdiction of | ||
Incorporation or Organization) | (I.R.S. Employer Identification No.) |
| 2190 Dividend Drive | ||
| Columbus, Ohio | 43228 | |
| (Address of Principal Executive Offices) | (Zip Code) |
(614)921-8170
(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:
| Trading Symbol(s) | Name of each exchange on which registered | |||
| N/A | N/A |
Securities registered pursuant to Section 12(g) of the Act: Common stock, $0.001 par value.
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. Yes [X] ☒ No [ ]☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes [X] ☒ No [ ]☐
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”,filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b- 212b-2 of the Exchange Act.
| Large accelerated filer | Accelerated filer | |||
| Non-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 [ ] ☐ No [X] ☒
As of November 13, 2017August 12, 2021, there were 17,376,012 shares of the issuer’s common stock outstanding.outstanding, each with a par value of $0.001 per share.
INTELLINETICS, INC.
Form 10-Q
SeptemberJune 30, 2017 2021
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 and we mayforward-looking statements. In addition, from time to time make, forward-looking statements. From time to time in the future, 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 fact,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, but are not limited to,among other things, statements about the following:
| ● | the ongoing effect of the novel coronavirus pandemic (“COVID-19”), including its macroeconomic effects on our business, operations, and financial results; and the effect of governmental lockdowns, restrictions and new regulations on our operations and processes; | |
| ● | our prospects, including our future business, 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, | |
| ● | the effects on our business, financial condition and results of operations of current and future economic, business, market and regulatory conditions, including the current 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 | |
| ● | our expectation that the shift from an offline to online world will continue to benefit our business; | |
| ● | our ability to integrate our two 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 | |
| ● | 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 | |
| ● | the value of our assets and businesses, including the revenues, profits and cash flow they are capable of delivering in the future; |
| 3 |
| ● | 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 | |
| ● | the nature and intensity of our competition, and our ability to successfully compete in our | |
Any forward-looking statements we make are based on our current plans, intentions, objectives, goals, targets, strategies, hopes, beliefs, 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 “Item 1A. Risk Factors”Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2020, filed on March 30, 2017,2021, as well as other risks, uncertainties and factors discussed elsewhere in this report,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. |
| 4 |
PART I Financial Information– FINANCIAL INFORMATION
ItemITEM 1. Financial StatementsFINANCIAL STATEMENTS
INTELLINETICS, INC. and SUBSIDIARYSUBSIDIARIES
Condensed Consolidated Balance Sheets
| 2021 | 2020 | |||||||
| (unaudited) | ||||||||
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 1,140,631 | $ | 1,907,882 | ||||
| Accounts receivable, net | 1,001,625 | 792,380 | ||||||
| Accounts receivable, unbilled | 512,075 | 523,522 | ||||||
| Parts and supplies, net | 60,922 | 79,784 | ||||||
| Prepaid expenses and other current assets | 252,661 | 162,166 | ||||||
| Total current assets | 2,967,914 | 3,465,734 | ||||||
| Property and equipment, net | 1,010,312 | 698,752 | ||||||
| Right of use assets | 3,832,916 | 2,641,005 | ||||||
| Intangible assets, net | 1,076,733 | 1,184,971 | ||||||
| Goodwill | 2,322,887 | 2,322,887 | ||||||
| Other assets | 27,284 | 31,284 | ||||||
| Total assets | $ | 11,238,046 | $ | 10,344,633 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 163,869 | $ | 141,823 | ||||
| Accrued compensation | 458,567 | 271,889 | ||||||
| Accrued expenses, other | 152,370 | 131,685 | ||||||
| Lease liabilities - current | 606,350 | 518,531 | ||||||
| Deferred revenues | 942,947 | 996,131 | ||||||
| Deferred compensation | 100,828 | 100,828 | ||||||
| Earnout liabilities - current | 923,109 | 877,522 | ||||||
| Accrued interest payable - current | - | 5,941 | ||||||
| Notes payable - current | - | 580,638 | ||||||
| Total current liabilities | 3,348,040 | 3,624,988 | ||||||
| Long-term liabilities: | ||||||||
| Notes payable - net of current portion | 1,649,324 | 1,802,184 | ||||||
| Lease liabilities - net of current portion | 3,304,366 | 2,196,951 | ||||||
| Earnout liabilities - net of current portion | 643,369 | 1,566,478 | ||||||
| Total long-term liabilities | 5,597,059 | 5,565,613 | ||||||
| Total liabilities | 8,945,099 | 9,190,601 | ||||||
| Stockholders’ equity: | ||||||||
| Common stock, $ par value, shares authorized; and shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively | 2,823 | 2,811 | ||||||
| Additional paid-in capital | 24,251,172 | 24,147,488 | ||||||
| Accumulated deficit | (21,961,048 | ) | (22,996,267 | ) | ||||
| Total stockholders’ equity | 2,292,947 | 1,154,032 | ||||||
| Total liabilities and stockholders’ equity | $ | 11,238,046 | $ | 10,344,633 | ||||
| (Unaudited) | ||||||||
| September 30, 2017 | December 31, 2016 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 183,703 | $ | 689,946 | ||||
| Accounts receivable, net | 457,070 | 259,497 | ||||||
| Prepaid expenses and other current assets | 164,959 | 150,620 | ||||||
| Total current assets | 805,732 | 1,100,063 | ||||||
| Property and equipment, net | 23,969 | 18,783 | ||||||
| Other assets | 10,284 | 10,285 | ||||||
| Total assets | $ | 839,985 | $ | 1,129,131 | ||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 830,472 | $ | 767,197 | ||||
| Deferred revenues | 562,057 | 665,460 | ||||||
| Deferred compensation | 215,012 | 215,012 | ||||||
| Notes payable - current | 518,265 | 360,496 | ||||||
| Notes payable - related party - current | 157,322 | 38,307 | ||||||
| Total current liabilities | 2,283,128 | 2,046,472 | ||||||
| Long-term liabilities: | ||||||||
| Notes payable - net of current portion | 554,251 | 585,782 | ||||||
| Notes payable - related party - net of current portion | 329,408 | 299,447 | ||||||
| Deferred interest expense | 154,832 | 158,062 | ||||||
| Other long-term liabilities - related parties | 25,931 | 1,125 | ||||||
| Total long-term liabilities | 1,064,422 | 1,044,416 | ||||||
| Total liabilities | 3,347,550 | 3,090,888 | ||||||
| Stockholders' deficit: | ||||||||
| Common stock, $0.001 par value, 50,000,000 shares authorized; 17,376,012 and 16,815,850 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively | 30,380 | 26,816 | ||||||
| Additional paid-in capital | 13,451,486 | 12,966,177 | ||||||
| Accumulated deficit | (15,989,431 | ) | (14,954,750 | ) | ||||
| Total stockholders' deficit | (2,507,565 | ) | (1,961,757 | ) | ||||
| Total liabilities and stockholders' deficit | $ | 839,985 | $ | 1,129,131 | ||||
See Notes to these condensed consolidatedCondensed Consolidated financial statements
| 5 |
INTELLINETICS, INC. and SUBSIDIARYSUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues: | ||||||||||||||||
| Sale of software | $ | 5,598 | $ | 9,674 | $ | 15,192 | $ | 103,774 | ||||||||
| Software as a service | 376,154 | 248,693 | 699,880 | 474,687 | ||||||||||||
| Software maintenance services | 335,073 | 314,111 | 675,519 | 575,354 | ||||||||||||
| Professional services | 1,897,780 | 1,045,679 | 3,550,243 | 1,605,709 | ||||||||||||
| Storage and retrieval services | 295,041 | 218,025 | 604,031 | 290,322 | ||||||||||||
| Total revenues | 2,909,646 | 1,836,182 | 5,544,865 | 3,049,846 | ||||||||||||
| Cost of revenues: | ||||||||||||||||
| Sale of software | 2,122 | 5,357 | 6,359 | 43,659 | ||||||||||||
| Software as a service | 91,781 | 71,281 | 168,121 | 143,796 | ||||||||||||
| Software maintenance services | 22,272 | 31,569 | 46,660 | 78,085 | ||||||||||||
| Professional services | 861,267 | 514,036 | 1,695,505 | 811,132 | ||||||||||||
| Storage and retrieval services | 118,137 | 42,546 | 209,249 | 56,537 | ||||||||||||
| Total cost of revenues | 1,095,579 | 664,789 | 2,125,894 | 1,133,209 | ||||||||||||
| Gross profit | 1,814,067 | 1,171,393 | 3,418,971 | 1,916,637 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative | 1,058,061 | 844,657 | 2,097,087 | 1,688,860 | ||||||||||||
| Change in fair value of earnout liabilities | 7,261 | - | 77,211 | - | ||||||||||||
| Significant transaction costs | - | 175,673 | - | 636,440 | ||||||||||||
| Sales and marketing | 341,595 | 229,873 | 631,906 | 473,562 | ||||||||||||
| Depreciation and amortization | 101,432 | 86,750 | 196,316 | 114,842 | ||||||||||||
| Total operating expenses | 1,508,349 | 1,336,953 | 3,002,520 | 2,913,704 | ||||||||||||
| Income (loss) from operations | 305,718 | (165,560 | ) | 416,451 | (997,067 | ) | ||||||||||
| Other income (expense) | ||||||||||||||||
| Gain on extinguishment of debt | - | - | 845,083 | 287,426 | ||||||||||||
| Interest expense, net | (113,271 | ) | (116,796 | ) | (226,315 | ) | (407,226 | ) | ||||||||
| Total other income/expense | (113,271 | ) | (116,796 | ) | 618,768 | (119,800 | ) | |||||||||
| Income (loss) before income taxes | 192,447 | (282,356 | ) | 1,035,219 | (1,116,867 | ) | ||||||||||
| Income tax benefit | - | - | - | 188,300 | ||||||||||||
| Net income/loss | $ | 192,447 | $ | (282,356 | ) | $ | 1,035,219 | $ | (928,567 | ) | ||||||
| Basic and diluted net income (loss) per share: | $ | 0.07 | $ | (0.10 | ) | $ | 0.37 | $ | (0.46 | ) | ||||||
| Diluted net income (loss) per share: | $ | 0.06 | $ | (0.10 | ) | $ | 0.33 | $ | (0.46 | ) | ||||||
| Weighted average number of common shares outstanding - basic and diluted | 2,823,072 | 2,810,865 | 2,822,870 | 1,998,356 | ||||||||||||
| Weighted average number of common shares outstanding - diluted | 3,104,334 | 2,810,865 | 3,105,602 | 1,998,356 | ||||||||||||
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenues: | ||||||||||||||||
| Sale of software | $ | 134,732 | $ | 96,869 | $ | 375,007 | $ | 289,437 | ||||||||
| Software as a service | 180,517 | 137,343 | 461,734 | 363,842 | ||||||||||||
| Software maintenance services | 241,358 | 256,441 | 732,160 | 748,354 | ||||||||||||
| Professional services | 81,751 | 153,895 | 436,977 | 337,680 | ||||||||||||
| Third Party services | 35,882 | 34,897 | 116,109 | 180,272 | ||||||||||||
| Total revenues | 674,240 | 679,445 | 2,121,987 | 1,919,585 | ||||||||||||
| Cost of revenues: | ||||||||||||||||
| Sale of software | 32,714 | 16,432 | 71,515 | 54,001 | ||||||||||||
| Software as a service | 78,915 | 66,180 | 228,154 | 176,416 | ||||||||||||
| Software maintenance services | 30,432 | 25,019 | 87,463 | 109,564 | ||||||||||||
| Professional services | 36,688 | 32,476 | 183,133 | 94,443 | ||||||||||||
| Third Party services | 5,209 | 26,103 | 33,707 | 108,918 | ||||||||||||
| Total cost of revenues | 183,958 | 166,210 | 603,972 | 543,342 | ||||||||||||
| Gross profit | 490,282 | 513,235 | 1,518,015 | 1,376,243 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative | 490,943 | 396,638 | 1,571,184 | 1,525,294 | ||||||||||||
| Sales and marketing | 141,315 | 338,843 | 560,735 | 842,421 | ||||||||||||
| Depreciation | 3,231 | 2,437 | 9,016 | 8,160 | ||||||||||||
| Total operating expenses | 635,489 | 737,918 | 2,140,935 | 2,375,875 | ||||||||||||
| Loss from operations | (145,207 | ) | (224,683 | ) | (622,920 | ) | (999,632 | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense, net | (141,483 | ) | (22,084 | ) | (411,761 | ) | (184,865 | ) | ||||||||
| Total other income (expense) | (141,483 | ) | (22,084 | ) | (411,761 | ) | (184,865 | ) | ||||||||
| Net loss | $ | (286,690 | ) | $ | (246,767 | ) | $ | (1,034,681 | ) | $ | (1,184,497 | ) | ||||
| Basic and diluted net loss per share: | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.06 | ) | $ | (0.07 | ) | ||||
| Weighted average number of common shares outstanding - basic and diluted | 17,376,012 | 16,810,582 | 17,369,012 | 16,622,864 | ||||||||||||
See Notes to these condensed consolidatedCondensed Consolidated financial statements
| 6 |
INTELLINETICS, INC. and SUBSIDIARYSUBSIDIARIES
Condensed Consolidated Statement of Stockholders' DeficitStockholders’ Equity
For the NineThree and Six Months Ended SeptemberJune 30, 20172021 and 2020
(Unaudited)
| Common Stock | Additional Paid-in | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
| Balance, December 31, 2016 | 16,815,850 | $ | 26,816 | $ | 12,966,177 | $ | (14,954,750 | ) | $ | (1,961,757 | ) | |||||||||
| Stock Issued to Directors | 64,051 | 64 | 57,436 | - | 57,500 | |||||||||||||||
| Stock Option Compensation | - | - | 91,063 | - | 91,063 | |||||||||||||||
| Exercise of stock warrants | 496,111 | 3,500 | (3,500 | ) | - | 0 | ||||||||||||||
| Note Offer Warrant | - | - | 91,787 | - | 91,787 | |||||||||||||||
| Beneficial Conversion of Convertible Notes | - | - | 248,523 | - | 248,523 | |||||||||||||||
| Net Loss | - | - | - | (1,034,681 | ) | (1,034,681 | ) | |||||||||||||
| Balance, September 30, 2017 | 17,376,012 | $ | 30,380 | $ | 13,451,486 | $ | (15,989,431 | ) | $ | (2,507,565 | ) | |||||||||
| Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
| Common Stock | Additional Paid-in | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
| Balance, March 31, 2020 | 2,810,865 | $ | 2,811 | $ | 24,100,291 | $ | (21,442,277 | ) | $ | 2,660,825 | ||||||||||
| Stock Issued to Directors | ||||||||||||||||||||
| Stock Issued to Directors, shares | ||||||||||||||||||||
| Stock Issued | ||||||||||||||||||||
| Stock Issued, shares | ||||||||||||||||||||
| Stock Issued for Convertible Notes | ||||||||||||||||||||
| Stock Issued for Convertible Notes, shares | ||||||||||||||||||||
| Equity Issuance Costs | ||||||||||||||||||||
| Note Offer Warrants | ||||||||||||||||||||
| Stock Option Compensation | - | - | 7,110 | - | 7,110 | |||||||||||||||
| Net Loss | - | - | - | (282,356 | ) | (282,356 | ) | |||||||||||||
| Balance, June 30, 2020 | 2,810,865 | $ | 2,811 | $ | 24,107,401 | $ | (21,724,633 | ) | $ | 2,385,579 | ||||||||||
| Balance, March 31, 2021 | 2,823,072 | 2,823 | 24,228,074 | (22,153,495 | ) | 2,077,402 | ||||||||||||||
| Stock Option Compensation | - | - | 23,098 | - | 23,098 | |||||||||||||||
| Net Income | - | - | - | 192,447 | 192,447 | |||||||||||||||
| Balance, June 30, 2021 | 2,823,072 | $ | 2,823 | $ | 24,251,172 | $ | (21,961,048 | ) | $ | 2,292,947 | ||||||||||
| Common Stock | Additional Paid-in | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
| Balance, December 31, 2019 | 370,497 | $ | 371 | $ | 14,419,437 | $ | (20,796,066 | ) | $ | (6,376,258 | ) | |||||||||
| Stock Issued to Directors | 16,429 | 16 | 57,484 | - | 57,500 | |||||||||||||||
| Stock Option Compensation | - | - | 18,683 | - | 18,683 | |||||||||||||||
| Stock Issued | 955,000 | 955 | 3,819,045 | - | 3,820,000 | |||||||||||||||
| Stock Issued for Convertible Notes | 1,468,939 | 1,469 | 5,728,566 | - | 5,730,035 | |||||||||||||||
| Equity Issuance Costs | - | - | (307,867 | ) | - | (307,867 | ) | |||||||||||||
| Note Offer Warrants | - | - | 372,053 | - | 372,053 | |||||||||||||||
| Net Loss | - | - | - | (928,567 | ) | (928,567 | ) | |||||||||||||
| Balance, June, 2020 | 2,810,865 | $ | 2,811 | $ | 24,107,401 | $ | (21,724,633 | ) | $ | 2,385,579 | ||||||||||
| Balance, December 31, 2020 | 2,810,865 | 2,811 | 24,147,488 | (22,996,267 | ) | 1,154,032 | ||||||||||||||
| Stock Issued to Directors | 12,207 | 12 | 57,488 | - | 57,500 | |||||||||||||||
| Stock Option Compensation | - | - | 46,196 | - | 46,196 | |||||||||||||||
| Net Income | - | - | - | 1,035,219 | 1,035,219 | |||||||||||||||
| Net Income (loss) | - | - | - | 1,035,219 | 1,035,219 | |||||||||||||||
| Balance, June 30, 2021 | 2,823,072 | $ | 2,823 | $ | 24,251,172 | $ | (21,961,048 | ) | $ | 2,292,947 | ||||||||||
See Notes to these condensed consolidatedCondensed Consolidated financial statements
| 7 |
INTELLINETICS, INC. and SUBSIDIARYSUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| 2021 | 2020 | |||||||
| For the Six Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | 1,035,219 | $ | (928,567 | ) | |||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 196,316 | 114,842 | ||||||
| Bad debt (recovery) expense | (11,453 | ) | 44,705 | |||||
| Parts and supplies reserve change | 9,000 | 6,000 | ||||||
| Amortization of deferred financing costs | 51,869 | 65,222 | ||||||
| Amortization of beneficial conversion option | - | 11,786 | ||||||
| Amortization of debt discount | 53,333 | 35,555 | ||||||
| Amortization of right of use asset | 292,051 | 160,290 | ||||||
| Stock issued for services | 57,500 | 57,500 | ||||||
| Stock options compensation | 46,196 | 18,683 | ||||||
| Note conversion stock issue expense | - | 141,000 | ||||||
| Warrant issue expense | - | 236,761 | ||||||
| Interest on converted debt | - | 176,105 | ||||||
| Amortization of original issue discount on notes | - | 18,296 | ||||||
| Gain on extinguishment of debt | (845,083 | ) | (287,426 | ) | ||||
| Change in fair value of earnout liabilities | 77,211 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (197,792 | ) | 804,874 | |||||
| Accounts receivable, unbilled | 11,447 | (150,846 | ) | |||||
| Parts and supplies | 9,862 | 1,676 | ||||||
| Prepaid expenses and other current assets | (86,495 | ) | (53,400 | ) | ||||
| Accounts payable and accrued expenses | 229,409 | (399,261 | ) | |||||
| Lease liabilities, current and long-term | (288,728 | ) | (154,257 | ) | ||||
| Deferred compensation | - | (16,338 | ) | |||||
| Accrued interest, current and long-term | 442 | 2,236 | ||||||
| Deferred revenues | (53,184 | ) | (37,723 | ) | ||||
| Total adjustments | (448,099 | ) | 796,280 | |||||
| Net cash used in operating activities | 587,120 | (132,287 | ) | |||||
| Cash flows from investing activities: | ||||||||
| Cash paid to acquire business, net of cash acquired | - | (4,017,816 | ) | |||||
| Purchases of property and equipment | (399,638 | ) | (21,927 | ) | ||||
| Net cash used in investing activities | (399,638 | ) | (4,039,743 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Payment of earnout liabilities | (954,733 | ) | - | |||||
| Proceeds from issuance of common stock | - | 3,167,500 | ||||||
| Offering costs paid on issuance of common stock | - | (307,867 | ) | |||||
| Payment of deferred financing costs | - | (175,924 | ) | |||||
| Proceeds from notes payable | - | 3,008,700 | ||||||
| Repayment of notes payable - related parties | - | (47,728 | ) | |||||
| Net cash provided by financing activities | (954,733 | ) | 5,644,681 | |||||
| Net increase in cash | (767,251 | ) | 1,472,651 | |||||
| Cash - beginning of period | 1,907,882 | 404,165 | ||||||
| Cash - end of period | $ | 1,140,631 | $ | 1,876,816 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid during the period for interest | $ | 121,339 | $ | 85,949 | ||||
| Cash paid during the period for income taxes | $ | 2,088 | $ | - | ||||
| Supplemental disclosure of non-cash financing activities: | ||||||||
| Accrued interest notes payable converted to equity | $ | - | $ | 796,074 | ||||
| Accrued interest notes payable related parties converted to equity | - | 238,883 | ||||||
| Discount on notes payable for beneficial conversion feature | - | 320,000 | ||||||
| Discount on notes payable for warrants | - | 135,292 | ||||||
| Notes payable converted to equity | - | 3,421,063 | ||||||
| Notes payable converted to equity - related parties | - | 1,465,515 | ||||||
| Right-of-use asset obtained in exchange for operating lease liability | 1,483,962 | - | ||||||
| Supplemental disclosure of non-cash investing activities relating to business acquisitions: | ||||||||
| Cash | $ | - | $ | 17,269 | ||||
| Accounts receivable | - | 1,122,737 | ||||||
| Accounts receivable, unbilled | - | 276,023 | ||||||
| Parts and supplies | - | 91,396 | ||||||
| Prepaid expenses | - | 73,116 | ||||||
| Other current assets | - | 5,954 | ||||||
| Right of use assets | - | 2,885,618 | ||||||
| Property and equipment | - | 735,885 | ||||||
| Intangible assets | - | 1,361,000 | ||||||
| Accounts payable | - | (169,289 | ) | |||||
| Accrued expenses | - | (163,168 | ) | |||||
| Lease liabilities | - | (2,947,684 | ) | |||||
| Federal and state taxes payable | - | (168,900 | ) | |||||
| Deferred revenues | - | (195,448 | ) | |||||
| Deferred tax liabilities, net | - | (149,900 | ) | |||||
| Net assets acquired in acquisition | - | 2,774,609 | ||||||
| Total goodwill acquired in acquisition | - | 2,319,676 | ||||||
| Total purchase price of acquisition | - | 5,094,285 | ||||||
| Purchase price of business acquisition financed with earnout liability | - | (889,200 | ) | |||||
| Purchase price of business acquisition financed with installment payments | - | (170,000 | ) | |||||
| Cash used in business acquisition | $ | - | $ | 4,035,085 | ||||
| For the Nine Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (1,034,681 | ) | $ | (1,184,497 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 9,016 | 8,160 | ||||||
| Bad debt expense | 6,646 | 758 | ||||||
| Amortization of deferred financing costs | 59,761 | 2,124 | ||||||
| Amortization of beneficial conversion option | 188,385 | - | ||||||
| Stock issued for services | 57,500 | 62,500 | ||||||
| Stock options compensation | 91,063 | 113,589 | ||||||
| Note conversion warrant expense | - | 137,970 | ||||||
| Note offer warrant expense | 54,015 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (204,219 | ) | (112,814 | ) | ||||
| Prepaid expenses and other current assets | (14,338 | ) | (125,544 | ) | ||||
| Accounts payable and accrued expenses | 63,275 | (116,262 | ) | |||||
| Other long-term liabilities - related parties | 24,806 | (12,852 | ) | |||||
| Deferred interest expense | (3,230 | ) | 23,226 | |||||
| Deferred revenues | (103,403 | ) | (46,007 | ) | ||||
| Total adjustments | 229,277 | (65,152 | ) | |||||
| Net cash used in operating activities | (805,404 | ) | (1,249,649 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | (14,202 | ) | (6,867 | ) | ||||
| Net cash used in investing activities | (14,202 | ) | (6,867 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Sale of Common Stock | - | 559,285 | ||||||
| Exercise of stock options | - | 3,500 | ||||||
| Payment of deferred financing costs | (103,328 | ) | - | |||||
| Proceeds from notes payable | 560,000 | - | ||||||
| Proceeds from notes payable - related parties | 150,000 | - | ||||||
| Repayment of notes payable | (268,195 | ) | (180,000 | ) | ||||
| Repayment of notes payable - related parties | (25,114 | ) | (83,834 | ) | ||||
| Net cash provided by financing activities | 313,363 | 298,951 | ||||||
| Net increase (decrease) in cash | (506,243 | ) | (957,565 | ) | ||||
| Cash - beginning of period | 689,946 | 1,117,118 | ||||||
| Cash - end of period | $ | 183,703 | $ | 159,553 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid during the period for interest and taxes | $ | 89,071 | $ | 35,808 | ||||
| Supplemental disclosure of non-cash financing activities: | ||||||||
| Accrued interest notes payable converted to equity | $ | - | $ | 35,038 | ||||
| Discount on notes payable for beneficial conversion feature | 248,523 | - | ||||||
| Discount on notes payable – related parties for warrants | 38,836 | - | ||||||
| Notes payable conversion warrant expense | - | 113,762 | ||||||
| Notes payable conversion underwriting warrant expense | - | 24,207 | ||||||
| Notes payable converted to equity | - | 135,000 | ||||||
See Notes to these condensed consolidatedCondensed Consolidated financial statements
| 8 |
INTELLINETICS, INC. AND SUBSIDIARYSUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1.Business Organization and Nature of Operations
Intellinetics, Inc., formerly known as GlobalWise Investments, Inc., (“Intellinetics” or the “Company” or “we” or “us”), is a Nevada corporation incorporated in 1997, with a single operating subsidiary,two subsidiaries: Intellinetics, Inc., an Ohio corporation that is wholly-owned by the Company (“Intellinetics Ohio”), together with Intellinetics,and Graphic Sciences, Inc., a Michigan corporation that is also wholly-owned by the Company (“Company,” “we,” “us,” and “our”Graphic Sciences”). Intellinetics Ohio was incorporated in 1996, and on February 10, 2012, Intellinetics Ohio became the sole operating subsidiary of Intellineticsthe Company as a result of a reverse merger and recapitalization. On March 2, 2020, the Company purchased all the outstanding capital stock of Graphic Sciences.
