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What changed in INTELLINETICS, INC.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of INTELLINETICS, INC.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+209 added−239 removedSource: 10-K (2024-03-28) vs 10-K (2023-03-27)

Top changes in INTELLINETICS, INC.'s 2023 10-K

209 paragraphs added · 239 removed · 187 edited across 5 sections

Item 1. Business

Business — how the company describes what it does

87 edited+10 added−26 removed91 unchanged
Biggest changeFinancial Statements INTELLINETICS, INC. and SUBSIDIARIES Consolidated Balance Sheets December 31, December 31, 2022 2021 ASSETS Current assets: Cash $ 2,696,481 $ 1,752,630 Accounts receivable, net 1,121,083 1,176,059 Accounts receivable, unbilled 596,410 444,782 Parts and supplies, net 73,221 76,691 Contract assets 80,378 78,556 Prepaid expenses and other current assets 325,466 155,550 Total current assets 4,893,039 3,684,268 Property and equipment, net 1,068,706 1,091,780 Right of use assets, operating 3,200,191 3,841,612 Right of use asset, finance 154,282 - Intangible assets, net 4,419,646 968,496 Goodwill 5,789,821 2,322,887 Other assets 417,457 53,089 Total assets $ 19,943,142 $ 11,962,132 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 370,300 $ 181,521 Accrued compensation 411,683 343,576 Accrued expenses 114,902 161,862 Lease liabilities, operating - current 692,074 616,070 Lease liability, finance - current 22,493 - Deferred revenues 2,754,064 1,194,649 Deferred compensation - 100,828 Earnout liabilities - current 700,000 958,818 Notes payable - current 936,966 - Total current liabilities 6,002,482 3,557,324 Long-term liabilities: Notes payable - net of current portion 2,085,035 1,754,527 Notes payable - related party 529,084 - Lease liabilities, operating - net of current portion 2,624,608 3,316,682 Lease liability, finance - net of current portion 133,131 - Earnout liabilities - net of current portion - 671,863 Total long-term liabilities 5,371,858 5,743,072 Total liabilities 11,374,340 9,300,396 Stockholders’ equity: Common stock, $ 0.001 par value, 25,000,000 shares authorized; 4,073,757 and 2,823,072 shares issued and outstanding at December 31, 2022 and 2021, respectively 4,074 2,823 Additional paid-in capital 30,179,017 24,297,229 Accumulated deficit (21,614,289 ) (21,638,316 ) Total stockholders’ equity 8,568,802 2,661,736 Total liabilities and stockholders’ equity $ 19,943,142 $ 11,962,132 See Notes to these consolidated financial statements F-3 INTELLINETICS, INC. and SUBSIDIARIES Consolidated Statements of Operations 2022 2021 For the Twelve Months Ended December 31, 2022 2021 Revenues: Sale of software $ 159,084 $ 78,450 Software as a service 4,017,409 1,441,683 Software maintenance services 1,387,885 1,350,470 Professional services 7,357,937 7,468,716 Storage and retrieval services 1,094,613 1,120,946 Total revenues 14,016,928 11,460,265 Cost of revenues: Sale of software 64,577 14,828 Software as a service 701,433 333,001 Software maintenance services 79,738 81,641 Professional services 3,908,205 3,709,348 Storage and retrieval services 353,817 378,465 Total cost of revenues 5,107,770 4,517,283 Gross profit 8,909,158 6,942,982 Operating expenses: General and administrative 4,945,214 4,044,296 Change in fair value of earnout liabilities 87,652 141,414 Transaction costs 355,281 - Sales and marketing 1,971,493 1,378,352 Depreciation and amortization 722,197 413,932 Total operating expenses 8,081,837 5,977,994 Income from operations 827,321 964,988 Other (expense) income Gain on extinguishment of debt - 845,083 Interest expense (803,294 ) (452,120 ) Total other (expense) income, net (803,294 ) 392,963 Income before income taxes 24,027 1,357,951 Net income $ 24,027 $ 1,357,951 Basic net income per share: $ 0.01 $ 0.48 Diluted net income per share: $ 0.01 $ 0.44 Weighted average number of common shares outstanding - basic 3,767,299 2,822,972 Weighted average number of common shares outstanding - diluted 4,295,817 3,104,820 See Notes to these consolidated financial statements F-4 INTELLINETICS, INC. and SUBSIDIARIES Consolidated Statement of Stockholders’ Equity For the Twelve Months Ended December 31, 2022 and 2021 Shares Amount Capital Deficit Total Common Stock Additional Paid-in Accumulated Shares Amount Capital Deficit Total Balance, December 31, 2020 2,810,865 $ 2,811 $ 24,147,488 $ (22,996,267 ) $ 1,154,032 Stock Issued to Directors 12,207 12 57,488 - 57,500 Stock Option Compensation - - 92,253 - 92,253 Net Income - - - 1,357,951 1,357,951 Balance, December 31, 2021 2,823,072 $ 2,823 $ 24,297,229 $ (21,638,316 ) $ 2,661,736 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 - - 363,950 - 363,950 Stock Issued 1,242,588 1,243 5,739,515 - 5,740,758 Equity Issuance Costs - - (492,182 ) - (492,182 ) Warrants Issued and Extended - - 213,013 - 213,013 Net Income - - - 24,027 24,027 Balance, December 31, 2022 4,073,757 $ 4,074 $ 30,179,017 $ (21,614,289 ) $ 8,568,802 See Notes to these consolidated financial statements F-5 INTELLINETICS, INC. and SUBSIDIARIES Consolidated Statements of Cash Flows 2022 2021 For the Twelve Months Ended December 31, 2022 2021 Cash flows from operating activities: Net income $ 24,027 $ 1,357,951 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 722,197 413,932 Bad debt expense (recovery) 42,129 (11,187 ) Loss on disposal of fixed assets 24,473 - Parts and supplies reserve change - 9,000 Amortization of deferred financing costs 216,381 103,739 Amortization of debt discount 102,400 106,666 Right of use asset, operating 641,421 635,649 Amortization of right of use asset, finance 6,708 - Stock issued for services 57,500 57,500 Stock option compensation 363,950 92,253 Gain on extinguishment of debt - (845,083 ) Change in fair value of earnout liabilities 87,652 141,414 Changes in operating assets and liabilities: Accounts receivable 81,227 (372,492 ) Accounts receivable, unbilled (151,628 ) 78,740 Parts and supplies 3,470 (5,907 ) Prepaid expenses and other current assets (176,596 ) (93,745 ) Accounts payable and accrued expenses 173,480 141,562 Lease liabilities, operating, current and long-term (616,070 ) (618,986 ) Deferred compensation (100,828 ) - Accrued interest, current and long-term - 442 Deferred revenues 486,885 198,518 Total adjustments 1,964,751 32,015 Net cash provided by operating activities 1,988,778 1,389,966 Cash flows from investing activities: Cash paid to acquire business (6,383,269 ) - Capitalization of internal use software (376,345 ) (38,305 ) Purchases of property and equipment (200,980 ) (552,180 ) Net cash used in investing activities (6,960,594 ) (590,485 ) Cash flows from financing activities: Payment of earnout liabilities (1,018,333 ) (954,733 ) 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 portion of finance lease liability (5,366 ) - Repayment of notes payable (1,019,550 ) - Net cash provided by (used in) financing activities 5,915,667 (954,733 ) Net increase (decrease) in cash 943,851 (155,252 ) Cash - beginning of period 1,752,630 1,907,882 Cash - end of period $ 2,696,481 $ 1,752,630 Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 496,805 $ 242,545 Cash paid during the period for income taxes $ 12,888 $ 4,595 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 - Right-of-use asset obtained in exchange for operating lease liability - 1,836,256 Right-of-use asset obtained in exchange for finance lease liability 160,990 - 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 consolidated financial statements F-6 INTELLINETICS, INC.
Biggest changeFinancial Statements INTELLINETICS, INC. and SUBSIDIARIES Consolidated Balance Sheets December 31, December 31, 2023 2022 ASSETS Current assets: Cash $ 1,215,248 $ 2,696,481 Accounts receivable, net 1,850,375 1,121,083 Accounts receivable, unbilled 1,320,837 596,410 Parts and supplies, net 110,272 73,221 Contract assets 140,165 80,378 Prepaid expenses and other current assets 367,478 325,466 Total current assets 5,004,375 4,893,039 Property and equipment, net 924,257 1,068,706 Right of use assets, operating 2,532,928 3,200,191 Right of use assets, finance 219,777 154,282 Intangible assets, net 3,909,338 4,419,646 Goodwill 5,789,821 5,789,821 Other assets 645,764 417,457 Total assets $ 19,026,260 $ 19,943,142 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 194,454 $ 370,300 Accrued compensation 337,884 411,683 Accrued expenses 164,103 114,902 Lease liabilities, operating - current 712,607 692,074 Lease liabilities, finance - current 49,926 22,493 Deferred revenues 2,927,808 2,754,064 Earnout liabilities - current - 700,000 Notes payable - current - 936,966 Total current liabilities 4,386,782 6,002,482 Long-term liabilities: Notes payable - net of current portion 2,209,242 2,085,035 Notes payable - related party 560,602 529,084 Notes payable 560,602 529,084 Lease liabilities, operating - net of current portion 1,942,970 2,624,608 Lease liabilities, finance - net of current portion 175,943 133,131 Total long-term liabilities 4,888,757 5,371,858 Total liabilities 9,275,539 11,374,340 Stockholders’ equity: Common stock, $ 0.001 par value, 25,000,000 shares authorized; 4,113,621 and 4,073,757 shares issued and outstanding at December 31, 2023 and 2022, respectively 4,114 4,074 Additional paid-in capital 30,841,630 30,179,017 Accumulated deficit (21,095,023 ) (21,614,289 ) Total stockholders’ equity 9,750,721 8,568,802 Total liabilities and stockholders’ equity $ 19,026,260 $ 19,943,142 See Notes to these consolidated financial statements F-2 INTELLINETICS, INC. and SUBSIDIARIES Consolidated Statements of Income 2023 2022 For the Twelve Months Ended December 31, 2023 2022 Revenues: Sale of software $ 100,260 $ 159,084 Software as a service 5,133,215 4,017,409 Software maintenance services 1,407,064 1,387,885 Professional services 9,167,428 7,357,937 Storage and retrieval services 1,078,414 1,094,613 Total revenues 16,886,381 14,016,928 Cost of revenues: Sale of software 25,736 64,577 Software as a service 889,135 701,433 Software maintenance services 59,373 79,738 Professional services 4,992,826 3,908,205 Storage and retrieval services 355,356 353,817 Total cost of revenues 6,322,426 5,107,770 Gross profit 10,563,955 8,909,158 Operating expenses: General and administrative 6,455,088 4,945,214 Change in fair value of earnout liabilities - 87,652 Transaction costs - 355,281 Sales and marketing 2,026,871 1,971,493 Depreciation and amortization 974,527 722,197 Total operating expenses 9,456,486 8,081,837 Income from operations 1,107,469 827,321 Other (expense) income Interest expense, net (588,203 ) (803,294 ) Total other (expense) income, net (588,203 ) (803,294 ) Net income $ 519,266 $ 24,027 Basic net income per share: $ 0.13 $ 0.01 Diluted net income per share: $ 0.11 $ 0.01 Weighted average number of common shares outstanding - basic 4,074,194 3,767,299 Weighted average number of common shares outstanding - diluted 4,652,058 4,295,817 See Notes to these consolidated financial statements F-3 INTELLINETICS, INC. and SUBSIDIARIES Consolidated Statement of Stockholders’ Equity For the Twelve Months Ended December 31, 2023 and 2022 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 - - 363,950 - 363,950 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 Income - - - 24,027 24,027 Balance, December 31, 2022 4,073,757 $ 4,074 $ 30,179,017 $ (21,614,289 ) $ 8,568,802 Stock Issued to Directors 39,864 40 198,084 - 198,124 Stock Option Compensation - - 464,529 - 464,529 Net Income - - - 519,266 519,266 Balance, December 31, 2023 4,113,621 $ 4,114 $ 30,841,630 $ (21,095,023 ) $ 9,750,721 See Notes to these consolidated financial statements F-4 INTELLINETICS, INC. and SUBSIDIARIES Consolidated Statements of Cash Flows 2023 2022 For the Twelve Months Ended December 31, 2023 2022 Cash flows from operating activities: Net income $ 519,266 $ 24,027 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 974,527 722,197 Bad debt expense 77,211 42,129 Loss on disposal of fixed assets - 24,473 Amortization of deferred financing costs 177,164 216,381 Amortization of debt discount 22,045 102,400 Amortization of right of use assets, financing 42,115 6,708 Stock issued for services 198,124 57,500 Stock option compensation 464,529 363,950 Change in fair value of earnout liabilities - 87,652 Changes in operating assets and liabilities: Accounts receivable (806,503 ) 81,227 Accounts receivable, unbilled (724,427 ) (151,628 ) Parts and supplies (37,051 ) 3,470 Prepaid expenses and other current assets (101,799 ) (176,596 ) Accounts payable and accrued expenses (200,444 ) 173,480 Operating lease assets and liabilities, net 6,158 25,351 Deferred compensation - (100,828 ) Deferred revenues 173,744 486,885 Total adjustments 265,393 1,964,751 Net cash provided by operating activities 784,659 1,988,778 Cash flows from investing activities: Cash paid to acquire business, net - (6,383,269 ) Capitalization of internal use software (436,837 ) (376,345 ) Purchases of property and equipment (111,240 ) (200,980 ) Net cash used in investing activities (548,077 ) (6,960,594 ) 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 Other net changes in finance lease assets and liabilities (2,411 ) - Principal payments on financing lease liability (34,954 ) (5,366 ) Repayment of notes payable (980,450 ) (1,019,550 ) Net cash (used in) provided by financing activities (1,717,815 ) 5,915,667 Net (decrease) increase in cash (1,481,233 ) 943,851 Cash - beginning of period 2,696,481 1,752,630 Cash - end of period $ 1,215,248 $ 2,696,481 Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 418,790 $ 496,805 Cash paid during the period for income taxes $ 21,667 $ 12,888 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 Right-of-use asset obtained in exchange for finance lease liability 107,610 160,990 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 consolidated financial statements F-5 INTELLINETICS, INC.
