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 ~~March 31,~~September 30, 2023

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________________to _________________________

Commission file number: 001-41495

INTELLINETICS, INC.

(Exact name of registrant as specified in its charter)

Nevada

87-0613716

(State or Other Jurisdiction of

of Incorporation or Organization)

(I.R.S. Employer

Identification No.)

2190 Dividend Drive
Columbus, Ohio		43228
(Address of Principal Executive Offices)		(Zip Code)

(~~614~~(614)) 921-8170

(Registrant’s telephone number, including area code)

(Former name and former address, if changed since ~~the~~ last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, $0.001 par value		INLX		NYSE American

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ 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,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b- 2 of the Exchange Act.

Large accelerated filer	☐	(Do not check if a smaller reporting company)	Accelerated filer	☐
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 ☒

As of ~~May 11,~~November 10, 2023, there were 4,073,757 shares of the issuer’s common stock outstanding, each with a par value of $0.001 per share.

INTELLINETICS, INC.

Form 10-Q

~~March 31,~~September 30, 2023

TABLE OF CONTENTS

		Page No.
PART I

FINANCIAL INFORMATION		54

ITEM 1.	Financial Statements.	4

	Condensed Consolidated Balance Sheets as of September 30, 2023 (Unaudited) and December 31, 2022	4

	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2023 and 2022 (Unaudited)	5

	Condensed Consolidated ~~Balance Sheets as~~Statement of ~~March 31, 2023 (Unaudited) and December 31, 2022~~	5

	~~Condensed Consolidated Statements of Operations~~Stockholders’ Equity for the three and nine months ended ~~March 31,~~September 30, 2023 and 2022 (Unaudited)	6

	Condensed Consolidated ~~Statement~~Statements of ~~Stockholders’ Equity~~Cash Flows for the ~~three~~nine months ended ~~March 31,~~September 30, 2023 and 2022 (Unaudited)	7

	~~Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022 (Unaudited)~~	8

	Notes to Condensed Consolidated Financial Statements (Unaudited)	98

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	2421

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk.	31

ITEM 4.	Controls and Procedures.	31

PART II

OTHER INFORMATION		32

ITEM 1.	Legal Proceedings.	32

ITEM 1A.	Risk Factors.	32

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	32

ITEM 3.	Defaults Upon Senior Securities.	32

ITEM 4.	Mine Safety Disclosures.	32

ITEM 5.	Other Information.	32

ITEM 6.	Exhibits.	32

SIGNATURES		33

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q and the documents incorporated into this report by reference contain forward-looking statements. In addition, from time to time we may make additional forward-looking statements in presentations, at conferences, in press releases, in other reports and filings and otherwise. Forward-looking statements are all statements other than statements of historical facts, including statements that refer to plans, intentions, objectives, goals, targets, strategies, hopes, beliefs, projections, prospects, expectations or other characterizations of future events or performance, and assumptions underlying the foregoing. The words “may,” “could,” “should,” “would,” “will,” “project,” “intend,” “continue,” “believe,” “anticipate,” “estimate,” “forecast,” “expect,” “plan,” “potential,” “opportunity,” “scheduled,” “goal,” “target,” and “future,” variations of such words, and other comparable terminology and similar expressions and references to future periods are often, but not always, used to identify forward-looking statements. Examples of forward-looking statements include, among other things, statements about the following:

	●	the effects on our business, financial condition, and results of operations of current and future economic, business, market and regulatory conditions, including the current global inflation, economic downturn, and other economic and market conditions, and their effects on our customers and their capital spending and ability to finance purchases of our products, services, technologies and systems;

	●	our prospects, including our future business, revenues, recurring revenues, expenses, net income, earnings per share, margins, profitability, cash flow, cash position, liquidity, financial condition and results of operations, backlog of orders and revenue, our targeted growth rate, our goals for future revenues and earnings, and our expectations about realizing the revenues in our backlog and in our sales pipeline;

	●	our expectation that the shift from an offline to online world will continue to benefit our business;

	●	our ability to integrate our recent acquisitions and any future acquisitions, grow their businesses and obtain the expected financial and operational benefits from those businesses;

	●	the effects of fluctuations in sales on our business, revenues, expenses, net income, earnings per share, margins, profitability, cash flow, capital expenditures, liquidity, financial condition and results of operations;

	●	our products, services, technologies and systems, including their quality and performance in absolute terms and as compared to competitive alternatives, their benefits to our customers and their ability to meet our customers’ requirements, and our ability to successfully develop and market new products, services, technologies and systems;

	●	our markets, including our market position and our market share;

	●	our ability to successfully develop, operate, grow and diversify our operations and businesses;

	●	our business plans, strategies, goals and objectives, and our ability to successfully achieve them;

	●	the sufficiency of our capital resources, including our cash and cash equivalents, funds generated from operations, availability credit and financing arrangements and other capital resources, to meet our future working capital, capital expenditure, lease and debt service and business growth needs;

	●	the value of our assets and businesses, including the revenues, profits and cash flow they are capable of delivering in the future;

	●	the amount and timing of revenue recognition from customer contracts with commitments for performance obligations, including our estimate of the remaining amount of commitments and when we expect to recognize revenues;

	●	industry trends and customer preferences and the demand for our products, services, technologies and systems; and

	●	the nature and intensity of our competition, and our ability to successfully compete in our markets.

Any forward-looking statements we make are based on our current plans, intentions, objectives, strategies, projections and expectations, as well as assumptions made by and information currently available to management. Forward-looking statements are not guarantees of future performance or events, but are subject to and qualified by substantial risks, uncertainties and other factors, which are difficult to predict and are often beyond our control. Forward-looking statements will be affected by assumptions and expectations we might make that do not materialize or that prove to be incorrect and by known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those expressed, anticipated or implied by such forward-looking statements. These risks, uncertainties and other factors include, but are not limited to, those described in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed on March 27, 2023, as well as other risks, uncertainties and factors discussed elsewhere in this Quarterly Report, in documents that we include as exhibits to or incorporate by reference in this report, and in other reports and documents we from time to time file with or furnish to the Securities and Exchange Commission (the “SEC”). In light of these risks and uncertainties, you are cautioned not to place undue reliance on any forward-looking statements that we make.

Any forward-looking statements contained in this report speak only as of the date of this report, and any other forward-looking statements we make from time to time in the future speak only as of the date they are made. We undertake no duty or obligation to update or revise any forward-looking statement or to publicly disclose any update or revision for any reason, whether as a result of changes in our expectations or the underlying assumptions, the receipt of new information, the occurrence of future or unanticipated events, circumstances or conditions or otherwise.

As used in this Quarterly Report, unless the context indicates otherwise:

	●	the terms “Intellinetics,” “Company,” “the company” “us,” “we,” “our,” and similar terms refer to Intellinetics, Inc., a Nevada corporation, and its subsidiaries;
	●	“Intellinetics Ohio” refers to Intellinetics, Inc., an Ohio corporation and a wholly-owned subsidiary of Intellinetics; and
	●	“Graphic Sciences” refers to Graphic Sciences, Inc., a Michigan corporation and a wholly-owned subsidiary of Intellinetics.

PART I – FINANCIAL INFORMATION

~~ITEM~~Item 1. ~~FINANCIAL STATEMENTS~~Financial Statements

INTELLINETICS, INC. and SUBSIDIARIES

Condensed Consolidated Balance Sheets

	(unaudited)
	March 31,			December 31,			September 30, 2023			December 31, 2022
	2023			2022			(unaudited)
							September 30, 2023			December 31, 2022
ASSETS
Current assets:
Cash	$	1,419,138		$	2,696,481		$	1,689,125		$	2,696,481
Accounts receivable, net		1,182,523			1,121,083			1,324,225			1,121,083
Accounts receivable, unbilled		887,742			596,410			1,277,800			596,410
Parts and supplies, net		81,455			73,221			95,170			73,221
Contract assets		80,577			80,378			138,062			80,378
Prepaid expenses and other current assets		327,198			325,466			339,391			325,466
Total current assets		3,978,633			4,893,039			4,863,773			4,893,039

Property and equipment, net		1,029,127			1,068,706			961,504			1,068,706
Right of use assets, operating		3,070,782			3,200,191			2,716,512			3,200,191
Right of use asset, finance		147,574			154,282
Right of use assets, finance								233,711			154,282
Intangible assets, net		4,292,069			4,419,646			4,036,915			4,419,646
Goodwill		5,789,821			5,789,821			5,789,821			5,789,821
Other assets		491,464			417,457			624,184			417,457
Total assets	$	18,799,470		$	19,943,142		$	19,226,420		$	19,943,142

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	368,797		$	370,300		$	249,359		$	370,300
Accrued compensation		604,260			411,683			437,468			411,683
Accrued expenses		153,677			114,902			223,309			114,902
Lease liabilities, operating - current		708,573			692,074			713,638			692,074
Lease liability, finance - current		22,918			22,493
Lease liabilities, finance - current								48,802			22,493
Deferred revenues		2,182,276			2,754,064			3,132,125			2,754,064
Earnout liabilities - current		-			700,000			-			700,000
Notes payable - current		696,459			936,966			-			936,966
Total current liabilities		4,736,960			6,002,482			4,804,701			6,002,482

Long-term liabilities:
Notes payable - net of current portion		2,116,087			2,085,035			2,178,190			2,085,035
Notes payable - related party		536,964			529,084			552,723			529,084
Notes payable		536,964			529,084			552,723			529,084
Lease liabilities, operating - net of current portion		2,482,692			2,624,608			2,126,449			2,624,608
Lease liability, finance - net of current portion		127,240			133,131
Lease liabilities, finance - net of current portion								188,854			133,131
Total long-term liabilities		5,262,983			5,371,858			5,046,216			5,371,858
Total liabilities		9,999,943			11,374,340			9,850,917			11,374,340

Stockholders’ equity:
Common stock, $0.001 par value, 25,000,000 shares authorized; 4,073,757 shares issued and outstanding at March 31, 2023 and December 31, 2022		4,074			4,074
Common stock, $0.001 par value, 25,000,000 shares authorized; 4,073,757 shares issued and outstanding at September 30, 2023 and December 31, 2022								4,074			4,074
Additional paid-in capital		30,297,179			30,179,017			30,528,090			30,179,017
Accumulated deficit		(21,501,726	)		(21,614,289	)		(21,156,661	)		(21,614,289	)
Total stockholders’ equity		8,799,527			8,568,802			9,375,503			8,568,802
Total liabilities and stockholders’ equity	$	18,799,470		$	19,943,142		$	19,226,420		$	19,943,142

See Notes to these condensed consolidated financial statements

INTELLINETICS, INC. and SUBSIDIARIES

Condensed Consolidated Statements of Operations

(unaudited)

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2023 2022 2023 2022

Revenues:
Sale of software $ 9,422 $ 18,390 $ 88,361 $ 93,986
Software as a service 1,293,745 1,211,407 3,810,095 2,801,084
Software maintenance services 353,010 352,892 1,051,691 1,033,375
Professional services 2,333,090 2,007,613 6,930,695 5,221,326
Storage and retrieval services 259,162 269,325 812,850 829,011
Total revenues 4,248,429 3,859,627 12,693,692 9,978,782

Cost of revenues:
Sale of software 5,889 10,647 21,414 44,232
Software as a service 200,104 207,502 679,126 489,939
Software maintenance services 13,165 19,024 44,998 56,509
Professional services 1,338,526 1,028,074 3,832,983 2,794,783
Storage and retrieval services 85,154 88,195 273,308 266,279
Total cost of revenues 1,642,838 1,353,442 4,851,829 3,651,742

Gross profit 2,605,591 2,506,185 7,841,863 6,327,040

Operating expenses:
General and administrative 1,516,009 1,321,299 4,632,559 3,511,852
Change in fair value of earnout liabilities - 28,494 - 144,999
Transaction costs - - - 355,281
Sales and marketing 496,289 492,540 1,568,103 1,374,059
Depreciation and amortization 247,738 205,849 715,259 524,070

Total operating expenses 2,260,036 2,048,182 6,915,921 5,910,261

Income from operations 345,555 458,003 925,942 416,779

Interest expense (136,224 ) (240,467 ) (468,314 ) (593,536 )

Net income (loss) $ 209,331 $ 217,536 $ 457,628 $ (176,757 )

Basic net income (loss) per share: $ 0.05 $ 0.05 $ 0.11 $ (0.05 )
Diluted net income (loss) per share: $ 0.05 $ 0.05 $ 0.10 $ (0.05 )

Weighted average number of common shares outstanding - basic 4,073,757 4,073,757 4,073,757 3,664,024
Weighted average number of common shares outstanding - diluted 4,387,515 4,695,162 4,389,145 3,664,024

See Notes to these condensed consolidated financial statements

5

~~INTELLINETICS, INC. and SUBSIDIARIES~~
~~Condensed Consolidated Statements of Operations~~
~~(unaudited)~~
2023 2022
For the Three Months Ended March 31,
2023 2022

Revenues:
Sale of software $ 15,293 $ 64,491
Software as a service 1,238,432 431,221
Software maintenance services 349,542 336,602
Professional services 2,299,289 1,587,948
Storage and retrieval services 284,277 283,250
Total revenues 4,186,833 2,703,512

Cost of revenues:
Sale of software 8,181 26,193
Software as a service 220,640 91,249
Software maintenance services 16,716 18,300
Professional services 1,187,116 848,167
Storage and retrieval services 108,341 87,766
Total cost of revenues 1,540,994 1,071,675

Gross profit 2,645,839 1,631,837

Operating expenses:
General and administrative 1,554,611 935,691
Change in fair value of earnout liabilities - 64,204
Transaction costs - 70,051
Sales and marketing 579,511 352,114
Depreciation and amortization 227,718 117,302
Total operating expenses 2,361,840 1,539,362

Income from operations 283,999 92,475

Interest expense (171,436 ) (112,601 )

Net income (loss) $ 112,563 $ (20,126 )

Basic net income (loss) per share: $ 0.03 $ (0.01 )
Diluted net income per (loss) share: $ 0.03 $ (0.01 )

Weighted average number of common shares outstanding - basic 4,073,757 2,830,899
Weighted average number of common shares outstanding - diluted 4,695,106 2,830,899
~~See Notes to these condensed consolidated financial statements~~
6
INTELLINETICS, INC. and SUBSIDIARIES
Condensed Consolidated Statement of Stockholders’ Equity
For the Three and Nine Months Ended ~~March 31,~~September 30, 2023 and 2022
(unaudited)

Shares Amount Capital Deficit Total
Common Stock Additional Paid-in Accumulated
Shares Amount Capital Deficit Total

Balance, December 31, 2021 2,823,072 $ 2,823 $ 24,297,229 $ (21,638,316 ) $ 2,661,736

Stock Issued to Directors 8,097 8 57,492 - 57,500

Stock Option Compensation - - 22,960 - 22,960

Net Loss - - - (20,126 ) (20,126 )

Balance, March 31, 2022 2,831,169 $ 2,831 $ 24,377,681 $ (21,658,442 ) $ 2,722,070

Balance, December 31, 2022 4,073,757 $ 4,074 $ 30,179,017 $ (21,614,289 ) $ 8,568,802
Beginning balance 4,073,757 $ 4,074 $ 30,179,017 $ (21,614,289 ) $ 8,568,802

Stock Option Compensation - - 118,162 - 118,162

Net Income - - - 112,563 112,563
Net Income(loss) - - - 112,563 112,563

Balance, March 31, 2023 4,073,757 $ 4,074 $ 30,297,179 $ (21,501,726 ) $ 8,799,527
Ending balance 4,073,757 $ 4,074 $ 30,297,179 $ (21,501,726 ) $ 8,799,527
7