The Company is a contentOur products and services software development, sales,are provided through two reporting segments: Document Management and marketing company serving bothDocument Conversion. Our Document Management segment, which includes the public and private sectors. The Company’sCEO Imaging Systems, Inc. (“CEO Image”) asset acquisition in April 2020, consists primarily of solutions involving our software platform, allowsallowing customers to capture and manage alltheir documents across operations such as scanned hard-copy documents and all digital documents including those from Microsoft Office 365, digital images, audio, video and emails. The Company’sOur Document Conversion segment, which includes and primarily consists of the Graphic Sciences acquisition, provides assistance to customers as a part of their overall document strategy to convert documents from one medium to another, predominantly paper to digital, including migration to our software solutions, as well as long-term storage and retrieval services. Our solutions create value for customers by making it easy to connect business-critical documents to the processes they drivepeople who need them by making themthose document easy to find and access, while also being secure and compliant with itsthe customers’ audit requirements. Solutions are sold both directly to end-users and through resellers.
2.Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim.
The financial information and the instructions tostatements presented in this Quarterly Report on Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Inare unaudited. However, in the opinion of management, these unaudited condensed consolidated financial statements include all adjustments, (consistingconsisting solely of normal accruals) considered for a fair presentation ofrecurring adjustments, necessary to present fairly the consolidated financial position, of the Company as of September 30, 2017 and the consolidated results of its operations and cash flows for the threeperiods presented in conformity with GAAP applicable to interim periods. The financial data and nine months ended September 30, 2017other financial information disclosed in these notes to the accompanying condensed consolidated financial statements are also unaudited. As such, certain information and 2016,footnote disclosures normally included in financial statements prepared in accordance with GAAP have been included. The Company has evaluated subsequent events through the issuance of this Form 10-Q. condensed or omitted pursuant to applicable rules and regulations thereunder.
Operating results for the three and nine months ended September 30, 2017interim periods presented are not necessarily indicative of the results that may be expected for the full fiscal year ending December 31, 20172021 or any other interim or future period. For further information, refer to
These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes theretothe related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 included in the Company’s Form 10-K2020 filed with the Securities and Exchange CommissionSEC filed on March 30, 2017.2021.
3.Liquidity and Management’s Plans
Through September
We have financed our operations primarily through a combination of cash on hand, cash generated from operations, borrowings from third parties and related parties, and proceeds from private sales of equity. Since 2012, we have raised a total of approximately $18.6 million in cash through issuances of debt and equity securities. As of June 30, 2017, the Company2021, we had incurred$1,140,631 in cash and cash equivalents, net working capital deficit of $380,126, and an accumulated deficit since its inception of $15,989,431. At September 30, 2017,approximately $22 million. In June 2021, we paid $954,733 in annual earnout liabilities.
In 2020, we engaged in several actions that significantly improved our liquidity and cash flows, including:
| ● | acquiring Graphic Sciences and CEO Image, resulting in increased cash flow from operations, | |
| ● | receiving aggregate gross proceeds of $3.5 million from the private placement of our common stock, | |
| ● | converting all of the outstanding principal and accrued interest payable on our then-existing convertible debt in the approximate amount of $6.0 million into shares of common stock at a conversion price of $4.00 per share, |
| 9 |
| ● | receiving $2.0 million in proceeds from the issuance of 12% subordinated promissory notes due February 28, 2023, which we refer to as the 2020 Notes, and | |
| ● | obtaining the loan under the Paycheck Protection Program through PNC Bank in the principal amount of $838,700 (the “PPP loan”),the principal and interest on which was forgiven in its entirety by the U.S. Small Business Administration (the “SBA”) by notice we received on January 20, 2021. |
Overall, we reduced our outstanding debt by approximately $3 million during 2020 and have not incurred any new debt in 2021.
Our ability to meet our capital needs in the Company had afuture will depend on many factors, including maintaining and enhancing our operating cash balanceflow, successfully managing the transition of $183,703.our recent acquisitions of Graphic Sciences and CEO Image, successfully retaining and growing our client base in the midst of general economic uncertainty, and managing the continuing effects of the COVID-19 pandemic on our business. We will need to successfully manage our cash flows to support potential future earnout commitments and debt service commitments.
FromBased on our current plans and assumptions, we believe our capital resources, including our cash and cash equivalents, along with funds expected to be generated from our operations, will be sufficient to meet our anticipated cash needs arising in the Company’s inception, it has generated revenues from the sales and implementationordinary course of its internally generated software applications.
The Company’s business plan is to increase its sales and market share by developing an expanded network of resellers through which the Company will sell its expanded software product portfolio, as well as direct selling efforts with a focus on select markets. The Company expects that this marketing initiative will require that it continue its efforts towards reseller training and on-boarding, enhance direct marketing campaigns and leads management, and develop additional software integration and customization capabilities, all of which will require additional capital.
The Company expects that throughfor at least the next 12 months, the capital requirementsincluding to fund the Company’s growth, service existing debt obligations, and to cover the operating costs as a public company will consume substantially all of the cash flows that it intends to generate from its operations. The Company further believes that during this period, while the Company is focusing on the growth and expansion of its business, the gross profit that it expects to generate from operations will not generate sufficient funds to cover these anticipated operating costs. Our cash requirements are insufficient by approximately $77,000 per month. During 2016 and the nine months ending September 30, 2017, the Company has used the proceeds from the convertible note issuances and the sale of equity securities to sustain operations and to follow through on the execution of its business plan. There is no assurance that the Company has or will be able to obtain sufficient funds to fund the Company’s operations. Given these conditions, the Company’s ability to continue as a going concern is contingent upon increasing its revenues and successfully managing its cash requirements. In addition, the Company’s ability to continue as a going concern must be considered in light of the problems, expenses and complications frequently encountered by entrants into established markets, the competitive environment in which the Company operates and its cash requirements. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.
Since inception, the Company’s operations have primarily been funded through a combination of gross margins, state business development loans, bank loans, convertible loans and loans from friends and family, and the sale of securities. Although management believes that the Company may have access to additional capital resources, there is no assurance that the Company will be able to obtain additional funds on commercially acceptable terms, if at all.
During the nine months ended September 30, 2017, the Company raised a net $606,672 through the issuance of convertible notes. The proceeds from the issuance were used to fund the Company’ssatisfy our expected working capital needs, earnout obligations and capital and debt repayment obligations.service commitments.
4.Summary of Significant Accounting Policies
Principles of Consolidation
The current levelcondensed consolidated financial statements accompanying these notes include the accounts of cashIntellinetics and operating margins may not be enough to cover the existing fixed and variable obligationsaccounts of all its subsidiaries in which it holds a controlling interest. Under GAAP, consolidation is generally required for investments of more than 50% of the Company, so increased revenue performance andoutstanding voting stock of an investee, except when control is not held by the addition of capital are critical to the Company’s success.
The Company’s financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should it be unable to continue as a going concern.
On February 10, 2012,majority owner. We have two subsidiaries: Intellinetics Ohio was acquired by Intellinetics, when it was known as GlobalWise Investments, Inc., pursuant to a reverse merger, with Intellinetics Ohio surviving as a wholly-owned subsidiary of Intellinetics.
On September 1, 2014,and Graphic Sciences. We consider the Company changed its name from GlobalWise Investments, Inc., to Intellinetics, Inc.criteria established under Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 810, “Consolidations” in the consolidation process. All significant intercompany balances and effected a one-for-seven (1-for-7) reverse stock split of the Company’s common stock. All share and per share amounts hereintransactions have been adjusted to reflect the reverse stock split.eliminated in consolidation.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses. ActualBy their nature, these estimates and assumptions are subject to an inherent degree of uncertainty. The impact of COVID-19 has significantly increased economic and demand uncertainty. Because future events and their effects cannot be determined with precision, actual results could differ significantly from estimated amounts.
Significant estimates and assumptions include valuation allowances related to receivables, accounts receivable -unbilled, allowance for obsolescence or slow-moving parts and supplies inventory, the recoverability of long-term assets, depreciable lives of property and equipment, purchase price allocations for acquisitions, fair value for goodwill and intangibles, the lease liabilities, estimates of fair value deferred taxes and related valuation allowances. The Company’sOur management monitors these risks and assesses itsour business and financial risks on a quarterly basis.
| 10 |
ConcentrationsRevenue Recognition
In accordance with ASC 606, “Revenue From Contracts With Customers,” we follow a five-step model to assess each contract of Credit Risk
a sale or service to a customer: identify the legally binding contract, identify the performance obligations, determine the transaction price, allocate the transaction price, and determine whether revenue will be recognized at a point in time or over time. Revenue is recognized when a performance obligation is satisfied and the customer obtains control of promised goods and services. The Company maintains its cash with high credit quality financial institutions. At times,amount of revenue recognized reflects the Company’s cashconsideration to which we expect to be entitled to receive in exchange for these goods and services. In addition, ASC 606 requires disclosures of the nature, amount, timing, and uncertainty of revenue and cash equivalents may be uninsured orflows arising from contracts with customers.
We categorize revenue as software, software as a service, software maintenance services, professional services, and storage and retrieval services. We earn the majority of our revenue from the sale of professional services, followed by the sale of software maintenance services and software as a service. We apply our revenue recognition policies as required in deposit accounts that exceedaccordance with ASC 606 based on the Federal Deposit Insurance Corporation insurance limit.
The numberfacts and circumstances of customers that compriseeach category of revenue. More detail regarding each category of revenue is contained in our Annual Report on Form 10-K for the Company’s customer base, alongfiscal year ended December 31, 2020 filed with the SEC filed on March 30, 2021
Contract balances
When the timing of our delivery of goods or services is different industries, governmental entities and geographic regions,from the timing of payments made by customers, we recognize either a contract asset (performance precedes contractual due date) or a contract liability (customer payment precedes performance). Customers that prepay are represented by deferred revenue until the performance obligation is satisfied. Contract assets represent arrangements in which the Company’sgood or service has been delivered but payment is not yet due. Our contract assets consisted of accounts receivable, unbilled, which are disclosed on the condensed consolidated balance sheets. Our contract liabilities consisted of deferred (unearned) revenue, which is generally related to software as a service or software maintenance contracts. We classify deferred revenue as current based on the timing of when we expect to recognize revenue, which are disclosed on the condensed consolidated balance sheets.
The following table present changes in our contract assets and liabilities during the six months ended June 30, 2021 and 2020:
Schedule of Changes in Contract Assets and Liabilities
| Balance at Beginning of Period | Addition from acquisition (Note 5) | Revenue Recognized in Advance of Billings | Billings | Balance at End of Period | ||||||||||||||||
| Six months ended June 30, 2021 | ||||||||||||||||||||
| Contract assets: Accounts receivable, unbilled | $ | 523,522 | $ | - | $ | 1,944,919 | $ | (1,956,366 | ) | $ | 512,075 | |||||||||
| Six months ended June 30, 2020 | ||||||||||||||||||||
| Contract assets: Accounts receivable, unbilled | $ | 23,371 | $ | 276,023 | $ | 208,404 | $ | (57,558 | ) | $ | 450,240 | |||||||||
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 be recognized. Deferred revenues typically relate to maintenance and software-as-a-service agreements which have been paid for by customers operate, limits concentrationsprior to the performance of credit riskthose 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.
| 11 |
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 95% of the remaining performance obligations over the next 12 months, with respectthe remainder recognized thereafter. As of June 30, 2021, the aggregate amount of the transaction price allocated to accounts receivable. The Companyremaining performance obligations for software as a service and software maintenance contracts with a duration greater than one year was $48,454. As of December 31, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations for software as a service and software maintenance contracts with a duration greater than one year was $45,323. This does not generally require collateralinclude revenue related to performance obligations that are part of a contract whose original expected duration is one year or other security to support customer receivables; however,less.
| Balance at Beginning of Period | Addition from acquisition (Note 5) | Billings | Recognized Revenue | Balance at End of Period | ||||||||||||||||
| Six months ended June 30, 2021 | ||||||||||||||||||||
| Contract liabilities: Deferred revenue | $ | 996,131 | $ | - | $ | 2,141,905 | $ | (2,195,089 | ) | $ | 942,947 | |||||||||
| Six months ended June 30, 2020 | ||||||||||||||||||||
| Contract liabilities: Deferred revenue | $ | 754,073 | $ | 195,448 | $ | 1,482,894 | $ | (1,520,617 | ) | $ | 911,798 | |||||||||
12
Parts and Supplies
Parts and supplies are valued at the Company may require its customers to provide retainers, up-front depositslower of cost or irrevocable letters-of-credit when considered necessary to mitigate credit risks. The Company has establishednet realizable value. Costs are determined using the first-in, first-out method. Parts and supplies are used for scanning and document conversion services. A provision for potentially obsolete or slow-moving parts and supplies inventory is made based on parts and supplies levels, future sales forecasted and management’s judgment of potentially obsolete parts and supplies. We recorded an allowance for doubtful accounts based upon facts surrounding the credit risk of specific customers $24,000and past collections history. Credit losses have been within management’s expectations. At September$15,000 at June 30, 20172021 and December 31, 2016, the Company’s allowance for doubtful accounts was $22,202 and $19,034,2020, respectively.
Property and Equipment
Property, equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed over the estimated useful lives of the related assets on a straight-line basis. Furniture and fixtures, computer hardware and purchased software are depreciated over three to seven years. Leasehold improvements are amortized over the life of the lease or the asset, whichever is shorter, generally seven to ten years. Upon retirement or other disposition of these assets, the cost and related accumulated depreciation and amortization of these assets are removed from the accounts and the resulting gains and losses are reflected in the results of operations. Construction in progress represents warehouse racking for document storage and retrieval purposes. No depreciation is provided for construction in progress until it is completed and placed into service.
| 13 |
ImpairmentPurchase Accounting Related Fair Value Measurements
We allocate the purchase price, including contingent consideration, of Long-Lived Assets
The Company accounts forour acquisitions to the impairmentassets and disposition of long-livedliabilities acquired, including identifiable intangible assets, in accordance with Accounting Standards Codification (“ASC”) Topic 360, “Property, Plant, and Equipment.” The Company tests long-lived assets or asset groups, such as property and equipment, for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable.
Circumstances which could trigger a review include, but are not limited to: significant adverse changes in the business climate or legal factors; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and a current expectation that the asset will more likely than not be sold or disposed of before the end of its estimated useful life.
Recoverability is assessed based on comparing the carrying amount of the asset to the aggregate pre-tax undiscounted cash flows expected to result from the use and eventual disposal of the asset or asset group. Impairment is recognized when the carrying amount is not recoverable and exceeds the fair value of the asset or asset group. The impairment loss, if any, is measured as the amount by which the carrying amount exceeds fair value, which for this purpose is based upon the discounted projected future cash flows of the asset or asset group.