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.
Markets served include highly regulated, risk and compliance-intensive markets in K-12 education, public safety, other public sector, healthcare, risk management, financial services, and others. Solutions are sold both directly to end-users and through resellers.
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.
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.
Issues of Stock-Based Compensation The following represent grants of stock options, including the fair value recognized or to be recognized over the requisite service period: Schedule of Grants of Stock Options Over Requisite Service Period Grant date Shares granted (canceled) Exercise price Date fully vested Fair value February 10, 2016 4,200 $ 48.00 February 10, 2020 $ 174,748 December 6, 2016 2,000 38.00 December 6, 2020 63,937 September 25, 2017 15,000 15.00 September 25, 2019 194,149 September 25, 2017 10,000 19.00 September 25, 2019 126,862 January 30, 2019 250 45.00 January 30, 2019 885 March 11, 2019 (33,200 ) - - - March 11, 2019 33,200 6.50 December 6, 2020 24,898 (1) March 11, 2019 10,100 6.50 March 11, 2023 44,591 September 2, 2020 99,000 4.00 September 2, 2024 327,181 April 14, 2022 220,587 6.08 April 14, 2025 1,152,470 (1) Represents incremental fair value of replacement shares compared to canceled shares. 14.
Issues of Stock-Based Compensation The following represent grants of stock options, including the fair value recognized or to be recognized over the requisite service period: Schedule of Stock Options Grant Grant date Shares granted (canceled) Exercise price Date fully vested Fair value February 10, 2016 4,200 $ 48.00 February 10, 2020 $ 174,748 December 6, 2016 2,000 38.00 December 6, 2020 63,937 September 25, 2017 15,000 15.00 September 25, 2019 194,149 September 25, 2017 10,000 19.00 September 25, 2019 126,862 January 30, 2019 250 45.00 January 30, 2019 885 March 11, 2019 (33,200 ) - - - March 11, 2019 33,200 6.50 December 6, 2020 24,898 (1) March 11, 2019 10,100 6.50 March 11, 2023 44,591 September 2, 2020 99,000 4.00 September 2, 2024 327,181 April 14, 2022 220,587 6.08 April 14, 2025 1,152,470 (1) Represents incremental fair value of replacement shares compared to canceled shares. 14.
Total capitalized costs to obtain contracts are included in contract assets on our consolidated balance sheets. l) Sales taxes Sales taxes charged to and collected from customers as part of our sales transactions are excluded from revenues, as well as the determination of transaction price for contracts with multiple performance obligations, and recorded as a liability to the applicable governmental taxing authority. m) Disaggregation of revenue We provide disaggregation of revenue based on product groupings in our consolidated statements of operations as we believe this best depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
Total capitalized costs to obtain contracts are included in contract assets on our consolidated balance sheets. l) Sales taxes Sales taxes charged to and collected from customers as part of our sales transactions are excluded from revenues, as well as the determination of transaction price for contracts with multiple performance obligations, and recorded as a liability to the applicable governmental taxing authority. m) Disaggregation of revenue We provide disaggregation of revenue based on product groupings in our consolidated statements of income as we believe this best depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
Schedule of Related Party Transactions Name of Investor Relationship to Intellinetics Number of Shares Purchased Amount of Notes Purchased Date of Transaction Michael N. Taglich Beneficially owns more than 5% of the common stock of Intellinetics. 262,986 - 04/01/2022 Robert F.
Schedule of Related Party Transactions Name of Investor Relationship to Intellinetics Number of Shares Purchased Amount of Notes Purchased Date of Transaction Michael N. Taglich Director; Beneficially owns more than 5% of the common stock of Intellinetics. 262,986 - 04/01/2022 Robert F.
Warrants The following sets forth the warrants to purchase our common stock that were outstanding as of December 31, 2022: ● 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 The following sets forth the warrants to purchase our common stock that were outstanding as of December 31, 2023: ● 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.
F-13 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.
F-12 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.
Schedule of Estimated Values of Warrants Valuation Assumptions 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 % F-22 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.
Schedule of Estimated Values of Warrants Valuation Assumptions 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 % F-21 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.
Diluted earnings per share exclude all diluted potential shares if their effect is anti-dilutive, including warrants or options which are out-of-the-money and for those periods with a net loss. The twelve months ended December 31, 2022 and 2021 reported net income. Income Taxes We file a consolidated federal income tax return with our subsidiaries.
Diluted earnings per share exclude all diluted potential shares if their effect is anti-dilutive, including warrants or options which are out-of-the-money and for those periods with a net loss. The twelve months ended December 31, 2023 and 2022 reported net income. Income Taxes We file a consolidated federal income tax return with our subsidiaries.
F-21 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 .
F-20 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 addition, we assess the credit-worthiness of each reseller, and if the reseller is undercapitalized or in financial difficulty, any revenues expected to emanate from such resellers are deferred and recognized only when cash is received and all other revenue recognition criteria are met. F-9 k) Contract costs We capitalize the incremental costs of obtaining a contract with a customer.
In addition, we assess the credit-worthiness of each reseller, and if the reseller is undercapitalized or in financial difficulty, any revenues expected to emanate from such resellers are deferred and recognized only when cash is received and all other revenue recognition criteria are met. F-8 k) Contract costs We capitalize the incremental costs of obtaining a contract with a customer.
Revenues from contracts are primarily within the United States. International revenues were not material to the consolidated financial statements for the years ended December 31, 2022 and 2021. n) Significant financing component Our customers typically do not pay in advance for goods or services to be transferred in excess of one year.
Revenues from contracts are primarily within the United States. International revenues were not material to the consolidated financial statements for the years ended December 31, 2023 and 2022. n) Significant financing component Our customers typically do not pay in advance for goods or services to be transferred in excess of one year.
F-8 g) Contract balances When the timing of our delivery of goods or services is different from the timing of payments made by customers, we recognize either a contract asset (performance precedes contractual due date) or a contract liability (customer payment precedes performance). Customers that prepay are represented by deferred revenue until the performance obligation is satisfied.
F-7 g) Contract balances When the timing of our delivery of goods or services is different from the timing of payments made by customers, we recognize either a contract asset (performance precedes contractual due date) or a contract liability (customer payment precedes performance). Customers that prepay are represented by deferred revenue until the performance obligation is satisfied.
The impairment loss, if any, is measured as the amount by which the carrying amount exceeds fair value, which for this purpose is based upon the discounted projected future cash flows of the asset or asset group. There was no impairment of long lived assets in the twelve month periods ended 2022 or 2021.
The impairment loss, if any, is measured as the amount by which the carrying amount exceeds fair value, which for this purpose is based upon the discounted projected future cash flows of the asset or asset group. There was no impairment of long lived assets in the twelve month periods ended 2023 or 2022.
F-11 Purchase Accounting Related Fair Value Measurements We allocate the purchase price, including contingent consideration, of our acquisitions to the assets and liabilities acquired, including identifiable intangible assets, based on their respective fair values at the date of acquisition, with the exception of acquired contract assets and contract liabilities, which are measured under ASC 606.
F-10 Purchase Accounting Related Fair Value Measurements We allocate the purchase price, including contingent consideration, of our acquisitions to the assets and liabilities acquired, including identifiable intangible assets, based on their respective fair values at the date of acquisition, with the exception of acquired contract assets and contract liabilities, which are measured under ASC 606.
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.
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 state, county, and municipal governments.
Reclassifications Certain amounts reported in prior filings of the consolidated financial statements have been reclassified to conform to current presentation. F-14 4. Business Acquisitions On April 1, 2022, we entered into an asset purchase agreement to acquire substantially all of the assets of Yellow Folder.
F-13 Reclassifications Certain amounts reported in prior filings of the consolidated financial statements have been reclassified to conform to current presentation. 4. Business Acquisitions On April 1, 2022, we entered into an asset purchase agreement to acquire substantially all of the assets of Yellow Folder.
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 97 % of the remaining performance obligations over the next 12 months, with the remainder recognized thereafter.
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 98 % of the remaining performance obligations over the next 12 months, with the remainder recognized thereafter.
Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. A 100 % valuation allowance has been established on deferred tax assets at December 31, 2022 and 2021, due to the uncertainty of our ability to realize future taxable income.
Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. A 100 % valuation allowance has been established on deferred tax assets at December 31, 2023 and 2022, due to the uncertainty of our ability to realize future taxable income.
Level 3 inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable. F-16 The carrying values of cash and equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value because of its short maturity.
Level 3 inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable. F-15 The carrying values of cash and equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value because of its short maturity.
Warrants to purchase 124,258 shares of common stock were issued during the year ended December 31, 2022 at a fair value determined to be $ 3.91 per warrant utilizing the Black-Scholes valuation model.
No warrants were issued during 2023. Warrants to purchase 124,258 shares of common stock were issued during the year ended December 31, 2022 at a fair value determined to be $ 3.91 per warrant utilizing the Black-Scholes valuation model.
Acquisition costs which include legal and other professional fees of $ 355,281 for the twelve months ended December 31, 2022, were expensed as nonrecurring transaction costs and are included in transaction costs in the accompanying consolidated statements of operations.
Acquisition costs which include legal and other professional fees of $ 355,281 for the twelve months ended December 31, 2022, were expensed as nonrecurring transaction costs and are included in transaction costs in the accompanying consolidated statements of income.
The estimated value of the warrants issued during the year ended December 31, 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. No warrants were issued during 2021.
The estimated value of the warrants issued during the year ended December 31, 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.
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.
The Document Management Segment provides cloud-based and premise-based content services software, including document management and payables automation. 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.