Common Stock Additional Paid-in Accumulated
Shares Amount Capital Deficit Total

Balance, June 30, 2022 4,073,757 $ 4,074 $ 29,941,019 $ (22,032,609 ) $ 7,912,484

Stock Option Compensation - - 118,999 - 118,999

Net Income - - - 217,536 217,536

Balance, September 30, 2022 4,073,757 $ 4,074 $ 30,060,018 $ (21,815,073 ) $ 8,249,019

Balance, June 30, 2023 4,073,757 $ 4,074 $ 30,412,634 $ (21,365,992 ) $ 9,050,716

Stock Option Compensation - - 115,456 - 115,456

Net Income - - - 209,331 209,331

Balance, September 30, 2023 4,073,757 $ 4,074 $ 30,528,090 $ (21,156,661 ) $ 9,375,503

~~INTELLINETICS, INC. and SUBSIDIARIES~~
~~Condensed Consolidated Statements of Cash Flows~~
~~(unaudited)~~
2023 2022
For the Three Months Ended March 31,
2023 2022

Cash flows from operating activities:
Net income (loss) $ 112,563 $ (20,126 )
Adjustments to reconcile net income (loss) to net cash used in / provided by operating activities:
Depreciation and amortization 227,718 117,302
Bad debt expense (recovery) 20,102 (2,097 )
Amortization of deferred financing costs 49,997 25,935
Amortization of debt discount 11,378 26,666
Amortization of right of use asset, financing 6,709 -
Stock issued for services - 57,500
Stock option compensation 118,162 22,960
Change in fair value of earnout liabilities - 64,204
Changes in operating assets and liabilities:
Accounts receivable (81,542 ) 279,757
Accounts receivable, unbilled (291,332 ) (29,204 )
Parts and supplies (8,234 ) 10,978
Prepaid expenses and other current assets (1,931 ) (63,583 )
Accounts payable and accrued expenses 229,849 85,739
Operating lease assets and liabilities, net 3,992 8,286
Deferred compensation - (20,166 )
Deferred revenues (571,788 ) (58,583 )
Total adjustments (286,920 ) 525,694
Net cash used in / provided by operating activities (174,357 ) 505,568

Cash flows from investing activities:
Capitalization of internal use software (112,208 ) (29,397 )
Purchases of property and equipment (22,361 ) (56,043 )
Net cash used in investing activities (134,569 ) (85,440 )

Cash flows from financing activities:
Payment of earnout liabilities (700,000 ) -
Principal payments on financing lease liability (5,467 ) -
Repayment of notes payable (262,950 ) -
Net cash used in financing activities (968,417 ) -

Net (decrease) increase in cash (1,277,343 ) 420,128
Cash - beginning of period 2,696,481 1,752,630
Cash - end of period $ 1,419,138 $ 2,172,758
$ 2,172,758
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 116,110 $ 60,000
Cash paid during the period for income taxes $ 2,499 $ 1,303
Common Stock Additional Paid-in Accumulated
Shares Amount Capital Deficit Total

Balance, December 31, 2021 2,823,072 $ 2,823 $ 24,297,229 $ (21,638,316 ) $ 2,661,736

Stock Issued to Directors 8,097 8 57,492 - 57,500

Stock Option Compensation - - 244,951 - 244,951

Stock Issued 1,242,588 1,243 5,739,515 - 5,740,758

Equity Issuance Costs - - (492,182 ) - (492,182 )

Note Offer Warrants - - 213,013 - 213,013

Net Loss - - - (176,757 ) (176,757 )

Balance, September 30, 2022 4,073,757 $ 4,074 $ 30,060,018 $ (21,815,073 ) $ 8,249,019

Balance, December 31, 2022 4,073,757 $ 4,074 $ 30,179,017 $ (21,614,289 ) $ 8,568,802

Stock Option Compensation - - 349,073 - 349,073

Net Income - - - 457,628 457,628
Net Income (Loss) - - - 457,628 457,628

Balance, September 30, 2023 4,073,757 $ 4,074 $ 30,528,090 $ (21,156,661 ) $ 9,375,503

See Notes to these condensed consolidated financial statements

86

INTELLINETICS, INC. and SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)

For the Nine Months Ended September 30,
2023 2022

Cash flows from operating activities:
Net income (loss) $ 457,628 $ (176,757 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 715,259 524,070
Bad debt expense 59,485 22,370
Amortization of deferred financing costs 138,234 155,667
Amortization of debt discount 22,044 79,999
Amortization of right of use assets, financing 28,181 -
Stock issued for services - 57,500
Stock option compensation 349,073 244,951
Change in fair value of earnout liabilities - 144,999
Changes in operating assets and liabilities:
Accounts receivable (262,627 ) 368,139
Accounts receivable, unbilled (681,390 ) (47,164 )
Parts and supplies (21,949 ) 2,151
Prepaid expenses and other current assets (71,609 ) (168,815 )
Accounts payable and accrued expenses 13,251 45,403
Operating lease assets and liabilities, net 4,673 21,415
Deferred compensation - (80,662 )
Deferred revenues 378,061 731,468
Total adjustments 670,686 2,101,491
Net cash provided by operating activities 1,128,314 1,924,734

Cash flows from investing activities:
Cash paid to acquire business, net - (6,383,269 )
Capitalization of internal use software (348,051 ) (315,148 )
Purchases of property and equipment (84,002 ) (142,903 )
Net cash used in investing activities (432,053 ) (6,841,320 )

Cash flows from financing activities:
Payment of earnout liabilities (700,000 ) (1,018,333 )
Proceeds from issuance of common stock - 5,740,758
Offering costs paid on issuance of common stock and notes - (746,342 )
Proceeds from notes payable - 2,364,500
Proceeds from notes payable - related parties - 600,000
Principal payments on financing lease liability (23,167 ) -
Repayment of notes payable (980,450 ) -
Net cash (used in) provided by financing activities (1,703,617 ) 6,940,583

Net (decrease) increase in cash (1,007,356 ) 2,023,997
Cash - beginning of period 2,696,481 1,752,630
Cash - end of period $ 1,689,125 $ 3,776,627

Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 329,855 $ 357,870
Cash paid during the period for income taxes $ 8,344 $ 11,050

Supplemental disclosure of non-cash financing activities:
Discount on notes payable for warrants $ - $ 169,900
Discount on notes payable - related parties for warrants - 43,113
Warrants issued and extended for common stock issuance costs - 412,500
Right-of-use asset obtained in exchange for finance lease liability 107,610 -

Supplemental disclosure of non-cash investing activities relating to business acquisitions:
Accounts receivable $ - $ 68,380
Prepaid expenses - 38,913
Property and equipment - 30,018
Intangible assets - 3,888,000
Goodwill - 3,466,934
Accounts payable - (36,446 )
Deferred revenues - (1,072,530 )
Net assets acquired in acquisition - 6,383,269
Cash used in business acquisition $ - $ 6,383,269
See Notes to these condensed consolidated financial statements
7
INTELLINETICS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

1. Business Organization and Nature of Operations

Intellinetics, Inc., formerly known as GlobalWise Investments, Inc., is a Nevada corporation incorporated in 1997, with two wholly-owned subsidiaries: Intellinetics, Inc., an Ohio corporation (“Intellinetics Ohio”), and Graphic Sciences, Inc., a Michigan corporation (“Graphic Sciences”). Intellinetics Ohio was incorporated in 1996, and on February 10, 2012, Intellinetics Ohio became our sole operating subsidiary as a result of a reverse merger and recapitalization. On March 2, 2020, we purchased all the outstanding capital stock of Graphic Sciences.

Our digital transformation products and services are provided through two reporting segments: Document Management and Document Conversion. Our Document Management segment, which includes the Yellow Folder, LLC (“Yellow Folder”) asset acquisition in April 2022 and the CEO Imaging Systems, Inc. (“CEO Image”) asset acquisition in April 2020, consists primarily of solutions involving our software platform, allowing customers to capture and manage their documents across operations such as scanned hard-copy documents and digital documents including those from Microsoft Office 365, digital images, audio, video and emails. Our 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 people who need them by making those documents easy to find and access, while also being secure and compliant with the 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 (“GAAP”).

The financial statements presented in this Quarterly Report on Form 10-Q are unaudited. However, in the opinion of management, these unaudited condensed consolidated financial statements include all adjustments, consisting solely of normal recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows for the periods presented in conformity with GAAP applicable to interim periods. The financial data and other financial information disclosed in these notes to the accompanying condensed consolidated financial statements are also unaudited. As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to applicable rules and regulations thereunder.

Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the full fiscal year ending December 31, 2023 or any other future period.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the SEC filed on March 27, 2023.

3. Summary of Significant Accounting Policies

Principles of Consolidation

The condensed consolidated financial statements accompanying these notes include the accounts of Intellinetics and the accounts of all its subsidiaries in which it holds a controlling interest. Under GAAP, consolidation is generally required for investments of more than ~~50%~~50% of the outstanding voting stock of an investee, except when control is not held by the majority owner. We have two subsidiaries: Intellinetics Ohio and Graphic Sciences. We consider the criteria established under Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 810, “Consolidations” in the consolidation process. All significant intercompany balances and transactions have been eliminated in consolidation.
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Concentrations of Credit Risk

We maintain our cash with high credit quality financial institutions. At times, our cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation insurance limit.
We do not generally require collateral or other security to support customer receivables; however, we may require customers to provide retainers, up-front deposits or irrevocable letters-of-credit when considered necessary to mitigate credit risks. ~~We have established an allowance for~~The Company recognizes current estimated credit losses (“CECL”) for accounts receivable and accounts receivable-unbilled. The CECL for trade receivables are estimated based ~~upon facts surrounding~~on the trade receivable aging category, credit risk of specific customers, past collection history, and management’s evaluation of accounts receivable. Provisions for CECL are classified within selling, general and administrative costs.
Upon the adoption of FASB ASU No. 2016-13 (CECL model) effective January 1, 2023, Intellinetics, Inc. has revised its methodology for estimating expected credit losses on financial instruments, specifically trade receivables. This new model requires the recognition of lifetime expected credit losses at each reporting date, considering past events, current conditions, and reasonable forecasts. In assessing the credit quality of our portfolio, management utilizes a provision matrix that classifies trade receivables by customer type and age of receivable. Government and education sector receivables carry a low risk, while a higher risk is attributed to the remaining receivables as their aging progresses. For receivables with questionable collectability, a specific reserve is assigned. The estimated credit losses are a reflection of these factors, with the matrix applying percentages to the receivables based on their risk profile, adjusted for current and expected future ~~collections.~~conditions.
During the reporting period, the estimate of credit losses may change due to several factors including payment patterns of customers, changes in customer creditworthiness, and broader economic conditions. Such changes are captured in the financial statements to ensure they accurately reflect the company’s assessment of credit risk and expected losses at the end of each reporting period. Credit losses have been within management’s expectations. At ~~March 31,~~September 30, 2023 and December 31, 2022, our allowance for credit losses was $~~107,341~~114,235 and $88,331, respectively.
~~Revenue Recognition~~

~~We categorize revenue as software, software as a service, software maintenance services, professional services, and storage and retrieval services. We earn~~Changes in 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 accordance with ASC 606 based on the facts and circumstances of each category of revenue. More detail regarding each category of revenue is contained in our Annual Report on Form 10-Kallowance for credit losses for the ~~fiscal year~~period ended ~~December 31, 2022 filed with the SEC filed on March 27, 2023.~~Sep 30, 2023 were as follows:
Schedule of Allowance for Credit Losses
Trade Receivables
As of December 31, 2022 $ (88,331 )
(Provisions) Reductions charged to operating results $ (20,649 )
Accounts write-offs $ 1,640
As of March 31, 2023 $ (107,340 )
(Provisions) Reductions charged to operating results $ (6,878 )
Accounts write-offs $ 0
As of June 30, 2023 $ (114,219 )
(Provisions) Reductions charged to operating results $ (31,957 )
Accounts write-offs $ 31,941
As of September 30, 2023 $ (114,235 )
Contract balances

The following ~~tables~~table present changes in our contract assets during the ~~three~~nine months ended ~~March 31,~~September 30, 2023 and 2022:
Schedule of Changes in Contract Assets

Balance at
Beginning of
Period
Billings
Payments
Received

Balance at
End of
Period
Addition
Three months ended March 31, 2023
Balance at from Balance at
Beginning acquisition Recognized End of
of Period (Note 4) Billings Revenue Period
Nine months ended September 30, 2023
Accounts receivable $ 1,121,083 $ 3,341,583 $ (3,280,144 ) $ 1,182,523 $ 1,121,083 $ - - - - $ 12,405,093 $ (12,201,951 ) $ 1,324,225

Three months ended March 31, 2022
Nine months ended September 30, 2022
Accounts receivable $ 1,176,059 $ 2,622,808 $ (2,900,468 ) $ 898,400 $ 1,176,059 $ 68,380 $
10,715,024
$ (11,105,533 ) $ 853,930

Balance at
Beginning of Period

Revenue
Recognized in
Advance of
Billings
Billings
Balance at
End of
Period
Balance at Beginning of Period Revenue Recognized in Advance of Billings Billings Balance at End of Period
Three months ended March 31, 2023
Nine months ended September 30, 2023
Accounts receivable, unbilled $ 596,410 $ 1,336,851 $ (1,045,519 ) $ 887,742 $ 596,410 $ 3,892,301 $ (3,210,911 ) $ 1,277,800

Three months ended March 31, 2022
Nine months ended September 30, 2022
Accounts receivable, unbilled $ 444,782 $ 700,869 $ (671,665 ) $ 473,986 $ 444,782 $ 2,573,944 $ (2,526,780 ) $ 491,946

Balance at
Beginning of
Period

Commissions
Paid

Commissions
Recognized

Balance at
End of
Period
Balance at Beginning
of Period Commissions Paid Commissions Recognized Balance at End of Period
Three months ended March 31, 2023
Nine months ended September 30, 2023
Other contract assets $ 80,378 $ 27,792 $ (27,593 ) $ 80,577 $ 80,378 $ 157,265 $ (99,581 ) $ 138,062

Three months ended March 31, 2022
Nine months ended September 30, 2022
Other contract assets $ 78,556 $ 22,136 $ (14,089 ) $ 86,603 $ 78,556 $ 102,321 $ (58,123 ) $ 122,754

Deferred revenue

Amounts that have been invoiced are recognized in accounts receivable, deferred revenue or revenue, depending on whether the revenue recognition criteria have been met. Deferred revenue represents amounts billed for which revenue has not yet been recognized. Deferred revenues typically relate to maintenance and software-as-a-service agreements which have been paid for by customers prior to the performance of those services, and payments received for professional services and license arrangements and software-as-a-service performance obligations that have been deferred until fulfilled under our revenue recognition policy.

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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 9799% of the remaining performance obligations over the next 12 months, with the remainder recognized thereafter. As of ~~March 31,~~September 30, 2023, 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 $~~54,899~~27,367. As of December 31, 2022, 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 $74,448. This does not include revenue related to performance obligations that are part of a contract whose original expected duration is one year or less.