Share-Based Compensation
The Company accounts for stock-based payments to employees in accordance with ASC 718, “Stock Compensation.” Stock-based payments to employees include grants of stock that are recognized in the consolidated statement of operations based on their respective fair values at the date of grant.
acquisition. Such fair market value assessments are primarily based on third-party valuations using assumptions developed by management that require significant judgments and estimates that can change materially as additional information becomes available. The Company accounts for stock-based paymentspurchase price allocated to non-employees in accordance with ASC 718 and ASC 505-50, “Equity-Based Payments to Non-Employees,” which requires that such equity instruments are recorded at their fair value on the measurement date, with the measurement of such compensation being subject to periodic adjustment as the underlying equity instruments vest.
The grant date fair value of stock option awards is recognized in earnings as share-based compensation cost over the requisite service period of the award using the straight-line attribution method. The Company estimates the fair value of the stock option awards using the Black-Scholes-Merton option pricing model. The exercise price of options is specified in the stock option agreements. The expected volatilityintangibles is based on unobservable factors, including but not limited to, projected revenues, expenses, customer attrition rates, a weighted average cost of capital, among others. The weighted average cost of capital uses a market participant’s cost of equity and after-tax cost of debt and reflects the historical volatility ofrisks inherent in the Company’s stock forcash flows. The approach to valuing the previous period equal toinitial contingent consideration associated with the expected term of the options. The expected term of options granted is based on the midpoint between the vesting datepurchase price also uses similar unobservable factors such as projected revenues and the end of the contractual term. The risk-free interest rate is based upon a U.S. Treasury instrument with a life that is similar to the expected term of the options. The expected dividend yield is based upon the yield expected on date of grant to occurexpenses over the term of the option.
On January 3 and March 17, 2017, the Company issued 61,110 and 2,941 new Shares, respectively, of restricted common stock to directors of the Company in accordance with the 2015 Intellinetics Equity Incentive Plan (the “2015 Plan”). Stock compensation of $57,500 was recorded on the issuance of the Shares.
On March 15, 2017, the Company granted an employee stock options to purchase 100,000 Shares at an exercise price of $0.85 per Share, in accordance with the 2015 Plan, with vesting continuing until 2020. The total fair value of $70,872 for these stock options would have been recognized by the Company over the applicable vesting period. These options were forfeited upon the termination of the employee and expiry of the exercise period. The total stock option compensationcontingent earnout period, discounted for the threeperiod over which the initial contingent consideration is measured, and ninevolatility rates. We finalize the purchase price allocation once certain initial accounting valuation estimates are finalized, and no later than 12 months ended September 30, 2017 was $0 and $19,563, respectively.following the acquisition date.
On September 25, 2017, the Company granted an employee stock options to purchase 750,000 Shares at an exercise price of $0.30 per Share and 500,000 Shares at an exercise price of $0.38 per Share, in accordance with the 2015 Plan, with vesting continuing until 2019. The total fair value of $321,011 for these stock options will be recognized by the Company over the applicable vesting period. The total stock option compensation for the three and nine months ended September 30, 2017 was $2,646.
For the three and nine months ended September 30, 2017, the Company recorded Share-based compensation to employees of $24,877 and $91,063, respectively, and to non-employees of $0 and $57,500, respectively. For the three and nine months ended September 30, 2016, the Company recorded Share-based compensation to employees of $23,238 and $113,589, respectively, and to non-employees of $0 and $55,000, respectively.
Software Development Costs
Software development costs for software to be sold or otherwise marketed incurred prior to the establishment of technological feasibility are expensed as incurred. The Company defines establishment of technological feasibility as the completion of a working model. Software development costs incurred subsequent to the establishment of technological feasibility through the period of general market availability of the product are capitalized, if material. To date, all software development costs for software to be sold or otherwise marketed have been expensed as incurred. In accordance with ASC 350-40, “Internal-Use Software,” the Company capitalizes purchase and implementation costs of internal use software. No such costs were capitalized during the periods presented.
Research and Development
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. WeIn 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 as incurred. were capitalized during the periods presented in this report.
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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 complete 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. No such costs were capitalized during the periods presented in this report.
For the three and ninesix months ending Septemberended June 30, 20172021 and 2016,2020, our research andexpensed software development costs were $125,411$95,374 and $252,596,$197,569, respectively, and $119,538$80,854 and $292,714$168,749, respectively.
RecentRecently Issued Accounting Pronouncements Not Yet Effective
Stock CompensationFinancial Instruments – Credit Losses
In MarchJune 2016, the FASB issued ASU No. 2016-09, Compensation2016-13, Financial Instruments – Stock CompensationCredit Losses (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”)326), which simplified certain aspectsrequires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of the accounting for share-based payment transactions, including income taxes, classification of awards and classificationcredit losses on the statement of cash flows. ASU 2016-09 will befinancial assets measured at amortized cost. ASC 2016-16 is effective for the Companyannual reporting periods beginning in its first quarter of 2018. The Company is currently evaluating the impact of adopting ASU 2016-09 on its consolidated financial statements.
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which modified lease accounting for both lessees and lessors to increase transparency and comparability by recognizing lease assets and lease liabilities by lessees forafter December 15, 2023, including interim reporting periods within those leases classified as operating leases under previous accounting standards and disclosing key information about leasing arrangements. ASU 2016-02 will be effective for the Company beginning in its first quarter of 2020, and earlyannual reporting periods. Early adoption is permitted. The Company is currently evaluating the timing of its adoption and the impact of adopting ASU 2016-02 on its consolidated financial statements.
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. The core principle of ASU 2014-09 is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this objective, ASU 2014-09 requires five basic steps: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Entities will generally be required to make more estimates and use more judgment than under current guidance, which will be highlighted for users through increased disclosure requirements. Subsequently, the FASB has issued the following standards related to ASU 2014-09: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (“ASU 2016-08”); ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”); ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”); and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers (“ASU 2016-20”). The Company must adopt ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 with ASU 2014-09 (collectively, the “new revenue standards”). In July 2015, the FASB deferred the effective date of the new revenue standards for one year beyondguidance on its condensed consolidated financial statements and related disclosures.
Reference Rate Reform
In March 2020, the originally specified effective date. The update is now effective for public entities for annual periods beginning after December 15, 2017, including interim periods therein. Earlier application is permitted only asFASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Three basic transition methods are available – full retrospective, retrospective with certainthe Effects of Reference Rate Reform on Financial Reporting” which provides optional relief through specific exceptions and practical expedients andfor transitioning away from reference rates that are expected to be discontinued. The relief generally applies to eligible modifications of contractual terms that change (or have the potential to change) the amount or timing of contractual cash flows related to replacement of a cumulative effect approach.
As required, the Company will adopt the new standard on January 1, 2018, and currently anticipates adopting the standard using the full retrospective methodreference rate. The relief allows such modifications to restate each prior reporting period presented.be accounted for as continuations of existing contracts without additional analysis. The Company's ability to adopt this standard using the full retrospective methodoptional relief is dependent upon system readiness for both revenue and commissions and the completion of the analysis of information necessary to restate prior period financial statements.available from March 2020 through December 31, 2022. The Company is continuing to assess the impact of adopting ASU 2014-09 on its financial position, results of operations and related disclosures and has not yet determined whether the effect of the revenue portion will be material. Additionally, as the Company continues to assess the new standard along with industry trends and additional interpretive guidance, the Company may adjust its implementation plan accordingly
The Company believes that there will be no significant changes required to our processes and systems to adopt the new standard. We are also identifying and designing additional controls and updating our accounting policies to support our implementation and ongoing compliance with the new standard.The Company expects revenue recognition for its sale of software, maintenance, professional and third party services offerings to remain largely unchanged. However, the new standard is expected to change the timing of revenue recognition in certain areas, including software licenses with professional services and software as a service. These impacts are not expected to be material.The Company is alsocurrently evaluating the impact of the guidance inthis ASU.
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No other Accounting Standards Codification (ASC) 340-40, Other Assets and Deferred Costs; Contracts with Customers, under ASU 2014-09. Under ASC 340-40,Updates that have been issued but are not yet effective are expected to have a material effect on the Company would be required to capitalize and amortize incremental costs of obtaining a contract. Since the company currently expenses sales commissions as incurred, the requirement in the new standard to capitalize certain in-scope sales commissions will result in an accounting change for the company. However, the impact to theCompany’s future condensed consolidated financial statements is not expected to be material.statements.
The Company does not expect the adoption of ASU 2014-09 to have any impact on its operating cash flows. The Company continues to assess all potential impacts of the guidance and given normal ongoing business dynamics, preliminary conclusions are subject to change. Advertising
Revenue Recognition
a) Sale of Software
The Company recognizes revenues in accordance with ASC Topic 985-605, “Software Revenue Recognition.”
The Company records revenues from the sale of software licenses when persuasive evidence of an arrangement exists, the software product has been installed, there are no significant uncertainties surrounding product acceptance by the customer, the fees are fixed and determinable, and collection is considered probable. Revenues included in this classification typically include sales of additional software licenses to existing customers and sales of software to the Company’s Resellers (See section h) - Reseller Agreements, below.
The Company assesses whether payment terms are customary or extended in accordance with normal practice relative to the market in which the sale is occurring. The Company’s sales arrangements generally include standard payment terms. These terms effectively relate to all customers, products, and arrangements regardless of customer type, product mix or arrangement size.
If an undelivered element for the arrangement exists under the license arrangement, revenues related to the undelivered element are deferred based on Vendor Specific Objective Evidence (“VSOE”) of the fair value of the undelivered element. Often, multiple-element sales arrangements include arrangements where software licenses and the associated post-contract customer support (“PCS”) are sold together. The Company has established VSOE of the fair value of the undelivered PCS element based on the contracted price for renewal PCS included in the original multiple element sales arrangement, as substantiated by contractual terms and the Company’s significant PCS renewal experience, from the Company’s existing customer base.
The Company records the revenues for the sales of software with professional services as prescribed by ASC 985-605, in accordance with the contract accounting guidelines in ASC 605-35, “Revenue Recognition: Construction-Type and Production-Type Contracts” (“ASC 605-35”), after evaluating for separation of any non-ASC 605-35 elements in accordance with the provisions of ASC 605-25, “Revenue Recognition: Multiple-Element Arrangements,” as updated. The Company accounts for these contracts on a percentage of completion basis, measured by the percentage of labor hours incurred to date to estimated total labor hours for each contract, or on a completed contract basis when dependable estimates are not available.
The fair value of any undelivered elements in multiple-element arrangements in connection with the sales of software licenses with professional services are deferred based upon VSOE.
b) Sale of Software as a Service
Sale of software as a service (“SaaS”) consists of revenues from arrangements that provide customers the use of the Company’s software applications, as a service, typically billed on a monthly or annual basis. Advance billings of these services are not recorded to the extent that the term of the arrangement has not commenced and payment has not been received. Revenue on these services is recognized ratably over the term of the underlying arrangement.
c) Sale of Software Maintenance Services
Software maintenance services revenues consist of revenues derived from arrangements that provide PCS to the Company’s software license holders. These revenues are recognized ratably over the term of the contract. Advance billings of PCS are not recorded to the extent that the term of the PCS has not commenced and payment has not been received.
d) Sale of Professional Services
Professional services consist principally of revenues from consulting, advisory services, training and customer assistance with management and uploading of data into the Company’s applications. When these services are provided on a time and material basis, the Company records the revenue as the services are rendered, since the revenues from services rendered through any point in time during the performance period are not contingent upon the completion of any further services. Where the services are provided under a fixed priced arrangement, the Company records the revenue on a proportional performance method, since the revenues from services rendered through any point in time during the performance period are not contingent upon the completion of any further services.
e) Sale of Third Party Services
Sale of third party services consist principally of third party software and/or equipment as a pass through of software and equipment purchased from third parties at the request of customers.
f) Deferred revenues
The Company records deferred revenue primarily related to software maintenance support agreements, when the customer pays for the contract prior to the time the services are performed. Substantially all maintenance agreements have a one-year term that commences immediately following the delivery of the maintained products or on the date of the applicable renewal period.
g) Rights of return and other incentives
The Company does not generally offer rights of return or any other incentives such as concessions, product rotation, or price protection and, therefore, does not provide for or make estimates of rights of return and similar incentives. The Company, from time to time, may discount bundled software sales with PCS services. Such discounts are recorded as a component of the software sale and any revenue related to PCS is deferred over the PCS period based upon appropriate VSOE of fair value.
h) Reseller agreements
The Company executes certain sales contracts through resellers and distributors (collectively, “Resellers”). The Company recognizes revenues relating to sales through Resellers on the sell-through method (when reseller executes sale to end customer) when all the recognition criteria have been met—in other words, persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed and determinable, and collectability is probable. In addition, the Company assesses the credit-worthiness of each Reseller, and if the Reseller is undercapitalized or in financial difficulty, any revenues expected to emanate from such Resellers are deferred and recognized only when cash is received and all other revenue recognition criteria are met.
Advertising
The Company expensesWe expense the cost of advertising as incurred. Advertising expense for the three and ninesix months ended SeptemberJune 30, 20172021 and 20162020 amounted to approximately $4,420$366 and $23,675,$1,041, respectively, and $6411,691 and $1,587,$3,680, respectively.
Basic earningsincome 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 Company hasdiluted 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. The three and six months ended June 30, 2021 reported net income, while the three and six months ended June 30, 2020 reported net losses.
We have outstanding stock options which have not been included in the calculation of diluted net loss per share for the three and six months ended June 30, 2020 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 each period are the same.
Income Taxes
The Company and its subsidiaryWe file a consolidated federal income tax return.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%100% valuation allowance has been established on deferred tax assets at SeptemberJune 30, 20172021 and December 31, 2016,2020, due to the uncertainty of our ability to realize future taxable income.
The Company accountsWe account for uncertainty in income taxes in itsour financial statements as required under ASC 740,Accounting for Uncertainty in Income “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 the Companyus in itsour tax returns.
Segment Information
Operating segments are defined in the criteria established under the FASB ASC Topic 280 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 2 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 no intersegment sales. We evaluate the performance of our segments based on gross profits.
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.
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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 business 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:
Schedule of Segment Information
| For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues | ||||||||||||||||
| Document Management | $ | 791,004 | $ | 622,865 | $ | 1,526,822 | $ | 1,240,916 | ||||||||
| Document Conversion | 2,118,642 | 1,213,317 | 4,018,043 | 1,808,930 | ||||||||||||
| Total revenues | $ | 2,909,646 | $ | 1,836,182 | $ | 5,544,865 | $ | 3,049,846 | ||||||||
| Gross profit | ||||||||||||||||
| Document Management | $ | 638,169 | $ | 486,127 | $ | 1,225,700 | $ | 920,832 | ||||||||
| Document Conversion | 1,175,898 | 685,266 | 2,193,271 | 995,805 | ||||||||||||
| Total gross profit | $ | 1,814,067 | $ | 1,171,393 | $ | 3,418,971 | $ | 1,916,637 | ||||||||
| Capital additions, net | ||||||||||||||||
| Document Management | $ | - | $ | 4,717 | $ | 38,116 | $ | 7,911 | ||||||||
| Document Conversion | 165,455 | 12,981 | 361,522 | 17,529 | ||||||||||||
| Total capital additions, net | $ | 165,455 | $ | 17,698 | $ | 399,638 | $ | 25,440 | ||||||||
| As of June 30, | ||||||||
| 2021 | 2020 | |||||||
| Total assets | ||||||||
| Document Management | $ | 1,562,655 | $ | 2,295,165 | ||||
| Document Conversion | 9,675,391 | 8,049,468 | ||||||
| Total assets | $ | 11,238,046 | $ | 10,344,633 | ||||
Statement of Cash Flows
For purposes of reporting cash flows, cash includes cash on hand and demand deposits held by banks.
Reclassifications
Certain amounts reported in prior filings of the 2016condensed consolidated financial statements have been reclassified to conform to current period presentation.
5. Business Acquisitions – Earnout Liability
On March 2, 2020, we acquired all of the issued and outstanding stock of Graphic Sciences. The purchase price paid for Graphic Sciences was $3,906,253 in cash plus potential contingent, or earnout, payments of up $833,000 annually over a three year presentation.period based on a gross profit level achieved by Graphic Sciences on an annual basis, for maximum total earnout payments over a three year period of $2,500,000, and with no minimum earnout payments. At the time of this acquisition, management estimated a fair value of the contingent liability—earnout (“earnout liability”) of $686,200 based on the terms of the earnout, and accordingly, recorded this amount as our earnout liability at the acquisition date in accordance with GAAP. For the three and six months ended June 30, 2021 we recorded a change in fair value of our earnout liabilities in the amount of $0 and $69,950, respectively. On June 8, 2021, we paid $769,733 for the first annual period. At June 30, 2021, our condensed consolidated balance sheets reflected an earnout liability for Graphic Sciences in the amount of $1,410,217. See Note 7 for the estimated fair value of the earnout liability as of June 30, 2021.
On April 21, 2020, we acquired substantially all of the assets of CEO Image. The purchase price paid for the assets of CEO Image consisted of $128,832 in cash, $170,000 in installment payments paid during 2020, and potential contingent, or earnout, payments of up $185,000 annually over a two year period based on a sales revenue level achieved by certain customers of CEO Image on an annual basis, for maximum total earnout payments over a two year period of $370,000, and with no minimum earnout payments. At the time of this acquisition, management estimated a fair value of the contingent liability—earnout (“earnout liability”) of $203,000 based on the terms of the earnout, and accordingly, recorded this amount as our earnout liability at the acquisition date in accordance with GAAP. For the three and six months ended June 30, 2021 we recorded a change in fair value of our earnout liabilities in the amount of $7,261. On June 10, 2021, we paid $185,000 for the first annual period. At June 30, 2021, our condensed consolidated balance sheets reflected an earnout liability for CEO Image in the amount of $156,261. See Note 7 for the estimated fair value of the earnout liability as of June 30, 2021.
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The following unaudited pro forma information presents a summary of the condensed consolidated results of operations for the Company as if the acquisitions of Graphic Sciences and CEO Image had occurred on January 1, 2020.
Schedule of Pro Forma Information
| For the six months ended June 30, 2020 | (unaudited) | |||
| June 30, 2020 | ||||
| Total revenues | $ | 4,482,809 | ||
| Net loss | $ | (721,755 | ) | |
| Basic and diluted net loss per share | $ | (0.26 | ) | |
The unaudited pro forma consolidated results are based on the Company’s historical financial statements and those of Graphic Sciences and CEO Image 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, 2020.
The following tables present the amounts of revenue and earnings of the acquirees since the acquisition date included in the condensed consolidated income statement for the reporting period.
| For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Graphic Sciences: | ||||||||||||||||
| Total revenues | $ | 2,028,798 | $ | 1,192,164 | $ | 3,872,019 | $ | 1,843,221 | ||||||||
| Net income | 279,374 | $ | 61,984 | $ | 497,895 | $ | 141,326 | |||||||||
| For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| CEO Image: | ||||||||||||||||
| Total revenues | $ | 139,591 | $ | 64,519 | $ | 272,196 | $ | 64,519 | ||||||||
| Net income | $ | - | (a) | $ | - | (a) | $ | - | (a) | $ | - | (a) | ||||
Total earnings from the CEO Image acquisition are impracticable to disclose as they are not accounted for separately because its operations and |
6. Intangible Assets, Net
At June 30, 2021, intangible assets consisted of the following:
Schedule of Intangible Assets
| Estimated | Accumulated | |||||||||||||
| Useful Life | Costs | Amortization | Net | |||||||||||
| Trade names | 10 years | $ | 119,000 | $ | (15,867 | ) | $ | 103,133 | ||||||
| Customer contracts | 5-8 years | 1,242,000 | (268,400 | ) | 973,600 | |||||||||
| $ | 1,361,000 | $ | (284,267 | ) | $ | 1,076,733 | ||||||||
At December 31, 2020, intangible assets consisted of the following:
| Estimated | Accumulated | |||||||||||||
| Useful Life | Costs | Amortization | Net | |||||||||||
| Trade names | 10 years | $ | 119,000 | $ | (9,917 | ) | $ | 109,083 | ||||||
| Customer contracts | 5-8 years | 1,242,000 | (166,112 | ) | 1,075,888 | |||||||||
| $ | 1,361,000 | $ | (176,029 | ) | $ | 1,184,971 | ||||||||
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Amortization expense for the three and six months ended June 30, 2021 and June 30, 2020, amounted to $54,119 and $108,238, respectively, and $51,936 and $67,792, respectively. The following table represents future amortization expense for intangible assets subject to amortization.
Schedule of Amortization Expense for Intangible Assets
| For the Twelve Months Ending June 30, | Amount | |||
| 2022 | $ | 216,475 | ||
| 2023 | 216,475 | |||
| 2024 | 216,475 | |||
| 2025 | 212,108 | |||
| 2026 | 137,608 | |||
| Thereafter | 77,592 | |||
| Intangible assets | $ | 1,076,733 | ||
7. Fair Value Measurements
Under GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy consists of the following three levels. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs consist of quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data. Level 3 inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.