As of December 31, 2022 and 2021, unamortized debt issuance costs and unamortized debt discount were reflected within short and long term liabilities on the consolidated balance sheets, netted with the corresponding notes payable balance.
As of December 31, 2023 and 2022, unamortized debt issuance costs and unamortized debt discount were reflected within short and long term liabilities on the consolidated balance sheets, netted with the corresponding notes payable balance.
F-7 b) Sale of software as a service Sale of software as a service (“SaaS”) consists of revenues from arrangements that provide customers the use of our software applications, as a service, typically billed on a monthly or annual basis.
F-6 b) Sale of software as a service Sale of software as a service (“SaaS”) consists of revenues from arrangements that provide customers the use of our software applications, as a service, typically billed on a monthly or annual basis.
With respect to all notes payable – related parties outstanding, interest expense, including the amortization of debt issuance costs, for the years ended December 31, 2022 and was $ 77,638 and $ 0 , 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).
With respect to all notes payable – related parties outstanding, interest expense, including the amortization of debt issuance costs, for the years ended December 31, 2023 and 2022 was $ 103,518 and $ 77,638 , 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 inputs used to calculate the fair value of the earnout liabilities are considered to be Level 3 inputs due to the lack of relevant market activity and significant management judgment. Key unobservable inputs include revenue growth rates, which ranged from 0% to 7%, and volatility rates, which were 20% for gross profits.
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 unaudited pro forma information presents a summary of the consolidated results of operations for the Company as if the acquisition of Yellow Folder had occurred on January 1, 2021.
The following unaudited pro forma information presents a summary of the consolidated results of operations for the Company as if the acquisition of Yellow Folder had occurred on January 1, 2022.
For each of the above listed leases, management has determined it will utilize the base rental period and have not considered any renewal periods.
Leases For each of the below listed leases, management has determined it will utilize the base rental period and have not considered any renewal periods.
As of December 31, 2022 and 2021, unamortized deferred financing costs were reflected within long term liabilities on the consolidated balance sheets.
As of December 31, 2023 and 2022, unamortized deferred financing costs were reflected within long term liabilities on the consolidated balance sheets.
Accounts receivable balances from our two largest customers at December 31, 2022 have been partially collected. F-24 15. Certain Relationships and Related Transactions Certain Relationships and Related Transactions The following is a summary of the related person transactions that Intellinetics has participated in at any time during the reporting period.
Accounts receivable balances from our two largest customers at December 31, 2023 have been partially collected. F-23 15. Certain Relationships and Related Transactions Certain Relationships and Related Transactions The following is a summary of the related person transactions that Intellinetics has participated in at any time during the reporting period.
Stock-Based Compensation We account for stock-based payments in accordance with ASC 718, “Compensation - Stock Compensation,” which requires that such equity instruments be measured at their fair values on the grant date. Stock-based payments to employees include grants of stock that are recognized in the consolidated statement of operations based on their fair values at the date of grant.
Stock-Based Compensation We account for stock-based payments in accordance with ASC 718, “Compensation - Stock Compensation,” which requires that such equity instruments be measured at their fair values on the grant date. Stock-based payments to employees include grants of stock that are recognized in the consolidated statements of income based on their fair values at the date of grant.
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.
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 2023.
We have earnout liabilities related to our two 2020 acquisitions which are measured on a recurring basis and recorded at fair value, measured using probability-weighted analysis and discounted using a rate that appropriately captures the risks associated with the obligation.
We had earnout liabilities related to 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.
Notes Payable - Related Parties Summary of Notes Payable to Related Parties The table below summarizes all notes payable to related parties at December 31, 2022 and 2021: Schedule of Notes Payable December 31, 2022 December 31, 2021 Notes payable – “2022 Related Note” $ 600,000 $ - Notes payable $ 600,000 $ - Less unamortized debt issuance costs (70,916 ) - Long-term portion of notes payable $ 529,084 $ - 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 December 31, Amount 2025 $ 600,000 Total $ 600,000 As of December 31, 2022 and 2021, accrued interest for these notes payable – related parties was $ 0 .
Notes Payable - Related Parties Summary of Notes Payable to Related Parties The table below summarizes all notes payable to related parties at December 31, 2023 and 2022: Schedule of Notes Payable December 31, 2023 December 31, 2022 Notes payable – “2022 Related Note” $ 600,000 $ 600,000 Less unamortized debt issuance costs (39,398 ) (70,916 ) Long-term portion of notes payable $ 560,602 $ 529,084 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 December 31, Amount 2025 $ 600,000 Total $ 600,000 As of December 31, 2023 and 2022, accrued interest for these notes payable – related parties was $ 0 .
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 years ended December 31, 2022 and 2021 was $ 737,949 and $ 452,120 , respectively. 2022 Unrelated Notes On April 1, 2022, we sold $ 2,364,500 in 12% Subordinated Notes (“2022 Unrelated Notes”) to unrelated accredited investors .
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 years ended December 31, 2023 and 2022 was $ 514,480 and $ 737,949 , respectively. 2022 Unrelated Notes On April 1, 2022, we sold $ 2,364,500 in 12% Subordinated Notes (“2022 Unrelated Notes”) to unrelated accredited investors .
For the years ended December 31, 2022, and 2021, government contracts, including K-12 education, represented approximately 77% and 72% of our net revenues, respectively. A significant portion of our sales to resellers represent ultimate sales to government agencies.
For the years ended December 31, 2023, and 2022, government contracts, including K-12 education, represented approximately 80 % and 77 % of our net revenues, respectively. A significant portion of our sales to resellers represent ultimate sales to government agencies.
Schedule of Pro Forma Information For the twelve months ended (unaudited) (unaudited) December 31, 2022 December 31, 2021 Total revenues $ 14,794,780 $ 14,273,739 Net income $ 58,543 $ 1,316,854 Basic net income per share $ 0.01 $ 0.32 Diluted net income per share $ 0.01 $ 0.29 The unaudited pro forma 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.
Schedule of Pro Forma Information For the twelve months ended December 31, 2022 (unaudited) Total revenues $ 14,794,780 Net income $ 58,543 Basic net income per share $ 0.01 Diluted net income per share $ 0.01 The unaudited pro forma 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.
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 offering was recorded at $ 116,793 , for the year ended December 31, 2022.
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 offering was recorded at $ 155,724 and $ 116,793 , for the years ended December 31, 2023 and 2022.
Changes in fair value are recorded in change in fair value of earnout liabilities in our consolidated statements of operations. 7.
Changes in fair value are recorded in change in fair value of earnout liabilities in our consolidated statements of income. 7.
Advertising We expense the cost of advertising as incurred. Advertising expense for the years ended December 31, 2022 and 2021 amounted to $ 25,830 and $ 10,237 , respectively. Earnings 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.
Advertising We expense the cost of advertising as incurred. Advertising expense for the years ended December 31, 2023 and 2022 amounted to $ 26,404 and $ 25,830 , respectively. Earnings 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.
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 $ 99,589 and $ 103,739 for the years ended December 31, 2022 and 2021.
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 $ 21,439 and $ 99,589 for the years ended December 31, 2023 and 2022.
The following table presents changes in our contract liabilities during the years ended December 31, 2022 and 2021: Balance at Beginning of Period Addition from acquisition (Note 4) Billings Recognized Revenue Balance at End of Period Year ended December 31, 2022 Contract liabilities: Deferred revenue $ 1,194,649 $ 860,456 $ 7,107,625 $ (6,408,666 ) $ 2,754,064 Year ended December 31, 2021 Contract liabilities: Deferred revenue $ 996,131 $ - $ 3,700,828 $ (3,502,310 ) $ 1,194,649 i) Rights of return and customer acceptance We do not generally offer variable consideration, financing components, rights of return or any other incentives such as concessions, product rotation, or price protection and, therefore, does not provide for or make estimates of rights of return and similar incentives.
The following table presents changes in our contract liabilities during the years ended December 31, 2023 and 2022: Balance at Beginning of Period Addition from acquisition (Note 4) Billings Recognized Revenue Balance at End of Period Year ended December 31, 2023 Contract liabilities: Deferred revenue $ 2,754,064 $ - $ 7,808,195 $ (7,634,451 ) $ 2,927,808 Year ended December 31, 2022 Contract liabilities: Deferred revenue $ 1,194,649 $ 860,456 $ 7,107,625 $ (6,408,666 ) $ 2,754,064 i) Rights of return and customer acceptance We do not generally offer variable consideration, financing components, rights of return or any other incentives such as concessions, product rotation, or price protection and, therefore, does not provide for or make estimates of rights of return and similar incentives.
Common Stock As of December 31, 2022, 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”).
Common Stock As of December 31, 2023, 4,113,621 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”).
Taglich, each beneficial owners of more than 5% of our common stock, are also both principals of Taglich Brothers, Inc. We retained Taglich Brothers, Inc. on an exclusive basis to render financial advisory and investment banking services to us in connection with our acquisition of Yellow Folder.
Taglich, each beneficial owners of more than 5% of our common stock, are both principals of Taglich Brothers, Inc ., and Michael N. Taglich is a director of Intellinetics. We retained Taglich Brothers, Inc. on an exclusive basis to render financial advisory and investment banking services to us in connection with our acquisition of Yellow Folder.
The following table provides a summary of the changes in fair value of the earnout liabilities for the years ended December 31, 2022 and 2021: Summary of Changes in Fair Value of Earnout Liabilities Year ended December 31, 2022 Fair value at January 1, 2022 $ 1,630,681 Fair value, beginning balance $ 1,630,681 Payments (1,018,333 ) Change in fair value 87,652 Fair value at December 31, 2022 $ 700,000 Fair value, ending balance $ 700,000 Year ended December 31, 2021 Fair value at January 1, 2021 $ 2,444,000 Fair value, beginning balance $ 2,444,000 Payments (954,733 ) Change in fair value 141,414 Fair value at December 31, 2021 $ 1,630,681 Fair value, ending balance $ 1,630,681 The fair values of amounts owed are recorded in the current and long-term portions of earnout liabilities in our consolidated balance sheets.
The following table provides a summary of the changes in fair value of the earnout liabilities for the years ended December 31, 2023 and 2022: Summary of Changes in Fair Value of Earnout Liabilities Year ended December 31, 2023 Fair value at January 1, 2023 $ 700,000 Fair value, beginning balance $ 700,000 Payments (700,000 ) Fair value at December 31, 2023 $ - Fair value, ending balance $ - Year ended December 31, 2022 Fair value at January 1, 2022 $ 1,630,681 Fair value, beginning balance $ 1,630,681 Payments (1,018,333 ) Change in fair value 87,652 Fair value at December 31, 2022 $ 700,000 Fair value , ending balance $ 700,000 The fair values of amounts owed are recorded in the current portions of earnout liabilities in our consolidated balance sheets.
As of December 31, 2021, 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 $ 16,835 .
As of December 31, 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 $ 72,212 .
During the years ended December 31, 2022 and 2021, our largest customer, the State of Michigan, accounted for 38% and 47% , respectively, of our total revenues for each period, and our second largest customer, Rocket Mortgage, accounted for 6% and 9% , respectively, of our total revenues.
During the years ended December 31, 2023 and 2022, our largest customer, the State of Michigan, accounted for 35 % and 38 %, respectively, of our total revenues for each period, and our second largest customer, Rocket Mortgage, accounted for 5 % and 6 %, respectively, of our total revenues.
As of December 31, 2022, accounts receivable concentrations from our two largest customers were 44% and 7% of gross accounts receivable, respectively by customer. As of December 31, 2021, accounts receivable concentrations from our two largest customers were 65% and 7% of our gross accounts receivable, respectively by customer.
As of December 31, 2023, accounts receivable concentrations from our two largest customers were 62 % and 3 % of gross accounts receivable, respectively by customer. As of December 31, 2022, accounts receivable concentrations from our two largest customers were 44 % and 7 % of gross accounts receivable, respectively by customer.