The following table presents changes in our contract liabilities during the ~~three~~nine months ended ~~March 31,~~September 30, 2023 and 2022:
Schedule of Contract Liability
Addition
Balance at from Balance at
Beginning acquisition Recognized End of
of Period (Note 4) Billings Revenue Period
Nine months ended September 30, 2023
Contract liabilities: Deferred revenue $ 2,754,064 $ - $ 5,997,723 $ (5,619,662 ) $ 3,132,125

Nine months ended September 30, 2022
Contract liabilities: Deferred revenue $ 1,194,649 $ 860,456 $ 5,560,018 $ (4,616,476 ) $ 2,998,647

Balance at
Beginning
of Period Billings Recognized
Revenue Balance at
End of
Period
Three months ended March 31, 2023
Contract liabilities: deferred revenue $ 2,754,064 $ 1,146,380 $ (1,718,168 ) $ 2,182,276

Three months ended March 31, 2022
Contract liabilities: deferred revenue $ 1,194,649 $ 984,117 $ (1,042,700 ) $ 1,136,066
Leases
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We have made an accounting policy election to not record a right-of-use asset and lease liability for short-term leases, which are defined as leases with a lease term of 12 months or less. Instead, the lease payments are recognized as rent expense in the general and administrative expenses on the statement of operations.

Software Development Costs

We design, develop, test, market, license, and support new software products and enhancements of current products. We continuously monitor our software products and enhancements to remain compatible with standard platforms and file formats. In accordance with ASC 985-20 “Costs of Software to be Sold, Leased or Otherwise Marketed,” we expense software development costs, including costs to develop software products or the software component of products to be sold, leased, or marketed to external users, before technological feasibility is reached. Once technological feasibility has been established, certain software development costs incurred during the application development stage are eligible for capitalization. Based on our software development process, technical feasibility is established upon completion of a working model. Technological feasibility is typically reached shortly before the release of such products. No such costs were capitalized during the ~~periods presented~~nine-month period 2023. Such costs in ~~this report.~~the amounts of $0 and $43,771 were capitalized during the three and nine-month period 2022.

In accordance with ASC 350-40, “Internal-Use Software,” we capitalize purchase and implementation costs of internal use software. Once an application has reached development stage, internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing. We also capitalize costs related to specific upgrades and enhancements when it is probable that the expenditure will result in additional functionality. Such costs in the amount of $~~112,208~~139,633 and $~~29,397~~348,051 were capitalized during the ~~first quarter 2023~~three and ~~2022, respectively.~~nine months ended September 30, 2023. Such costs in the amount of $143,943 and $315,148 were capitalized during the three and nine months ended September 30, 2022.

Capitalized costs are stated at cost less accumulated amortization. Amortization is computed over the estimated useful lives of the related assets on a straight-line basis, which is three years. At ~~March 31,~~September 30, 2023 and December 31, 2022, our condensed consolidated balance sheets included $~~476,680~~609,399 and $402,673, respectively, in other long-term assets.

For the three and nine months ended ~~March 31,~~September 30, 2023 and 2022, our expensed software development costs were $~~131,743~~120,830 and $~~62,751~~392,576, respectively, and $42,852 and $157,811, respectively.

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Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13 “Credit Losses - Measurement of Credit Losses on Financial Instruments.” ASU No. 2016-13 significantly changes how entities measure credit losses for most financial assets, including accounts receivable and held-to-maturity marketable securities, by replacing today’s “incurred loss” approach with an “expected loss” model under which allowances will be recognized based on expected rather than incurred losses. ASU No. 2016-13 became effective for us in the first quarter of 2023. The adoption of ASU No. 2016-13 resulted in aan initial reduction in the allowance for doubtful accounts of $11,662, and the current calculation is reflected in the accompanying condensed consolidated financial statements.
Advertising

We expense the cost of advertising as incurred. Advertising expense for the three and nine months ended ~~March 31,~~September 30, 2023 and 2022 amounted to $~~6,120~~7,853 and $~~448~~20,096, respectively, and $10,371 and $19,871, respectively.

Earnings (Loss) Per Share

Basic income or loss per share is computed by dividing net income or loss by the weighted average number of shares of common stock outstanding during the period. Diluted income or loss per share is computed by dividing net income or loss by the diluted weighted average number of shares of common stock outstanding during the period. The diluted weighted average number of shares gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method. Diluted earnings per share exclude all diluted potential shares if their effect is anti-dilutive, including warrants or options which are out-of-the-money and for those periods with a net loss.

We have outstanding warrants and stock options which have not been included in the calculation of diluted net loss per share for the ~~three~~nine months ended ~~March 31, 2023 and~~September 30, 2022 because to do so would be anti-dilutive. For the first quarter 2023, certain options and warrants were in-the-money and others were not. The three months ended March 31, 2023 reported net income, while the three months ended March 31, 2022 reported a net loss. For the first quarter 2022,As such, the numerator and the denominator used in computing both basic and diluted net loss per share for that period are the same.

Income Taxes

We file a consolidated federal income tax return with our subsidiaries. The provision for income taxes is computed by applying statutory rates to income before taxes.

Deferred income taxes are recognized for the tax consequences in future years of temporary differences between the financial reporting and tax bases of assets and liabilities as of each period-end based on enacted tax laws and statutory rates. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. A ~~100~~%100% valuation allowance has been established on deferred tax assets at ~~March 31,~~September 30, 2023 and December 31, 2022, due to the uncertainty of our ability to realize future taxable income.

We account for uncertainty in income taxes in our financial statements as required under ASC 740, “Income Taxes.” The standard prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The standard also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition accounting. Management determined there were no material uncertain positions taken by us in our tax returns.

Segment Information

Operating segments are defined in the criteria established under ASC 280, “Segment Reporting,” as components of public entities that engage in business activities from which they may earn revenues and incur expenses for which separate financial information is available and which is evaluated regularly by our chief operating decision maker (“CODM”) in deciding how to assess performance and allocate resources. Our CODM assesses performance and allocates resources based on two operating segments: Document Management and Document Conversion. These segments contain individual business components that have been combined on the basis of common management, customers, solutions offered, service processes and other economic characteristics. We currently have immaterial intersegment sales. We evaluate the performance of our segments based on gross profits.

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The Document Management Segment provides cloud-based and premise-based content services software. Its modular suite of solutions complements existing operating and accounting systems to serve a mission-critical role for organizations to make content secure, compliant, and process-ready. This segment conducts its primary operations in the United States. Markets served include highly regulated, risk and compliance-intensive markets in healthcare, K-12 education, public safety, other public sector, risk management, financial services, and others. Solutions are sold both directly to end-users and through resellers.

The Document Conversion Segment provides services for scanning and indexing, converting images from paper to digital, paper to microfilm, and microfiche to microfilm, as well as long-term physical document storage and retrieval. This segment conducts its primary operations in the United States. Markets served include businesses and federal, county, and municipal governments. Solutions are sold both directly to end-users and through a reseller distributor.

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Information by operating segment is as follows:
Schedule of Segment Information
2023 2022 2023 2022
For the three months ended September 30, For the nine months ended September 30,

Three months
ended
March 31, 2023

Three months
ended
March 31, 2022
2023 2022 2023 2022
Revenues
Document Management $ 1,769,483 $ 914,950 $ 1,871,395 $ 1,693,128 $ 5,549,194 $ 4,180,931
Document Conversion 2,417,350 1,788,562 2,377,034 2,166,499 7,144,498 5,797,851
Total revenues $ 4,186,833 $ 2,703,512 $ 4,248,429 $ 3,859,627 $ 12,693,692 $ 9,978,782

Gross profit
Document Management $ 1,483,108 $ 734,906 $ 1,590,314 $ 1,427,696 $ 4,639,866 $ 3,488,947
Document Conversion 1,162,731 896,931 1,015,277 1,078,489 3,201,997 2,838,093
Total gross profit $ 2,645,839 $ 1,631,837 $ 2,605,591 $ 2,506,185 $ 7,841,863 $ 6,327,040

Capital additions, net
Document Management $ 116,041 $ 31,084 $ 140,952 $ 145,581 $ 353,202 $ 321,382
Document Conversion 18,528 54,356 - 43,069 78,851 136,669
Total capital additions, net $ 134,569 $ 85,440 $ 140,952 $ 188,650 $ 432,053 $ 458,051

March 31, 2023 December 31, 2022 September 30, 2023 December 31, 2022
Goodwill
Document Management $ 3,989,645 $ 3,989,645 $ 3,989,645 $ 3,989,645
Document Conversion 1,800,176 1,800,176 1,800,176 1,800,176
Total goodwill $ 5,789,821 $ 5,789,821 $ 5,789,821 $ 5,789,821

March 31, 2023 December 31, 2022 September 30, 2023 December 31, 2022
Total assets
Document Management $ 9,707,317 $ 10,284,143 $ 10,254,349 $ 10,284,183
Document Conversion 9,092,153 9,658,959 8,972,071 9,658,959
Total assets $ 18,799,470 $ 19,943,142 $ 19,226,420 $ 19,943,142

Statement of Cash Flows

For purposes of reporting cash flows, cash includes cash on hand and demand deposits held by banks.

12
Reclassifications

Certain amounts reported in prior filings of the condensed consolidated financial statements have been reclassified to conform to current presentation.
14
4. Business ~~Acquisitions~~Combinations

On April 1, 2022, we entered into an asset purchase agreement to acquire substantially all of the assets of Yellow Folder. The acquisition was accounted for in accordance with GAAP and was made to expand our market share in the digital transformation industry and due to synergies of product lines and services between the Companies.

The purchase price has been preliminarily allocated to assets acquired and liabilities assumed based on the estimated fair value of such assets and liabilities at the date of acquisitions as follows:
Schedule of Fair ~~Value~~value of Assets Acquired and Liabilities Assumed
Assets acquired:
Accounts receivable $ 68,380
Prepaid expenses 38,913
Property and equipment 30,018
Intangible assets (see Note 5) 3,888,000
Assets 4,025,311
Liabilities assumed:
Accounts payable 36,446
Deferred revenue 1,072,530
Liabilities 1,108,976

Total identifiable net assets 2,916,335

Purchase price 6,383,269

Goodwill - Excess of purchase price over fair value of net assets acquired $ 3,466,934

The purchase price of $6,383,269 was paid in cash. Goodwill in the amount of $3,466,934 was recognized in the acquisition of Yellow Folder and is attributable to the cash flows of the business derived from our potential to outperform the market due to its existing relationship and other synergies created within the Company.

The following unaudited pro forma information presents a summary of the condensed consolidated results of operations for the Company as if the acquisition of Yellow Folder had occurred on January 1, 2022.
Schedule of Pro Forma Information
September 30, 2023 September 30, 2022
For the three months ended
(unaudited) (unaudited)
September 30, 2023 September 30, 2022
Total revenues $ 4,248,429 $ 3,859,627

Net income $ 209,331 $ 217,536

Basic net income per share $ 0.05 $ 0.05
Diluted net income per share $ 0.05 $ 0.05

March 31, 2023 March 31, 2022
For the three months ended
(unaudited) (unaudited)
March 31, 2023 March 31, 2022
Total revenues $ 4,186,833 $ 3,481,413

Net income $ 112,563 $ 14,440

Basic net income per share $ 0.03 $ 0.00
Diluted net income per share $ 0.03 $ 0.00
September 30, 2023 September 30, 2022
For the nine months ended
(unaudited) (unaudited)
September 30, 2023 September 30, 2022
Total revenues $ 12,693,692 $ 10,756,634

Net (loss) income $ 457,628 $ (142,241 )

Basic net income (loss) per share $ 0.11 $ (0.03 )
Diluted net income (loss) per share $ 0.10 (0.03 )
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The unaudited pro forma condensed consolidated results are based on our historical financial statements and those of Yellow Folder and do not necessarily indicate the results of operations that would have resulted had the acquisition actually been completed at the beginning of the applicable period presented. The pro forma financial information assumes that the companies were combined as of January 1, 2022.
15
The following tables present the amounts of revenue and earnings of Yellow Folder since the acquisition date included in the condensed consolidated income statement for the reporting ~~period.~~periods.
For the For the
three months ended nine months ended
September 30, 2023 September 30, 2023
Yellow Folder:
Total revenues $ 968,870 $ 2,707,764
Net income $ 181,332 $ 452,443

For the three months ended
March 31, 2023
Yellow Folder:
Total revenues $ 874,562
Net income $ 185,702
For the
three months ended
September 30, 2022 For the
nine months ended
September 30, 2022
Yellow Folder:
Total revenues $ 829,856 $ 1,620,224
Net income $ 178,973 $ 375,531

5. Intangible Assets ~~Net~~

At ~~March 31,~~September 30, 2023, intangible assets consisted of the following:

Schedule of Intangible Assets
Estimated Accumulated Estimated Accumulated
Useful Life Costs Amortization Net Useful Life Costs Amortization Net
Trade names 10 years $ 297,000 $ (54,492 ) $ 242,508 10 years $ 297,000 $ (69,343 ) $ 227,657
Proprietary technology 10 years 861,000 (86,100 ) 774,900 10 years 861,000 (129,150 ) 731,850
Customer relationships 5-15 years 4,091,000 (816,339 ) 3,274,661 5-15 years 4,091,000 (1,013,592 ) 3,077,408
$ 5,249,000 $ (956,931 ) $ 4,292,069 $ 5,249,000 $ (1,212,085 ) $ 4,036,915

At December 31, 2022, intangible assets consisted of the following:

Estimated Accumulated
Useful Life Costs Amortization Net
Trade names 10 years $ 297,000 $ (47,067 ) $ 249,933
Proprietary technology 10 years 861,000 (64,575 ) 796,425
Customer relationships 5-15 years 4,091,000 (717,712 ) 3,373,288
$ 5,249,000 $ (829,354 ) $ 4,419,646

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Amortization expense for the three and nine months ended ~~March 31,~~September 30, 2023 and September 30, 2022, amounted to $127,577 and $~~54,119~~382,731, respectively, and $127,577 and $309,273, 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 March 31, Amount
For the Twelve Months Ending September 30, Amount
2024 $ 510,308 $ 510,308
2025 510,308 499,391
2026 473,125 391,941
2027 326,108 326,108
2028 324,410 314,223
Thereafter 2,147,810 1,994,944
Intangible assets $ 4,292,069 $ 4,036,915

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6. Fair Value Measurements

We paid our final earnout liability in January 2023 and as of ~~March 31,~~September 30, 2023, we have no earnout liabilities remaining. As of December 31, 2022 we had earnout liabilities related to one of our two 2020 acquisitions which were measured on a recurring basis and recorded at fair value, measured using probability-weighted analysis and discounted using a rate that appropriately captures the risks associated with the obligation. The inputs used to calculate the fair value of the earnout liabilities were considered to be Level 3 inputs due to the lack of relevant market activity and significant management judgment. Key unobservable inputs included revenue growth rates, which ranged from 0% to 7%, and volatility rates, which were 20% for gross profits.

The following table provides a summary of the changes in fair value of the earnout liabilities for the ~~three~~nine months ended ~~March 31,~~September 30, 2023 and 2022:

Summary of Changes in Fair ~~Value~~value of Earnout Liabilities
March 31, 2023 Nine months ended September 30, 2023
Fair value at December 31, 2022 $ 700,000 $ 700,000
Fair value, beginning balance $ 700,000
Fair value. beginning balance $ 700,000
Payments (700,000 ) (700,000 )
Change in fair value -
Fair value at March 31, 2023 $ -
Fair value, ending balance $ -
Fair value at September 30, 2023 $ -
Fair value , ending balance $ -

Nine months ended
March 31, 2022 September 30, 2022
Fair value at December 31, 2021 $ 1,630,681 $ 1,630,681
Fair value, beginning balance $ 1,630,681 $ 1,630,681
Payment (1,018,333 )
Change in fair value 64,204 144,999
Fair value at March 31, 2022 $ 1,694,885
Fair value, ending balance $ 1,694,885
Fair value at September 30, 2022 $ 757,347
Fair value , ending balance $ 757,347

The fair values of earnout liabilities amounts owed were recorded in current liabilities in our condensed consolidated balance sheet as of December 31, 2022. Changes in fair value are recorded in change in fair value of earnout liabilities in our condensed consolidated statements of operations.