The carrying values of cash and equivalents, accounts receivable, accounts payable, accrued expenses, and the PPP loan (prior to forgiveness) approximate fair value because of its short maturity. Management believes that the carrying value of the 2020 Notes approximate fair value given the March 2, 2020 transaction proximity to December 31, 2020 in conjunction with the absence of significant net change in the overall economic environment with regards to availability of credit to Company.
We have earnout liabilities related to our two 2020 acquisitions which are 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 are considered to be Level 3 inputs due to the lack of relevant market activity and significant management judgment. Key unobservable inputs include revenue growth rates, which ranged from 0% to 7%, and volatility rates, which were 20% for gross profits. An increase in future revenues and gross profits may result in a higher estimated fair value while a decrease in future revenues and gross profits may result in a lower estimated fair value of the earnout liabilities.
The following table provides a summary of the changes in fair value of the earnout liabilities for the three and six months ended June 30, 2021:
Summary of Changes in Fair Value of Earnout Liabilities
Three months ended June 30, 2021 | ||||
| Fair value at March 31, 2021 | $ | 2,513,950 | ||
| Payment | (954,733 | ) | ||
| Change in fair value | 7,261 | |||
| Fair value at June 30, 2021 | $ | 1,566,478 | ||
Six months ended June 30, 2021 | ||||
| Fair value at December 31, 2020 | $ | 2,444,000 | ||
| Payment | (954,733 | ) | ||
| Change in fair value | 77,211 | |||
| Fair value at June 30, 2021 | $ | 1,566,478 | ||
The fair values of amounts owed are recorded in the current and long-term portions of earnout liabilities in our condensed consolidated balance sheets. Changes in fair value are recorded in change in fair value of earnout liabilities in our condensed consolidated statements of operations.
8. Property and Equipment
Property and equipment are comprised of the following:
Schedule of Property and Equipment
| September 30, 2017 | December 31, 2016 | June 30, 2021 | December 31, 2020 | |||||||||||||
| Computer hardware and purchased software | $ | 323,869 | $ | 309,667 | $ | 1,407,667 | $ | 1,019,259 | ||||||||
| Leasehold improvements | 221,666 | 221,666 | 286,337 | 275,106 | ||||||||||||
| Furniture and fixtures | 88,322 | 88,322 | 82,056 | 82,056 | ||||||||||||
| 633,857 | 619,655 | |||||||||||||||
| Less: accumulated depreciation and amortization | (609,888 | ) | (600,872 | ) | ||||||||||||
| Property and equipment, gross | 1,776,060 | 1,376,421 | ||||||||||||||
| Less: accumulated depreciation | (765,748 | ) | (677,669 | ) | ||||||||||||
| Property and equipment, net | $ | 23,969 | $ | 18,783 | $ | 1,010,312 | $ | 698,752 | ||||||||
Total depreciation expense on the Company’sour property and equipment for the three and ninesix months ended SeptemberJune 30, 20172021 and 20162020 amounted to $3,231$47,313 and $9,016,$88,078, respectively, and $2,437$34,814 and $8,160,$47,050, respectively.
On July 17, 2009, Intellinetics Ohio, now the sole operating subsidiary9. Notes Payable – Unrelated Parties
Summary of the Company, issued a note payableNotes Payable to the Ohio State Development Authority in the amount of $1,012,500, bearing interest at a rate of 6.00% per annum (“Authority Loan No. 1”). Pursuant to the terms of the Authority Loan No. 1, Intellinetics Ohio was required to pay only interest through September 30, 2010 and thereafter monthly principal and interest payments of $23,779 each through September 1, 2015. The Authority Loan No. 1 is secured by a senior secured interest on all business assets financed with loan proceeds, as well as a second secured interest in all business assets. Upon maturity, by acceleration or otherwise, Intellinetics Ohio is required to pay a loan participation fee of $101,250, which is accounted for as a loan premium, accreted monthly, utilizing the interest method, over the term of the Authority Loan No. 1. In June 2014, Intellinetics Ohio and the Ohio State Development Authority entered into a Notice and Acknowledgement of Modification to Payment Schedule relating to Authority Loan No.1, deferring a portion of the principal and interest payment until June 1, 2015. On September 25, 2015, Intellinetics Ohio and the Ohio State Development Authority entered into a Third Amendment to the Loan Agreement related to Authority Loan No. 1, deferring a portion of the principal payment until October 1, 2016 and extending the maturity date until August 1, 2018.Unrelated Parties
On June 3, 2011, Intellinetics Ohio issued a note payable to the Ohio State Development Authority in the amount of $750,000, bearing interest at a rate of 1% per annum for the first 12 months, then interest at a rate of 7% per annum for the second 12 months (“Authority Loan No. 2,” and together with Authority Loan No. 1, the “Authority Loans”). Intellinetics Ohio was not obligated to remit payments of principal until September 1, 2013. The monthly principal and interest payments, beginning on the third anniversary of the loan origination, are $14,850 and are payable on a monthly basis through August 1, 2018. The Authority Loan No. 2 is secured by a senior secured interest on all business assets financed with loan proceeds, as well as a second secured interest in all business assets. Upon maturity, by acceleration or otherwise, Intellinetics Ohio is required to pay a loan participation fee of $75,000, which is accounted for as a loan premium, accreted monthly utilizing the interest method, over the term of the Authority Loan No. 2. The interest rate of 1% during the first 12 months of this loan was considered to be below market for that period. Intellinetics Ohio further determined that over the life of the Authority Loan No. 2, the effective interest rate was 5.6% per annum. Accordingly, during the first 12 months of the Authority Loan No. 2, Intellinetics Ohio recorded interest expense at the 5.6% rate per annum. The difference between the interest expense accrual at 5.6% and the stated rate of 1% over the first 12 months is credited to deferred interest. The deferred interest amount that is accumulated over the first 12 months of the loan term will be amortized as a reduction to interest expense over the remaining term of the Authority Loan No. 2. On September 30, 2017 and December 31, 2016, deferred interest of $154,832 and $158,062, respectively, was reflected within long term liabilities on the accompanying consolidated balance sheets. In June 2014, Intellinetics Ohio and the Ohio State Development Authority entered into a Notice and Acknowledgement of Modification to Payment Schedule, deferring a portion of the principal and interest payment until June 1, 2015. On September 25, 2015 Intellinetics Ohio and the Ohio State Development Authority entered into a Third Amendment to the Loan Agreement related to Authority Loan No. 2, deferring a portion of the principal payment until October 1, 2016.
The Authority Loans were granted to Intellinetics Ohio in connection with the State of Ohio’s economic development programs. The proceeds from these loans were used by Intellinetics Ohio to support its efforts in developing software solutions for its customers.
The Authority Loans are subject to certain covenants and reporting requirements. Intellinetics Ohio is required to, within three years of the respective loan origination dates of each of the Authority Loans, have created and/or retained an aggregate of 25 full time jobs in the State of Ohio. If Intellinetics has not attained these employment levels by the respective dates, then the interest rates on the Authority Loans shall increase to 10% per annum. In July 2014, Intellinetics Ohio informed the State of Ohio that it would not meet the required employment level. As a result of this non-compliance with a covenant of Authority Loan No. 1, the Ohio State Development Authority exercised its right to increase the interest rate from 6.0% to 7.0%, effective October 1, 2014. The approximate impact of this increase is to raise Intellinetics Ohio’s balloon payment by $6,000 on Authority Loan No. 1, which is due, as amended on August 1, 2018. Intellinetics Ohio has had past instances of non-compliance with certain of the loan covenants. Intellinetics Ohio is currently in compliance with all the other loan covenants. There can be no assurance that Intellinetics Ohio will not become non-compliant with one or more of these covenants in the future.
The Company evaluated the terms of its convertible notes payable in accordance with ASC 815 – 40, Derivatives and Hedging - Contracts in Entity’s Own Stock and determined that the underlying common stock is indexed to the Company’s common stock. The Company determined that the conversion feature did not meet the definition of a liability and therefore did not bifurcate the conversion feature and account for it as a separate derivative liability. The Company evaluated the conversion feature for a beneficial conversion feature. The effective conversion price was compared to the market price on the date of each note. If the conversion price was deemed to be less than the market value of the underlying common stock at the inception of the note, then the Company would recognize a beneficial conversion feature resulting in a discount on the note payable, upon satisfaction of the contingency. The beneficial conversion features are amortized to interest expense over the life of the respective notes, starting from the date of recognition.
Between June 24, 2014 and July 7, 2014, the Company issued convertible promissory notes in an aggregate amount of $135,000 to two accredited investors (“Unrelated Notes due December 31, 2015”). The notes matured on December 31, 2015 and bore interest at an annual rate of interest of 10% until maturity, with interest payable quarterly. The note investors had a right, in their sole discretion, to convert the notes into Shares under certain circumstances at a conversion rate of $0.56 per Share. Because the notes had not been fully repaid by the Company or converted into Shares prior to maturity, the notes began accruing interest at the annual rate of 12% commencing on the maturity date. The Company used the proceeds for working capital, general corporate purposes, and debt repayment. On January 6, 2016, the note investors converted $135,000 of the notes and accrued interest thereon of $35,038 into 303,912 Shares and 141,698 warrants to purchase Shares, as part of a private placement and note exchange commenced in December 2015. The warrants have an exercise price equal to $0.65 per Share and contain a cashless exercise provision. All warrants are immediately exercisable and are exercisable for five years from issuance. Interest expense of $113,762 was recorded on the issuance of these warrants.
Between December 30, 2016, and January 31, 2017, the Company issued convertible promissory notes in an aggregate amount of $875,000 (“Unrelated Notes due December 31, 2018”) to unrelated accredited investors. The notes mature on December 31, 2018, and bear interest at an annual rate of interest of 12% until maturity, with partial interest of 6% payable quarterly. The note investors have a right, in their sole discretion, to convert the notes into Shares under certain circumstances at a conversion rate of $0.65 per Share. If the notes have not been fully repaid by the Company by the maturity date or converted into Shares at the election of the note investors prior to maturity, then such notes will accrue interest at the annual rate of 14% from the maturity date until the date the notes are repaid in full. Any interest not paid quarterly will also accrue interest at the annual rate of 8% instead of 6%. The Company used the proceeds of the notes for working capital, general corporate purposes, and debt repayment. The Company recognized a beneficial conversion feature in the amount of $369,677. Interest expense recognized on the amortization of the beneficial conversion feature was $46,210 and $134,299 for the three and nine months ended September 30, 2017.
The table below reflectssummarizes all notes payable at SeptemberJune 30, 20172021 and December 31, 2016,2020, respectively, with the exception of related party notes disclosed in Note 8 - Notes10 “Notes Payable - Related Parties.”
Schedule of Notes Payable to Unrelated Parties
| September 30, 2017 | December 31, 2016 | June 30, 2021 | December 31, 2020 | |||||||||||||
| Authority Loan No. 1, due August 1, 2018 | $ | 198,694 | $ | 353,346 | ||||||||||||
| Authority Loan No. 2, due August 1, 2018 | 319,571 | 433,115 | ||||||||||||||
| Unrelated Notes due December 31, 2018 | 639,622 | 193,846 | ||||||||||||||
| PPP Note (a) | $ | - | $ | 838,700 | ||||||||||||
| 2020 Notes | 2,000,000 | 2,000,000 | ||||||||||||||
| Total notes payable | $ | 1,157,887 | $ | 980,307 | $ | 2,000,000 | $ | 2,838,700 | ||||||||
| Less unamortized debt issuance costs | (85,371 | ) | (34,029 | ) | (172,898 | ) | (224,767 | ) | ||||||||
| Less unamortized debt discount | (177,778 | ) | (231,111 | ) | ||||||||||||
| Less current portion | (518,265 | ) | (360,496 | ) | - | (580,638 | ) | |||||||||
| Long-term portion of notes payable | $ | 554,251 | $ | 585,782 | $ | 1,649,324 | $ | 1,802,184 | ||||||||
| (a) | The full amount of the principal and interest on the PPP Note was forgiven in its entirety in January 2021. |
Future minimum principal payments of these notes payable with the exception of the related party notes in Note 8 -2020 Notes Payable - Related Parties, as described in this Note 7 are as follows:
Schedule of Future Minimum Principal Payments of Notes Payable
| For the Twelve Months | ||||
| Ending September 30, | Amount | |||
| 2018 | $ | 518,265 | ||
| 2019 | 639,622 | |||
| Total | $ | 1,157,887 | ||
| As of June 30, | Amount | |||
| 2023 | $ | 2,000,000 | ||
| Total | $ | 2,000,000 | ||
As of SeptemberJune 30, 20172021 and December 31, 2016,2020, accrued interest for these notes payable with the exception of the related party notes in Note 8 - Notes10, “Notes Payable - Related Parties,” was $335,337$0 and $282,147, respectively, and was reflected within accounts payable and accrued expenses on the consolidated balance sheets.$5,941, respectively. As of SeptemberJune 30, 20172021 and December 31, 2016, accrued loan participation fees were $175,406 and $172,659, respectively, and reflected within accounts payable and accrued expenses on the consolidated balance sheets. As of September 30, 2017 and December 31, 2016,2020, unamortized deferred financing costs were $85,371 and $34,029, respectively, andunamortized debt discount were reflected within long term liabilities on the condensed consolidated balance sheets.
With respect to all notes outstanding (other than the notes to related parties), for the three and nine months ended September 30, 2017, and 2016, interest expense, including the amortization of deferred financing costs, accrued loan participation fees, original issue discounts, deferred interest and related fees, interest expense related to warrants issued for the conversion of convertible notes, and the embedded conversion feature for the three and six months ended June 30, 2021 was $105,164 $113,271and $306,004,$226,315, respectively, and $18,528for the three and $173,576six months ended June 30, 2021 and 2020 $115,365 and $318,285, respectively.
We have evaluated the terms of our convertible notes payable in accordance with ASC 815 – 40, “Derivatives and Hedging - Contracts in Entity’s Own Stock” and determined that the underlying common stock is indexed to our common stock. We determined that the conversion feature did not meet the definition of a derivative and therefore did not bifurcate the conversion feature and account for it as a separate derivative liability. We evaluated the conversion feature for a beneficial conversion feature. The effective conversion price was compared with the market price on the date of each note. If the conversion price was deemed to be less than the market value of the underlying common stock at the inception of the note, then we recognized a beneficial conversion feature resulting in a discount on the note payable, upon satisfaction of the contingency. The beneficial conversion features were amortized to interest expense over the life of the respective notes, starting from the date of recognition.
2016-18 Unrelated Party Notes and 2020 Note Conversion
In 2016 through 2018, we issued convertible promissory notes to unrelated parties in an aggregate principal amount of $3,535,000. On March 29, 2012,2, 2020, we entered into amendments to these convertible promissory notes, as well as amendments to convertible promissory notes with related parties (see note 10), that permitted us to convert all of the Companyoutstanding principal and accrued and unpaid interest payable on all outstanding convertible promissory notes into shares of common stock at a reduced conversion rate equal to the purchase price of our common stock issued in the contemporaneous private placement offering. Pursuant thereto, we converted all of the outstanding principal and accrued and unpaid interest payable with respect to all convertible promissory notes, with related parties and with unrelated parties, into a total of shares of our common stock at a conversion rate of $ per share. Taglich Brothers, Inc. acted as the exclusive placement agent for the note conversion and received compensation (relating to the conversion of both the related and the unrelated notes) of shares of our common stock, based on a fee valued at $ per share.
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2020 Notes
On March 2, 2020, we sold units, at an offering price of $1,000 per unit, to accredited investors in a private placement offering, with each unit consisting of $1,000 in 12% Subordinated Notes (“2020 Notes”) and shares of our common stock, for aggregate gross proceeds of $2,000,000. The entire outstanding principal and accrued interest of the 2020 Notes are due and payable on February 28, 2023. Interest on the 2020 Notes accrues at the rate of 12% per annum, payable quarterly in cash, beginning on June 30, 2020. Any accrued but unpaid quarterly installment of interest will accrue interest at the rate of 14.0% per annum. Any overdue principal and accrued and unpaid interest at the maturity date will accrue a mandatory default penalty of 20% of the outstanding principal balance and an interest rate of 14% per annum from the maturity date until paid in full. We used a portion of the net proceeds from the private placement offering to finance the acquisitions of Graphic Sciences and CEO Image and the remaining net proceeds for working capital and general corporate purposes. We recognized a debt discount of $320,000 for the shares issued in conjunction with the units. The amortization of the debt discount, which will be recognized over the life of the 2020 Notes as interest expense, for the three and six months ended June 30, 2021 was $26,667 and $53,333, respectively, and for the three and six months ended June 30, 2020 was $26,667 and $35,556, respectively.
PPP Note
On April 15, 2020, we were issued an unsecured promissory note payable to Ramon Shealy,(“PPP Note”) for the PPP loan through PNC Bank with a then-director of the Company, who subsequently resigned from the Company’s board of directors on December 17, 2012, for personal reasons, in theprincipal amount of $238,000, bearing interest at a rate of 10% for the$838,700. The term of the note. AllPPP Note Payable was two years, with an interest rate of 1.0% per annum deferred for the first six months. We received notice on January 20, 2021 that the SBA had forgiven the full amount of principal and interest was due and payable on September 27, 2012, but was later extended to November 24, 2012. On April 16, 2012, the Company issued another promissory note payable to Mr. Shealy, in the amount of $12,000, bearing interest at a rate of 10% per quarter. All principal and interest was due on July 15, 2012, but was later extended to November 24, 2012. On November 24, 2012, the two notes were cancelled and replaced with a $250,000 promissory note, under the same terms, with a maturity date of January 1, 2014. On December 24, 2013, the maturity date of the $250,000 promissory note was extended to January 1, 2015. On March 13, 2013, the Company paid $100,000 of the principal amount of the $250,000 promissory note to Mr. Shealy. On December 31, 2014, the CompanyPPP Note, and Ramon Shealy agreed to extended payment terms for the remaining total principal and interest in the amount of $193,453, payable in sixty (60) monthly installments beginning January 31, 2015, with a maturity date of January 1, 2020. As of September 30, 2017 and December 31, 2016, this Note had a principal balance of $102,294 and $127,408, respectively.
On November 30, 2016, the Company issued convertible promissory notes in a maximum aggregate principal amount of $225,000 to Robert and Michael Taglich (each holding more than 5% beneficial interest in the Company’s Shares) and Robert Schroeder (Director) (“Bridge Notes”). The notes had a maturity date of December 1, 2017, bearing interest at an annual rate of interest of 8% until maturity. Each note holder had a right, in their sole discretion, to convert the notes into securities to be issued by the Company in a private placement of equity, equity equivalent, convertible debt or debt financing. Interest expense recognized for the twelve months ended December 31, 2016 was $1,125. On December 30, 2016, the Bridge Notes were converted by the note holders into the Related Notes due December 31, 2018, described below.
On December 30, 2016, the Company issued convertible promissory notes in an aggregate amount of $375,000 (the “Related Notes due December 31, 2018”) to accredited investors, including Robert and Michael Taglich (each holding more than 5% beneficial interest in the Company’s Shares) and Robert Schroeder (Director), in exchange for the conversion of $225,000 principal from the Bridge Notes and $150,000 cash. The notes bear interest at an annual rate of interest of 12% until maturity, with partial interest of 6% payable quarterly, and mature on December 31, 2018. The note investorswe have a right, in their sole discretion, to convert the notes into Shares at a conversion rate of $0.65 per Share. If the notes have not been fully repaid by the Company by the maturity date or converted into Shares at the election of the note investors prior to the maturity date, then such notes will accrue interest at the annual rate of 14% from the maturity date until the date the notes are repaid in full. Any interest not paid quarterly will also accrue interest at the annual rate of 8% instead of 6%. The Company used the proceeds of the notes for working capital, general corporate purposes, and debt repayment. The Company recognized a beneficial conversion feature in the amountgain on extinguishment of $144,231. Interest expense recognized on the amortizationdebt of the beneficial conversion feature was $18,029 $0 and $54,087, respectively, $845,083 for the three and ninesix months ended SeptemberJune 30, 2017.2021, respectively.
10. Notes Payable - Related Parties
On September 21, 2017, the Company issued convertible promissory notes in a maximum aggregate principal amount of $154,640 (the “Bridge Notes due September 21, 2018”) to Robert and Michael Taglich (each holding more than 5% beneficial interest in the Company’s Shares). The notes included an original issue discount of $4,640. Interest expense recognized on the amortization of the original discount was $116, forFor the three and ninesix months ended SeptemberJune 30, 2017. The notes bear interest at an annual rate of interest of 8% beginning March 21, 2018, until maturity, and mature on September 21, 2018. The effective interest rate is 7% for the term of the notes. Any interest not paid at maturity will also accrue interest at the annual rate of 12% instead of 8%. The note investors have a right, in their sole discretion, to convert the notes into securities to be issued by the Company in a private placement of equity, equity equivalent, convertible debt or debt financing. There2021, there was no interest expense recognized for the nine months ended September 30, 2017. In conjunctionin connection with the issue of the Bridge Notes due September 21, 2017, 150,000 warrants were issued. The warrants have an exercise price equal to $0.30 per Share and contain a cashless exercise provision. All warrants are immediately exercisable and are exercisable for five years from issuance. The Company recognized debt issuance costs, recorded as a debt discount, on the issue of the warrants in the amount of $38,836. Interest expense recognized on the amortization of the debt discount was $1,064, for the three and nine months ended September 30, 2017.