The pro forma financial information assumes that the companies were combined as of January 1, 2021. F-15 The following tables present the amounts of revenue and earnings of Yellow Folder since the acquisition date included in the consolidated income statement for the reporting period.
The pro forma financial information assumes that the companies were combined as of January 1, 2022. F-14 The following table presents the amounts of revenue and earnings of Yellow Folder since the acquisition date included in the consolidated income statement for the reporting period.
The weighted average assumptions that were used in calculating such values during the year ended December 31, 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 14, 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 years ended December 31, 2022 and 2021 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, 2022 144,860 $ 5.61 8 years $ 19,200 Granted 220,587 6.08 Outstanding at December 31, 2022 365,447 $ 5.89 8 years $ 19,200 Exercisable at December 31, 2022 93,085 $ 6.44 7 years $ 19,200 Weighted- Weighted- Average Shares Average Remaining Aggregate Under Exercise Contractual Intrinsic Option Price Life Value Outstanding at January 1, 2021 145,360 $ 5.61 9 years $ 19,200 Forfeited and expired (500 ) 6.50 Outstanding at December 31, 2021 144,860 $ 5.61 8 years $ 19,200 Exercisable at December 31, 2021 66,060 $ 7.35 8 years $ 19,200 F-23 During the years ended December 31, 2022 and 2021, stock-based compensation for options was $ 363,950 and $ 92,253 , respectively.
The weighted average assumptions that were used in calculating such values during the year ended December 31, 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 14, 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 years ended December 31, 2023 and 2022 is as follows: Schedule of Stock Option Activity 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 Forfeited (7,560 ) 15.34 (19,200 ) Outstanding at December 31, 2023 357,887 $ 5.69 8 years $ - Exercisable at December 31, 2023 186,594 $ 5.60 7 years $ - 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 Granted 220,587 6.08 Outstanding at December 31, 2022 365,447 $ 5.89 8 years $ 19,200 Exercisable at December 31, 2022 93,085 $ 6.44 7 years $ 19,200 F-22 During the years ended December 31, 2023 and 2022, stock-based compensation for options was $ 464,529 and $ 363,950 , respectively.
The total fair value of stock options that vested during the years ended December 31, 2022, and 2021 was $ 91,913 .
The total fair value of stock options that vested during the years ended December 31, 2023 and 2022 was $ 467,771 and $ 91,913 , respectively.
Goodwill The carrying value of goodwill is not amortized, but is tested for impairment annually as of December 31, as well as on an interim basis whenever events or changes in circumstances indicate that the carrying amount of a reporting unit may not be recoverable.
Amortization is computed over the useful life of the related assets on a straight-line method. Goodwill The carrying value of goodwill is not amortized, but is tested for impairment annually as of December 31, as well as on an interim basis whenever events or changes in circumstances indicate that the carrying amount of a reporting unit may not be recoverable.
As of December 31, 2022 and 2021, there was $ 1,019,140 and $ 230,620 , 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 .
As of December 31, 2023 and 2022, there was $ 547,981 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 one year.
Notes Payable – Unrelated Parties Summary of Notes Payable to Unrelated Parties The table below summarizes all notes payable at December 31, 2022 and 2021, respectively with the exception of related party notes disclosed in Note 9 “Notes Payable - Related Parties.” Schedule of Notes Payable December 31, 2022 December 31, 2021 2022 Unrelated Notes $ 2,364,500 $ - 2020 Notes 980,450 2,000,000 Total notes payable $ 3,344,950 $ 2,000,000 Less unamortized debt issuance costs (300,904 ) (121,029 ) Less unamortized debt discount (22,045 ) (124,444 ) Less current portion, net (936,966 ) - Long-term portion of notes payable $ 2,085,035 $ 1,754,527 Future minimum principal payments of the Notes Payable to Unrelated Parties are as follows: Schedule of Future Minimum Principal Payments of Notes Payable As of December 31, Amount 2023 $ 980,450 2025 2,364,500 Total $ 3,344,950 As of December 31, 2022 and 2021, accrued interest for these notes payable with the exception of the related party notes in Note 9, “Notes Payable - Related Parties,” was $ 0 .
Notes Payable – Unrelated Parties Summary of Notes Payable to Unrelated Parties The table below summarizes all notes payable at December 31, 2023 and 2022, respectively with the exception of related party notes disclosed in Note 9 “Notes Payable - Related Parties.” Schedule of Notes Payable December 31, 2023 December 31, 2022 2022 Unrelated Notes $ 2,364,500 $ 2,364,500 2020 Notes - 980,450 Total notes payable $ 2,364,500 $ 3,344,950 Less unamortized debt issuance costs (155,258 ) (300,904 ) Less unamortized debt discount - (22,045 ) Less current portion, net - (936,966 ) Long-term portion of notes payable $ 2,209,242 $ 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 As of December 31, Amount 2025 $ 2,364,500 Total $ 2,364,500 As of December 31, 2023 and 2022, accrued interest for these notes payable with the exception of the related party notes in Note 9, “Notes Payable - Related Parties,” was $ 0 .
Restricted Stock On January 6, 2022 and February 15, 2021, we issued 8,097 shares and 12,207 shares, respectively, 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.
Restricted Stock On December 28, 2023 and January 6, 2022, we issued 39,864 shares and 8,097 shares, respectively, 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.
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.
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 We made no deferred incentive compensation payments during 2023.
F-25 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.
We made no deferred incentive compensation payments during 2021. F-19 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.
F-18 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.
Taglich Beneficially owns more than 5% of the Common Stock of Intellinetics. 179,652 $ 600,000 04/01/2022 Promoters and Certain Control Persons William M. Cooke, a director of Intellinetics, is the Vice President of Investment Banking at Taglich Brothers, Inc. Robert F. Taglich and Michael N.
Taglich Beneficially owns more than 5% of the Common Stock of Intellinetics. 179,652 $ 600,000 04/01/2022 Promoters and Certain Control Persons William M. Cooke, chair of the board of directors of Intellinetics, retired from his position as Vice President of Investment Banking at Taglich Brothers, Inc. effective December 31, 2023. Robert F. Taglich and Michael N.
We issued and sold (i) shares of common stock, at a price of $ 4.62 per share and (ii) 12% subordinated notes. The principal amount of the 12% subordinated notes, together with any accrued and unpaid interest thereon, become due and payable from February 28, 2023 to August 31, 2023.
We issued and sold (i) shares of common stock, at a price of $ 4.62 per share and (ii) 12% subordinated notes. The principal amount of the 12% subordinated notes, together with any accrued and unpaid interest thereon, is due and payable on March 30, 2025.
The following tables present changes in our accounts receivable and contract assets during the years ended December 31, 2022, and 2021: Schedule of Changes in Contract Assets and Liabilities Balance at Beginning of Period Addition from acquisition (Note 5) Billings Payments Received Balance at End of Period Year ended December 31, 2022 Accounts receivable $ 1,176,059 $ 68,380 $ 14,422,286 $ (14,545,641 ) $ 1,121,083 Year ended December 31, 2021 Accounts receivable $ 792,380 $ - $ 11,871,874 $ (11,488,195 ) $ 1,176,059 Balance at Beginning of Period Revenue Recognized in Advance of Billings Billings Balance at End of Period Year ended December 31, 2022 Accounts receivable, unbilled $ 444,782 $ 3,776,612 $ (3,624,984 ) $ 596,410 Year ended December 31, 2021 Accounts receivable, unbilled $ 523,522 $ 4,213,550 $ (4,292,290 ) $ 444,782 Balance at Beginning of Period Commissions Paid Commissions Recognized Balance at End of Period Year ended December 31, 2022 Contract assets $ 78,556 $ 120,966 $ (119,144 ) $ 80,378 Year ended December 31, 2021 Contract assets $ 31,283 $ 88,168 $ (40,895 ) $ 78,556 h) 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.
The following tables present changes in our accounts receivable and contract assets during the years ended December 31, 2023, and 2022: Schedule of Changes in Contract Assets and Liabilities Balance at Beginning of Period Addition from acquisition (Note 5) Billings Payments Received Balance at End of Period Year ended December 31, 2023 Accounts receivable $ 1,121,083 $ - - - - $ 16,389,136 $ (15,659,844) $ 1,850,375 Year ended December 31, 2022 Accounts receivable $ 1,176,059 $ 68,380 $ 14,422,286 $ (14,545,641 ) $ 1,121,083 Balance at Beginning of Period Revenue Recognized in Advance of Billings Billings Balance at End of Period Year ended December 31, 2023 Accounts receivable, unbilled $ 596,410 $ 5,195,866 $ (4,471,439 ) $ 1,320,837 Year ended December 31, 2022 Accounts receivable, unbilled $ 444,782 $ 3,776,612 $ (3,624,984 ) $ 596,410 Balance at Beginning of Period Commissions Paid Commissions Recognized Balance at End of Period Year ended December 31, 2023 Contract assets $ 80,378 $ 194,455 $ (134,668 ) $ 140,165 Year ended December 31, 2022 Contract assets $ 78,556 $ 120,966 $ (119,144 ) $ 80,378 h) 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.
The following table represents future amortization expense for intangible assets subject to amortization. Schedule of Amortization Expense for Intangible Assets For the Years Ending December 31, Amount 2023 $ 510,308 2024 510,308 2025 492,841 2026 352,441 2027 326,108 Thereafter 2,227,640 Intangible assets $ 4,419,646 6.
The following table represents future amortization expense for intangible assets subject to amortization. Schedule of Amortization Expense for Intangible Assets For the Years Ending December 31, Amount 2024 $ 510,308 2025 492,841 2026 352,441 2027 326,108 2028 309,129 Thereafter 1,918,511 Intangible assets $ 3,909,338 6.
For the twelve months ended December 31, 2022 Yellow Folder: Total revenues $ 2,460,474 Ne t income $ 520,186 Ne t income (loss) $ 520,186 5.
For the twelve months ended December 31, 2023 For the twelve months ended December 31, 2022 Yellow Folder: Total revenues $ 3,613,764 $ 2,460,474 Net income $ 677,820 $ 520,186 5.
Deferred Compensation Pursuant to an employment agreement, we have accrued incentive compensation totaling $ 0 and $ 100,828 as of December 31, 2022 and 2021, respectively, for one of our founders. During the year ended December 31, 2022, we paid $ 100,828 , in deferred incentive compensation, which amount was reflected as a reduction in our deferred compensation liability.
Pursuant to an employment agreement, during the year ended December 31, 2022, we paid $ 100,828 , in deferred incentive compensation for one of our founders, which amount was reflected as a reduction in our deferred compensation liability. There were no remaining unpaid deferred compensation payments reflected on our consolidated balance sheets as of December 31, 2023 or 2022.
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.
Principal in the amount of $ 845,000 remains 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.
Intangible Assets, Net At December 31, 2022, intangible assets consisted of the following: Schedule of Intangible Assets 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 At December 31, 2021, intangible assets consisted of the following: Estimated Accumulated Useful Life Costs Amortization Net Trade names 10 years $ 119,000 $ (21,817 ) $ 97,183 Customer relationships 5 - 8 years 1,242,000 (370,687 ) 871,313 $ 1,361,000 $ (392,504 ) $ 968,496 Amortization expense for the years ended December 31, 2022 and 2021, amounted to $ 436,850 and $ 216,475 , respectively.
Intangible Assets, Net At December 31, 2023, intangible assets consisted of the following: Schedule of Intangible Assets Estimated Accumulated Useful Life Costs Amortization Net Trade names 10 years $ 297,000 $ (76,767 ) $ 220,233 Proprietary technology 10 years 861,000 (150,675 ) 710,325 Customer relationships 5 - 15 years 4,091,000 (1,112,220 ) 2,978,780 $ 5,249,000 $ (1,339,662 ) $ 3,909,338 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 Amortization expense for the years ended December 31, 2023 and 2022, amounted to $ 510,308 and $ 436,850 , respectively.