7. Property and Equipment

Property and equipment are comprised of the following:

Schedule of Property and Equipment
March 31, 2023 December 31, 2022 September 30, 2023 December 31, 2022
Computer hardware and purchased software $ 1,601,116 $ 1,578,756 $ 1,662,756 $ 1,595,652
Leasehold improvements 395,919 395,918 395,919 395,918
Furniture and fixtures 71,325 71,325 71,325 71,325
Property and equipment, gross 2,068,360 2,062,895 2,130,000 2,062,895
Less: accumulated depreciation (1,039,233 ) (977,293 ) (1,168,496 ) (994,189 )
Property and equipment, net $ 1,029,127 $ 1,068,706 $ 961,504 $ 1,068,706

Total depreciation expense on our property and equipment for the three and nine months ended ~~March 31,~~September 30, 2023 and 2022 amounted to $~~61,939~~64,590 and $~~59,991~~191,204, respectively, and $66,286 and $193,977, respectively.
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8. Notes Payable – Unrelated Parties

Summary of Notes Payable to Unrelated Parties

The ~~table~~tables below ~~summarizes~~summarize all notes payable at ~~March 31,~~September 30, 2023 and December 31, 2022, respectively, with the exception of related party notes disclosed in Note 9 “Notes Payable - Related Parties.”

Schedule of Notes Payable
March 31, 2023 December 31, 2022 September 30, 2023 December 31, 2022
2022 Unrelated Notes $ 2,364,500 $ 2,364,500 $ 2,364,500 $ 2,364,500
2020 Notes 717,500 980,450 - 980,450
Total notes payable $ 3,082,000 $ 3,344,950 $ 2,364,500 $ 3,344,950
Less unamortized debt issuance costs (258,787 ) (300,904 ) (186,310 ) (300,904 )
Less unamortized debt discount (10,667 ) (22,045 ) - (22,045 )
Less current portion, net (696,459 ) (936,966 )
Less current portion - (936,966 )
Long-term portion of notes payable $ 2,116,087 $ 2,085,035 $ 2,178,190 $ 2,085,035
Subordinated Notes Payable Issue Date Interest Rate Interest Due Principal Due
2022 Unrelated Notes April 1, 2022 12 % Quarterly March 30, 2025

Future minimum principal payments of the Notes Payable to Unrelated Parties are as follows:

Schedule of Future Minimum Principal Payments of Notes ~~Payable~~payable
As of March 31, Amount
2024 $ 717,500
As of September 30, Amount
2025 2,364,500 $ 2,364,500
Total $ 3,082,000 $ 2,364,500

As of ~~March 31,~~September 30, 2023 and December 31, 2022, accrued interest for these notes payable with the exception of the related party notes in Note 9, “Notes Payable - Related Parties,” was $0. As of ~~March 31,~~September 30, 2023 and December 31, 2022, unamortized ~~debt issuance~~deferred financing costs and unamortized debt discount were reflected within short and long term liabilities on the condensed consolidated balance sheets, netted with the corresponding notes payable balance.
15

With respect to all notes outstanding (other than the notes to related parties), interest expense, including the amortization of debt issuance costs and debt discount, for the three and nine months ended ~~March 31,~~September 30, 2023 and 2022 was $~~151,605~~124,753 and $~~112,601~~412,494, respectively, and $214,587 and $541,777, respectively.

~~2022 Unrelated Notes~~
~~On April 1, 2022, we sold $2,364,500~~ ~~in 12% Subordinated Notes (“2022 Unrelated Notes”) to unrelated accredited investors~~. ~~The entire outstanding principal and unpaid interest of the 2022 Notes are due and payable on~~ ~~March 30, 2025. Interest on the 2022 Unrelated Notes accrues at the rate of~~ 12~~% per annum, payable quarterly in cash, beginning on September 30, 2022. 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 acquisition of Yellow Folder and the remaining net proceeds for working capital and general corporate purposes.
~~2020 Notes~~
~~On March 2, 2020, we sold~~ ~~2,000~~ ~~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~~ 40 ~~shares of our common stock, for aggregate gross proceeds of $2,000,000~~. ~~The entire outstanding principal and unpaid interest of the 2020 Notes were initially due and payable on~~ ~~February 28, 2023. On December 1, 2022, we paid the note holders an amount totaling $1,019,550~~ ~~as a prepayment of principal. On February 28, 2023, we paid the note holders an amount totaling $262,950~~ ~~as a payment of principal. In December 2022, a majority of the note holders signed an amendment to extend the maturity date for $717,500~~ ~~of the remaining 2020 Notes to August 31, 2023. Interest on the 2020 Notes accrues at the rate of~~ 12~~% per annum, payable quarterly in cash, beginning on June 30, 2021. 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~~ 80,000 shares issued in conjunction with the ~~units.~~2020 Notes. The amortization of the debt discount, which will be recognized over the life of the 2020 Notes as interest expense, for the three and nine months ended September 30, 2023 and 2022 was $~~11,378~~4,267 and $~~26,666~~22,044, ~~respectively, for the three months ended March 31, 2023~~ and ~~2022.~~$26,667 and $79,999, respectively.
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9. Notes Payable - Related Parties

Summary of Notes Payable to Related Parties

The ~~table~~tables below ~~summarizes~~summarize all notes payable to related parties at ~~March 31,~~September 30, 2023 and December 31, 2022:

Schedule of Notes Payable
March 31, 2023 December 31, 2022 September 30, 2023 December 31, 2022
Notes payable – “2022 Related Note” $ 600,000 $ 600,000 $ 600,000 $ 600,000
Notes payable $ 600,000 $ 600,000

Less unamortized debt issuance costs (63,036 ) (70,916 ) (47,277 ) (70,916 )
Long-term portion of notes payable $ 536,964 $ 529,084 $ 552,723 $ 529,084
Subordinated Notes Payable Issue Date Interest Rate Interest Due Principal Due
2022 Related Note April 1, 2022 12 % Quarterly March 30, 2025

Future minimum principal payments of the 2022 Notes to related parties are as follows:

Schedule of Future Minimum Principal Payments of Notes Payable
As of March 31, Amount
As of September 30, Amount
2025 $ 600,000 $ 600,000
Total $ 600,000 $ 600,000

As of ~~March 31,~~September 30, 2023 and December 31, 2022, accrued interest for these notes payable – related parties ~~were~~was $0. As of ~~March 31,~~September 30, 2023 and December 31, 2022, unamortized deferred financing costs and unamortized debt discount were reflected within long term liabilities on the condensed consolidated balance ~~sheets, netted with the corresponding notes payable balance.~~sheets.

With respect to all notes payable – related parties outstanding, interest expense, including the amortization of debt issuance costs, for the three and nine months ended ~~March 31,~~September 30, 2023 and 2022 ~~and~~ was $25,879 and $077,638, and $25,880 and $51,759, respectively.
~~2022 Related Note~~
~~On April 1, 2022, we issued a 12% Subordinated Note with a principal amount of $600,000~~ (the “2022 Related Note”) to Robert Taglich (holding more than 5% beneficial interest in the Company’s Shares). The entire outstanding principal and unpaid interest of the 2022 Related Note is due and payable on March 30, 2025. Interest on the 2022 Related Note accrues at the rate of 12~~% per annum, payable quarterly in cash, beginning on September 30, 2022. 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 acquisition of Yellow Folder and the remaining net proceeds for working capital and general corporate purposes.

10. Deferred Compensation

Pursuant to an employment agreement, we had accrued incentive cash compensation for one of our founders which was fully paid as of December 31, 2022. During the three and nine months ended ~~March 31,~~September 30, 2022, we paid $~~20,166~~30,248 and $80,662, respectively, in deferred incentive compensation, which amount was reflected as a reduction in our deferred compensation liability.

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11. Commitments and Contingencies

From time to time we are involved in legal proceedings, claims and litigation related to employee claims, contractual disputes and taxes in the ordinary course of business. Although we cannot predict the outcome of such matters, currently we have no reason to believe the disposition of any current matter could reasonably be expected to have a material adverse impact on our financial position, results of operations or the ability to carry on any of our business activities.
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Operating Leases

~~On January 1, 2010, we entered into an agreement to lease~~ ~~6,000~~ rentable square feet of office space in Columbus, Ohio, used for our corporate headquarters, Document Conversion operations, and a small portion of our Document Management operations. The lease commenced on ~~January 1, 2010~~ ~~and, pursuant to a lease extension dated~~ ~~September 18, 2021, the lease expires on December 31, 2028. The monthly rental payment is $5,100, with gradually higher annual increases each January up to $5,850~~ ~~for the final year.~~
~~We lease~~ ~~36,000~~ ~~square feet of space in Madison Heights, Michigan as the main facility for our Document Conversion operations.~~ ~~20,000~~ ~~square feet is used for records storage services, with the remainder of the space used for production, sales, and administration. The monthly rental payment is $43,185, 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~~.
~~We also lease a separate~~ ~~37,000~~ ~~square foot building in Sterling Heights, Michigan for our Document Conversion operations, with most of the space used for document storage, except approximately~~ ~~5,000~~ ~~square feet, which is used for production. The monthly rental payment is $21,072, with gradually higher annual increases each May up to $24,171~~ ~~for the final year, and with a lease term continuing to~~ ~~April 30, 2028~~.
~~We lease office space in Traverse City, Michigan for Document Conversion production. The monthly rental payment is $4,500, with a lease term continuing until~~ ~~January 31, 2024~~.
We also lease and use vehicles for logistics pertaining to our Document Conversion segment, primarily pickup and delivery of client materials, including storage and retrieval operations. The monthly rental payments for these vehicles total $~~5,429, with lease terms continuing until~~ ~~September 30, 2028~~.
~~We also lease and use an additional temporary office space in Madison Heights for our Document Conversion operations, 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.
For each of the ~~above~~below listed leases, management has determined it will utilize the base rental period and have not considered any renewal periods.
Schedule of Operating Lease
Location Square Feet Monthly Rent Lease Expiry
Columbus, OH 6,000 $ 5,100 December 31, 2028
Madison Heights, MI 36,000 $ 43,185 August 31, 2026
Sterling Heights, MI 37,000 $ 21,072 April 30, 2028
Traverse City, MI 5,200 $ 4,500 January 31, 2024

Temporary space
Madison Heights, MI 3,200 $ 1,605 month to month

Vehicles
various n/a $ 2,708 September 30, 2028

The following table sets forth the future minimum lease payments under our leases:

Schedule of Future Rental ~~Payments~~Payment for Operating ~~Leases~~Lease
For the twelve months ending March 31, Finance Lease Operating Leases
For the twelve months ending September 30, Finance Leases Operating Leases
2024 $ 33,195 $ 944,783 $ 67,358 $ 916,353
2025 33,195 890,685 67,358 892,047
2026 33,195 899,991 63,306 855,585
2027 33,195 578,184 49,500 353,662
2028 33,195 358,282 37,228 238,947
Thereafter 16,598 76,821 - 17,550
$ 182,573 $ 3,748,746
Less Imputed Interest (47,094 ) (429,243 )
Less Short-term lease payments - (4,814 )
Total $ 237,656 $ 2,840,087
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The following table summarizes the components of lease expense:

Summary of Components of Lease Expense
For the three months ending March 31, 2023 2022
For the three months ending September 30, 2023 2022
Finance lease expense:
Amortization of ROU asset $ 6,709 $ - $ 13,221 $ -
Interest on lease liabilities 2,832 - 5,036 -
Operating lease expense 237,449 238,487 238,864 243,301
Short-term lease expense 4,814 4,814 4,814 4,814
For the nine months ending September 30, 2023 2022
Finance lease expense:
Amortization of ROU asset $ 28,181 $ -
Interest on lease liabilities 11,462 -
Operating lease expense 715,176 729,902
Short-term lease expense 14,441 14,441

The following tables set forth additional information pertaining to our leases:

Schedule of Additional Information Pertaining to Leases
For the three months ending March 31, 2023 2022
Cash paid for amounts included in the measurement of lease liabilities:
Financing cash flows from finance lease (interest) $ 2,832 $ -
Financing cash flows from finance lease (principal) 5,467 -
Operating cash flows from operating leases 170,759 151,032
Weighted average remaining lease term – finance lease 5.5 years -
Weighted average remaining lease term – operating leases 4.2 years 5.1 years
Discount rate – finance lease 7.50 % -
Weighted average discount rate – operating leases 6.97 % 7.01 %
For the nine months ending September 30, 2023 2022
Cash paid for amounts included in the measurement of lease liabilities:
Financing cash flows from finance leases (interest) $ 11,462 $ -
Financing cash flows from finance leases (principal) 23,167 -
Operating cash flows from operating leases 531,567 318,030
Weighted average remaining lease term – finance leases 4.4 years -
Weighted average remaining lease term – operating leases 3.8 years 4.7 years
Weighted average discount rate – finance leases 8.88 % -
Weighted average discount rate – operating leases 6.93 % 6.99 %
Schedule of Operating and Finance Leases

March 31, 2023

December 31, 2022
September 30, 2023 December 31, 2022
Operating leases:
Right-of-use assets, operating $ 3,070,782 $ 3,200,191 $ 2,716,512 $ 3,200,191
Lease liabilities, operating – current 708,573 692,074 713,638 692,074
Lease liabilities, operating – net of current 2,482,692 2,624,608 2,126,449 2,624,608
Total operating lease liabilities $ 3,191,265 $ 3,316,682 $ 2,840,087 $ 3,316,682

Finance leases:
Right-of-use asset, finance $ 160,990 $ 160,990 $ 261,892 $ 160,990
Accumulated amortization (13,416 ) (6,708 ) (28,181 ) (6,708 )
Right-of-use asset, finance, net
$
147,574 $ 154,282 $ 233,711 $ 154,282

Lease liability, finance – current
$
22,918 $ 22,493
Lease liability, finance – net of current 127,240 133,131
Lease liabilities, finance – current $ 48,802 $ 22,493
Lease liabilities, finance – net of current 188,854 133,131
Total finance lease liability $ 150,158 $ 155,624 $ 237,656 $ 155,624
2018

12. Stockholders’ Equity

Common Stock

As of ~~March 31,~~September 30, 2023, 4,073,757 shares of common stock were issued and outstanding, 255,958 shares of common stock were reserved for issuance upon the exercise of outstanding warrants, and 497,330 shares of common stock were reserved for issuance under our 2015 Equity Incentive Plan, as amended (the “2015 Plan”).