The table below reflects Notes payable due to related parties at September 30, 2017 and December 31, 2016, respectively:
| September 30, 2017 | December 31, 2016 | |||||||
| The $250,000 Shealy Note | 102,294 | 127,408 | ||||||
| Related Notes due September 21, 2018 | 150,116 | - | ||||||
| Related Notes due December 31, 2018 | 284,856 | 230,769 | ||||||
| Total notes payable - related party | $ | 537,266 | $ | 358,177 | ||||
| Unamortized debt issuance costs | (50,536 | ) | (20,423 | ) | ||||
| Less current portion | (157,322 | ) | (38,307 | ) | ||||
| Long-term portion of notes payable-related party | $ | 329,408 | $ | 299,447 | ||||
Future minimum principal payments of these notes payable as described in this Note 8 are as follows:
| For the Twelve Months Ending | ||||
| September 30, | Amount | |||
| 2018 | $ | 195,094 | ||
| 2019 | 330,079 | |||
| 2020 | 12,093 | |||
| TOTAL | $ | 537,266 | ||
As of September 30, 2017 and December 31, 2016, accrued interest for these notes payable – related parties amounted to $25,931 and $1,125, respectively.
parties. For the three and ninesix months ended SeptemberJune 30, 2017, and 2016,2020, interest expense in connection with notes payable – related parties was $1,431 and $88,941, respectively.
2016-19 Related Party Notes and 2020 Note Conversion
In 2016 through 2019, we issued convertible promissory notes to related parties, including 5% stockholders, executive officers and directors, in an aggregate principal amount of $1,562,728. On March 2, 2020, we entered into amendments to these convertible promissory notes with related parties, as well as to convertible promissory notes with unrelated parties (see note 9), that permitted us to convert all of the embeddedoutstanding principal and accrued and unpaid interest payable thereon into shares of common stock at a reduced conversion feature,rate equal to the purchase price of our common stock issued in the contemporaneous private placement offering. Pursuant thereto, we converted all of the outstanding principal and accrued and unpaid interest payable with respect to all convertible promissory notes (with related parties as well as with unrelated parties) into a total of shares of our common stock at a conversion rate of $ per share, with the exception of the 2019 related party notes. On March 2, 2020, $350,000 of the 2019 related party notes were converted into equity. On May 15, 2020, the remaining balance of $47,728 was $36,319 and $105,757, and $3,556 and $11,288, respectively.repaid by the Company in cash.
11. Deferred Compensation
Pursuant to the Company’san employment agreements with the founders, the foundersagreement, we have earnedaccrued incentive compensation totaling $215,012 $100,828 in cash whichas of June 30, 2021 and December 31, 2020 for one of our founders. We deferred these payment obligation has been deferred by the Companyobligations until itwe reasonably believes it hasbelieve we have sufficient cash to make those payments in cash. We made no deferred incentive compensation payments during the payment.six months ended June 30, 2021. Following the retirement of founder A. Michael Chretien on December 8, 2017, we made bi-weekly payments until his deferred compensation had been fully paid, which occurred in May 2020. During the three and six months ended June 30, 2020, we paid $3,292 and $16,338, respectively,in deferred incentive compensation, which amounts were reflected as a reduction in our deferred compensation liability.
12. 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.
Employment Agreements
The Company hasWe have entered into employment agreements with fourthree of itsour key executives.executives, including one of our founders. Under their respective employment agreements, the executives serve at willare employed on an “at-will” basis and are bound by typical confidentiality, non-solicitation and non-competition provisions. Deferred compensation for the founders of the Company, as disclosed in Note 9 above, is stillone founder remains outstanding as of SeptemberJune 30, 2017.2021.
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Operating Leases
On January 1, 2010, the Companywe entered into an agreement to lease 6,000 rentable square feet of office space in Columbus, Ohio. The lease commenced on January 1, 2010 and, pursuant to a lease extension dated August 9, 2016, the lease expires on December 31, 2021.2021. We are currently evaluating renewal options.
FutureOur subsidiary, Graphic Sciences, uses 36,000 square feet of leased space in Madison Heights, Michigan as its main facility. Graphic Sciences uses about 20,000 square feet for its records storage services, with the remainder of the space used for production, sales, and administration. The monthly rental payment is $41,508, with gradually higher annual increases each September up to $45,828 for the final year, and with a lease term continuing until August 31, 2026. Graphic Sciences also leases and uses a separate 20,000 square foot building for document storage in Highland Park, Michigan, and a satellite office in Traverse City, Michigan for production.The monthly Highland Park rental payment is $11,250, with a lease term continuing until September 30, 2021. The monthly Traverse City rental payment is $4,500, with a lease term continuing until January 31, 2024. Graphic Sciences also leases and uses four leased vehicles for logistics. The monthly rental payments for these vehicles total $2,618, with lease terms continuing until October 31, 2024.
Graphic Sciences also leases and uses an additional temporary storage space in Madison Heights, with a monthly rental payment of $1,605 and a lease term on a month-to-month basis. 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.
During 2021, we signed a lease for 37,000 square foot building, primarily for document storage, in Sterling Heights, Michigan, with monthly rental payments of $20,452 commencing on May 1, 2021, with gradually higher annual increases each May up to $24,171for the final year, and with a lease term continuing to April 30, 2028.
The following table sets forth the future minimum lease payments under thisthese operating lease are as follows:leases:
Schedule of Future Rental Payments for Operating Leases
| For the Twelve Months Ending September 30, | Amount | |||
| 2018 | $ | 51,372 | ||
| 2019 | 52,668 | |||
| 2020 | 53,964 | |||
| 2021 | 55,314 | |||
| 2022 | 13,914 | |||
| $ | 227,232 | |||
| For the period ending June 30, | Amount | |||
| 2022 | $ | 954,935 | ||
| 2023 | 871,294 | |||
| 2024 | 848,274 | |||
| 2025 | 812,086 | |||
| 2026 | 824,564 | |||
| Thereafter | 617,218 | |||
| Future lease payments under operating lease | $ | 4,928,371 | ||
Rent expense, recorded on a straight-line basis,Lease costs charged to operations for the three and nine months ended SeptemberJune 30, 20172021 and 20162020 amounted to $13,252 $260,907 and $39,755,$217,570, respectively, and $10,125for the six months ended June 30, 2021 and $30,375,2020 amounted to $498,982 and $294,620, respectively. Included in the lease costs for the three and six months ended June 30, 2021 were short-term lease costs of $17,314 and $56,418, respectively. The following table sets forth additional information pertaining to our leases:
Schedule of Operating Lease Costs
| For the Six Months Ending June 30, 2021: | ||||
| Operating cash flows from operating leases | $ | 371,894 | ||
| Weighted average remaining lease term – operating leases | 5.6 years | |||
| Weighted average discount rate – operating leases | 7.1 | % | ||
Because these leases do not provide an implicit rate, we use an incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments.
Warehouse Equipment Financing
During the six months ended June 30, 2021, we committed to purchase warehouse racking in the amount of $351,854, of which $300,276 was purchased as of June 30, 2021.
13. Stockholders’ Equity
DescriptionCommon Stock
As of Authorized Capital
The Company is authorized to issue up to 50,000,000 SharesJune 30, 2021, shares of common stock with $0.001 par value. The holders of the Company’s common stock are entitled to one (1) vote per Share. The holderswere issued and outstanding, shares of common stock are entitled to receive ratably such dividends, if any, as may be declared bywere reserved for issuance upon the Boardexercise of Directors out of legally available funds. However, the current policy of the Board of Directors is to retain earnings, if any, for the operationoutstanding warrants, and expansion of the business. Upon liquidation, dissolution or winding-up of the Company, the holders shares of common stock are entitled to share ratably in all assetswere reserved for issuance under our 2015 Equity Incentive Plan, as amended (the “2015 Plan”).
On March 2, 2020, we sold shares of the Company that are legally available for distribution.
Issuance of Restricted Common Stock to Directors
On January 5 and March 22, 2017, and on January 2, 2016, the Company issued 61,110, 2,941, and 69,433 Shares, respectively, of restrictedour common stock and certain subordinated notes in a private placement to directors of the Company in accordance with the 2015 Plan, andaccredited investors as part of an annual compensation plan for directors. The grant of Shares was not subject to vesting. For the three and nine months ended September 30, 2017 and 2016, stock compensation of $0 and $57,500, and $0 and $62,500, respectively, was recorded on the issuance of the common stock.follows:
| ● | shares of our common stock at a purchase price of $ per share, for aggregate gross proceeds of $3,500,000, and | |
| ● | units at a purchase price of $ per unit, with each unit consisting of $1,000 in 12% Subordinated Notes and shares of our common stock, for aggregate gross proceeds of $2,000,000. |
Exercise of Warrants
On February 15, 2013, the Company and Matthew Chretien, a member of the Board of Directors, entered into a return to treasury agreement dated February 15, 2013, whereby Matthew Chretien returned 500,000 Shares to the Company. As consideration for Matthew Chretien returning to the Company treasury these 500,000 Shares, the Company issued one four-year warrant to Matthew Chretien with a right to purchase 500,000 Shares at $0.007 per Share within four years of the shareholders of the Company increasing the number of authorized Shares, with piggyback registration rights. The warrant had a right of first refusal for Matthew Chretien to exercise up to 500,000 Shares prior to the Company issuing Shares in any transaction. On January 5, 2017, Matthew Chretien exercised the warrant and purchased 496,111 Shares at $0.007 per Share through a cashless exercise.
Issuance of Warrants
On November 30, 2016, the Company issued 56,250 warrants to purchase one Share to Robert and Michael Taglich (each holding more than 5% beneficial interest in the Company’s Shares) and Robert Schroeder (Director) inIn connection with the convertible promissory notes issued on November 30, 2016 (the “Bridge Notes”). The warrants are exercisable to purchase one Share at an exercise price of $0.68 per Share, contain a cashless exercise provision, and are exercisable for five years after issuance. Expense of $32,192 was recorded for the issuance of these warrants on November 30, 2016, utilizing the Black-Scholes valuation model to value the warrants issued. The fair value of warrants issued was determined to be $0.57.
Between December 30, 2016 and January 30, 2017, the Company issued convertible promissory notes in an aggregate amount of $1,250,000 with certain accredited investors. The Company retained Taglich Brothers, Inc. as the exclusiveprivate placement agent for the Convertible Note Offering. In compensation, the Companyoffering, we paid the placement agent a$440,000 in cash, payment of equal to 8% of the gross proceeds of the offering, along with 95,500 warrants to purchase Shares,shares of our common stock and the reimbursement for the placement agent’s reasonable out of pocket expenses, FINRA filing fees and related legal fees. Subsequent to December 31, 2016, the Company paid the placement agent cash in the amount of $100,000 and issued the placement agent 153,846The warrants to purchase Sharesare exercisable at an exercise price at $0.75 $4.00 per Share, which will be exercisableshare for a period of five years after issuance, contain customary cashless exercise provisions and anti-dilution protection and are entitled to limited piggyback registration rights. Of the warrants issued to the placement agent, 84,923 warrants were issued in conjunction with proceeds raised in December 2016, and underwritingUnderwriting expense of $65,243 was$236,761 and debt issuance costs of $135,291 were recorded for the issuance of thesethe March 2, 2020 warrants, utilizing the Black-Scholes valuation model to value the warrants issued. The remaining 68,923 warrants were issued in conjunction with proceeds raised in January 2017, and underwriting expense of $52,951 was recorded for the issuance of these warrants, utilizing the Black-Scholes valuation model to value the warrants issued.model. The fair value of warrants issued was determined to be $0.77.
On September 21, 2017, the Company issued 150,000 warrants to purchase one Share to Robert $. Underwriting expense of $307,867 and Michael Taglich (each holding more than 5% beneficial interest in the Company’s Shares) in connection with the convertible promissory notes issued on September 21, 2017 (the “Bridge Notes due September 21, 2018”). The warrants are exercisable to purchase one Share at an exercise pricedebt issuance costs of $0.30 per Share, contain a cashless exercise provision, and are exercisable for five years after issuance. A debt discount of $38,837 $175,924 was recorded for the placement agent cash fee and other related legal fees. For the three and six months ended June 30, 2021, interest expense of $25,935 and $51,869, respectively, was recorded as amortization of the debt issuance costs for this private placement offering. For the three and six months ended June 30, 2020, interest expense of $25,935 and $34,580, respectively, was recorded as amortization of the debt issuance costs for this private placement offering.
Reverse Stock Split
In February 2020, upon recommendation and authorization by our Board of Directors, our stockholders holding a majority in interest of the issued and outstanding shares of our common stock, acting by written consent, adopted an amendment to our Articles of Incorporation to effectuate a reverse split of our issued and outstanding shares of common stock at a ratio of one-for-fifty (1-for-50) (the “Reverse Split”), and reduce the number of authorized shares of our common stock to shares (the “25,000,000 Share Amendment”). The Reverse Split and the 25,000,000 Share Amendment became effective on March 20, 2020.
Effective March 2, 2020, before the Reverse Split and the 25,000,000 Share Amendment became effective, upon recommendation and authorization by the Board of Directors, stockholders holding a majority in interest of the issued and outstanding shares of our common stock, acting by written consent, adopted an amendment to our Articles of Incorporation to increase the authorized number of shares of our common stock to shares (representing shares on a post-split basis) from shares (representing shares on a post-split basis), in order to facilitate the acquisition of Graphic Sciences and certain private placement offerings and note conversions. Thereafter, on March 20, 2020, when the Reverse Split and the 25,000,000 Share Amendment became effective, our authorized capital stock became shares of common stock.
The Reverse Split did not cause an adjustment to the par value of the common stock. Pursuant to the Reverse Split, we adjusted the amounts for shares reserved for issuance upon the exercise of outstanding warrants, outstanding stock options, and shares reserved for the 2015 Plan.
All references to shares of common stock and per share data in the accompanying condensed consolidated financial statements and in these notes related thereto have been adjusted to reflect the Reverse Split for all periods presented.
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Warrants
The following sets forth the warrants to purchase our common stock that were outstanding as of June 30, 2021:
| ● | Warrants to purchase 3,077 shares of common stock at an exercise price of $37.50 per share exercisable until between December 30, 2021 and January 31, 2022, issued to the placement agent in connection with private placements of our convertible promissory notes. | |
| ● | Warrants to purchase 3,000 shares of common stock at an exercise price of $15.00 per share exercisable until September 21, 2022, issued to certain 5% stockholders. | |
| ● | Warrants to purchase 17,200 shares of common stock at an exercise price of $12.50 per share exercisable until between November 17, 2022 and November 30, 2022, issued to the placement agent in connection with private placements of our convertible promissory notes. | |
| ● | Warrants to purchase 15,999 shares of common stock at an exercise price of $9.00 per share exercisable until between September 20, 2023 and September 26, 2023, issued to the placement agent in connection with private placements of our convertible promissory notes. | |
| ● | Warrants to purchase 95,500 shares of common stock at an exercise price of $4.00 per share exercisable until March 2, 2025, issued to the placement agent in connection with private placements of our convertible promissory notes. |
No warrants were issued during the six months ended June 30, 2021. Warrants to purchase 95,500 shares of common stock were issued during the six months ended June 30, 2020 at a fair value determined to be $ per warrant utilizing the Black-Scholes valuation model tomodel. The estimated value of the warrants issued and interest expense of $1,064 for amortization ofduring the debt discount was recognized for the three and ninesix months ended SeptemberJune 30, 2017. The fair value of warrants issued was determined to be $0.26.
The estimated values of warrants,2020, as well as the assumptions that were used in calculating such values, were based on estimates at the issuance date as follows:
| Bridge Noteholders | Placement Agent | Bridge Noteholders September 21, 2017 | ||||||||||
| Risk-free interest rate | 1.83 | % | 1.93 | % | 1.89 | % | ||||||
| Weighted average expected term | 5 years | 5 years | 5 years | |||||||||
| Expected volatility | 123.94 | % | 123.07 | % | 130.80 | % | ||||||
| Expected dividend yield | 0.00 | % | 0.00 | % | 0.00 | % | ||||||
Shares Issued and Outstanding and Shares Reserved for ExerciseSchedule of Estimated Values of Warrants Convertible Notes,Valuation Assumptions
| Warrants Issued March 2, 2020 | ||||
| Risk-free interest rate | 0.88 | % | ||
| Weighted average expected term | 5 years | |||
| Expected volatility | 130.12 | % | ||
| Expected dividend yield | 0.00 | % | ||
From time to time, we issue stock options and the 2015 Planrestricted stock as compensation for services rendered by our directors and employees.
Restricted Stock
On February 15, 2021 and January 2, 2020, we issued shares and shares, respectively, of restricted common stock to our directors as part of their annual compensation plan. The Company had 17,376,012 Shares issued and outstanding, 5,066,625 Shares reserved for issuance upon the exercisegrants of outstanding warrants, 2,563,926 Shares reserved for issuance upon the conversion of convertible debt, and 2,366,506 Shares reserved for issuance underrestricted common stock were made outside the 2015 Plan asand were not subject to any vesting conditions. Stock compensation of September$was recorded on this issuance of restricted common stock for the six months ended June 30, 2017.
On April 30, 2015,2021. Stock compensation of $on the Company entered into a Non-qualified Stock Option Agreement with Sophie Pibouin, a directorissuance of the Company, in accordance withrestricted common stock to directors was recorded for the 2015 Plan. The agreement granted options to purchase 128,000 Shares prior to the expiration date of April 29, 2025 at an exercise price of $0.75. The options granted vested on a graded scale over a period of time through Octobertwelve months ending December 31, 2015.2020.
On April 30, 2015, the Company entered into a Non-qualified Stock Option Agreement with Murray Gross, a director of the Company, in accordance with the 2015 Plan. The agreement granted options to purchase 640,000 Shares prior to the expiration date of April 29, 2025 at an exercise price of $0.75. 400,000 of the options granted immediately vested on the date of grant, and the remaining 240,000 options granted will vest upon the date at which the Company first reports two consecutive fiscal quarters with revenues of One Million Dollars ($1,000,000) each. The unvested options wereOptions
We did not exercisable after the director’s termination of continuous service, on September 30, 2017, as defined in the agreement.
On January 1, 2016, the Company granted employees stock options to purchase 250,000 Shares at an exercise price of $0.90 per Share in accordance with the 2015 Plan, with vesting continuing until 2019. The total fair value of $196,250 for these stock options will be recognized by the Company over the applicable vesting period.
On February 10, 2016, the Company granted employees stock options to purchase 210,000 Shares at an exercise price of $0.96 per Share in accordance with the 2015 Plan, with vesting continuing until 2020. The total fair value of $174,748 for these stock options will be recognized by the Company over the applicable vesting period.
On December 6, 2016, the Company granted one employee stock options to purchase 100,000 Shares at an exercise price of $0.76 per Share in accordance with the 2015 Plan, with vesting continuing until 2020. The total fair value of $63,937 for these stock options will be recognized by the Company over the applicable vesting period.
On March 15, 2017, the Company granted one employee stock options to purchase 100,000 Shares at an exercise price of $0.85 per Share in accordance with the 2015 Plan, with vesting continuing until 2020. The total fair value of $70,872 for these stock options will be recognized by the Company over the applicable vesting period.
On September 25, 2017, the Company granted an employee stock options to purchase 750,000 Shares at an exercise price of $0.30 per Share and 500,000 Shares at an exercise price of $0.38 per Share, in accordance with the 2015 Plan, with vesting continuing until 2019. The 500,000 Shares will vest quarterly through 2019, and they are also subject to availability contingencies relating to pending shareholder approval of an amendment to the 2015 Plan. The total fair value of $321,011 for these stock options will be recognized by the Company over the applicable vesting period.