Parts and supplies are used for scanning and document conversion services. A provision for potentially obsolete or slow-moving parts and supplies inventory is made based on parts and supplies levels, future sales forecasted and management’s judgment of potentially obsolete parts and supplies. We recorded an allowance of $ 24,000 at December 31, 2022 and 2021.
Costs are determined using the first-in, first-out method. Parts and supplies are used for scanning and document conversion services. A provision for potentially obsolete or slow-moving parts and supplies inventory is made based on parts and supplies levels, future sales forecasted and management’s judgment of potentially obsolete parts and supplies.
Property and Equipment Property and equipment are comprised of the following: Schedule of Property and Equipment December 31, 2022 December 31, 2021 Computer hardware and purchased software $ 1,595,652 $ 1,494,918 Leasehold improvements 395,918 295,230 Furniture and fixtures 71,325 71,325 Property and equipment, gross 2,062,895 1,861,473 Less: accumulated depreciation (994,189 ) (769,693 ) Property and equipment, net $ 1,068,706 $ 1,091,780 Total depreciation expense on our property and equipment for the years ended December 31, 2022 and 2021 amounted to $ 229,599 and $ 197,457 , respectively.
Property and Equipment Property and equipment are comprised of the following: Schedule of Property and Equipment December 31, 2023 December 31, 2022 Computer hardware and purchased software $ 1,437,023 $ 1,352,581 Leasehold improvements 395,919 395,918 Furniture and fixtures 324,296 314,396 Property and equipment, gross 2,157,238 2,062,895 Less: accumulated depreciation (1,232,981 ) (994,189 ) Property and equipment, net $ 924,257 $ 1,068,706 Total depreciation expense on our property and equipment for the years ended December 31, 2023 and 2022 amounted to $ 255,689 and $ 229,599 , respectively.
Information by operating segment is as follows: Schedule of Segment Information Year ended December 31, 2022 Year ended December 31, 2021 Revenues Document Management $ 5,999,726 $ 3,089,669 Document Conversion 8,017,202 8,370,596 Total revenues $ 14,016,928 $ 11,460,265 Gross profit Document Management $ 4,978,163 $ 2,542,135 Document Conversion 3,930,995 4,400,847 Total gross profit $ 8,909,158 $ 6,942,982 Capital additions, net Document Management $ 434,654 $ 44,052 Document Conversion 186,442 546,433 Total capital additions, net $ 621,096 $ 590,485 December 31, 2022 December 31, 2021 Goodwill Document Management $ 3,989,645 $ 522,711 Document Conversion 1,800,176 1,800,176 Total goodwill $ 5,789,821 $ 2,322,887 December 31, 2022 December 31, 2021 Total assets Document Management $ 10,284,143 $ 2,233,419 Document Conversion 9,658,959 9,728,713 Total assets $ 19,943,142 $ 11,962,132 Statement of Cash Flows For purposes of reporting cash flows, cash includes cash on hand and demand deposits held by banks.
Information by operating segment is as follows: Schedule of Segment Information Year ended December 31, 2023 Year ended December 31, 2022 Revenues Document Management $ 7,298,264 $ 5,999,726 Document Conversion 9,588,117 8,017,202 Total revenues $ 16,886,381 $ 14,016,928 Gross profit Document Management $ 6,133,130 $ 4,978,163 Document Conversion 4,430,825 3,930,995 Total gross profit $ 10,563,955 $ 8,909,158 Capital additions, net Document Management $ 441,990 $ 434,654 Document Conversion 106,087 186,442 Total capital additions, net $ 548,077 $ 621,096 December 31, 2023 December 31, 2022 Goodwill Document Management $ 3,989,645 $ 3,989,645 Document Conversion 1,800,176 1,800,176 Total goodwill $ 5,789,821 $ 5,789,821 December 31, 2023 December 31, 2022 Total assets Document Management $ 10,104,004 $ 10,284,143 Document Conversion 8,922,256 9,658,959 Total assets $ 19,026,260 $ 19,943,142 Statement of Cash Flows For purposes of reporting cash flows, cash includes cash on hand and demand deposits held by banks.
F-10 Property and Equipment Property, equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed over the estimated useful lives of the related assets on a straight-line basis. Furniture and fixtures, computer hardware and purchased software are depreciated over three to seven years .
We recorded an allowance of $ 24,000 at December 31, 2023 and 2022. F-9 Property and Equipment Property, equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed over the estimated useful lives of the related assets on a straight-line basis.
Such costs in the amount of $ 43,771 were capitalized during the 2022. No such costs were capitalized during 2021. In accordance with ASC 350-40, “Internal-Use Software,” we capitalize purchase and implementation costs of internal use software.
Such costs in the amount of $ 43,771 were capitalized during the 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.
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.
The entire outstanding principal and unpaid interest of the 2022 Related Note was initially due and payable on March 30, 2025.
Stock compensation of $ 57,500 was recorded on this issuance of restricted common stock for the years ended December 31, 2022 and 2021. Stock Options 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.
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.
In December 2022, a majority of the note holders signed an amendment to extend the maturity date for $ 717,500 of the remaining $ 980,450 in 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.
In December 2022, a majority of the note holders signed an amendment to extend the maturity date for $ 717,500 of the remaining $ 980,450 in 2020 Notes to August 31, 2023, and the outstanding principal and unpaid interest was paid on their respective due dates of February 28, 2023 and August 31, 2023.
The amortization of the debt discount, which will be recognized over the life of the 2020 Notes as interest expense, for the years ended December 31, 2022 and 2021 was $ 102,400 and $ 106,666 , respectively.
We recognized a debt discount of $ 320,000 for the 80,000 shares issued in conjunction with the units. The amortization of the debt discount, which was recognized over the life of the 2020 Notes as interest expense, for the years ended December 31, 2023 and 2022 was $ 22,045 and $ 102,400 , respectively. F-17 9.
Leasehold improvements are amortized over the life of the lease or the asset, whichever is shorter, generally seven to ten years . Upon retirement or other disposition of these assets, the cost and related accumulated depreciation and amortization of these assets are removed from the accounts and the resulting gains and losses are reflected in the results of operations.
Upon retirement or other disposition of these assets, the cost and related accumulated depreciation and amortization of these assets are removed from the accounts and the resulting gains and losses are reflected in the results of operations. Intangible Assets All intangible assets have finite lives and are stated at cost, net of amortization.
Such costs in the amount of $ 376,345 were capitalized during 2022. Such costs in the amount of $ 38,305 were capitalized during 2021. 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.
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 December 31, 2023 and 2022, our consolidated balance sheets included $ 630,979 and $ 402,673 , respectively, in other long-term assets.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeAny significant reduction in the sales efforts or cooperative efforts from our partners could materially impact our revenues. We rely on close cooperation with our resellers for sales and product development as well as for the optimization of opportunities that arise in our competitive environment.
Biggest changeWe rely on close cooperation with our distribution partners for sales and product development as well as for the optimization of opportunities that arise in our competitive environment. In particular, the success of our ERP partner programs are entirely dependent upon our relationships with our ERP partners.
Prior to recommending speculative, low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives, and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative, low-priced securities will not be suitable for at least some customers.
Prior to recommending speculative, low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives, and other information. Under interpretations of these rules, FINRA believes that there is a high probability that low-priced securities will not be suitable for at least some customers.
Any future acquisition involves risks commonly encountered in business relationships, including: ● difficulties in assimilating and integrating the operations, personnel, systems, technologies, finance and accounting functions, internal controls, business policies, and products and services of the acquired business; ● technologies, products or businesses that we acquire may not achieve expected levels of revenue, profitability, benefits or productivity; ● we may not be able to achieve the expected synergies from an acquisition, or it may take longer than expected to achieve those synergies; ● unexpected costs and liabilities and unknown risks associated with the acquisition; ● diversion of management’s time and resources away from our daily operations; ● risks of entering markets in which we have no or limited direct prior experience; ● potential need for restructuring operations or reductions in workforce, which may result in substantial charges to our operations; ● incurring future impairment charges related to diminished fair value of businesses acquired as compared to the price we paid for them; and ● issuing potentially dilutive equity securities, or incurring debt or contingent liabilities, which could harm our financial condition. 9 We cannot assure you that we will make any additional acquisitions, or that any future acquisitions will be successful, will assist us in the accomplishment of our business strategy, or will generate sufficient revenues to offset the associated costs and other adverse effects or will otherwise result in us receiving the intended benefits of the acquisition.
Any future acquisition involves risks commonly encountered in business relationships, including: ● difficulties in assimilating and integrating the operations, personnel, systems, technologies, finance and accounting functions, internal controls, business policies, and products and services of the acquired business; ● technologies, products or businesses that we acquire may not achieve expected levels of revenue, profitability, benefits or productivity; ● we may not be able to achieve the expected synergies from an acquisition, or it may take longer than expected to achieve those synergies; ● unexpected costs and liabilities and unknown risks associated with the acquisition; ● diversion of management’s time and resources away from our daily operations; ● risks of entering markets in which we have no or limited direct prior experience; ● potential need for restructuring operations or reductions in workforce, which may result in substantial charges to our operations; ● incurring future impairment charges related to diminished fair value of businesses acquired as compared to the price we paid for them; and ● issuing potentially dilutive equity securities, or incurring debt or contingent liabilities, which could harm our financial condition. 10 We cannot assure you that we will make any additional acquisitions, or that any future acquisitions will be successful, will assist us in the accomplishment of our business strategy, or will generate sufficient revenues to offset the associated costs and other adverse effects or will otherwise result in us receiving the intended benefits of the acquisition.
Concerns about our practices with regard to the collection, use, disclosure, or security of personal information or other privacy-related matters, even if unfounded and even if we are in compliance with applicable laws, could damage our reputation and harm our business. 14 Breaches, or perceived breaches, in security could result in a negative impact for us and for our customers, potentially affecting our business, assets, revenues, brand, and reputation, and resulting in penalties, fines, litigation, remediation costs, increased insurance costs, and other potential liabilities, in each case depending upon the nature of the information disclosed.
Concerns about our practices with regard to the collection, use, disclosure, or security of personal information or other privacy-related matters, even if unfounded and even if we are in compliance with applicable laws, could damage our reputation and harm our business. 15 Breaches, or perceived breaches, in security could result in a negative impact for us and for our customers, potentially affecting our business, assets, revenues, brand, and reputation, and resulting in penalties, fines, litigation, remediation costs, increased insurance costs, and other potential liabilities, in each case depending upon the nature of the information disclosed.
Additionally, government contracts are generally subject to audits and investigations that could result in various civil and criminal penalties and administrative sanctions, including termination of contracts, refund of a portion of fees received, forfeiture of profits, suspension of payments, fines and suspensions, or debarment from future government business. 13 We are subject to the reporting requirements of federal securities laws, causing us to make significant compliance-related expenditures that may divert resources from other projects, thus impairing its ability to grow.
Additionally, government contracts are generally subject to audits and investigations that could result in various civil and criminal penalties and administrative sanctions, including termination of contracts, refund of a portion of fees received, forfeiture of profits, suspension of payments, fines and suspensions, or debarment from future government business. 14 We are subject to the reporting requirements of federal securities laws, causing us to make significant compliance-related expenditures that may divert resources from other projects, thus impairing its ability to grow.
If future financing is not available or is not available on acceptable terms, we may not be able to fund our future needs, which would have a material adverse effect on our business plans, prospects, results of operations, and financial condition. 15 Shares of our common stock that have not been registered under the Securities Act, regardless of whether such shares are restricted or unrestricted, are subject to resale restrictions imposed by Rule 144.
If future financing is not available or is not available on acceptable terms, we may not be able to fund our future needs, which would have a material adverse effect on our business plans, prospects, results of operations, and financial condition. 16 Shares of our common stock that have not been registered under the Securities Act, regardless of whether such shares are restricted or unrestricted, are subject to resale restrictions imposed by Rule 144.