~~Private Placement~~The following table describes the shares and warrants issued as part of our 2022 and 2020 private placements:

~~On April 1, 2022, we entered into a Securities Purchase Agreement with certain accredited investors, pursuant to which we issued~~Schedule of Shares and ~~sold (i)~~ ~~1,242,588shares of the Company’s Common Stock, at a price of $4.62~~ ~~per share, for aggregate gross proceeds of $5,740,756~~Warrants Issued ~~and (ii)~~ $~~2,964,500~~ ~~in 12% Subordinated Notes, for aggregate gross proceeds of $8,705,256~~ ~~for the combined private placement~~. We used a portion of the net proceeds of the offering to finance the acquisition of Yellow Folder, and used the remaining net proceeds for working capital and general corporate purposes, including debt reduction.
Issuance of Common Stock Issue Date Shares Issued Price per share Warrants Issued Warrant Exercise Price Warrant Fair Value
Private Placement 2022 April 1, 2022 1,242,588 $ 4.62 124,258 $ 4.62 $ 3.91
Private Placement 2020 March 2, 2020 955,000 $ 4.00 95,500 $ 4.00 $ 3.90

~~We retained Taglich Brothers, Inc. as the exclusive placement agent for the private placement. In compensation, we paid the placement agent a cash payment of~~ 8% of the gross proceeds of the offering, along with warrants to purchase shares of Company common stock, an extension of its existing warrants, and reimbursement for the placement agent’s reasonable out of pocket expenses, FINRA filing fees and related legal fees. On April 1, 2022, the Company paid the placement agent cash in the amount of $~~696,420~~ ~~and issued the placement agent warrants to purchase~~ ~~124,258~~ ~~shares at an exercise price at $4.62~~ per share, which are exercisable 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. In addition, we agreed to extend the expiration date of all currently outstanding warrants previously issued to the placement agent and/or its assignees to March 30, 2027. Debt issuance costs of $~~165,406~~ ~~were recorded for the issuance of the April 1, 2022 warrants, utilizing the Black-Scholes valuation model. The fair value of warrants issued was determined to be $3.91. Debt issuance costs of $47,607~~ were recorded for the extension of the exercise period for existing unexpired warrants to March 30, 2027, utilizing the Black-Scholes valuation model. The fair value of warrants affected was determined to be from $~~3.30~~ ~~to $3.97. Underwriting paid-in-capital charges of $492,181~~ ~~and debt issuance costs of $254,160~~ ~~was recorded for the placement agent cash fee and other related legal fees.~~ Amortization of the debt issuance costs for ~~this private placement~~the Private Placement 2020 offering was recorded at $~~38,931, for the three months ended March 31, 2023.~~
~~Private Placement 2020~~
~~On March 2, 2020, we sold~~ ~~955,000~~ ~~shares of our common stock and certain subordinated notes in a private placement to accredited investors as follows:~~
● ~~875,000~~ ~~shares of our common stock at a purchase price of $4.00~~ ~~per share, for aggregate gross proceeds of $3,500,000, and~~
● ~~2,000~~ ~~units at a purchase price of $1,000~~ ~~per unit, with each unit consisting of $1,000~~ ~~in 12% Subordinated Notes and~~ 40 ~~shares of our common stock, for aggregate gross proceeds of $2,000,000~~.
~~In connection with the private placement offering, we paid the placement agent $440,000~~ ~~in cash, equal to~~ 8~~% of the gross proceeds of the offering, along with~~ ~~95,500~~ warrants to purchase shares of our common stock and reimbursement for the placement agent’s reasonable out of pocket expenses, FINRA filing fees and related legal fees. The warrants are exercisable at an exercise price at $~~4.00~~ ~~per share 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. Underwriting expense of $236,761~~ ~~and debt issuance costs of $135,291~~ ~~were recorded for the issuance of the March 2, 2020 warrants, utilizing the Black-Scholes valuation model. The fair value of warrants issued was determined to be $3.90. Underwriting expense of $307,867~~ ~~and debt issuance costs of $175,924~~ ~~was recorded for the placement agent cash fee and other related legal fees. Amortization of the debt issuance costs for this private placement offering was recorded at $11,065~~4,150 and $~~25,935~~21,439 for the three and nine months ended ~~March 31,~~September 30, 2023, and at $25,935 and $77,804 for the three and nine months ended September 30, 2022.
Warrants

The following sets forth the warrants to purchase our common stock that were outstanding as of ~~March 31,~~September 30, 2023:
Schedule of Warrants to Purchase Common Stock
● ~~Warrants to purchase~~ ~~3,000~~ ~~shares of common stock at an exercise price of $15.00~~ ~~per share exercisable until~~ ~~March 30, 2027, 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~~ ~~March 30, 2027, issued to the placement agent in connection with private placements of our convertible promissory notes.~~
● ~~Warrants to purchase~~ ~~16,000~~ ~~shares of common stock at an exercise price of $9.00~~ ~~per share exercisable until~~ ~~March 30, 2027, 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 30, 2027, issued to the placement agent in connection with private placements of our promissory notes.~~
● ~~Warrants to purchase~~ ~~124,258~~ ~~shares of common stock at an exercise price of $4.62~~ ~~per share exercisable until~~ ~~March 30, 2027, issued to the placement agent in connection with private placements of our promissory notes.~~
Warrants Outstanding Warrant
Exercise Price Warranty Expiry
124,258 $ 4.62 March 30, 2027
95,500 $ 4.00 March 30, 2027
16,000 $ 9.00 March 30, 2027
17,200 $ 12.50 March 30, 2027
3,000 $ 15.00 March 30, 2027

NoThe estimated value of the warrants ~~were~~ issued during the ~~three~~nine months ended ~~March 31, 2023 or 2022.~~September 30, 2022, as well as the assumptions that were used in calculating such values, were based on estimates at the issuance date in the table below.
Schedule of Estimated Values of Warrants Valuation Assumptions
21 Warrants Issued
April 1, 2022
Risk-free interest rate 2.55 %
Weighted average expected term 5 years
Expected volatility 116.32 %
Expected dividend yield 0.00 %

13. Stock-Based Compensation

From time to time, we issue stock options and restricted stock as compensation for services rendered by our directors and employees.

Restricted Stock

On January 6, 2022, we issued 8,097 shares of restricted common stock to our directors as part of their annual compensation plan. The grants of restricted common stock were made outside the 2015 Plan and were not subject to vesting. Stock compensation of $57,500 was recorded on the issuance of the common stock for the ~~three~~nine months ended ~~March 31,~~September 30, 2022.

Stock Options

We did not make any stock option grants during the ~~three~~nine months ended ~~March 31, 2023 or 2022.~~September 30, 2023. On April 14, 2022, we granted employees stock options to purchase 220,587 shares at an exercise price of $6.08 per share in accordance with the 2015 Plan, with vesting continuing until 2025. The total fair value of $1,152,470 for these stock options is being recognized over the requisite service period.
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The weighted-average grant date fair value of options granted during the three and nine months ended September 30, 2022 was $5.22. The weighted average assumptions that were used in calculating such values during the nine months ended September 30, 2022, as well as the assumptions that were used in calculating such values, were based on estimates at the grant date in the table as follows:
Schedule of Estimated Values of Stock Option Grants Valuation Assumptions
Grant Date
April 1, 2022
Risk-free interest rate 2.82 %
Weighted average expected term 6 years
Expected volatility 116.60 %
Expected dividend yield 0.00 %

A summary of stock option activity during the ~~three~~nine months ended ~~March 31,~~September 30, 2023 and 2022 is as follows:
Schedule of Stock Option Activity
Weighted-
Weighted- Average
Shares Average Remaining Aggregate
Under Exercise Contractual Intrinsic
Option Price Life Value
Outstanding at January 1, 2023 365,447 $ 5.89 8 years $ 19,200
Forfeited (5,000 ) 4.00
Outstanding at March 31, 2023 360,447 $ 5.92 8 years $ 19,200

Exercisable at March 31, 2023 92,860 $ 6.50 7 years $ 19,200
Weighted-
Weighted- Average
Average Remaining Aggregate
Shares Exercise Contractual Intrinsic
Under Option Price Life Value
Outstanding at January 1, 2023 365,447 $ 5.89 8 years $ 19,200
Granted 220,587 6.08
Forfeited (7,560 ) 15.34 (19,200 )
Outstanding at September 30, 2023 357,887 $ 5.69 8 years $ -

Exercisable at September 30, 2023 186,594 $ 5.60 7 years $ -

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Weighted-
Weighted- Average
Shares Average Remaining Aggregate
Under Exercise Contractual Intrinsic
Option Price Life Value
Outstanding at January 1, 2022 144,860 $ 5.61 8 years $ 19,200

Outstanding at March 31, 2022 144,860 $ 5.61 8 years $ 19,200

Exercisable at March 31, 2022 68,335 $ 7.32 7 years $ 19,200
Weighted-
Weighted- Average
Average Remaining Aggregate
Shares Exercise Contractual Intrinsic
Under Option Price Life Value
Outstanding at January 1, 2022 144,860 $ 5.61 8 years $ 19,200
Granted 220,587 6.08
Outstanding at September 30, 2022 365,447 $ 5.89 9 years $ 19,200

Exercisable at September 30, 2022 93,085 $ 6.44 7 years $ 19,200

During the three and nine months ended ~~March 31,~~September 30, 2023 and 2022, stock-based compensation for options was $~~118,162~~115,456 and $~~22,960~~349,073, respectively, and $118,999 and $244,951, respectively.

As of ~~March 31,~~September 30, 2023 and December 31, 2022, there ~~was~~were $~~897,697~~663,437 and $1,019,140, 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 ~~three~~nine months ended ~~March 31,~~September 30, 2023 and 2022 was $467,771 and $~~10,238~~91,913., respectively.

14. Concentrations

Revenues from a limited number of customers have accounted for a substantial percentage of our total revenues. During the three months ended ~~March~~ September 30, 2023 and 2022, our largest customer, the State of Michigan, accounted for 31% and 37%, respectively, of our total revenues. For the three months ended September 30, 2023 our second largest customer, Lansing Schools, accounted for 5% of our total revenues. During the nine months ended September 30, 2023 and 2022, our largest customer, the State of Michigan, accounted for 34% and 4037%, respectively, of our total revenues, ~~for each period,~~ and our second largest customer, Rocket Mortgage, accounted for 105% and 7%, respectively, of our total ~~revenues for each period.~~revenues.

For the three months ended ~~March 31,~~September 30, 2023 and 2022, government contracts, including K-12 education, represented approximately 7282% and 6678% respectively, of our net ~~revenues, respectively.~~revenues. For the nine months ended September 30, 2023 and 2022, government contracts, including K-12 education, represented approximately 79% and 77%, respectively, of our net revenues. A significant portion of our sales to resellers represent ultimate sales to government agencies.

As of ~~March 31,~~September 30, 2023, accounts receivable concentrations from our two largest customers were 4329% and 64% of our gross accounts receivable, respectively by customer. Accounts receivable balances from our two largest customers at September 30, 2023 have been partially collected. As of December 31, 2022, accounts receivable concentrations from our two largest customers were 44% and 7% of gross accounts receivable, respectively by customer. ~~Accounts receivable balances from our two largest customers at March 31, 2023 have been partially collected.~~
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ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial conditions and results of operations should be read together with our condensed consolidated financial statements and notes thereto included in Part I, Item 1, “Financial Statements,” of this Quarterly Report on Form 10-Q, and with the condensed consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. Historical results and percentage relationships among any amounts in the financial statements are not necessarily indicative of trends in operating results for any future periods. Any forward-looking statements in this discussion and analysis should be read in conjunction with the information set forth in “Note Regarding Forward-Looking Statements” elsewhere herein. In this Quarterly Report, we sometimes refer to the three ~~month period~~and nine-month periods ended ~~March 31,~~September 30, 2023 as the ~~first~~third quarter 2023 and the nine-month period 2023 respectively, and to the three ~~month period~~and nine-month periods ended ~~March 31,~~September 30, 2022 as the ~~first~~third quarter 2022 and the nine-month period 2022.

Company Overview

We are a document services and software solutions company serving both the small-to-medium business and governmental sectors with their digital transformation and process automation initiatives. On April 1, 2022, we made a significant business acquisition that has significantly impacted our financial operations and grown our business operations. For further information about this acquisition, please see Note 4 to our condensed consolidated financial statements included in Item 1, Part I of this Quarterly Report.

Our digital transformation products and services are provided through two reporting segments: Document Management and Document Conversion. Our Document Management segment, which includes the Yellow Folder, LLC (“Yellow Folder”) asset acquisition in April 2022, consists primarily of solutions involving our software platform, allowing customers to capture and manage their documents across operations such as scanned hard-copy documents and digital documents including those from Microsoft Office 365, digital images, audio, video and emails. Our Document Conversion segment 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 people who need them by making those documents easy to find and access, while also being secure and compliant with the customers’ audit requirements. Solutions are sold both directly to end-users and through resellers.

Our customers use our software by one of two methods: purchasing our software and installing it onto their own equipment, which we refer to as a “premise” model, or licensing and accessing our platform via the Internet, which we refer to as a “software as a service” or “SaaS” model and also as a “cloud-based” model. Licensing of our software through 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, Expedient, and Evocative, providing our customers with reliable hosting services that we believe are consistent with industry best practices in data security and performance.

We operate a U.S.-based business with concentrated sales to the State of Michigan for our Document Conversion segment, complemented by our diverse set of document management software solutions and services. We hold or compete for leading positions regionally in select markets and attribute this leadership to several factors including the strength of our brand name and reputation, our comprehensive offering of innovative solutions, and the quality of our service support. Net growth in sales of software as a service in recent years reflects market demand for these solutions over traditional sales of on-premise software. We expect to continue to benefit from our select niche leadership market positions, innovative product offering, growing customer base, and the impact of our sales and marketing programs. Examples of these programs include identifying and investing in growth and expanded market penetration opportunities, more effective products and services pricing strategies, 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.

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For further information about our consolidated revenue and earnings, please see our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report.

How We Evaluate our Business Performance and Opportunities

There has been no material change during the ~~first quarter~~nine-month period 2023 to the major qualitative and quantitative factors we consider in the evaluation of our operating results as 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 fiscal year ended December 31, 2022.

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Executive Overview of Results

The biggest ~~factor~~factors in the changes in our results of operations during the ~~first quarter~~nine-month period 2023 compared to the nine-month period 2022 was our acquisition of Yellow Folder on April 1, 2022. Our results for the ~~first~~third quarter and nine-month period 2023 include the results of Yellow Folder operations for the ~~three quarters. Our first quarter~~full periods reported, while our nine-month period 2022 results ~~do not~~ include only the second and third quarter results of Yellow Folder operations. Without Yellow Folder, revenues were up $608,759, or 23%, primarily driven by renewed professional services as well as strength in software as a service, which, excluding Yellow Folder, grew 18% year over year for the first quarter 2023. Our strong professional services performance, driven by an increase in Document Conversion project work, was not impacted meaningfully by the acquisition of Yellow Folder, and ~~software as a service performance~~the third quarter 2023 continued our strong 2023 growth, at 33% for the nine-month period 2023. This growth was partially offset by ~~weaknesses in sales of software, which is increasingly inconsistent with reduced sales of on-premise software and~~ lingering softer demand for the transactional portion of our storage and retrieval services from a significant customer in the home mortgage lending industry.

Below are our key financial results for the ~~first~~third quarter 2023 (consolidated unless otherwise noted):

● Revenues were ~~$4,186,833,~~$4,248,429, representing revenue growth of ~~55%~~10% year over year.

● Cost of revenues was ~~$1,540,994,~~$1,642,838, an increase of ~~44%~~21% year over year.

● Operating expenses (excluding cost of revenues) were ~~$2,361,840,~~$2,260,036, an increase of ~~53%~~10% year over year.

● Income from operations was ~~$283,999,~~$345,555, compared to income from operations of $458,003 in third quarter 2022.
● Net income was $209,331 with basic and diluted net income per share of $0.05, compared to net income of $217,536 in third quarter 2022.
● Operating cash provided was $1,427,945, compared to $1,852,085 in third quarter 2022.
● Capital expenditures were $140,952, compared to $188,687 in third quarter 2022.
Below are our key financial results for the nine-month period 2023 (consolidated unless otherwise noted):
● Revenues were $12,693,692, representing revenue growth of 27% year over year.
● Cost of revenues was $4,851,829, an increase of ~~207%~~33% year over year.
● Operating expenses (excluding cost of revenues) were $6,915,921, an increase of 17% year over year.
22
● Income from operations was $925,942, an increase of 122% year over year.