The weighted average estimated values of director and employeemake any stock option grants as well as the weighted average assumptions that were used in calculating such values during the ninesix months ended SeptemberJune 30, 2017 2021 or 2020. Stock-based compensation for options was $and 2016, were based on estimates at$, during the date of grant as follows:three months ended June 30, 2021 and 2020, respectively, and $and $, during the six months ended June 30, 2021 and 2020, respectively.
| April 30, | January 1, | February 10, | ||||||||||
| 2015 Grant | 2016 Grant | 2016 Grant | ||||||||||
| Risk-free interest rate | 1.43 | % | 1.76 | % | 1.15 | % | ||||||
| Weighted average expected term | 5 years | 5 years | 5 years | |||||||||
| Expected volatility | 143.10 | % | 134.18 | % | 132.97 | % | ||||||
| Expected dividend yield | 0.00 | % | 0.00 | % | 0.00 | % | ||||||
| December 6 | March 15, | September 25, | ||||||||||
| 2016 Grant | 2017 Grant | 2017 Grant | ||||||||||
| Risk-free interest rate | 1.84 | % | 2.14 | % | 1.85 | % | ||||||
| Weighted average expected term | 5 years | 5 years | 5 years | |||||||||
| Expected volatility | 123.82 | % | 121.19 | % | 130.79 | % | ||||||
| Expected dividend yield | 0.00 | % | 0.00 | % | 0.00 | % | ||||||
Schedule of Stock Option Activity
| Weighted- | ||||||||||||||||
| Weighted- | Average | |||||||||||||||
| Shares | Average | Remaining | Aggregate | |||||||||||||
| Under | Exercise | Contractual | Intrinsic | |||||||||||||
| Option | Price | Life | Value | |||||||||||||
| Outstanding at January 1, 2017 | 1,328,000 | $ | 0.81 | 9 years | 115,200 | |||||||||||
| Granted | 1,350,000 | 0.37 | ||||||||||||||
| Exercised | - | |||||||||||||||
| Forfeited and expired | (440,000 | ) | 0.81 | |||||||||||||
| Outstanding at September 30, 2017 | 2,238,000 | $ | 0.55 | 9 years | $ | 79,200 | ||||||||||
| Exercisable at September 30, 2017 | 668,000 | $ | 0.79 | 8 years | $ | 79,200 | ||||||||||
| Weighted- | ||||||||||||||||
| Weighted- | Average | |||||||||||||||
| Shares | Average | Remaining | Aggregate | |||||||||||||
| Under | Exercise | Contractual | Intrinsic | |||||||||||||
| Option | Price | Life | Value | |||||||||||||
| Outstanding at January 1, 2021 | 145,360 | $ | 5.61 | years | $ | 19,200 | ||||||||||
| Outstanding at June 30, 2021 | 145,360 | $ | 5.61 | years | $ | 19,200 | ||||||||||
| Exercisable at June 30, 2021 | 41,560 | $ | 9.34 | years | $ | 19,200 | ||||||||||
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| Weighted- | ||||||||||||||||
| Weighted- | Average | |||||||||||||||
| Shares | Average | Remaining | Aggregate | |||||||||||||
| Under | Exercise | Contractual | Intrinsic | |||||||||||||
| Option | Price | Life | Value | |||||||||||||
| Outstanding at January 1, 2020 | 46,860 | $ | 9.02 | years | $ | 19,200 | ||||||||||
| Outstanding at June 30, 2020 | 46,860 | $ | 9.02 | years | $ | 19,200 | ||||||||||
| Exercisable at June 30, 2020 | 38,785 | $ | 9.54 | years | $ | 19,200 | ||||||||||
The weighted-average grant date fair value of options granted during the nine months ended September 30, 2017 and 2016 was $0.29 and $0.81, respectively.
As of SeptemberJune 30, 2017,2021 and December 31, 2016,2020, there was $497,136 $and $492,057,$ , 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 two years.. The total fair value of stock options that vested during the ninesix months ended SeptemberJune 30, 20172021 and 20162020 was $100,655 $and $49,062,$, respectively.
15. Concentrations
Revenues from the Company’s services to a limited number of customers have accounted for a substantial percentage of the Company’sour total revenues. During the three months ended June 30, 2021 and 2020, our largest customer, the State of Michigan, accounted for 45% and 43%, respectively, of our total revenues, and our second largest customer, Quicken Loans, accounted for 9% and 11%, respectively, of our total revenues. During the six months ended June 30, 2021 and 2020, our largest customer, the State of Michigan, accounted for 48% and 40%, respectively, of our total revenues, and our second largest customer, Quicken Loans, accounted for 10% and 8%, respectively, of our total revenues.]
For the three months ended SeptemberJune 30, 2017, the Company’s two largest customers, Ohio Department of Commerce (“ODC”) a direct client2021 and Tiburon, Inc. (“Tiburon”) a Reseller accounted for approximately 19 % and 9%, of the Company’s total revenue for that period. For the three months ended September 30, 2016, the Company’s two largest customers, Tiburon and Franklin County Data Center (“FCDC”) a direct client accounted for approximately 13% and 11%, respectively, of the Company’s total revenue for that period. For the nine months ended September 30, 2017, the Company’s two largest customers, ODC and Tiburon accounted for approximately 10% and 9%, respectively, of the Company’s total revenues for that period. For the nine months ended September 30, 2016, the Company’s two largest customers, Tiburon and FCDC, accounted for approximately 10% and 9%, respectively, of the Company’s total revenues for that period.
For the three months ended September 30, 2017 and 2016,2020, government contracts represented approximately 42% 59% and 37%57%, respectively, of our net revenues. For the Company’s total revenues, respectively.six months ended June 30, 2021 and 2020, government contracts represented approximately 64% and 58%, respectively, of our net revenues. A significant portion of the Company’sour sales to Tiburonresellers represent ultimate sales to government agencies. For the nine months ended September 30, 2017 and 2016 government contracts represented approximately 42% and 41%, respectively, of the Company’s total revenue.
As of SeptemberJune 30, 2017,2021, accounts receivable concentrations from the Company’s fourour two largest customers were 33%, 13%, 11%,36% and 11%12% of our gross accounts receivable, respectively by customer. Accounts receivable balances from our two largest customers at June 30, 2021 have been partially collected. As of December 31, 2020, accounts receivable concentrations from our two largest customers were 54% and 16% of gross accounts receivable, respectively by customer.
16. Certain Relationships and Related Transactions
We did not participate in any related person transactions during the three and six months ended June 30, 2021.
17. Provision For Income Taxes
We file federal and various state income tax returns in the U.S. For the three and six months ended June 30, 2021 and 2020, we have recognized the minimum amount of state income tax as required by the states in which we are required to file taxes. We are not currently subject to any other federal or state taxes because we have incurred losses since our inception.
Income tax benefit consists of December 31, 2016, accounts receivable concentrations from the Company’s three largest customers were 20%, 19%following federal, deferred components for the six months ended June 30, 2021 and 16%2020:
Summary of gross accounts receivable, respectively. Accounts receivable balances from the Company’s four largest customers at September 30, 2017 have been partially collected.Income Tax Benefits
Six months ended June 30, 2021 | Six months ended June 30, 2020 | |||||||
| Benefit of net operating losses | $ | 48,641 | $ | (154,168 | ) | |||
| Other timing differences | 28,609 | (62,741 | ) | |||||
| Change in valuation allowance, including $188,000 reduction in valuation allowance due to purchased deferred tax liability in 2020 | (77,250 | ) | 29,909 | |||||
| Tax benefit | $ | - | $ | (188,300 | ) | |||
.
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A reconciliation is provided below of the U.S. Federal income tax expense at a statutory rate of 21% for the six months ended June 30, 2021 and 2020:
Summary of Reconciliation of Income Tax Expense
Six months ended June 30, 2021 | Six months ended June 30, 2020 | |||||||
| U.S. statutory rate | 21 | % | 21 | % | ||||
| U.S. Federal income tax at statutory rate | $ | 217,688 | $ | (234,570 | ) | |||
| Increase (decrease) in income taxes due to: | ||||||||
| Non-taxable PPP loan and accrued interest recovery | (177,467 | ) | - | |||||
| Non-deductible earnout expense | 16,214 | - | ||||||
| Non-deductible goodwill amortization | 19,979 | 12,810 | ||||||
| Other differences | 836 | 4,830 | ||||||
| Benefit of acquisition-date purchased deferred tax liability | - | (188,300 | ) | |||||
| Other change in valuation allowance | (77,250 | ) | 216,930 | |||||
| Income tax benefit | $ | - | $ | (188,300 | ) | |||
The approximate tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below:
Summary of Deferred Tax Assets and Liabilities
| June 30, 2021 | December 31, 2020 | |||||||
| Deferred tax assets | ||||||||
| Reserves and accruals not currently deductible for tax purposes | $ | 49,000 | $ | 51,000 | ||||
| Amortizable assets | 68,000 | 72,000 | ||||||
| Net operating loss carryforwards | 3,971,000 | 4,020,000 | ||||||
| Deferred tax assets | 4,088,000 | 4,143,000 | ||||||
| Deferred tax liabilities | ||||||||
| Property and equipment | (164,000 | ) | (143,000 | ) | ||||
| Net Deferred tax assets | 3,924,000 | 4,000,000 | ||||||
| Valuation allowance | (3,924,000 | ) | (4,000,000 | ) | ||||
| Deferred tax assets and liabilities | $ | - | $ | - | ||||
As of June 30, 2021 and December 31, 2020, we had federal net operating loss carry forwards of approximately $18,988,000 and $19,129,000, respectively, which can be used to offset future federal income tax. The federal and state net operating loss carry forwards expire at various dates through 2039for pre-2020 losses. The operating losses during and after 2020 do not expire. We recorded a valuation allowance against all of our deferred tax assets as of both June 30, 2021 and December 31, 2020. We intend to continue maintaining a full valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability that we are able to actually achieve.
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| ITEM 2 | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following management’s discussion and analysis of our financial conditions and results of operations of the Company for the three and nine months ended September 30, 2017, and 2016 should be read in conjunctiontogether with our condensed consolidated financial statements and the notes to those financial statements that are included elsewhere in this Form 10-Q. References in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to the “Company,” “us,” “we,” “our,” and similar terms refer to Intellinetics, Inc., a Nevada corporation (“Intellinetics”), and its sole operating subsidiary, Intellinetics, Inc., an Ohio corporation (“Intellinetics Ohio”), unless we state otherwise or the context indicates otherwise.
This discussion includes forward-looking statements, as that term is defined in the federal securities laws, based upon current expectations that involve risks and uncertainties, such as plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. Words such as “anticipate,” “estimate,” “plan,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions are used to identify forward-looking statements.
We caution you that these statements 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. Factors that may affect our results include, but are not limited to, the risk factors that arethereto included in Part I, Item IA1, “Financial Statements,” of our Annualthis Quarterly Report on Form 10-K for10-Q, and with the year ended December 31, 2016. Any one or more of these uncertainties, riskscondensed consolidated financial statements and other influences could materially affect our results of operationsnotes thereto and whether forward-looking statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations section discussescontained in our financial statements, which have been preparedAnnual Report on Form 10-K for the fiscal year ended December 31, 2020. Historical results and percentage relationships among any amounts in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management 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 revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition accrued expenses, financing operations, contingencies and litigation. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actualnecessarily indicative of trends in operating results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financialfor any future periods. Any forward-looking statements include estimates as to the appropriate carry value of certain assets and liabilities which are not readily apparent from other sources. These accounting policies are described at relevant sections in this discussion and analysis andshould be read in conjunction with the notesinformation set forth in “Note Regarding Forward-Looking Statements” elsewhere herein. In this Quarterly Report, we sometimes refer to the three and six month periods ended June 30, 2021 as the second quarter 2021 and the six month period 2021 respectively, and to the three and six month periods ended June 30, 2020 as the second quarter 2020 and the six month period 2020.
Company Overview
We are a document services and solutions software company serving both the small-to-medium business and governmental sectors. During 2020, we made two significant business acquisitions that have significantly impacted our financial operations and grown our business operations:
| ● | Graphic Sciences, on March 2, 2020, and | |
| ● | CEO Image, on April 21, 2020. |
For further information about these acquisitions, please see Note 5 to our condensed consolidated financial statements included in Part I, Item 1 of this report for the threeQuarterly Report.
Our products and nine months ended September 30, 2017.
Company Overview
Intellinetics is a Nevada holding company incorporated in 1997, with a single operating subsidiary, Intellinetics Ohio. Intellinetics Ohio was incorporated in 1996,services are provided through two reporting segments: Document Management and on February 10, 2012, Intellinetics Ohio became the sole operating subsidiaryDocument Conversion. Our Document Management segment, which includes our CEO Image acquisition, consists primarily of Intellinetics as a result of a reverse merger and recapitalization.
The Company is a content services software development, sales, and marketing company serving both the public and private sectors. The Company’ssolutions involving our software platform, allowsallowing customers to capture and manage alltheir documents across operations such as scanned hard-copy documents and all digital documents including those from Microsoft Office 365, digital images, audio, video and emails. The Company’sOur Document Conversion segment, which includes and primarily consists of our Graphic Sciences acquisition, provides assistance to customers as a part of their overall document strategy to convert documents from one medium to another, predominantly paper to digital, including migration to our software solutions, as well as long-term storage and retrieval services. Our solutions create value for customers by making it easy to connect business-critical documents to the processes they drivepeople who need them by making themthose document easy to find and access, while also being secure and compliant with itsthe customers’ audit requirements. Solutions are sold both directly to end-users and through resellers.
Customers obtainOur customers use of the Company’sour software by eitherone of two methods: purchasing our software and installing it for installation onto their own equipment, referredwhich we refer to as a “premise” model, or bylicensing and accessing theour platform via the Internet, referredwhich we refer to as a “cloud-based”“SaaS” or “software as a service” (“SaaS”)model and also as a “cloud-based” model. The Company anticipates that the provision of “cloud” application services, or SaaS cloud-based customer activation, will increase over time and become the priority in the market and the most significant strategic part of its revenue growth opportunity. Our revenues from cloud-based deliveryLicensing of our software includingthrough our SaaS model has become increasingly popular among our customers, especially in light of the increased deployment of remote workforce policies, and is a key ingredient in our revenue growth strategy. Our SaaS products are hosted with Amazon Web Services and Expedient, providing our customers with reliable hosting services asthat we believe maintain the best industry practices in data security.
We operate a percentageU.S.-based business with concentrated sales to the state of total revenueMichigan for the three months ended September 30, 2017our Document Conversion segment with a diverse set of document management software solutions and 2016, were 27%services. We hold or compete for leading positions regionally in select markets and 20% respectively.
Our current sales strategy isattribute this leadership to direct our sales efforts toward both sales through intermediaries, such as software developers and resellers and multi- function device resellers, and through direct sales. We have developed marketing programs with resellers that facilitate their selling and support of our software solutions. We refer to these resellers as our “channel partners.” We believe that our channel partner strategy improvements have increasedseveral factors including the competitive strength of our platformbrand name and reputation, our comprehensive offering of products. In addition, we have established a setinnovative solutions, and the quality of business solutions templates that provide base software configurations which we believe will facilitate our delivery and installationservice support. Net growth in sales of software to our customers.as a service in recent years reflects market demand for these solutions over traditional sales of on-premise software. We believe that these advancements, in the aggregate, will allow usexpect to license and sell our products to a broader customer base, shortening our sales cycle, making margins more consistent, and allowing us to expand our sales through new channel partnerships and direct customers. We continue to devote significant efforts, in both developmentbenefit from our select niche leader positions, innovative product offering, growing installed base, and marketing, in enhancing all channels to market.
Revenues
Revenues are generated from the licensing, subscription and maintenance of our enterprise software products and from professional services fees in connection with the implementation and integration of software applications. Our revenues, especially our license revenues, are impacted by the effectivenessimpact of our sales and marketing effortsprograms. Examples of these programs include identifying and the competitive strength ofinvesting in growth and market penetration opportunities, more effectively pricing our software products as well as general economic and industry conditions.
Forservices, demonstrating superior value to customers, increasing our sales force effectiveness through improved guidance and measurement, and continuing to optimize our lead generation and lead nurturing processes.
For further information about our consolidated revenue and earnings, please see our condensed consolidated financial statements included in Part I, Item 1 of software, our customer base has traditionally included customers with larger projects that can take as much as nine months to complete. For these projects, our policy is to recognize revenue on the percentage of completion basis, measured by the percentage of labor hours incurred to date to estimated total labor hours for each contract, or on a completed contract basis when dependable estimates are not available.this Quarterly Report.
Cost of Revenues
We maintain a staff of software design engineers, developers, installers and customer support personnel, dedicated to the development and implementation of customer applications, customer support and maintenance of deployed software applications. While the total costs related to these personnel are relatively consistent from period to period, the cost of revenues categories to which these costs are charged may vary depending on the type of work performed by our staff.
Costs of revenues also include the costs of server hosting and SaaS applications, as well as certain third-party costs and hardware costs incurred. Third-party and hardware costs may vary widely from quarter to quarter.
Sales and Marketing Expenses
Sales expenses consist of compensation and overhead associated with the development and support of our channel sales network, as well as our direct sales efforts. Marketing expenses consist primarily of compensation and overhead associated with the development and production of product marketing materials, as well as promotion of the Company’s products through the trade and industry.
General and Administrative Expenses
General and administrative expenses consist of the compensation and overhead of administrative personnel and professional services firms performing administrative functions, including management, accounting, finance and legal services, plus expenses associated with infrastructure, including depreciation, information technology, telecommunications, facilities, and insurance.
Interest Expense, Net
Interest Expense, net, consists primarily of interest expense and amortization of debt issuance costs and beneficial conversion feature discounts associated with our notes payable. See Results of Operations – Interest Expense – Net, for additional information.
How We Evaluate our Business Performance and Opportunities
Major Quantitative and Qualitative Factors we Consider inThere has been no material change during the Evaluation of our Business
Thesix month period 2021 to the major qualitative and quantitative factors we consider in the evaluation of our operating results includeas set forth in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — How We Evaluate our Business Performance and Opportunities” of our Annual Report on Form 10-K for the following:fiscal year ended December 31, 2020.
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Financial Impact of COVID-19
The spread of the COVID-19 pandemic and developments surrounding this global pandemic have had, and we expect will continue to have, a significant impact on our business, operations, financial condition and results of operations.
For approximately three months beginning in late March 2020, our Graphic Services business operations, which constitute a majority of our professional services revenues, were substantially reduced while the State of Michigan’s stay-at-home order was in effect, during which period we were only able to process work orders deemed “essential” by the State of Michigan. While there has not been a meaningful cancellation of future jobs or current contracts for our Graphic Services business operations, many of our customers have been adversely affected by the pandemic and related business restrictions and certain customers continue to be slow to resume operations to pre-pandemic levels, and certain customers may never fully return. In particular, the State of Michigan, our biggest customer, has not fully resumed normal operations, resulting in a decrease in the volume of work orders for our Document Conversion segment. In addition, we are seeing inconsistent demand in certain other areas of our operations, even though those operations are still currently open for business with mostly remote staff.
In addition, the majority of our Ohio employees are continuing to work remotely. Many of our clients operate in a variety of other states, which had differing time periods in which their operations have been, currently or may in the future be restricted due to COVID-19. Even though we have been able to fully resume our operations, we expect to see continued weakened demand in light of reduced governmental and small-business spending and general economic uncertainty.
Looking ahead, the ongoing impact of COVID-19 on our business continues to evolve and be unpredictable. For example, to the extent the pandemic continues to disrupt economic activity we, like other businesses, are not immune to continued adverse impacts to our business, operations and financial results from decreases in customer spending, the adverse impact on the liquidity of our customers, depressed economic activity, or volatility in capital markets. The extent of the impact will depend on a number of factors, including the duration and severity of the pandemic; the uneven impact to certain industries; advances in testing, treatment and prevention; the macroeconomic impact of government measures to contain the spread of the virus and related government stimulus measures. To address the potential impact to our business, we have engaged, and continue to assess and engage, in aggressive efforts to reduce expenses and preserve cash flow in order to address the effects of COVID-19 on our business, operations and results. Additionally, we have instituted safe distancing practices and additional cleaning procedures for all our company offices, as well as established work-from-home policies wherever feasible, in order to prevent or mitigate future outbreaks and disruptions to our business. At the same time, we believe the current environment is accelerating digital transformation and we remain focused on innovating and investing in the services we offer to our customers. Accordingly, the ongoing impact of COVID-19 and the extent of these measures we may implement could have a material impact on our financial results.
Uncertainties, Trends, and Risks that can cause Fluctuations in our Operating Results
Our operating results have fluctuated significantly in the past and are expected to continue to fluctuate in the future due to a variety of factors. Factorsfactors, in addition to COVID-19, that affectare discussed in Part I, Item IA, “Risk Factors” and in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Uncertainties, Trends, and Risks that can cause Fluctuations in our operating results includeOperating Results” of our Annual Report on Form 10-K for the following:
fiscal year ended December 31, 2020. Due to all these factors and the other risks discussed in Part I,this Item IA of2, our Annual Report on Form 10-K for the year ended December 31, 2016, ourpast results of operations should not be relied upon as an indication of our future performance. Comparisons of our operating results with prior periods is not necessarily meaningful or indicative of future performance.