Although we believe that we have secured proper licenses for all third-party software that is integrated into our products, third parties may assert infringement claims against us in the future. The third parties making these assertions and claims may include non-practicing entities (known as “patent trolls”) whose business model is to obtain patent-licensing revenues from operating companies, such as ours.
Although we believe that we have secured proper licenses for all third-party software that is integrated into our products, third parties may assert infringement claims against us in the future. The third parties making these assertions and claims may include non-practicing entities (known as “patent trolls”) whose business model is to obtain IP-licensing revenues from operating companies, such as ours.
Risks Related to Product Development We need to continue to develop new technologically-advanced products that successfully integrate with the software products and enhancements used by our customers.
Risks Related to Product Development We need to continue to develop new technologically-advanced products that satisfy our customers and successfully integrate with the software products and enhancements used by our customers.
If we are unable to manage growth effectively, our operating results will likely suffer which may, in turn, adversely affect our business. 8 We may be unable to acquire other businesses, technologies or companies or engage in other strategic transactions, and we may not be able to successfully realize the benefits of and may be exposed to a variety of risks from any such strategic transactions.
If we are unable to manage growth effectively, our operating results will likely suffer which may, in turn, adversely affect our business. 9 We may be unable to acquire other businesses, technologies or companies or engage in other strategic transactions, and we may not be able to successfully realize the benefits of and may be exposed to a variety of risks from any such strategic transactions.
Labor is a significant portion of our cost structure and is subject to many external factors, including minimum wage laws, prevailing wage rates, unemployment levels, health insurance costs and other insurance costs and changes in employment and labor legislation or other workplace regulation. Most companies experienced an increase in labor costs in 2022 and expect additional increases in 2023.
Labor is a significant portion of our cost structure and is subject to many external factors, including minimum wage laws, prevailing wage rates, unemployment levels, health insurance costs and other insurance costs and changes in employment and labor legislation or other workplace regulation. Most companies experienced an increase in labor costs in 2023 and expect additional increases in 2024.
The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares. 17 We do not expect to pay any dividends on our common stock for the foreseeable future.
The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares. 18 We do not expect to pay any dividends on our common stock for the foreseeable future.
Similarly, volatility in our stock price could hurt our ability to raise capital for the financing of acquisitions or other reasons. Any of these events, or any other events caused by the current turmoil in domestic or international financial markets, may have a material adverse effect on our business, operating results, and financial condition.
Similarly, volatility in our stock price could hurt our ability to raise capital for the financing of acquisitions or other reasons. Any of these events, or any other events caused by volatility in domestic or international financial markets, may have a material adverse effect on our business, operating results, and financial condition.
Moreover, new products and services may not be profitable, and even if they are profitable, operating margins for new products and businesses may not be as high as the margins we have experienced for our current or historical products and services. 10 Product development is a long, expensive, and uncertain process, and we may terminate one or more of our development programs.
Moreover, new products and services may not be profitable, and even if they are profitable, operating margins for new products and businesses may not be as high as the margins we have experienced for our current or historical products and services. 11 Product development is a long, expensive, and uncertain process, and we may terminate one or more of our development programs.
We expect that we will experience interruptions, delays and outages in service and availability from time to time. 18 The owners of our data centers have no obligation to renew agreements with us on commercially reasonable terms, or at all.
We expect that we will experience interruptions, delays and outages in service and availability from time to time. 19 The owners of our data centers have no obligation to renew agreements with us on commercially reasonable terms, or at all.
For 2021, we had a net income of $1.4 million, including $0.8 million of PPP forgiveness. For 2020, we had a net loss of $2.2 million, including a change in fair value of earnout liabilities of $1.6 million. We have an accumulated deficit of $21.6 million as of December 31, 2022.
For 2021, we had a net income of $1.4 million, including $0.8 million of PPP forgiveness income. For 2020, we had a net loss of $2.2 million, including a change in fair value of earnout liabilities of $1.6 million. We have an accumulated deficit of $21.0 million as of December 31, 2023.
Any substantial sale of our common stock pursuant to Rule 144 may have an adverse effect on the market price of our common stock. 16 The price of our common stock may fluctuate significantly and lead to losses by stockholders. The common stock of public companies can experience extreme price and volume fluctuations.
Any substantial sale of our common stock pursuant to Rule 144 may have an adverse effect on the market price of our common stock. 17 The price of our common stock may fluctuate significantly and lead to losses by stockholders. The common stock of public companies can experience extreme price and volume fluctuations.
Given this environment, there can be no assurance that our current customers will renew their maintenance agreements or agree to the same terms when they renew, which could result in a reduction or loss of maintenance fees.
Given this environment, there can be no assurance that our current customers will renew their subscription agreements or agree to the same terms when they renew, which could result in a reduction or loss of subscription fees.
This could have a material adverse effect on our business. 11 The loss of licenses to use third-party software or the lack of support or enhancement of such software could adversely affect our business. We currently depend upon a limited number of third-party software products.
This could have a material adverse effect on our business. 12 The loss of licenses to use third-party software or the lack of support or enhancement of such software could adversely affect our business. We currently depend upon a limited number of third-party software products.
In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to reduce or curtail our operations. 12 The terms of our promissory notes will restrict our financing flexibility. The terms of promissory notes we issued in 2020 and 2022 contain standard negative covenants customary for transactions of this type.
In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to reduce or curtail our operations. 13 The terms of our promissory notes will restrict our financing flexibility. The terms of promissory notes we issued in 2022 contain standard negative covenants customary for transactions of this type.
As a public company, we expect these rules and regulations to continue to keep our compliance costs high in 2023 and beyond, and to make certain activities more time-consuming and costly.
As a public company, we expect these rules and regulations to continue to keep our compliance costs high in 2024 and beyond, and to make certain activities more time-consuming and costly.
We may not be able to generate sufficient cash to service any indebtedness or contingent transaction consideration that we may incur from time to time, which could force us to sell assets, cease operations, or take other detrimental actions for our business.
We may not be able to generate sufficient cash to service any indebtedness that we may incur from time to time, which could force us to sell assets, cease operations, or take other detrimental actions for our business.
For the years ended December 31, 2022, and 2021, government contracts, including K-12 education, represented approximately 77% and 72% of our net revenues, respectively. The loss of one of our clients or the loss of a meaningful percentage of government contracts could materially affect our business and operating results.
For the years ended December 31, 2023, and 2022, government contracts, including K-12 education, represented approximately 80% and 77% of our net revenues, respectively. The loss of one of our clients or the loss of a meaningful percentage of government contracts could materially affect our business and operating results.
General Risks Global economic conditions and uncertainty are likely to adversely affect our operating results or financing in ways that are hard to predict or to defend against. Our overall performance depends on economic conditions.
General Risks Global economic uncertainty is likely to affect our operating results or financing in ways that are hard to predict or to defend against. Our overall performance depends on economic conditions.
Our competitive position may be adversely affected by our possible inability to effectively protect our intellectual property. 19
Our competitive position may be adversely affected by our possible inability to effectively protect our intellectual property. 20
The markets for our products are intensely competitive, and are subject to rapid technological change and other pressures created by changes in our industry. The convergence of many technologies has resulted in unforeseen competitors arising from companies that were traditionally not viewed as threats to our marketplace.
The markets for our products are intensely competitive, and are subject to rapid technological change and other pressures created by changes in our industry. The convergence of many technologies has resulted in unforeseen competitors arising from companies that were traditionally not viewed as threats to our marketplace, particularly with respect to artificial intelligence (AI).
Claims of infringement are becoming increasingly common as the software industry develops and as related legal protections, including patents are applied to software products. Although we are not aware of any infringement on the rights of third parties, third parties may assert infringement claims against us in the future.
Claims of infringement are common in the software industry and as related legal protections are applied to software products. Although we are not aware of any infringement on the rights of third parties, third parties may assert infringement claims against us in the future.
Also, if new industry standards emerge that we do not anticipate or adapt to, our software products could be rendered obsolete and, as a result, our business and operating results, as well as our ability to compete in the marketplace, would be materially harmed.
Also, if new industry standards emerge that we do not anticipate or adapt to, including more advanced AI-driven solutions, our software products could be rendered obsolete and, as a result, our business and operating results, as well as our ability to compete in the marketplace, would be materially harmed.
Our ability to meet our capital needs in the future will depend on many factors, including maintaining and enhancing our operating cash flow, successfully managing the transition of our recent acquisitions, successfully retaining and growing our client base in the midst of general economic uncertainty including an inflationary environment, and managing any continuing effects of the COVID-19 pandemic on our business.
Our ability to meet our capital needs in the future will depend on many factors, including maintaining and enhancing our operating cash flow, successfully managing the transition of our recent acquisitions, successfully retaining and growing our client base in the midst of general economic uncertainty including an inflationary environment.
From time to time in the ordinary course of our business, we may become involved in various legal proceedings, including commercial, product liability, employment, class action, and other litigation and claims, as well as governmental and other regulatory investigations and proceedings.
From time to time in the ordinary course of our business, we may become involved in various legal proceedings, including commercial, infringement, cybersecurity, employment, class action, workers’ compensation, and other litigation and claims, as well as governmental and other regulatory investigations and proceedings.
Revenues from a limited number of customers have accounted for a substantial percentage of our total revenues. Our two largest clients account for approximately 38% and 6%, and 47% and 9%, of our revenues for the years ended December 31, 2022 and 2021, respectively.
Revenues from a limited number of customers have accounted for a substantial percentage of our total revenues. Our two largest clients account for approximately 35% and 5%, and 38% and 6%, of our revenues for the years ended December 31, 2023 and 2022, respectively.
We currently have approximately $1 million in principal amount of debt maturing from February to August of 2023, and approximately $3 million in principal amount of debt maturing in March of 2025. In addition, we have operated with a history of losses. For 2022, we had a net income of approximately zero (break even).
We currently have approximately $3 million in principal amount of debt maturing in March of 2025. In addition, prior to 2021, we operated with a history of losses. For 2023, we had net income of approximately $0.6 million. For 2022, we had a net income of approximately zero (break-even).
We are unable to predict the extent to which our partners will be successful in marketing and licensing our products. A reduction in partner cooperation or sales efforts, or a decline in the number of channels, could materially reduce revenues.
We are unable to predict the extent to which our partners will be successful in marketing and licensing our products. A reduction in partner cooperation or sales efforts, or a decline in the number of channels, could materially reduce revenues. 8 Reduced IT or enterprise software spending may adversely impact our business.
In addition, the current contraction of the United States and global credit markets could adversely impact our ability to complete sales of our products and services, including maintenance and support renewals.
In addition, the current rise in interest rates in the United States and global credit markets could adversely impact our ability to complete sales of our products and services, including subscription renewals.
If our existing customers fail to renew their maintenance agreements, or if we are unable to generate additional maintenance fees through the licensing of updated products to existing or new customers, our business and future operating results could be adversely affected. 7 Reduced IT or enterprise software spending may adversely impact our business.
If our existing customers fail to renew their subscription agreements, or if we are unable to generate additional subscription fees through the licensing of updated products to existing or new customers, our business and future operating results could be adversely affected.
If we are unable to successfully integrate third-party software to develop new software products and enhancements to existing products, or to complete products currently under development which we license or acquire from third parties, our operating results will materially suffer.
If we are unable to successfully integrate third-party software to develop new software products and enhancements to existing products, or to complete products currently under development which we license or acquire from third parties, our operating results will materially suffer. If our products and services do not gain market acceptance, our operating results may be negatively affected.
A significant portion of our revenues comes from contracts with state and local governments, and their respective agencies, which may terminate most of these contracts at any time, without cause. As discussed above, government contracts constitute a significant portion of our total revenues. At this time, governments and their agencies are operating under increased pressure to reduce spending.
A significant portion of our revenues comes from contracts with state and local governments, school districts, and their respective agencies, which may terminate most of these contracts at any time, without cause. As discussed above, government contracts constitute a significant portion of our total revenues. Contracts at the state and local levels are subject to government funding authorizations.