● Net income was ~~$112,563~~$457,628 with basic and diluted net income per share of ~~$0.03,~~$0.11 and $0.10, respectively, compared to a net loss of ~~$20,126~~$176,757 with basic and diluted net ~~income~~loss per share of ~~($0.01) in~~$0.05 for the ~~first quarter~~nine-month period 2022.
● Q1Nine-month period 2022 included ~~$64,204~~$355,281 of ~~change in~~transaction costs and $144,999 of earnout fair value ~~of earnout liabilities costs and $70,051 of transaction costs.~~adjustments.
● Net cash ~~used in~~provided by operating activities was ~~$174,357, driven primarily by a $571,788 reduction in deferred revenues,~~$1,128,314, compared to ~~$505,568 provided by operations in~~$1,924,734 for the ~~first quarter~~nine-month period 2022.

● Capital expenditures were ~~$134,569,~~$432,053, compared to ~~$85,440 in~~$458,051 for the ~~first quarter~~nine-month period 2022.

● As of ~~March 31,~~September 30, 2023, we had ~~167~~165 employees, including 2829 part-time employees, compared to ~~107~~132 employees, including 14 part-time employees, as of ~~March 31,~~September 30, 2022.

Financial Impact of Current Economic Conditions

Our overall performance depends on economic conditions, including the current inflationary environment and the widespread expectation of ~~near-term global recession.~~continued economic uncertainty.

Employee wages, our largest expense, have recently increased due to wage inflation. These increased labor costs have slightly decreased our profit margin ~~over~~in 2022 and ~~into~~further in 2023, but we continue to mitigate this by appropriately increasing customer renewal rates whenever we have the contractual ability to do so. More significantly, general wage inflation in the market has resulted in a slower hiring process as we grew our staff during 2022 and 2023, particularly for our Document Conversion segment. These hiring and staffing challenges ~~slow~~slowed our ability to complete project-based work backlog and ~~reduce~~reduced our ~~revenue.~~revenue in the first part of 2022. However, we ended the ~~first quarter~~nine-month period 2023 with more staff than ~~2022, and have continued to hire more staff as of the date of this report.~~2022. We anticipate that the inflationary effect on our wages has stabilized.

Other volatility, particularly from global supply chain disruptions, has had and are expected to continue to have a minimal impact on us as we consume relatively little in raw materials. A global recession may affect our customers’ and potential customers’ budgets for technology procurement, but as of the date of this report, we have not experienced diminished customer demand due to adverse economic conditions. Absent significant global economic disruptions, and based on the current trend of our business operations and our continued focus on strategic initiatives to grow our customer base, we believe in the strength of our brand and that our focus on our strategic priorities will deliver consistent growth.

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, in addition to economic conditions, that are discussed 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” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. Due to all these factors and the other risks discussed in Part II, Item 1 of this Quarterly Report, and Part I, Item IA, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, our past 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.
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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.”

23
Results of Operations

Revenues

The following table sets forth our revenues by reportable segment for the periods indicated:

Three months
ended
March 31, 2023 Three months
ended
March 31, 2022 For the three months ended For the nine months ended
Revenues
September 30, September 30,
2023 2022 2023 2022
Revenues by segment
Document Management $ 1,769,483 $ 914,950 $ 1,871,395 $ 1,693,128 $ 5,549,194 $ 4,180,931
Document Conversion 2,417,350 1,788,562 2,377,034 2,166,499 7,144,498 5,797,851
Total revenues $ 4,186,833 $ 2,703,512 $ 4,248,429 $ 3,859,627 $ 12,693,692 $ 9,978,782

Gross profit
Gross profit by segment
Document Management $ 1,483,108 $ 734,906 $ 1,590,314 $ 1,427,696 $ 4,639,866 $ 3,488,947
Document Conversion 1,162,731 896,931 1,015,277 1,078,489 3,201,997 2,838,093
Total gross profit $ 2,645,839 $ 1,631,837 $ 2,605,591 $ 2,506,185 $ 7,841,863 $ 6,327,040

The following table sets forth our revenues by revenue source for the periods indicated:

Three months
ended
March 31, 2023 Three months
ended
March 31, 2022 For the Three Months Ended For the Nine Months Ended
Revenues by revenue source
September 30, September 30,
2023 2022 2023 2022

Revenues:
Sale of software $ 15,293 $ 64,491 $ 9,422 $ 18,390 $ 88,361 $ 93,986
Software as a service 1,238,432 431,221 1,293,745 1,211,407 3,810,095 2,801,084
Software maintenance services 349,542 336,602 353,010 352,892 1,051,691 1,033,375
Professional services 2,299,289 1,587,948 2,333,090 2,007,613 6,930,695 5,221,326
Storage and retrieval services 284,277 283,250 259,162 269,325 812,850 829,011
Total revenues $ 4,186,833 $ 2,703,512 $ 4,248,429 $ 3,859,627 $ 12,693,692 $ 9,978,782

Our total revenues in the ~~first~~third quarter 2023 increased by ~~$1,483,321,~~388,802, or ~~55%~~10%, over our ~~first~~third quarter 2022 revenues, driven primarily by the ~~acquisition of Yellow Folder. Yellow Folder added $874,562 revenue~~strong professional services in our Document Conversion segment, as further described below. The increase in total revenues for the ~~first quarter 2023. The remaining net increase of 23% was primarily~~nine months ended September 30, 2023 is driven by ~~renewed professional services~~the same factors as well as ~~strength in software as a service, which, excluding~~three quarters of Yellow Folder ~~grew 18% year over year for the first quarter 2023. Our strong professional services~~revenues in 2023 and ~~software as a service performance was partially offset by weaknesses~~only two quarters in sales of software, which is increasingly inconsistent with reduced sales of on-premise software and lingering softer demand for the transactional portion of our storage and retrieval services from a significant customer in the home mortgage lending industry.2022.

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 resellers. Yellow Folder does not ~~earn~~sell revenue in this category. Revenues from the sale of software, which are reported as part of our Document Management segment, decreased by ~~$49,198,~~$8,968, or ~~76% during~~49%, the ~~first~~third quarter 2023 compared to the third quarter 2022, and decreased by $5,625, or 6% during the nine-month period 2023 compared to the nine-month period 2022.

~~These period over period changes are due to the timing of direct sales projects compared to the same periods in 2022.~~ We expect the volatility of this revenue line item to continue as project timing is unpredictable and the frequency of on-premise software solution sales decreases over ~~time and project timing is unpredictable.~~time.

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Software as a Service Revenues

We 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 of one year or more. Under these agreements, we generally provide access to the applicable software, data storage and related customer assistance and support. Revenues from the sale of software as a service, which are reported as part of our Document Management segment increased by ~~$807,211,~~$82,338, or ~~187%~~7%, in the ~~first~~third quarter 2023 compared to the third quarter 2022 and increased by $1,009,011, or 36% in the nine-month period 2023 compared to the nine-month period 2022. ~~This~~The nine-month period increase was primarily the result of the Yellow Folder acquisition, which contributed ~~$730,345,~~$909,088, or 90%, of the increase, ~~augmenting the underlying new~~plus organic growth in our cloud-based ~~solution sales,~~solutions, as well as expanded data storage, user seats, and hosting fees for existing customers. ~~Excluding Yellow Folder, software as a service revenues grew 18% in the first quarter 2023 compared to 2022.~~
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Software Maintenance Services Revenues

Software maintenance services revenues consist of fees for post-contract customer support services provided to license (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 renewals of maintenance agreements, which typically run on a year-to-year basis. Yellow Folder does not ~~earn~~sell revenue in this category. Revenues from the sale of software maintenance services, which are reported as part of our Document Management segment, increased by ~~$12,940,~~$118, or 4%0%, in the ~~first~~third quarter 2023 compared to the third quarter 2022 and increased by $18,316, or 2%, in the nine-month period 2023 compared to the nine-month period 2022. This small increase in these revenues in ~~the first quarter~~ 2023 compared to the 2022 was driven by ~~the~~ expansion of services with existing customers and price increases being partially offset by normal attrition and certain customers migrating their premise solution to our cloud solution, resulting ~~software~~ maintenance ~~service revenues~~and support agreements decreasing and software as a service ~~revenues~~ increasing. ~~The combined growth of software as a service and software maintenance services revenues was 107%, which represents 16% without Yellow Folder.~~

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, as well as repair and maintenance services for customer equipment. These revenues include arrangements that do not involve the sale of software. Of our professional services revenues during the ~~first~~third quarter 2023 ~~$2,166,974 was~~and nine-month period 2023, $2,151,846 and $6,433,485, respectively, were derived from our Document Conversion operations and ~~$132,315 was~~$181,244 and $497,210, respectively, were derived from our Document Management operations. Our overall professional services revenues increased by ~~$711,341,~~$325,477, or ~~45%~~16%, in the ~~first~~third quarter 2023 compared to the third quarter 2022 and increased by $1,709,369, or 33%, in the nine-month period 2023 compared to the nine-month period 2022. This increase is primarily the result of the strong recovery in our Document Conversion segment in the ~~first quarter~~nine-month period 2023 from the softer demand of early ~~2022.~~2022, driven by increased project work including a large project with specific deadlines. The nine-month period increase includes the contribution of $110,316 in revenue from the Yellow Folder ~~for~~acquisition from the first ~~quarter.~~quarter 2023, which did not contribute revenue in the first quarter 2022.

Storage and Retrieval Services Revenues

We provide 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~~decreased by ~~$1,027,~~$10,163, or 0%4%, ~~during~~in the ~~first~~third quarter 2023 compared to the third quarter 2022 and decreased by $16,161, or 2%, during the nine-month period 2023 compared to the nine-month period 2022. This ~~net increase~~decrease was the result of ~~$33,901 revenue contributed from the Yellow Folder acquisition largely offset by~~ a ~~decrease of $32,874, primarily driven by a significant~~continued reduction in volume of ~~transactional~~ work from our largest storage and retrieval customer, Rocket Mortgage, due to the significant slowdown in the home mortgage and refinancing industry. Yellow Folder revenue partially offset the decrease by $35,799 in revenue contribution in the first quarter 2023.
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Costs of Revenues and Gross Profits

The following table sets forth our cost of revenues by reportable segment for the periods indicated:

For the three months ended For the nine months ended
September 30, September 30,
Three months
ended
March 31, 2023 Three months
ended
March 31, 2022 2023 2022 2023 2022
Cost of revenues by segment
Document Management $ 286,375 $ 180,044 $ 281,081 $ 265,432 $ 909,328 $ 691,984
Document Conversion 1,254,619 891,631 1,361,757 1,088,010 3,942,501 2,959,758
Total cost of revenues $ 1,540,994 $ 1,071,675 $ 1,642,838 $ 1,353,442 $ 4,851,829 $ 3,651,742

The following table sets forth our cost of revenues, by revenue source, for the periods indicated:

For the three months ended For the nine months ended
September 30, September 30,
2023 2022 2023 2022
Three months
ended
March 31, 2023 Three months
ended
March 31, 2022
Cost of revenues:
Sale of software $ 8,181 $ 26,193 $ 5,889 $ 10,647 $ 21,414 $ 44,232
Software as a service 220,640 91,249 200,104 207,502 679,126 489,939
Software maintenance services 16,716 18,300 13,165 19,024 44,998 56,509
Professional services 1,187,116 848,167 1,338,526 1,028,074 3,832,983 2,794,783
Storage and retrieval services 108,341 87,766 85,154 88,195 273,308 266,279
Total cost of revenues $ 1,540,994 $ 1,071,675 $ 1,642,838 $ 1,353,442 $ 4,851,829 $ 3,651,742

Our total cost of revenues during the ~~first~~third quarter 2023 increased by ~~$469,319~~$289,396, or ~~44%~~21%, over third quarter 2022 and increased by $1,200,087, or 33%, during the nine-month period 2023 over the nine-month period 2022. Our cost of revenues for our Document Management segment increased by ~~$106,331,~~$15,649, or ~~59%~~6%, in the third quarter 2023 compared to the third quarter 2022 and increased $217,344, or 31%, in the nine-month period 2023 compared to the nine-month period 2022 primarily due to the additional three-month impact of Yellow Folder in that segment. Our cost of revenues for our Document Conversion segment increased by ~~$362,988,~~$273,747, or ~~41%~~25%, in the ~~first~~third quarter 2023 compared to the third quarter 2022 ~~primarily~~and increased by $982,743, or 33%, during the nine-month period 2023 compared to the nine-month period 2022 due to the ~~increased demand, resulting in higher revenues and~~staffing ramp up to accommodate more ~~labor to complete projects,~~work volume, as well as wage ~~increases.~~increases for the hourly production workers.

For the three months ended For the nine months ended
For the three months ended
March 31, September 30, September 30,
2023 2022 2023 2022 2023 2022

Gross profit:
Sale of software $ 7,112 $ 38,298 $ 3,533 $ 7,743 $ 66,947 $ 49,754
Software as a service 1,017,792 339,972 1,093,641 1,003,905 3,130,969 2,311,145
Software maintenance services 332,826 318,302 339,845 333,868 1,006,693 976,866
Professional services 1,112,173 739,781 994,564 979,539 3,097,712 2,426,543
Storage and retrieval services 175,936 195,484 174,008 181,130 539,542 562,732
Total gross profit $ 2,645,839 $ 1,631,837 $ 2,605,591 $ 2,506,185 $ 7,841,863 $ 6,327,040

Gross profit percentage:
Sale of software 46.5 % 59.4 % 37.5 % 42.1 % 75.8 % 52.9 %
Software as a service 82.2 % 78.8 % 84.5 % 82.9 % 82.2 % 82.5 %
Software maintenance services 95.2 % 94.6 % 96.3 % 94.6 % 95.7 % 94.5 %
Professional services 48.4 % 46.6 % 42.6 % 48.8 % 44.7 % 46.5 %
Storage and retrieval services 61.9 % 69.0 % 67.1 % 67.3 % 66.4 % 67.9 %
Total gross profit percentage 63.2 % 60.4 % 61.3 % 64.9 % 61.8 % 63.4 %
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Our overall gross profit ~~increased~~decreased to ~~63%~~61.3% in the ~~first~~third quarter 2023 from ~~60%~~64.9% in the third quarter 2022, and decreased to 61.8% for the nine-month period 2023 from 63.4% for the nine-month period 2022. The increase in the mix of ~~software as a service~~professional services revenue was the principal driver of the ~~increase,~~overall decrease, with the relatively lower margin professional services revenues comprising a larger portion of our total revenues. The change in revenue mix was due to the ~~addition of Yellow Folder and overall strong margins~~significant growth in ~~the Document Management segment, partially offset by margin erosion in the~~our Document Conversion ~~segment, driven by reduced margins in the storage and retrieval services, as well as wage increases.~~segment.
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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. ~~During the first quarter 2023, cost~~Cost of software revenues during the third quarter 2023 decreased by ~~$18,012,~~$4,758, or ~~69%~~45%, from the third quarter 2022, ~~decreasing along with revenues.~~and decreased by $22,818, or 52%, from the nine-month period 2022, due to stronger margin projects sold in 2023. Our gross margin for software revenues decreased to ~~47%~~37.5% from ~~59%~~42.1% in the ~~first~~third quarter 2022 and increased to 75.8% from 52.9% the nine-month period 2022. The decrease in margin percent in the third quarter 2023 ~~margins were~~was driven by unfavorable changes in the software solution mix with weaker margin solutions, and was impacted by ~~solutions that required more costs to deliver.~~larger percentage swings on small dollar values. Yellow Folder had no impact to this category.