Executive Overview of Results
The biggest factors in the changes in our results of operations during the second quarter 2021 compared to the second quarter 2020, and the six month period 2021 compared to the six month period 2020 were our acquisitions of Graphic Sciences on March 2, 2020 and, to a much lesser extent, CEO Image on April 21, 2020, and the impact of the COVID-19 stay-at-home orders in Michigan and Ohio during most of the second quarter 2020. Our results for the six month period 2021 include the results of Graphic Sciences and CEO Image operations for the full period, while our six month period 2020 results include only approximately four month’s results of Graphic Sciences operations, and two month’s results of CEO Image.
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Below are our key financial results for the second quarter 2021 (consolidated unless otherwise noted):
| ● | Revenues were $2,909,646, representing revenue growth of 58% year over year. | |
| ● | Cost of revenues was $1,095,579. | |
| ● | Operating expenses (excluding cost of revenues) were $1,508,349. | |
| ● | Income from operations was $305,718. | |
| ● | Net income was $192,447 with basic and diluted net income per share of $0.07 and $0.06, respectively. | |
| ● | Operating cash flow was $260,251. | |
| ● | Capital expenditures were $231,699. |
Below are our key financial results for the six month period 2021 (consolidated unless otherwise noted):
| ● | Revenues were $5,544,865, representing revenue growth of 82% year over year. | |
| ● | Cost of revenues was $2,125,894. | |
| ● | Operating expenses (excluding cost of revenues) were $3,002,520. | |
| ● | Income from operations was $416,451. | |
| ● | Net income was $1,035,219 with basic and diluted net income per share of $0.37 and $0.33, respectively, including $845,083 gain on PPP loan forgiveness. | |
| ● | Operating cash flow was $587,120. | |
| ● | Capital expenditures were $399,638. | |
| ● | As of June 30, 2021, we had 115 employees, including 10 part-time employees. |
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Reportable Segments
We have two reportable segments: Document Management and Document Conversion. These reportable segments are discussed above under “Company Overview.”
Results of Operations
OverviewRevenues
We recorded net losses of $286,690 and $246,767The following table sets forth our revenues by reportable segment for the three months ended September 30, 2017 and 2016, respectively, representing an increase in net loss of $39,932 or 16%. We recorded gross profit of $490,282 and $513,235periods indicated:
| For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues by segment | ||||||||||||||||
| Document Management | $ | 791,004 | $ | 622,865 | $ | 1,526,822 | $ | 1,240,916 | ||||||||
| Document Conversion | 2,118,642 | 1,213,317 | 4,018,043 | 1,808,930 | ||||||||||||
| Total revenues | $ | 2,909,646 | $ | 1,836,182 | $ | 5,544,865 | $ | 3,049,846 | ||||||||
| Gross profit by segment | ||||||||||||||||
| Document Management | $ | 638,169 | $ | 486,127 | $ | 1,225,700 | $ | 920,832 | ||||||||
| Document Conversion | 1,175,898 | 685,266 | 2,193,271 | 995,805 | ||||||||||||
| Total gross profit | $ | 1,814,067 | $ | 1,171,393 | $ | 3,418,971 | $ | 1,916,637 | ||||||||
The following table sets forth our revenues by revenue source for the three months ended September 30, 2017periods indicated:
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues: | ||||||||||||||||
| Sale of software | $ | 5,598 | $ | 9,674 | $ | 15,192 | $ | 103,774 | ||||||||
| Software as a service | 376,154 | 248,693 | 699,880 | 474,687 | ||||||||||||
| Software maintenance services | 335,073 | 314,111 | 675,519 | 575,354 | ||||||||||||
| Professional services | 1,897,780 | 1,045,679 | 3,550,243 | 1,605,709 | ||||||||||||
| Storage and retrieval services | 295,041 | 218,025 | 604,031 | 290,322 | ||||||||||||
| Total revenues | 2,909,646 | 1,836,182 | 5,544,865 | 3,049,846 | ||||||||||||
Our total revenues in the second quarter 2021 increased by 1,073,464, or 58%, over our second quarter 2020 revenues, driven primarily by COVID-19 stay-at-home orders in Michigan and 2016, respectively, representing a decreaseOhio which were in gross profit of $22,953, or 4%. We recorded operating expenses of $635,489 and $737,918place for the three months ended September 30, 2017majority of the second quarter 2020 and 2016, respectively, representing a decrease in operating expensessignificantly affected our professional services revenues for that quarter. We estimate the impact of $102,429 or 14%. We reported net losses of $1,034,681 and $1,184,497COVID-19 on our Document Conversion segment to be approximately $655,000 reduced revenue for the nine months ended September 30, 2017 and 2016, respectively, representing a decrease in net loss of $149,816 or 13%. We reported gross profit of $1,518,015 and $1,376,243 for the nine months ended September 30, 2017 and 2016, respectively, representing ansecond quarter 2020. The remaining increase of $141,772, or 10%. We reported operating expenses of $2,140,935 and $2,375,875 for the nine months ended September 30, 2017 and 2016, respectively, representing a decrease of $234,940, or 10%. The decrease in operating expenses was principally related to one-time 2016 investments in sales and marketing, including consulting and developing IntelliCloud University.
Revenues
We recorded total revenues of $674,240 and $679,445 for the three months ended September 30, 2017 and 2016, respectively, representing a decrease of $5,205 or 1%. For the nine months ended September 30, 2017 and 2016, respectively, revenues were $2,121,987 and $1,919,585, respectively, representing an increase of $202,402, or 11%. The change in total revenues for the second quarter is primarily attributable to several factorsgrowth in software as a service and professional services, as further described below. The remaining increase in total revenues for the six months ended June 30, 2021 is driven primarily by the acquisition of our Graphic Sciences subsidiary and the associated expansion of our revenues from professional services and the addition of storage and retrieval services. Graphic Sciences, which was acquired towards the end of the first quarter 2020, accounted for $1,843,221 of our revenues in the first quarter 2021 compared to $556,254 in the first quarter 2020, constituting 91% of the increase in revenues. In addition, the CEO Image business line that we acquired after the first quarter 2020 accounted for $132,605 of our first quarter revenues, or 9% of the increase.
Sale of Software Revenues
Revenues from the sale of software principally consist of sales of additional or upgraded software licenses and applications to existing customers and salesresellers. Revenues from the sale of software, which are reported as part of our Document Management segment, decreased by $4,076, or 42%, the second quarter 2021 compared to our resellers. These software revenues were $134,732the second quarter 2020, and $96,869, fordecreased by $88,582, or 85% during the three months ended September 30, 2017 and 2016, respectively, representing an increase of $37,863, or 39%. The increasesix month period 2021 compared to the six month period 2020.
This decrease was due to timing of a larger one-time upgrade for a customer. Forlarge direct sales projects, with unfavorable comparisons to the nine months ended September 30, 2017high project volume the same periods in 2020. We expect the volatility of this revenue line item to continue as the frequency of on-premise software solution sales decreases over time and 2016, respectively, revenues were $375,007 and $289,437 representing an increase of $85,570, or 30%. The increase was primarily due to increased customer demand during the first and third quarters.project timing is unpredictable.
Sale of Software as a Service Revenues
For those customers that wish to avoid the upfront costs of typical premises-based software installations, weWe provide access to our software solutions as a service, accessible through the internet. Our customers typically enter into our software as a service agreement for periods in excess of one year.year or more. Under these agreements, we generally provide access to the applicable software, data storage and related customer assistance and support. OurRevenues from the sale of software as a service, revenues were $180,517which are reported as part of our Document Management segment increased by $127,461, or 51%, in the second quarter 2021 compared to the second quarter 2020 and $137,343, forincreased by $225,093, or 47% in the three months ended September 30, 2017 and 2016, respectively, representing ansix month period 2021 compared to the six month period 2020. This increase of $43,174, or 31%. Our software as a service revenues were $461,734 and $363,842, for the nine months ended September 30, 2017 and 2016, respectively, representing an increase of $97,892, or 27%. The increase in revenue year-over-year was primarily the result of most new customers choosing a cloud-based solution, as a result of our increased focus on softwarewell as a service.expanded data storage, user seats, and hosting fees for existing customers.
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Sale of Software Maintenance Services Revenues
Software maintenance services revenues consist of fees for post contractpost-contract customer support services provided to license holders.(premise-based) holders through support and maintenance agreements. These agreements allow our customers to receive technical support, enhancements and upgrades to new versions of our software products when and if available. A substantial portion of these revenues were generated from customers to whom we sold software in prior years who have continued to renew their maintenance agreements. The support andrenewals of maintenance agreements, which typically haverun on a termyear-to-year basis. Revenues from the sale of 12 months. Our software maintenance support revenue was $241,358services, which are reported as part of our Document Management segment, increased by $20,962, or 7%, in the second quarter 2021 compared to the second quarter 2020 and $256,411, forincreased by $100,165, or 17%, in the three months ended September 30, 2017 and 2016, respectively, representing a decrease of $15,083, or 6%. Our software maintenance support revenue was $732,160 and $748,354 forsix month period 2021 compared to the nine months ended September 30, 2017 and 2016, respectively, representing a decrease of $16,194, or 2%. The decrease in revenuesix month period 2020. This increase was primarily the result of cancellationsmaintenance and support agreements acquired with CEO Image, augmented by expansion of services with existing customers and price increases more than offsetting the sale of new customer software and the continued maintenance of previous customers, for which maintenance agreements are renewed each year.normal attrition.
Sale of Professional Services Revenues
Professional services revenues consist of revenues from document scanning and conversion services, consulting, discovery, training, and advisory services to assist customers with document management needs.needs, as well as repair and maintenance services for customer equipment. These revenues include those arrangements where wethat do not sell software license as an elementinvolve the sale of the overall arrangement. Professionalsoftware. Revenues from our professional services revenuesofferings were $81,751 and $153,895 for the three months ended September 30, 2017 and 2016, respectively, a decreaseenhanced with our acquisition of $72,144, or 47%. For the nine months ended September 30, 2017 and 2016, respectively,Graphic Sciences. Of our professional services revenues were $436,977 and $337,680, respectively, representing an increase of $99,297, or 29%. The overall increase in revenue primarily resulted from an increase in requests from our clients for custom projects during the second quarter.
Sale of Third Party Services
Third party services consist of third party vendor software, hardware and/or services purchases as requested byquarter 2021 and six month period 2021, $1,823,601 and $3,414,012, respectively, were derived from our customers in conjunction with Intellinetics core software or services. Third partyDocument Conversion operations and $74,179 and $136,231, respectively, were derived from our Document Management operations. Our overall professional services revenues were $35,882increased by $852,101, or 81%, in the second quarter 2021 compared to the second quarter 2020 and $34,897, respectively,increased by $1,944,534, or 121%, in the six month period 2021 compared to the six month period 2020. This increase is largely the net result of two key factors limiting professional service sales during those periods in 2020: the acquisition of Graphic Sciences late in the first quarter 2021 and the COVID-19 stay-at-home orders. The increase is also due to a solid pipeline and favorable mix of project work during those periods in 2021.
Storage and Retrieval Services Revenues
Graphic Sciences provides document storage and retrieval services to customers, primarily in Michigan. Revenues from storage and retrieval services, which are reported as part of our Document Conversion segment, increased by $77,016, or 35%, in the second quarter 2021 compared to the first quarter 2020 and increased by $313,709, or 108%, during the six month period 2021 compared to the six month period 2020. This increase was the result of a contract extension, including improved pricing, with our largest storage and retrieval customer, as well as unusually high project work including shredding of documents approved for destruction, and also the timing of the acquisition of Graphic Sciences in March 2020.
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Costs of Revenues and Gross Profits
The following table sets forth our cost of revenues, by revenue source, for the three months ended September 30, 2017 and 2016, respectively, representing an inecreaseperiods indicated:
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Cost of revenues: | ||||||||||||||||
| Sale of software | 2,122 | 5,357 | 6,359 | 43,659 | ||||||||||||
| Software as a service | 91,781 | 71,281 | 168,121 | 143,796 | ||||||||||||
| Software maintenance services | 22,272 | 31,569 | 46,660 | 78,085 | ||||||||||||
| Professional services | 861,267 | 514,036 | 1,695,505 | 811,132 | ||||||||||||
| Storage and retrieval services | 118,137 | 42,546 | 209,249 | 56,537 | ||||||||||||
| Total cost of revenues | 1,095,579 | 664,789 | 2,125,894 | 1,133,209 | ||||||||||||
The following table sets forth our cost of $985 or 3%. Forrevenues by reportable segment for the nine months ended September 30, 2017 and 2016, respectively, third party services were $116,109 and $180,272, representing a decrease of $64,183, or 36%, which was primarily due to the type of projects that are typically attached to new Software or new Software as a Service sales.periods indicated:
| For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Cost of revenues by segment | ||||||||||||||||
| Document Management | $ | 152,835 | $ | 136,738 | $ | 301,122 | $ | 320,084 | ||||||||
| Document Conversion | 942,744 | 528,051 | 1,824,772 | 813,125 | ||||||||||||
| Total revenues | $ | 1,095,579 | $ | 664,789 | $ | 2,125,894 | $ | 1,133,209 | ||||||||
Cost of Revenues
TheOur total cost of revenues during the three months ended September 30, 2017second quarter 2021 increased by $430,790, or 65%, over second quarter 2020 and 2016increased by $992,685, or 88%, during the six month period 2021 over the six month period 2020 primarily due to the corresponding increase in revenues for professional services and storage and retrieval services, which were $183,958adversely impacted by the stay-at-home orders in effect during second quarter 2020 as well as due to the acquisition of Graphic Sciences at the end of the first quarter 2020 and, $166,210, respectively, representing anto a lesser degree, the acquisition of CEO Image in April 2020. Our cost of revenues for our Document Management segment increased by $16,097, or 12%, in the second quarter 2021 compared to the second quarter 2020 and decreased $18,962, or 6%, in the six month period 2021 compared to the six month period 2020 primarily due to more efficient execution of the software maintenance services in that segment. Our cost of revenues for our Document Conversion segment increased by $414,693, or 79%, in the second quarter 2021 compared to the second quarter 2020 and increased by $1,011,647, or 124%, during the six month period 2021 compared to the six month period 2020 primarily due to the acquisition of Graphic Sciences at the end of the first quarter 2020.
Our overall gross profit decreased to 62% in the second quarter 2021 from 63% in the second quarter 2020, and decreased to 62% for the six month period 2021 from 63% during the six month period 2020. The increase in the mix of $17,748,professional services revenue was the principal driver in the decrease, but that decrease was partially offset by margin improvements related to other revenue sources.
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Cost of Software Revenues
Cost of software revenues consists primarily of labor costs of our software engineers and implementation consultants and third-party software licenses that are sold in connection with our core software applications. Cost of software revenues during the second quarter 2021 decreased by $3,235, or 11%. For60%, from the nine months ended September 30, 2017second quarter 2020, and 2016, respectively,decreased by $37,300, or 85%, from the six month period 2020, due to the decrease in revenues and implementations. Our gross margin for software revenues increased to 62% from 45% in the second quarter 2020 and remained consistent at 58% in both the six month period 2021 and the six month period 2020. The increase in the second quarter 2021 was driven by favorable changes in the software solution mix with stronger margin solutions, while changes in the software solution mix from the first quarter 2021 to the second quarter 2021 offset the opposite changes in the same quarters in 2020 resulting in consistent margins year to date.
Cost of Software as a Service
Cost of software as a service, or SaaS, consists primarily of technical support personnel, hosting services, and related costs. Cost of software as a service during the second quarter 2021 increased by $20,500, or 29%, over the second quarter 2020 and increased by $24,325, or 17%, during the six month period 2021 over the six month period 2020. This increase in the cost of revenuesSaaS was $603,972 and $543,342, representing an increase of $60,630, or 11%. Theless than the increase in costassociated SaaS revenues, so our gross margin in the second quarter 2021 increased to 76% compared to 71% in the second quarter 2020 and to 76% in the six month period 2021 compared to 70% during the six month period 2020, as a result of more standard projects, improved implementation efficiencies and scaling of hosting infrastructure.
Cost of Software Maintenance Services
Cost of software maintenance services consists primarily of technical support personnel and related costs. Cost of software maintenance services during the second quarter 2021 decreased by $9,297, or 29%, over the second quarter 2020 and decreased by $31,425, or 40%, in the six month period 2021 over the six month period 2020, due primarily to reduced support activity, especially compared to the unusually high support volumes in first quarter 2020. As a result, our gross margin for software maintenance services increased to 93% in both the second quarter 2021 and the six month period 2021 compared to 90% and 86% in the second quarter 2020 and the six month period 2020, respectively.
Cost of Professional Services
Cost of professional services consists primarily of compensation for employees performing the document conversion services, compensation of our software engineers and implementation consultants and related third-party costs. Cost of professional services during the second quarter 2021 increased by $347,231, or 68%, over the second quarter 2020 and increased in the six month period 2021 by $884,373, or 109%, over the six month period 2020, following the increased revenue volume primarily due to the acquisition of Graphic Sciences late in the first quarter 2020 to a slightly lesser extent. As a result, our gross margins professional services increased to 55% in the second quarter 2021 compared to 51% in the second quarter 2020 and increased to 52% during the six month period 2021 compared to 49% in the six month period 2020. Gross margins related to consulting services may vary widely, depending upon the nature of the consulting project and the amount of labor it takes to complete a project.
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Cost of Storage and Retrieval Services
Cost of storage and retrieval services consists primarily of compensation for employees performing the document storage and retrieval services, including logistics, provided by Graphic Sciences. Cost of storage and retrieval services increased by $75,591, or 178%, in the second quarter 2021 compared to the second quarter 2020, and increased by $152,712, or 270%, during the six month period ended September 30, 2017 is primarily2021 compared to the six month period 2020, due to additional labor costs associated with our 2021 warehouse consolidation, which began in completing professional services.the second quarter and will not be complete for several months, as well as costs for additional project work including shredding and the inclusion of storage and retrieval services during the entire period of the first quarter 2021 compared to less than one full month during the first quarter 2020. Gross margins for our storage and retrieval services, which exclude the cost of facilities rental, maintenance, and related overheads, decreased to 60% in the second quarter 2021 compared to 80% in the second quarter 2020 and decreased to 65% during six month period 2021 compared to 81% in the six month period 2020 primarily as a result of increased use of subcontractors for certain projects, including shredding, and labor associated with consolidating warehouses in 2021.
Gross MarginsOperating Expenses
Overall gross marginThe following table sets forth our operating expenses for the three months ended September 30, 2017 and 2016 were 73% and 76%, respectively. For the nine months ended September 30, 2017 and 2016, the gross margins were 72%. The decrease of 3% in gross margin for the three months ended September 30, 2017 is primarily due to strong margin custom projects in Professional Services in 2016.periods indicated:
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative | 1,058,061 | 844,657 | 2,097,087 | 1,688,860 | ||||||||||||
| Change in fair value of earnout liabilities | 7,261 | - | 77,211 | - | ||||||||||||
| Significant transaction costs | - | 175,673 | - | 636,440 | ||||||||||||
| Sales and marketing | 341,595 | 229,873 | 631,906 | 473,562 | ||||||||||||
| Depreciation and amortization | 101,432 | 86,750 | 196,316 | 114,842 | ||||||||||||
| Total operating expenses | 1,508,349 | 1,336,953 | 3,002,520 | 2,913,704 | ||||||||||||
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Operating Expenses
General and Administrative Expenses
General and administrative expenses were $490,943 during the three months ended September 30, 2017 as comparedsecond quarter 2021 increased by $213,404, or 25%, over the second quarter 2020, and increased in the six month period 2021 by $408,227, or 24%, over the six month period 2020, principally related to $396,638 during the three months ended September 30, 2016, representing an increaseaddition of $94,305 or 24%. For the nine months ended September 30, 2017Graphic Sciences expenses and 2016,certain furloughed hourly workers and management salary reductions in 2020. This was primarily reflected in our Document Conversion segment, in which our general and administrative expenses were $1,571,184increased to $684,013 and $1,525,294, representing an increase of $45,890, or 3%. The increase for$1,240,920 in the second quarter 2021 and the six month period ended September 30, 2017 was primarily2021, respectively, from $483,798 and $674,356 in the second quarter 2020 and the six month period 2020, respectively. In our Document Management segment, our general and administrative expenses increased slightly to $374,048 in the second quarter 2021 compared to $360,859 in the second quarter 2020, and decreased to $856,167 in the six month period 2021 compared to $1,014,504 in the six month period 2020, which changes were due to a net $63,897 training grant receivedthe impacts of reinstated full management salaries increasing those expenses while decreased legal and accounting professional fees and increased sharing of public company costs with the increased Document Conversion segment decreased those expenses in 2016.our Document Management segment.
Change in Fair Value of Earnout Liabilities
Improved gross margin performance at Graphic Science during the first quarter 2021 resulted in an adjustment to fair value of earnout liabilities of $69,950. Improved revenue performance at CEO Image during the six month period 2021 resulted in an adjustment to fair value of earnout liabilities of $7,261. There were no adjustments to fair value of earnout liabilities during the six month period 2020.