If we fail to sufficiently invest in our marketing programs or they are unsuccessful in attracting new customers by creating market awareness of our company and solutions, our business may be harmed.
If we fail to sufficiently invest in our marketing programs or they are unsuccessful in attracting new customers by creating market awareness of our company and solutions, our business may be harmed. Any significant reduction in the sales efforts or cooperative efforts from our partners could materially impact our revenues.
The United States’ and world economies are currently anticipating a recession, and suffering from uncertainty, inflation, volatility, disruption, and other adverse conditions, primarily caused by disruptions in the global economy from the effects of the war in Ukraine, including global sanctions on Russia, and those conditions will continue to adversely impact the business community and financial markets for some time.
The United States’ and world economies are currently experiencing slowing inflation, high interest rates, uncertainty, and other adverse conditions, caused by disruptions in the global economy from the effects of the conflict in Palestine and the ongoing war in Ukraine, including global sanctions on Russia, and trade tensions between the US and China, and those conditions will continue to adversely impact the business community and financial markets for some time.
If our products and services do not gain market acceptance, our operating results may be negatively affected. We intend to pursue our strategy of growing the capabilities of our document solutions software offerings through our proprietary research and the development of new product offerings.
We intend to pursue our strategy of growing the capabilities of our document solutions software offerings through our proprietary research and the development of new product offerings.
Our success depends upon our ability to design, develop, test, market, license, and support new software products and enhancements of current products on a timely basis in response to both competitive threats and marketplace demands. Recent examples of significant trends in the software industry include cloud computing, mobility, social media, networking, browser, and software as a service.
Our success depends upon our ability to design, develop, test, market, license, and support new software products and enhancements of current products on a timely basis in response to both competitive threats and marketplace demands. Our industry is subject to rapid technological change, and a significant example of this is the rapid advancement of artificial intelligence (AI) tools.
Removed
We have been and could continue to be negatively impacted by the novel coronavirus pandemic (COVID-19) and related governmental actions and orders and market effects.
Added
If we are unable to develop and sell new products and services that satisfy our customers, our revenue and operating results could be adversely affected.
Removed
The coronavirus pandemic (COVID-19) and related economic downturn continues to pose various and interrelated risks to our customers, our employees, our vendors and the communities in which we operate, which have all negatively impacted, and may continue to negatively impact, our business.
Removed
From March 24, 2020 to current, customers have responded with varying levels of project postponements, particularly in our document conversion segment, which generally requires picking up boxes from customer sites. Our level of customer engagement in document conversion has varied with the ebb and flow of the initial virus and the subsequent variants and outbreaks.
Removed
The State of Michigan, our largest customer, does not appear likely to return all of its agencies and departments to on site work at pre-pandemic levels. In addition, our business, financial condition and results of operations could be materially adversely affected by future outbreaks of COVID-19 generally or in our facilities.
Removed
If the pandemic or its recovery continues to reduce customer’s budgets and restrict business operations, the pandemic may have a material adverse effect on our business, results of operations, financial condition and cash flows and adversely impact the trading price of our common stock.
Removed
In particular, the success of our reseller program is entirely dependent upon our relationships with resellers of multi-functional devices, which are currently being purchased by current and potential customers in our target markets.
Removed
In addition, if the integrated or new products or enhancements do not achieve acceptance by the marketplace, our operating results will materially suffer.
Removed
Contracts at the state and local levels are subject to government funding authorizations.

Item 2. Properties

Properties — owned and leased real estate

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Biggest changeWe 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 $4,809, with lease terms continuing until September 30, 2028.
Biggest changeThe monthly rental payment is $4,500, with, pursuant to an extension, an increase in February 2024 up to $5,100 and a lease term continuing until January 31, 2026. 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 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 $4,950, with gradually higher annual increases each January up to $5,850 for the final year.
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 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.
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 statements of income.
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.
The monthly rental payment is $44,049, 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.
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.
The monthly rental payment is $21,692, 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. 21 We lease office space in Traverse City, Michigan for Document Conversion production.
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.
The monthly rental payments for these vehicles total $4,901, 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.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeWe currently intend to utilize all available funds to develop our business. 20 Unregistered Securities Issuances in Fiscal Year 2022 There have been no unregistered securities issuances in Fiscal Year 2022 that have not previously been disclosed in Current Reports on 8-K or Forms 10-Q. Issuer Purchase of Securities None. ITEM 6. [RESERVED]
Biggest changeWe currently intend to utilize all available funds to develop our business. 22 Unregistered Securities Issuances in Fiscal Year 2022 There have been no unregistered securities issuances in Fiscal Year 2023 that have not previously been disclosed in Current Reports on 8-K or Forms 10-Q. Issuer Purchase of Securities None. ITEM 6. [RESERVED]
Holders As of March 23, 2023 we had 147 stockholders of record. Such number of record stockholders does not include additional stockholders or other beneficial owners whose shares are held in street or nominee name by banks, brokerage firms, and other institutions on their behalf.
Holders As of March 23, 2024 we had 76 stockholders of record. Such number of record stockholders does not include additional stockholders or other beneficial owners whose shares are held in street or nominee name by banks, brokerage firms, and other institutions on their behalf.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeThese reportable segments are discussed above under “Company Overview.” Results of Operations Revenues The following table sets forth our revenues by reportable segment for the periods indicated: For the years ended December 31, 2022 2021 Revenues by segment Document Management $ 5,999,726 $ 3,089,669 Document Conversion 8,017,202 8,370,596 Total revenues $ 14,016,928 $ 11,460,265 Gross profit by segment Document Management $ 4,978,163 $ 2,542,135 Document Conversion 3,930,995 4,400,847 Total gross profit $ 8,909,158 $ 6,942,982 The following table sets forth our revenues by revenue source for the periods indicated: For the years ended December 31, 2022 2021 Revenues: Sale of software $ 159,084 $ 78,450 Software as a service 4,017,409 1,441,683 Software maintenance services 1,387,885 1,350,470 Professional services 7,357,937 7,468,716 Storage and retrieval services 1,094,613 1,120,946 Total revenues $ 14,016,928 $ 11,460,265 23 Our total revenues in 2022 increased by $2,556,663, or 22%, over 2021 revenues, driven primarily by the acquisition of Yellow Folder.
Biggest changeThese reportable segments are discussed above under “Company Overview.” Results of Operations Revenues The following table sets forth our revenues by reportable segment for the periods indicated: For the years ended December 31, 2023 2022 Revenues by segment Document Management $ 7,298,264 $ 5,999,726 Document Conversion 9,588,117 8,017,202 Total revenues $ 16,886,381 $ 14,016,928 Gross profit by segment Document Management $ 6,133,130 $ 4,978,163 Document Conversion 4,430,825 3,930,995 Total gross profit $ 10,563,955 $ 8,909,158 The following table sets forth our revenues by revenue source for the periods indicated: For the years ended December 31, 2023 2022 Revenues: Sale of software $ 100,260 $ 159,084 Software as a service 5,133,215 4,017,409 Software maintenance services 1,407,064 1,387,885 Professional services 9,167,428 7,357,937 Storage and retrieval services 1,078,414 1,094,613 Total revenues $ 16,886,381 $ 14,016,928 25 The following tables sets forth our revenues by revenue source and segment for the periods indicated: For the years ended December 31, 2023 2022 Document management segment revenues: Sale of software $ 100,260 $ 159,084 Software as a service 5,133,215 4,017,409 Software maintenance services 1,407,064 1,387,885 Professional services 657,725 435,348 Total document management segment revenues $ 7,298,264 $ 5,999,726 For the years ended December 31, 2023 2022 Document conversion segment revenues: Professional services $ 8,509,703 $ 6,922,589 Storage and retrieval services 1,078,414 1,094,613 Total document conversion segment revenues $ 9,588,117 $ 8,017,202 Our total revenues in 2023 increased by $2,869,453, or 21%, over 2022 revenues, driven primarily by the acquisition of Yellow Folder and the strong performance in professional services.
How We Evaluate our Business Performance and Opportunities The major qualitative and quantitative factors we consider in the evaluation of our operating results include the following: ● With respect to our Document Management segment, including the solutions recently acquired from Yellow Folder, our current strategy is to focus on cloud-based delivery of our software products.
How We Evaluate our Business Performance and Opportunities The major qualitative and quantitative factors we consider in the evaluation of our operating results include the following: ● With respect to our Document Management segment, including the solutions acquired from Yellow Folder, our current strategy is to focus on cloud-based delivery of our software products.
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, earnout obligations and capital and debt service commitments.
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.
Critical Accounting Policies and Estimates These critical accounting policies and estimates by our management should be read in conjunction with Note 3 Summary of Significant Accounting Policies to the Consolidated Financial Statements. 29 The preparation of our 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.
Critical Accounting Policies and Estimates These critical accounting policies and estimates by our management should be read in conjunction with Note 3 Summary of Significant Accounting Policies to the Consolidated Financial Statements. 31 The preparation of our 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.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following management’s discussion and analysis of financial conditions and results of operations for the fiscal years ended December 31, 2022, and 2021 should be read in conjunction with our consolidated financial statements and the notes to those consolidated financial statements that are included elsewhere in this Annual Report on Form 10-K.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following management’s discussion and analysis of financial conditions and results of operations for the fiscal years ended December 31, 2023, and 2022 should be read in conjunction with our consolidated financial statements and the notes to those consolidated financial statements that are included elsewhere in this Annual Report on Form 10-K.
We generally do not offer rights of return or any other incentives such as concessions, product rotation, or price protection and, therefore, do not provide for or make estimates of rights of return and similar incentives. 30 We establish allowances for doubtful accounts when available information causes us to believe that credit loss is probable.
We generally do not offer rights of return or any other incentives such as concessions, product rotation, or price protection and, therefore, do not provide for or make estimates of rights of return and similar incentives. 32 We establish allowances for doubtful accounts when available information causes us to believe that credit loss is probable.
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. Employee wages, our largest expense, have recently increased due to wage inflation.
Financial Impact of Current Economic Conditions Our overall performance depends on economic conditions, including the current inflationary environment, increased interest rates, and the widespread expectation of near-term global recession. Employee wages, our largest expense, have recently increased due to wage inflation.
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. 21 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.
Our SaaS products are hosted with Amazon Web Services, Expedient, and Corespace, providing our customers with reliable hosting services that we believe are consistent with industry best practices in data security and performance. 23 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 look for acquisitions that can add value for our customers and are expected to be accretive to our financial performance. 22 Executive Overview of Results The biggest factor in the changes in our results of operations during 2022 compared to 2021 was our acquisition of Yellow Folder on April 1, 2022.
We look for acquisitions that can add value for our customers and are expected to be accretive to our financial performance. 24 Executive Overview of Results The biggest factor in the changes in our results of operations during 2023 compared to 2022 was our acquisition of Yellow Folder on April 1, 2022.
In this Annual Report, we sometimes refer to the twelve month period ended December 31, 2022 as 2022, and to the twelve month period ended December 31, 2021 as 2021.
In this Annual Report, we sometimes refer to the twelve month period ended December 31, 2023 as 2023, and to the twelve month period ended December 31, 2022 as 2022.
Change in Fair Value of Earnout Liabilities Fair value adjustments amounted to $87,652 for 2022. The fair value adjustments were driven by updated assumptions to reflect the improved performance of both acquisitions against their threshold targets and the decreasing impact of present value discounting.
Change in Fair Value of Earnout Liabilities There were no fair value adjustments during 2023. Fair value adjustments amounted to $87,652 for 2022. The fair value adjustments were driven by updated assumptions to reflect the improved performance of both acquisitions against their threshold targets and the decreasing impact of present value discounting.
In December 2022, an amendment to the Graphic Sciences stock purchase agreement was signed, which accelerated the timing of the final Graphic Sciences earnout payment and set the amount at $700,000. This amount was paid subsequent to the balance sheet date, on January 3, 2023.