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 ~~first~~third quarter 2023 decreased by $7,398, or 4%, from the third quarter 2022 and increased by ~~$129,391,~~$189,187, or ~~142%~~39%, during the nine-month period 2023 over the ~~first quarter~~nine-month period 2022. ~~This increase~~Our cost to support SaaS is generally stable and consistent, and there were no unusual projects or significant variations in our support call volumes for the ~~cost of SaaS was less than the increase in associated SaaS revenues, so our~~periods reported. Our gross margin in the ~~first~~third quarter 2023 increased to ~~82%~~84.5% compared to ~~79%~~82.9% in the third quarter 2022 ~~as a result of strong margins with~~ and ~~without Yellow Folder, which contributed 84% gross margin.~~decreased to 82.2% in the nine-month period 2022 compared to 82.5% during the nine-month period 2022.

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 third quarter 2023 decreased by ~~$1,584,~~$5,859, or 9%31%, over the third quarter 2022 and decreased by $11,511, or 20%, in the ~~first quarter~~nine-month period 2023 ~~from~~over the nine-month period 2022, due primarily to ~~continued stable~~reduced support activity. As a result, our gross margin for software maintenance services ~~remained at 95%~~increased to 96.3% and 95.7% in the ~~first~~third quarter 2023 and ~~2022.~~the nine-month period 2023, respectively, compared to 94.6% and 94.5% in the third quarter 2022 and the nine-month period 2022, 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 third quarter 2023 increased by $310,452, or 30%, over the third quarter 2022 and increased in the ~~first quarter~~nine-month period 2023 by ~~$338,949,~~$1,038,200, or ~~40%~~37%, over the nine-month period 2022, primarily due to ~~increased staffing levels in our~~growing the Document Conversion ~~segment,~~staff to ~~support our corresponding increased revenues, as well as wage increases, resulting~~meet the growing backlog of orders. Our gross margins in ~~a gross margin of 46% without Yellow Folder, compared~~professional services decreased to ~~47%~~42.6% in the first quarter 2022. Yellow Folder contributed only $9,915 costs in the first quarter 2023, yielding a strong 91% margin. Consolidated, our gross margin for professional services increased to 48% during the firstthird quarter 2023 compared to ~~47%~~48.8% in the third quarter 2022 and decreased to 44.7% during the nine-month period 2023 compared to 46.5% in the nine-month period 2022. Gross margins related to consulting services ~~in Document Management and digital transformation services in Document Conversion~~ may vary widely, depending upon the nature of the digital conversion or consulting project and the amount of labor ~~required~~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 primarily by our Michigan operations and to a much lesser extent, Yellow Folder. Cost of storage and retrieval services ~~increased~~decreased by ~~$20,575,~~$3,041, or ~~23%~~3%, ~~during~~in the ~~first~~third quarter 2023 compared to the third quarter 2022, and increased by $7,029, or 3%, during the nine-month period 2023 compared to the nine-month period 2022. The ~~increase~~decrease was due to a reduction in transaction events in the third quarter 2023 compared to 2022, offset for the nine-month period by general wage inflation and fuel cost increases. Gross margins for our storage and retrieval services, which exclude the cost of facilities rental, maintenance, and related overheads, decreased to ~~62% during~~67.1% in the ~~first~~third quarter 2023 compared to ~~69%~~67.3% in the third quarter 2022 and decreased to 66.4% during nine-month period 2023 compared to 63.1% in the nine-month period 2022. Yellow Folder did not have a material impact ~~contributing costs of $10,664,~~to this category in 2023 or ~~10% of the cost in the first quarter 2023, at a gross margin of 69%.~~2022.

Operating Expenses

The following table sets forth our operating expenses for the periods indicated:

For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2023 2022 2023 2022
Three months
ended
March 31, 2023 Three months
ended
March 31, 2022
Operating expenses:
General and administrative $ 1,554,611 $ 935,691 $ 1,516,009 $ 1,321,299 $ 4,632,559 $ 3,511,852
Change in fair value of earnout liabilities - 64,204 - 28,494 - 144,999
Transaction costs - 70,051 - - - 355,281
Sales and marketing 579,511 352,114 496,289 492,540 1,568,103 1,374,059
Depreciation and amortization 227,718 117,302 247,738 205,849 715,259 524,070

Total operating expenses $ 2,361,840 $ 1,539,362 $ 2,260,036 $ 2,048,182 $ 6,915,921 $ 5,910,261
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General and Administrative Expenses

General and administrative expenses during the third quarter 2023 increased by $194,710, or 15%, over the third quarter 2022, and increased in the ~~first quarter~~nine-month period 2023 by ~~$615,728,~~$1,120,707, or ~~66%~~32%, over the nine-month period 2022, principally related to the addition of Yellow Folder expenses in the first quarter 2023, ~~as well as from direct~~resulting in a full nine months of expenses in 2023 compared to only six months of Yellow Folder expenses in 2022. In addition, general and ~~indirect cost increases stemming from~~administrative expenses increased commensurate with our larger size and complexity, including scale-related expenses such as our uplisting to NYSE American and our infrastructure ~~investments such as our internal~~investment in an ERP system upgrade, ~~from QuickBooks~~which are not expected to ~~NetSuite. These increases were~~materially further increase. The Yellow Folder increase was primarily reflected in ~~both~~ our Document Management segment, in which our general and administrative expenses increased to ~~$800,729~~$812,956 and $2,392,023 in ~~first~~the third quarter 2023 and the nine-month period 2023, respectively, from ~~$463,413~~$774,951 and $1,083,124 in the third quarter 2022 and ~~also in~~the nine-month period 2022, respectively. In our Document Conversion segment, ~~in which~~ our general and administrative expenses increased to ~~$753,882~~$703,053 in ~~first~~the third quarter 2023 ~~from $545,521~~compared to $558,334 in the third quarter 2022, and increased to $2,240,536 in the nine-month period 2023 compared to $1,621,134 in the nine-month period 2022.

Change in Fair Value of Earnout Liabilities

The final earnout liabilities were paid in January 2023 and there were no changes in fair value in 2023. Fair value adjustments amounted to $28,494 in the ~~first quarter 2023. During the first~~third quarter 2022 and $144,999 for the nine-month period 2022. The fair value adjustments ~~totaling $64,204~~ were driven by updated assumptions to reflect the improved performance of the affected acquisitions against their threshold targets and the decreasing impact of present value discounting.

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~~Significant~~
Transaction ~~Expenses~~Costs

There were no ~~significant~~ transaction ~~expenses~~costs during the ~~first~~third quarter 2023 and nine-month period 2023. The ~~significant~~ transactions ~~expenses~~costs during the ~~first quarter~~nine-month period 2022 were comprised of investment banker success fees, as well as legal and consulting fees, in connection with our acquisition of Yellow Folder, consummated on April 1, 2022.

Sales and Marketing Expenses

Sales and marketing expenses during the ~~first~~third quarter 2023 increased by ~~$227,397,~~$3,749, or ~~65%~~1%, from the third quarter 2022 and increased by $194,044, or 14%, during the nine-month period 2023 over the ~~first quarter 2022, principally related to~~nine-month period 2022. The nine-month increase was primarily driven by the ~~addition~~inclusion of the sales and marketing expenses of Yellow Folder ~~expenses in 2023.~~during the full nine-month period 2023, compared to only the second and third quarter 2022.

Depreciation and Amortization

Depreciation and amortization during the ~~first~~third quarter 2023 increased by ~~$110 416,~~$41,889, or ~~94%~~20%, over the ~~first~~third quarter 2022 ~~primarily~~and increased by $191,189, or 36%, during the nine-month period 2023 over the nine-month period 2022 as a result of increased amortization of capitalized software costs, as well as the additional quarter of amortization of new intangible assets related to the Yellow Folder acquisition ~~which amounted to $75,458~~ in ~~the first quarter 2023, as well as increased amortization of capitalized software costs.~~2023.

Other Items of Income and Expense

Interest Expense, Net

Interest expense ~~was $171,436 during~~decreased by $104,243, or 43%, in the ~~first~~third quarter 2023 as compared ~~with $112,601~~to the third quarter 2022, and decreased by $125,222, or 21% during the ~~first quarter 2022, representing an increase of $58,835 or 52%.~~nine-month period 2023 as compared to the nine-month period 2022. The ~~increase~~decrease resulted ~~from incremental interest expense on increased net debt following the April 1, 2022 private placement of securities, partially offset by reduced interest resulting~~ from partial principal repayment of the 2020 Notes on December 1, 2022 and February 28, 2023, and final payment on August 31, 2023.
29

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 private sales of equity. Since 2012, and including our private offering in April 2022, we have raised a total of approximately ~~$25.2~~$24.5 million in cash through issuances of debt and equity securities, net of ~~$1.3~~$2 million in debt repayments. As of ~~March 31,~~September 30, 2023, we had approximately ~~$1.4~~$1.7 million in cash and cash equivalents, net working capital ~~deficit~~ of ~~$0.8~~$0.1 million, and an accumulated deficit of ~~$21.5~~$21.2 million. In January 2023, we paid $0.7 million in final earnout payments and in February and August 2023 and December 2022 we ~~prepaid approximately $1.3~~repaid a total of $2 million in principal, ~~which was due in February 2023.~~representing full payments on the 2020 Notes.

In 2023 and 2022, we engaged in several actions that significantly improved our liquidity and cash flows, including (i) effective October 1, 2023 through May 30, 2025, securing a renewal contract with our largest customer, the State of Michigan, containing an estimated net rate increase of approximately 21%, compared to the current rates in effect for the contract period commencing June 1, 2018 and (ii), on April 1, 2022:

● acquiring the positive cash flow generated by Yellow Folder,

● receiving aggregate gross proceeds of approximately $5.7 million from the private placement of our common stock (all which was used to acquire Yellow Folder), and

● receiving approximately $3.0 million in proceeds from the issuance of 12% subordinated promissory notes due March 30, 2025, which we refer to as the 2022 Notes (some of which was used to acquire Yellow Folder, with the remainder used for general working capital).

29
~~Of our~~
Our existing debt as of ~~March 31,~~September 30, 2023 ~~$0.7 million~~ is ~~due August 31, 2023, and~~comprised of approximately $3 million is due March 30, 2025. Our operating cash flow alone may be insufficient to meet the debt obligations in full in ~~2023.~~2025. We believe we could seek additional debt or equity financing on acceptable terms. We believe that our balance sheet and financial statements would support a full or partial refinancing or other appropriate modification of the current promissory notes, such as an extension or conversion to equity. We are confident in our ability to prudently manage our current debt on terms acceptable to us.

Our ability to meet our capital needs in the short term will depend on many factors, including maintaining and enhancing our operating cash flow ~~successfully managing the transition of our recent acquisition of Yellow Folder,~~and successfully retaining and growing our client base in the midst of global inflation and general economic uncertainty.

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 and potential financing options, will be sufficient to meet our anticipated cash needs arising in the ordinary course of business for at least the next 12 months, including to satisfy our expected working capital needs and capital and debt service commitments.

Our ability to meet our capital needs further into the future will depend primarily on strategically managing the business and successfully retaining our client base.

Indebtedness

As of ~~March 31,~~September 30, 2023, our outstanding long-term indebtedness consisted of:

● ~~The 2020 Notes issued to accredited investors on March 2, 2020, with an aggregate outstanding principal balance of $717,500 and accrued interest of $0.~~
● The 2022 Notes issued to accredited investors on April 1, 2022, with an aggregate outstanding principal balance of $2,964,500 and accrued interest of $0.

See Note 8 and Note 9 to our condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report for further information on the ~~2020 and~~ 2022 ~~notes.~~Notes.

Capital Expenditures

There were no material commitments for capital expenditures at ~~March 31,~~September 30, 2023.

30
Cash ~~Used and~~ Provided by Operating Activities

Net cash ~~used in~~provided by operating activities during the ~~first quarter~~nine-month period 2023 was ~~$174,357,~~$1,128,314, primarily attributable to the net income adjusted for non-cash expenses of ~~$434,066,~~$1,312,276, an increase in operating assets of ~~$383,039~~$1,037,575 and ~~a decrease~~an increase in operating liabilities of ~~$337,947, primarily deferred revenues of $571,788.~~$395,985. Net cash provided by operating activities during the ~~first quarter~~nine-month period 2022 was ~~$505,568,~~$1,924,734, primarily attributable to the net loss adjusted for non-cash expenses of ~~$312,470,~~$1,229,556, a decrease in operating assets of ~~$197,948~~$154,311 and ~~a decrease~~an increase in operating liabilities of ~~$15,276.~~$717,624.

Cash Used inby Investing Activities

Net cash used in investing activities in the ~~first quarter~~nine-month period 2023 was ~~$134,569,~~$432,053, including ~~$112,208 related to~~$348,051 in capitalized ~~internal use~~ software. Net cash used in investing activities in the ~~first quarter~~nine-month period 2022 was ~~$85,440,~~$6,841,320, primarily $6,383,269 related to ~~purchases of property and equipment,~~cash paid to acquire Yellow Folder, as well as ~~$29,397 related to~~$315,148 in capitalized ~~internal use~~ software.
30
Cash Used in and Provided by Financing Activities

Net cash used by financing activities during the nine-month period 2023 amounted to $700,000 in earnout liability payments, ~~$262,950~~$980,450 in repayment of notes payable, and ~~$5,467~~$23,167 in the principal portion of a finance lease liability. ~~There were no~~Net cash provided by financing activities during the ~~first quarter 2022.~~nine-month period 2022 amounted to $6,940,583, as the result of cash generated from the sale of common stock of $5,740,758 and from new borrowings of $2,964,500, partially offset by issuance costs of $746,342, as well as a further offset of $1,018,333 in earnout liability payments.

Critical Accounting Policies and Estimates

The 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 in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. 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 estimates are set forth in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. There were no material changes to our critical accounting policies and estimates during the ~~first~~third quarter 2023.

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

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (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 ~~March 31,~~September 30, 2023, our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange 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 our disclosure controls and procedures, management recognizes that any controls system, no matter how well designed and operated, can provide only reasonable assurance of achieving its desired objectives. In addition, the design of disclosure controls and procedures must reflect resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report that materially affected, or are reasonably likely to materially affect, our internal control over financial 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.

31

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

None.

ITEM 1A. RISK FACTORS.

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. There have been no material changes to the risk factors set forth in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULT UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not Applicable.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

The following is a list of exhibits filed as part of this Quarterly Report on Form 10-Q.

Incorporation by reference
Exhibit No. Description of Exhibit Form Date Exhibit

10.1* ~~Intellinetics, Inc. 2023 Non-Employee Director Compensation Plan.~~
10.1* Contract Change Notice No. 2 and 3, by and between Graphic Sciences, Inc. and the State of Michigan Central Procurement Services, Department of Technology, Management, dated August 3, 2023. 10-Q 2023-08-14 10.1
31.1* Certification of Principal Executive Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.

31.2* Certification of Principal Financial Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.

32.1* Certification of Principal Executive Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.

32.2* Certification of Principal Financial Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.

101.INS* Inline XBRL Instance Document (The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.).

101.SCH* Inline XBRL Taxonomy Schema.

101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase.

101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase.

101.LAB* Inline XBRL Taxonomy Extension Label Linkbase.

101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase.

104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* Filed herewith.