Significant Transaction Expenses
There were no significant transaction expenses during the six month period 2021. The significant transactions expenses during the six month period 2020 were comprised of investment banker and placement agent success fees, as well as legal and consulting fees, in connection with our acquisition of Graphic Sciences and our financing and debt conversion.
Sales and Marketing Expenses
Sales and marketing expenses were $141,315 during the three months ended September 30, 2017 as compared to $338,843second quarter 2021 increased by $111,722, or 49%, over the second quarter 2020 and increased by $158,344, or 33%, during the three months ended September 30, 2016, representing a decreasesix month period 2021 over the six month period 2020. This increase was primarily driven by the inclusion of $197,528 or 58%. For the nine months ended September 30, 2017 and 2016, respectively, sales and marketing expenses were $560,735 and $842,421, representing a decreaseGraphic Sciences during all of $281,686, or 33%. The decrease was primarily related to one-time investmentsthose periods in 2016 in consulting, branding, and web site enhancement, which drove our IntelliCloud University reseller onboarding program,2021 as well as lower commissionsthe reinstatement of full sales and an open position.marketing salaries as a part of reducing expenses and preserving cash during the initial COVID-19 uncertainty in 2020, as well as adding a sales representative and a partial resumption of travel in 2021.
Depreciation and Amortization
Depreciation and amortization was $3,231 forduring the three months ended September 30, 2017,second quarter 2021 increased by $14,682, or 17%, over the second quarter 2020 and increased by $81,474, or 71%, during the six month period 2021 over the six month period 2020 as compared to $2,437 for the three months ended September 30, 2016, representing an increase of $794 or approximately 33%. For the nine months ended September 30, 2017 and 2016, respectively, depreciation and amortization was $9,016 and $8,160, representing an increase of $856 or 10%. The increase was thea result of depreciation on additional assets.assets placed in service, primarily racking associated with the warehouse consolidation, and the addition of Graphic Sciences depreciation.
Other Items of Income and Expense
Gain on Extinguishment of Debt
The $845,083 gain on extinguishment of debt during the six month period 2021 reflects the full forgiveness of the principal and interest on our PPP Note by the SBA in January 2021. The $287,426 gain on extinguishment of debt in the during the six month period 2020 was due to the extinguishment of certain debt as part of conversion of notes payable accounted for using troubled debt restructuring.
Income Tax Benefit
Income tax benefit was $0 during the six month period 2021 compared to $188,300 during the six month period 2020. The income tax benefit in the during the six month period 2020 was driven by the releases of a portion of the valuation allowance for deferred tax liabilities of Graphic Sciences that were no longer due.
Interest Expense, Net
Interest expense net, was $141,483 duringdecreased by $3,525, or 3%, in the three months ended September 30, 2017second quarter 2021 as compared to $22,084the second quarter 2020, and decreased by $180,911, or 44% during the three months ended September 30, 2016, representing an increase of $119,399 or 541%.six month period 2021 as compared to the six month period 2020. The increasedecrease resulted primarily from lower interest expense charged for our issuanceon lower net debt following the March 2020 private placement of convertible promissory notes between December 30, 2016securities and January 31, 2017. For the nine months ended September 30, 2017 and 2016, respectively,note conversion, as well as one-time interest expense was $411,761 and $184,865, an increase of $226,896, or 123%. The increase resulted primarily from interest expense charged for our issuance of convertible promissoryassociated with accelerating the beneficial conversion option on the notes between December 30, 2016 and January 31, 2017.converted in 2020.
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Liquidity and Capital Resources
We have financed our operations primarily through a combination of cash on hand, cash generated from operations, borrowings from third parties and related parties, and proceeds from issuanceprivate sales of convertible promissory notes. As of September 30, 2017, our major liquidity indicators are:
From our inception,equity. Since 2012, we have generated revenues from the sales and implementation of our internally generated software applications. Our plan is to increase our sales and market share by developing an expanded network of resellers through which we expect to sell our expanded software product portfolio, as well as continue selling directly. We expect that this marketing initiative will require us to continue our efforts towards reseller training and on-boarding, enhance lead generation activities, and develop additional software integration and customization capabilities, all of which will require additional capital. Although management believes that we may have access to additional capital resources, there is no assurance that we will be able to obtain funds on commercially acceptable terms, if at all.
On January 5 and January 30, 2017, the Company entered into note purchase agreements with certain accredited investors for a private placement of convertible notes for gross proceeds of $560,000, which was part of a private placement in December 2016. The offering raised a total of $1,250,000approximately $18.6 million in the sale of these unregistered securities. The proceeds from these notes were used primarily to fund our working capital needs and general corporate purposes, including without limitation, debt reduction.
On September 21, 2017, the Company entered into note purchase agreements with certain accredited investors for a private placement of convertible notes for net proceeds of $150,000. The proceeds from these notes were used primarily to fund our working capital needs and general corporate purposes, including without limitation, debt reduction.
The Company expects thatcash through the next 12 months the capital requirements to fund the Company’s growth and to cover the operating costs as a public company will consume substantially all the cash flows that it intends to generate from its operations, in addition to the proceeds from the issuances of debt and equity securities. The Company further believes that during this period, while the Company is focusing on the growthAs of June 30, 2021, we had $1,140,631 in cash and expansioncash equivalents, net working capital deficit of its business, the gross profit that it expects to generate$380,126, and an accumulated deficit of approximately $22 million. In June 2021, we paid $954,733 in annual earnout liabilities, reducing our net cash from operations mayfor the second quarter 2021.
In 2020, we engaged in several actions that significantly improved our liquidity and cash flows, including:
| ● | acquiring the positive cash flow generated by Graphic Sciences and CEO Image, | |
| ● | receiving aggregate gross proceeds of $3.5 million from the private placement of our common stock, | |
| ● | converting all of the outstanding principal and accrued interest payable on our then-existing convertible debt in the approximate amount of $6 million into shares of common stock at a conversion price of $4.00 per share, and | |
| ● | receiving $2.0 million in proceeds from the issuance of 12% subordinated promissory notes due February 29, 2023, which we refer to as the 2020 notes, and | |
| ● | obtaining the PPP loan in the principal amount of $838,700, the principal and interest on which was forgiven in its entirety by the SBA in January 2021. |
Overall, we reduced our outstanding debt by approximately $3 million during 2020 and have not generate sufficient funds to cover these anticipated operating costs. incurred any new debt in 2021.
Our cash flowsability to meet our capital needs in the future will depend on many factors, including maintaining and enhancing our operating cash requirements are insufficient by approximately $77,000 per month. Assuming overflow, successfully managing the transition of our recent acquisitions of Graphic Sciences and CEO Image, successfully retaining and growing our client base in the midst of general economic uncertainty, and managing the continuing effects of the COVID-19 pandemic on our business.
Based on our current plans and assumptions, we believe our capital resources, including our cash and cash equivalents, along with funds expected to be generated from our operations, will be sufficient to meet our anticipated cash needs arising in the ordinary course of business for at least the next 612 months, we do not increaseincluding to satisfy our cash flow generated from operations or obtain additionalexpected working capital orneeds, earnout obligations and capital and debt financing, we will not have sufficient funds for planned operationsservice commitments.
Indebtedness
As of June 30, 2021, our only outstanding long-term indebtedness consisted of the 2020 notes issued to accredited investors on March 2, 2020, with an aggregate outstanding principal balance of $2,000,000 and service for existing current debt obligations.
There is no assurance that the Company’s plans as discussed above will materialize and/or that the Company will have sufficient fundsaccrued interest of $0. See Note 9 to fund the Company’s operations. Given these conditions, the Company ability to continue as a going concern is contingent upon successfully managing its cash requirements.
Assuming that we are successful in our growth plans and development efforts, we believe that we will be able to raise additional funds through sales of our common stock, issuance of debt or some other financing source. There is no guarantee that we will be able to raise these additional funds or do so on acceptable terms.
Ourcondensed consolidated financial statements do not include any adjustments relating to the recoverability and classificationincluded in Part 1, Item 1 of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
Liquidity and Capital Resource - Equity Capital Resources
Shares Issued and Outstanding and Shares Reservedthis Quarterly Report for Exercise of Warrants, Stock Options, and the 2015 Plan
As of November 13, 2017, the Company has 17,376,012 shares of common stock issued and outstanding; and 10,017,318 shares reserved for issuance upon the exercise of outstanding warrants, convertible notes, outstanding stock options, and shares reserved for the 2015 Plan.
Our shares are available for quotationfurther information on the OTCQB, and2020 notes.
Capital Expenditures
There were no material commitments for capital expenditures at December 31, 2020. During the six month period 2021, we believe this is important for raising capitalcommitted to finance our growth plan. We intend to deploy any future capital we may raise to provide working capital, expand our sales and marketing capabilities, develop ancillary software products, enhance our internal infrastructure, and support the accounting, auditing and legal costs of operating as a public company.
Liquidity and Capital Resource - Debt Capital Resources
Deferral of Principal and Interest Payment Relating to Notes Payable Issued by Intellinetics to the Ohio State Development Authority
Intellinetics Ohio has issued two notes payable to the Ohio State Development Authority. In June 2014, Intellinetics Ohio and the Ohio State Development Authority entered into a Notice and Acknowledgement of Modification to Payment Schedule on both of the loans, deferring a portion of the interest payments until June 1, 2015. On September 25, 2015, both notes payable were amended as discussed below. Both of these notes are subject to certain covenants and reporting requirements.
On September 25, 2015, a note with a principal amount of $1,012,500 was amended and restated, setting forthpurchase warehouse racking in the amount of principal and interest payable under$351,854, of which $300,276 was purchased as of June 30, 2021. We are evaluating options to finance the note. The interest rate was changed to six percent per annum until paid, with principal and interest payments according to a new amortization schedule, which reduced principal payments and deferred interest payment until October 1, 2016. This note matures on August 1, 2018.equipment purchase.
On September 25, 2015, a different note with a principal amount of $750,000 was amended. This note requires the Company to create and/or maintain nineteen full-time jobs for each month beginning on October 1, 2016. Additionally, a new amortization schedule reduced the principal payments and deferred interest payments until October 1, 2016, at which time the payments will restate the monthly principal and interest payments through the maturity date of August 1, 2018.
For more information, please see Note 7 to the Consolidated Financial Statements, titled Notes Payable.
Other Promissory Note
On December 31, 2014, the Company and Ramon M. Shealy converted their previous promissory notes, whose total principal balance and unpaid interest was $193,453 to a new single promissory note, with a maturity date of January 1, 2020. For more information, please see Note 7 to the Consolidated Financial Statements, titled Notes Payable.
Issuance of Convertible Notes.
Between December 30, 2016, and January 31, 2017, the Company entered into note purchase agreements with certain accredited investors for a private placement of convertible notes for gross proceeds of $1,250,000. The proceeds from these notes will be used primarily to fund our working capital needs and general corporate purposes, including without limitation, debt reduction. As part of this offering, $690,000 of convertible notes were issued in 2016, with the remaining notes issued in 2017.
On September 21, 2017, the Company entered into note purchase agreements with certain accredited investors for a private placement of convertible notes for net proceeds of $150,000. The proceeds from these notes will be used primarily to fund our working capital needs and general corporate purposes, including without limitation, debt reduction.
For more information, please see Note 7 to the Consolidated Financial Statements, titled Notes Payable, Note 8 to the Consolidated Financial Statements, titled Notes Payable – Related Parties.
Summary of Current Outstanding Indebtedness
The Company’s outstanding indebtedness at September 30, 2017 was as follows:
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Capital Expenditures
We had no material commitments to make any capital expenditures at September 30, 2017.
Cash Flows
Provided by and Used in Operating Activities
Net cash provided by operating activities during the six month period 2021 was $587,120, primarily attributable to net income adjusted for non-cash expenses of $73,060, an increase in operating assets of $1,746,940 and an increase in operating liabilities of $417,168. Net cash used in operating activities forduring the nine months ended September 30, 2017 and 2016six month period 2020 was $805,404 and $1,249,649 respectively. During the nine months ended September 30, 2017, the net cash used in operating activities was$132,287, primarily attributable to the net loss adjusted for non-cash expenses of $466,386$799,319, a decrease in operating assets of $602,304 and a decrease in net operating liabilities of $237,109. During the nine months ended September 30, 2016, the net cash used in operating activities was primarily attributable to the net loss adjusted for non- cash expenses of $325,101 and a decrease in net operating liabilities of $390,253.$605,343.
Cash Used by Investing Activities
Net cash used in investing activities in the six month period 2021 was $399,638, primarily related to purchases of racking property and equipment for the nine months ended September 30, 2017new Sterling Heights, MI warehouse. Net cash used in investing activities in the six month period 2020 was $4,039,743, primarily related to cash paid to acquire Graphic Sciences and 2016CEO Image.
Cash Provided by Financing Activities
Net cash used by financing activities during the six month period 2021 amounted to $14,202 and $6,867, respectively, and was related$954,733, due to the purchasepayment of property and equipment.earnout liabilities.
Financing Activities
Net cash provided by financing activities forduring the nine months ended September 30, 2017six month period 2020 amounted to $313,363. The$5,644,681, as the result of net cash provided by financing activities resulted from new borrowings of $710,000, of which $150,000 was from related parties, offset by $293,309 of notes payable repayments, of which $25,114 was repaid to related parties, and payment of deferred financing costs of $103,328.
Net cash provided by financing activities for the nine months ended September 30, 2016 amounted to $298,951. The net cash provided by financing activities resultedgenerated from the sale of common stock of $2,859,633 and from new borrowings of $3,008,700, partially offset by $263,834deferred financing costs of notes$175,924. Notes payable repayments, of which $83,834 was repaidpayments to related parties.parties amounted to $47,728.
Critical Accounting Policies and Estimates
There have been no significantThe preparation of our condensed consolidated financial statements in accordance 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 monitor and analyze these items for changes duringin facts and circumstances, and material changes in these estimates could occur in the three months ended September 30, 2017 to the itemsfuture. We base our estimates and assumptions on current facts, historical experience and various other factors that we disclosed asbelieve 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. Changes in estimates are reflected in reported results for the period in which they become known. The actual results experienced by us may differ materially from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected.
Our critical accounting policies and use of estimates are set forth in ourPart II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations – Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
Liquidity, Going Concern and Management’s Plans
We have incurred substantial recurring losses since2020. There were no material changes to our inception. The accompanying financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. During the years 2012 through 2017 we raised a total of $9,383,610 through issuance of debt and equity securities. We are also in the process of exploring strategies to increase our existing revenues. We believe we will be successful in these efforts; however, there can be no assurance we will be successful in raising additional debt or equity financing or finding any other financing source to fund our operations on terms agreeable to us.
Use of Estimates
The preparation of our consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to exercise its judgment. We exercise considerable judgment with respect to establishing soundcritical accounting policies and in making estimates and assumptions that affectduring the reported amounts of our assets and liabilities, our recognition of revenues and expenses, and other financial information.second quarter 2021.
On an ongoing basis, we evaluate our estimates and judgments. Areas in which we exercise significant judgment include, but are not necessarily limited to, our valuation of accounts receivable, and income taxes, along with the estimated useful lives of depreciable property and equipment.ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We base our estimates and judgments on a variety of factors, including our historical experience, knowledge of our business and industry, current and expected economic conditions, and the attributes of our products and services. We periodically re-evaluate our estimates and assumptions with respect to these judgments and modify our approach when circumstances indicate that modifications are necessary.
While we believe that the factors we evaluate provide us with a meaningful basis for establishing and applying sound accounting policies, we cannot guarantee that the results will always be accurate. Since the determination of these estimates requires the exercise of judgment, actual results could differ from such estimates.
A description of significant accounting policies that require us to make significant estimates and assumptions in the preparation of our consolidated financial statements is the allowance for doubtful accounts and valuation allowance for deferred tax assets.
We establish allowances for doubtful accounts based on certain percentages of accounts sixty days or more past due and when available information causes us to believe that credit loss is probable. Due to historical losses, a full valuation allowance is recognized on deferred tax assets.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable to smaller reporting companies.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures.Procedures
(a) Evaluation of disclosure controls and procedures.
WithOur management, with the participation of our principal executive officerChief Executive Officer and principal financial officer, weChief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) at the end of the period covered by this this Quarterly Report.
Based on this evaluation, we concluded that, as of June 30, 2021, our disclosure controls and procedures were effective to Rule 13a-15provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange Act. Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
In designing and evaluating theour disclosure controls and procedures, we recognizemanagement recognizes that any controls and procedures,system, no matter how well designed and operated, can provide only reasonable assurance of achieving theits desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that we aremanagement is required to apply ourits judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on our evaluation, our principal executive officer and principal financial officer concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were not effective as required under Rules 13a-15(e) and 15d-15(e) under the Exchange Act as a result of the material weaknesses in our internal control over financial reporting.
The material weakness, which relates to internal control over financial reporting, that was identified is:
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We are committed to continually improving our financial organization, and from time to time we adopt additional processes and procedures over financial reporting. In addition, we will continue to evaluate the need and costs to increase our personnel resources and technical accounting expertise within the accounting function. In November 2016, we hired Joseph D. Spain as Controller, and he was appointed Chief Financial Officer in December 2016 when our former Chief Financial Officer resigned. We believe Mr. Spain has the requisite skill and knowledge to facilitate the Company’s effective internal control over financial reporting. As our operations are relatively small, we do not anticipate being able to hire additional internal personnel until such time as our operations are large enough to justify the hiring of additional accounting personnel. As necessary, we may engage consultants in the future in order to ensure proper accounting for our consolidated financial statements.
(b) Changes in internal control over financial reporting.Internal Control Over Financial Reporting
We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes. There were no changes in our internal control over financial reporting that occurred during the nine months ended September 30, 2017period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).
We regularly review our internal control over financial reporting and, from time to time, we have made changes as we deemed appropriate to maintain and enhance the effectiveness of our internal controls over financial reporting, although these changes do not have a material effect on our overall internal control.
PART II — OTHER INFORMATION
None.
Our business and operating results are subject to many risks, uncertainties and other factors. If any of these risks were to occur, our business, affairs, assets, financial condition, results of operations, cash flows and prospects could be materially and adversely affected. These risks, uncertainties and other factors includeExcept as supplemented by the information discussed elsewhere in this report as well asfollowing, there have been no material changes to the risk factors set forth in “Item 1A. Part I, Item 1A, “Risk Factors” inFactors,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2020:
Increases in the minimum wage and general labor costs, could adversely affect our business, financial condition and results of operations.
Labor is a significant portion of our cost structure and is subject to many external factors, including minimum wage laws, prevailing wage rates, unemployment levels, health insurance costs and other insurance costs and changes in employment and labor legislation or other workplace regulation. From time to time, legislative proposals are made to increase the federal minimum wage in the United States, as well as the minimum wage in Michigan and Ohio and municipalities, and to reform entitlement programs, such as health insurance and paid leave programs. On April 27, 2021, President Biden issued an Executive Order, effective January 30, 2022, requiring certain federal contractors to pay a $15 minimum wage to workers who work on federal contracts and to adjust that rate annually according to the consumer price index. While we do not currently have any federal contracts and are not directly affected by the Executive Order, the Executive Order may affect us in the future; it may influence other state and municipal jurisdictions to increase their statutory minimum wage; or it may significantly contribute to the overall increase in prevailing wage rates. As minimum wage rates increase or related laws and regulations change, we may need to increase not only the wage rates of our minimum wage employees, but also the wages paid to our other hourly or salaried employees. Any increase in the cost of our labor could have an adverse effect on our business, financial condition and results of operations, or if we fail to pay such higher wages we could suffer increased employee turnover. Increases in labor costs generally could force us to increase prices for other customers, which could adversely impact our sales. For some customers with multi-year fixed pricing contracts, increases in the minimum wage could decrease our profit margins or result in losses and could have not materially changed asa material adverse effect on our business, financial condition and results of the date of this report.operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
There have been no securities sold by the registrant during the period covered by this Quarterly Report on Form 10-Q that have not previously been included on a Form 8-K.None.
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not Applicable.
None.
The following is a list of exhibits filed as part of this Quarterly Report on Form 10-Q.
101.
* INS XBRL Instance Document.Filed herewith.
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101.* SCH XBRL Taxonomy Schema.SIGNATURES
101.* CAL XBRL Taxonomy Extension Calculation Linkbase.
101.* DEF XBRL Taxonomy Extension Definition Linkbase.
101.* LAB XBRL Taxonomy Extension Label Linkbase.
101.* PRE XBRL Taxonomy Extension Presentation Linkbase.
* filed herewith
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| INTELLINETICS, INC. | ||
| Dated: |
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| By: | /s/ James F. DeSocio | |
| James F. DeSocio | ||
| President and Chief Executive Officer | ||
| Dated: |
| |
| By: | /s/ Joseph D. Spain | |
| Joseph D. Spain | ||
| Chief Financial Officer | ||
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