32

SIGNATURES

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: ~~May 15,~~ November 14, 2023

By: /s/ James F. DeSocio
James F. DeSocio
President and Chief Executive Officer

Dated: ~~May 15,~~ November 14, 2023

By: /s/ Joseph D. Spain
Joseph D. Spain
Chief Financial Officer

33


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2023			2022			2023			2022

Revenues:
Sale of software	$	9,422		$	18,390		$	88,361		$	93,986
Software as a service		1,293,745			1,211,407			3,810,095			2,801,084
Software maintenance services		353,010			352,892			1,051,691			1,033,375
Professional services		2,333,090			2,007,613			6,930,695			5,221,326
Storage and retrieval services		259,162			269,325			812,850			829,011
Total revenues		4,248,429			3,859,627			12,693,692			9,978,782

Cost of revenues:
Sale of software		5,889			10,647			21,414			44,232
Software as a service		200,104			207,502			679,126			489,939
Software maintenance services		13,165			19,024			44,998			56,509
Professional services		1,338,526			1,028,074			3,832,983			2,794,783
Storage and retrieval services		85,154			88,195			273,308			266,279
Total cost of revenues		1,642,838			1,353,442			4,851,829			3,651,742

Gross profit		2,605,591			2,506,185			7,841,863			6,327,040

Operating expenses:
General and administrative		1,516,009			1,321,299			4,632,559			3,511,852
Change in fair value of earnout liabilities		-			28,494			-			144,999
Transaction costs		-			-			-			355,281
Sales and marketing		496,289			492,540			1,568,103			1,374,059
Depreciation and amortization		247,738			205,849			715,259			524,070

Total operating expenses		2,260,036			2,048,182			6,915,921			5,910,261

Income from operations		345,555			458,003			925,942			416,779

Interest expense		(136,224	)		(240,467	)		(468,314	)		(593,536	)

Net income (loss)	$	209,331		$	217,536		$	457,628		$	(176,757	)

Basic net income (loss) per share:	$	0.05		$	0.05		$	0.11		$	(0.05	)
Diluted net income (loss) per share:	$	0.05		$	0.05		$	0.10		$	(0.05	)

Weighted average number of common shares outstanding - basic		4,073,757			4,073,757			4,073,757			3,664,024
Weighted average number of common shares outstanding - diluted		4,387,515			4,695,162			4,389,145			3,664,024

	2023			2022
	For the Three Months Ended March 31,
	2023			2022

Revenues:
Sale of software	$	15,293		$	64,491
Software as a service		1,238,432			431,221
Software maintenance services		349,542			336,602
Professional services		2,299,289			1,587,948
Storage and retrieval services		284,277			283,250
Total revenues		4,186,833			2,703,512

Cost of revenues:
Sale of software		8,181			26,193
Software as a service		220,640			91,249
Software maintenance services		16,716			18,300
Professional services		1,187,116			848,167
Storage and retrieval services		108,341			87,766
Total cost of revenues		1,540,994			1,071,675

Gross profit		2,645,839			1,631,837

Operating expenses:
General and administrative		1,554,611			935,691
Change in fair value of earnout liabilities		-			64,204
Transaction costs		-			70,051
Sales and marketing		579,511			352,114
Depreciation and amortization		227,718			117,302
Total operating expenses		2,361,840			1,539,362

Income from operations		283,999			92,475

Interest expense		(171,436	)		(112,601	)

Net income (loss)	$	112,563		$	(20,126	)

Basic net income (loss) per share:	$	0.03		$	(0.01	)
Diluted net income per (loss) share:	$	0.03		$	(0.01	)

Weighted average number of common shares outstanding - basic		4,073,757			2,830,899
Weighted average number of common shares outstanding - diluted		4,695,106			2,830,899

	Shares		Amount		Capital		Deficit			Total
	Common Stock				Additional Paid-in		Accumulated
	Shares		Amount		Capital		Deficit			Total

Balance, December 31, 2021		2,823,072	$	2,823	$	24,297,229	$	(21,638,316	)	$	2,661,736

Stock Issued to Directors		8,097		8		57,492		-			57,500

Stock Option Compensation		-		-		22,960		-			22,960

Net Loss		-		-		-		(20,126	)		(20,126	)

Balance, March 31, 2022		2,831,169	$	2,831	$	24,377,681	$	(21,658,442	)	$	2,722,070

Balance, December 31, 2022		4,073,757	$	4,074	$	30,179,017	$	(21,614,289	)	$	8,568,802
Beginning balance		4,073,757	$	4,074	$	30,179,017	$	(21,614,289	)	$	8,568,802

Stock Option Compensation		-		-		118,162		-			118,162

Net Income		-		-		-		112,563			112,563
Net Income(loss)		-		-		-		112,563			112,563

Balance, March 31, 2023		4,073,757	$	4,074	$	30,297,179	$	(21,501,726	)	$	8,799,527
Ending balance		4,073,757	$	4,074	$	30,297,179	$	(21,501,726	)	$	8,799,527

	Trade Receivables
As of December 31, 2022	$	(88,331	)
(Provisions) Reductions charged to operating results	$	(20,649	)
Accounts write-offs	$	1,640
As of March 31, 2023	$	(107,340	)
(Provisions) Reductions charged to operating results	$	(6,878	)
Accounts write-offs	$	0
As of June 30, 2023	$	(114,219	)
(Provisions) Reductions charged to operating results	$	(31,957	)
Accounts write-offs	$	31,941
As of September 30, 2023	$	(114,235	)

	Balance at Beginning of Period		Billings		Payments Received			Balance at End of Period				Addition
Three months ended March 31, 2023
										Balance at		from										Balance at
										Beginning		acquisition							Recognized			End of
										of Period		(Note 4)					Billings		Revenue			Period
Nine months ended September 30, 2023
Accounts receivable	$	1,121,083	$	3,341,583	$	(3,280,144	)	$	1,182,523	$	1,121,083	$	-	-	-	-	$	12,405,093	$	(12,201,951	)	$	1,324,225

Three months ended March 31, 2022
Nine months ended September 30, 2022
Accounts receivable	$	1,176,059	$	2,622,808	$	(2,900,468	)	$	898,400	$	1,176,059	$	68,380				$	10,715,024	$	(11,105,533	)	$	853,930

	Balance at Beginning of Period		Revenue Recognized in Advance of Billings		Billings			Balance at End of Period		Balance at Beginning of Period		Revenue Recognized in Advance of Billings		Billings			Balance at End of Period
Three months ended March 31, 2023
Nine months ended September 30, 2023
Accounts receivable, unbilled	$	596,410	$	1,336,851	$	(1,045,519	)	$	887,742	$	596,410	$	3,892,301	$	(3,210,911	)	$	1,277,800

Three months ended March 31, 2022
Nine months ended September 30, 2022
Accounts receivable, unbilled	$	444,782	$	700,869	$	(671,665	)	$	473,986	$	444,782	$	2,573,944	$	(2,526,780	)	$	491,946

	Balance at Beginning of Period		Commissions Paid		Commissions Recognized			Balance at End of Period		Balance at Beginning of Period		Commissions Paid		Commissions Recognized			Balance at End of Period
Three months ended March 31, 2023
Nine months ended September 30, 2023
Other contract assets	$	80,378	$	27,792	$	(27,593	)	$	80,577	$	80,378	$	157,265	$	(99,581	)	$	138,062

Three months ended March 31, 2022
Nine months ended September 30, 2022
Other contract assets	$	78,556	$	22,136	$	(14,089	)	$	86,603	$	78,556	$	102,321	$	(58,123	)	$	122,754

	Balance at Beginning of Period		Billings		Recognized Revenue			Balance at End of Period
Three months ended March 31, 2023
Contract liabilities: deferred revenue	$	2,754,064	$	1,146,380	$	(1,718,168	)	$	2,182,276

Three months ended March 31, 2022
Contract liabilities: deferred revenue	$	1,194,649	$	984,117	$	(1,042,700	)	$	1,136,066

	March 31, 2023		December 31, 2022		September 30, 2023		December 31, 2022
Goodwill
Document Management	$	3,989,645	$	3,989,645	$	3,989,645	$	3,989,645
Document Conversion		1,800,176		1,800,176		1,800,176		1,800,176
Total goodwill	$	5,789,821	$	5,789,821	$	5,789,821	$	5,789,821

Assets acquired:
Accounts receivable	$	68,380
Prepaid expenses		38,913
Property and equipment		30,018
Intangible assets (see Note 5)		3,888,000
Assets		4,025,311
Liabilities assumed:
Accounts payable		36,446
Deferred revenue		1,072,530
Liabilities		1,108,976

Total identifiable net assets		2,916,335

Purchase price		6,383,269

Goodwill - Excess of purchase price over fair value of net assets acquired	$	3,466,934

	September 30, 2023		September 30, 2022
	For the three months ended
	(unaudited)		(unaudited)
	September 30, 2023		September 30, 2022
Total revenues	$	4,248,429	$	3,859,627

Net income	$	209,331	$	217,536

Basic net income per share	$	0.05	$	0.05
Diluted net income per share	$	0.05	$	0.05

	March 31, 2023		March 31, 2022
	For the three months ended
	(unaudited)		(unaudited)
	March 31, 2023		March 31, 2022
Total revenues	$	4,186,833	$	3,481,413

Net income	$	112,563	$	14,440

Basic net income per share	$	0.03	$	0.00
Diluted net income per share	$	0.03	$	0.00

	September 30, 2023		September 30, 2022
	For the nine months ended
	(unaudited)		(unaudited)
	September 30, 2023		September 30, 2022
Total revenues	$	12,693,692	$	10,756,634

Net (loss) income	$	457,628	$	(142,241	)

Basic net income (loss) per share	$	0.11	$	(0.03	)
Diluted net income (loss) per share	$	0.10		(0.03	)

	For the		For the
	three months ended		nine months ended
	September 30, 2023		September 30, 2023
Yellow Folder:
Total revenues	$	968,870	$	2,707,764
Net income	$	181,332	$	452,443

	For the three months ended September 30, 2022		For the nine months ended September 30, 2022
Yellow Folder:
Total revenues	$	829,856	$	1,620,224
Net income	$	178,973	$	375,531

	Estimated			Accumulated					Estimated			Accumulated
	Useful Life	Costs		Amortization			Net		Useful Life	Costs		Amortization			Net
Trade names	10 years	$	297,000	$	(54,492	)	$	242,508	10 years	$	297,000	$	(69,343	)	$	227,657
Proprietary technology	10 years		861,000		(86,100	)		774,900	10 years		861,000		(129,150	)		731,850
Customer relationships	5-15 years		4,091,000		(816,339	)		3,274,661	5-15 years		4,091,000		(1,013,592	)		3,077,408
		$	5,249,000	$	(956,931	)	$	4,292,069		$	5,249,000	$	(1,212,085	)	$	4,036,915

For the Twelve Months Ending March 31,	Amount
For the Twelve Months Ending September 30,			Amount
2024	$	510,308	$	510,308
2025		510,308		499,391
2026		473,125		391,941
2027		326,108		326,108
2028		324,410		314,223
Thereafter		2,147,810		1,994,944
Intangible assets	$	4,292,069	$	4,036,915

	March 31, 2023			Nine months ended September 30, 2023
Fair value at December 31, 2022	$	700,000		$	700,000
Fair value, beginning balance	$	700,000
Fair value. beginning balance				$	700,000
Payments		(700,000	)		(700,000	)
Change in fair value		-
Fair value at March 31, 2023	$	-
Fair value, ending balance	$	-
Fair value at September 30, 2023				$	-
Fair value , ending balance				$	-

Subordinated Notes Payable		Issue Date		Interest Rate				Interest Due		Principal Due
2022 Unrelated Notes		April 1, 2022			12	%		Quarterly		March 30, 2025

As of March 31,	Amount
2024	$	717,500
As of September 30,			Amount
2025		2,364,500	$	2,364,500
Total	$	3,082,000	$	2,364,500

Location	Square Feet		Monthly Rent		Lease Expiry
Columbus, OH		6,000	$	5,100	December 31, 2028
Madison Heights, MI		36,000	$	43,185	August 31, 2026
Sterling Heights, MI		37,000	$	21,072	April 30, 2028
Traverse City, MI		5,200	$	4,500	January 31, 2024

Temporary space
Madison Heights, MI		3,200	$	1,605	month to month

Vehicles
various		n/a	$	2,708	September 30, 2028

For the twelve months ending March 31,	Finance Lease		Operating Leases
For the twelve months ending September 30,					Finance Leases			Operating Leases
2024	$	33,195	$	944,783	$	67,358		$	916,353
2025		33,195		890,685		67,358			892,047
2026		33,195		899,991		63,306			855,585
2027		33,195		578,184		49,500			353,662
2028		33,195		358,282		37,228			238,947
Thereafter		16,598		76,821		-			17,550
	$	182,573	$	3,748,746
Less Imputed Interest						(47,094	)		(429,243	)
Less Short-term lease payments						-			(4,814	)
Total					$	237,656		$	2,840,087

For the three months ending March 31,	2023		2022
For the three months ending September 30,					2023		2022
Finance lease expense:
Amortization of ROU asset	$	6,709	$	-	$	13,221	$	-
Interest on lease liabilities		2,832		-		5,036		-
Operating lease expense		237,449		238,487		238,864		243,301
Short-term lease expense		4,814		4,814		4,814		4,814

For the nine months ending September 30,	2023		2022
Finance lease expense:
Amortization of ROU asset	$	28,181	$	-
Interest on lease liabilities		11,462		-
Operating lease expense		715,176		729,902
Short-term lease expense		14,441		14,441

Issuance of Common Stock	Issue Date	Shares Issued		Price per share		Warrants Issued		Warrant Exercise Price		Warrant Fair Value
Private Placement 2022	April 1, 2022		1,242,588	$	4.62		124,258	$	4.62	$	3.91
Private Placement 2020	March 2, 2020		955,000	$	4.00		95,500	$	4.00	$	3.90

	●	~~875,000~~ ~~shares of our common stock at a purchase price of $4.00~~ ~~per share, for aggregate gross proceeds of $3,500,000, and~~

	●	~~2,000~~ ~~units at a purchase price of $1,000~~ ~~per unit, with each unit consisting of $1,000~~ ~~in 12% Subordinated Notes and~~ 40 ~~shares of our common stock, for aggregate gross proceeds of $2,000,000~~.

	●	~~Warrants to purchase~~ ~~3,000~~ ~~shares of common stock at an exercise price of $15.00~~ ~~per share exercisable until~~ ~~March 30, 2027, 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~~ ~~March 30, 2027, issued to the placement agent in connection with private placements of our convertible promissory notes.~~

	●	~~Warrants to purchase~~ ~~16,000~~ ~~shares of common stock at an exercise price of $9.00~~ ~~per share exercisable until~~ ~~March 30, 2027, 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 30, 2027, issued to the placement agent in connection with private placements of our promissory notes.~~

	●	~~Warrants to purchase~~ ~~124,258~~ ~~shares of common stock at an exercise price of $4.62~~ ~~per share exercisable until~~ ~~March 30, 2027, issued to the placement agent in connection with private placements of our promissory notes.~~

Warrants Outstanding	Warrant Exercise Price		Warranty Expiry
124,258	$	4.62	March 30, 2027
95,500	$	4.00	March 30, 2027
16,000	$	9.00	March 30, 2027
17,200	$	12.50	March 30, 2027
3,000	$	15.00	March 30, 2027

21	Warrants Issued
	April 1, 2022
Risk-free interest rate		2.55	%
Weighted average expected term		5 years
Expected volatility		116.32	%
Expected dividend yield		0.00	%

	Grant Date
	April 1, 2022
Risk-free interest rate		2.82	%
Weighted average expected term		6 years
Expected volatility		116.60	%
Expected dividend yield		0.00	%