In December 2022, an amendment to the Graphic Sciences stock purchase agreement was signed, which accelerated the timing of the final Graphic Sciences earnout payment and set the amount at $700,000. This amount was paid on January 3, 2023.
As of December 31, 2022 and 2021, we recorded a change in fair value of earnout liabilities for both Graphic Sciences and CEO Image. The assumptions were updated to reflect the improved performance of both acquisitions against their threshold targets, a reduction of pandemic-related uncertainty, and the decreasing impact of time value of money.
For the twelve months ended December 31, 2022, we recorded a change in fair value of earnout liabilities for both Graphic Sciences and CEO Image. The assumptions were updated to reflect the improved performance of both acquisitions against their threshold targets, a reduction of pandemic-related uncertainty, and the decreasing impact of time value of money.
No such costs were capitalized during 2021. 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.
Such costs in the amount of $43,771 were capitalized during 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.
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.
Licensing of our software through our SaaS model has become increasingly popular among our customers, especially in light of remote workforce policies, and it is a key ingredient in our revenue growth strategy.
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 $376,345 were capitalized during 2022. Such costs in the amount of $38,305 were capitalized during 2021.
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 $436,837 were capitalized during 2023. Such costs in the amount of $376,345 were capitalized during 2022.
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. Such costs in the amount of $43,771 were capitalized during the 2022.
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 2023.
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 revenue in this category. Revenues from the sale of software maintenance services, which are reported as part of our Document Management segment, increased by $37,415, or 3%, in 2022 compared to 2021.
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 revenue in this category. Revenues from the sale of software maintenance services, which are reported as part of our Document Management segment, increased by $19,179, or 1%, in 2023 compared to 2022.
Cash Provided by Operating Activities. From our inception, we have generated revenues from the sales, implementation, subscriptions, and maintenance of our internally generated software applications, as well as significantly increased revenues from document conversion services beginning in 2020.
From our inception, we have generated revenues from the sales, implementation, subscriptions, and maintenance of our internally generated software applications, as well as significantly increased revenues from document conversion services beginning in 2020.
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. 31 Stock-Based Compensation We maintain one stock-based compensation plan.
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. 33 Stock-Based Compensation We maintain two stock-based compensation plans.
We account for stock-based payments to employees in accordance with ASC 718, “Compensation - Stock Compensation.” Stock-based payments to employees include grants of stock that are recognized in the consolidated statement of operations based on their fair values at the date of grant.
We account for stock-based payments to employees and directors in accordance with ASC 718, “Compensation - Stock Compensation.” Stock-based payments to employees include grants of stock that are recognized in the consolidated statements of income based on their fair values at the date of grant.
Transaction Costs The transactions costs during 2022 were comprised of investment banker success fees, as well as legal and consulting fees, in connection with our acquisition of Yellow Folder and related fundraising activities. There were no transaction costs during 2021. Sales and Marketing Expenses Sales and marketing expenses increased by $593,141, or 43%, during 2022 over 2021.
Transaction Costs There were no transaction costs during 2023. The transactions costs during 2022 were comprised of investment banker success fees, as well as legal and consulting fees, in connection with our acquisition of Yellow Folder and related fundraising activities. Sales and Marketing Expenses Sales and marketing expenses increased by $55,378, or 3%, during 2023 over 2022.
These increased labor costs have slightly decreased our profit margin over 2022, but we continue to mitigate this by appropriately increasing customer renewal rates whenever we have the contractual ability to do so.
These increased labor costs have slightly decreased our profit margin over 2022, but we continue to mitigate this by appropriately increasing customer renewal rates whenever we have the contractual ability to do so. We anticipate that the inflationary effect on our wages has stabilized.
Revenues from the sale of software, which are reported as part of our Document Management segment increased by $80,634, or 103% during 2022 compared to 2021. These period over period changes are due to timing of direct sales projects compared to the same periods in 2021.
Revenues from the sale of software, which are reported as part of our Document Management segment decreased by $58,824, or 37% during 2023 compared to 2022. These period over period changes are due to timing of direct sales projects compared to the same periods in 2022.
Since 2012, and including our private offering in April 2022, we have raised a total of approximately $26.5 million in cash through issuances of debt and equity securities. As of December 31, 2022, we had approximately $2.7 million in cash and cash equivalents, net working capital deficit of $1.1 million, and an accumulated deficit of $21.6 million.
Since 2012, we have raised a net total of approximately $24.5 million in cash through issuances of debt and equity securities, net of $2 million in debt repayments. As of December 31, 2023, we had approximately $1.2 million in cash and cash equivalents, net working capital deficit of $0.6 million, and an accumulated deficit of $21.0 million.
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 decreased by $24,648, or 7%, during 2022 compared to 2021.
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 relatively flat, increasing by $1,539, or 0%, during 2023 compared to 2022.
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, successfully retaining and growing our client base in the midst of global inflation and general economic uncertainty, and managing any continuing effects of the COVID-19 pandemic on our business.
Our ability to meet our capital needs in the short term will depend on many factors, including maintaining and enhancing our operating cash flow and successfully retaining and growing our client base in the midst of global inflation and general economic uncertainty.
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 2022, cost of software revenues increased by $49,749, or 336%, from 2021, increasing more than revenues with more complex solutions sold in 2022.
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 2023, cost of software revenues decreased by $38,841, or 60%, from 2022, decreasing more than revenues due to more complex solutions sold in 2022.
In 2022, we engaged in several actions that significantly improved our liquidity and cash flows, including, 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).
In 2023 and 2022, we engaged in several actions that significantly improved our liquidity and cash flows, including (i) effective October 1, 2023 through September 30, 2024, 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).
Indebtedness As of December 31, 2022, 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 $980,450 and accrued interest of $0 (of which $262,950 in principal has been paid as of the date of this report). ● 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. 28 Capital Expenditures There were no material commitments for capital expenditures at December 31, 2022.
Indebtedness As of December 31, 2023, our outstanding long-term indebtedness consisted of 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. 30 Capital Expenditures There were no material commitments for capital expenditures at December 31, 2023. Cash Provided by Operating Activities.
Operating Expenses The following table sets forth our operating expenses for the periods indicated: For the years ended December 31, 2022 2021 Operating expenses: General and administrative $ 4,945,214 $ 4,044,296 Change in fair value of earnout liabilities 87,652 141,414 Transaction costs 355,281 - Sales and marketing 1,971,493 1,378,352 Depreciation and amortization 722,197 413,932 Total operating expenses $ 8,081,837 $ 5,977,994 26 General and Administrative Expenses General and administrative expenses increased in 2022 by $900,918, or 22%, over 2021, principally related to the addition of Yellow Folder expenses in 2022.
Operating Expenses The following table sets forth our operating expenses for the periods indicated: For the years ended December 31, 2023 2022 Operating expenses: General and administrative $ 6,455,088 $ 4,945,214 Change in fair value of earnout liabilities - 87,652 Transaction costs - 355,281 Sales and marketing 2,026,871 1,971,493 Depreciation and amortization 974,527 722,197 Total operating expenses $ 9,456,486 $ 8,081,837 28 General and Administrative Expenses General and administrative expenses increased in 2023 by 1,509,874, or 31%, over 2022, principally related to the full year of Yellow Folder expenses in 2023.
This decrease was the result of a significant reduction in volume of work from our largest storage and retrieval customer, Rocket Mortgage, due to the significant slowdown in the home mortgage and refinancing industry. In addition, the decrease was also due to unusually high project work in 2021 including shredding of documents approved for destruction.
This decrease was the result of a slight reduction in volume of work from our largest storage and retrieval customer, Rocket Mortgage, due to the continued impact of the slowdown in the home mortgage and refinancing industry.
This was primarily reflected in our Document Management segment, in which our general and administrative expenses increased to $2,512,879 in 2022 from $1,610,017 in 2021. In our Document Conversion segment, our general and administrative expenses were roughly flat at $2,432,335 in 2022 compared to $2,434,279 in 2021.
This was reflected equally in our Document Management segment, in which our general and administrative expenses increased to $3,277,432 in 2023 from $2,512,879 in 2022, and in our Document Conversion segment, at $3,177,656 in 2023 compared to $2,432,335 in 2022.
Below are our key financial results for 2022 (consolidated unless otherwise noted): ● Revenues were $14,016,928, representing revenue growth of 22% year over year. ● Cost of revenues was $5,107,770, an increase of 13% year over year. ● Operating expenses (excluding cost of revenues) were $8,081,837, an increase of 35% year over year. ● Income from operations was $827,321, compared to $964,988 for 2021. ● Net income was $24,027 with basic and diluted net income per share of $0.01, compared to net income of $1,357,951 in 2021. ● 2021 included other income of $845,083 for forgiveness of the PPP loan and interest. ● 2022 included $355,281 of transaction costs. ● 2022 included $87,652 of earnout fair value adjustments, compared to $141,414 for 2021. ● Net cash provided by operating activities was $1,988,778, compared to $1,389,966 for 2021. ● Capital expenditures were $577,325, excluding cash paid to acquire the Yellow Folder business, compared to $590,485 for 2021. ● As of December 31, 2022, we had 161 employees, including 25 part-time employees, compared to 114 employees, including 13 part-time employees, as of December 31, 2021.
Below are our key financial results for 2023 (consolidated unless otherwise noted): ● Revenues were $16,886,381, representing revenue growth of 21% year over year. ● Cost of revenues was $6,322,426, an increase of 24% year over year. ● Operating expenses (excluding cost of revenues) were $9,456,486, an increase of 17% year over year. ● Income from operations was $1,107,469, an increase of 34% year over year. ● Net income was $519,266 with basic and diluted net income per share of $0.13 and $0.11, respectively, compared to net income of $24,027 in 2022. ● 2022 included $355,281 of transaction costs. ● 2022 included $87,652 of earnout fair value adjustments. ● Net cash provided by operating activities was $784,659, compared to $1,988,778 for 2022. ● Capital expenditures were $548,077, compared to $577,325, excluding cash paid to acquire the Yellow Folder business, for 2022. ● As of December 31, 2023, we had 171 employees, including 31 part-time employees, compared to 161 employees, including 25 part-time employees, as of December 31, 2022.
Our operating cash flow alone may be insufficient to meet the debt obligations in full in 2023. We have positive operating cash flow, and we believe we could seek additional debt or equity financing on acceptable terms.
Our existing debt as of December 31, 2023 is comprised of approximately $0.8 million due March 30, 2025 and approximately $2.1 million due December 31, 2025. Our operating cash flow alone may be insufficient to meet the debt obligations in full in 2025. We believe we could seek additional debt or equity financing on acceptable terms.
Net cash used in investing activities in 2022 was $6,960,594, primarily $6,383,269 in cash paid to acquire Yellow Folder, as well as $376,345 in capitalized internal use software. Net cash used in investing activities in 2021 was $590,485, primarily related to purchases of racking property and equipment for the new Sterling Heights, MI warehouse.
Net cash used in investing activities in 2022 was $6,960,594, primarily $6,383,269 in cash paid to acquire Yellow Folder, as well as $376,345 in capitalized internal use software. Cash Used in Provided by and Financing Activities.
This small increase in these revenues in 2022 compared to the 2021 was driven by 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 decreasing and software as a service revenues increasing.
This small increase in these revenues in 2023 compared to 2022 was driven by expansion of services with existing customers and price increases being partially offset by normal attrition.
Net cash provided by operating activities during 2022 was $1,988,778, primarily attributable to the net income adjusted for non-cash expenses of $2,264,811, an increase in operating assets of $243,527 and a decrease in operating liabilities of $56,533.
Net cash provided by operating activities during 2023 was $784,659, primarily attributable to the net income adjusted for non-cash expenses of $1,955,715, an increase in operating assets of $1,669,780 and a decrease in operating liabilities of $20,542.
Yellow Folder had no impact to this category. 25 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 increased by $368,432, or 111%, during 2022 over 2021.
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 increased by $187,702, or 27%, during 2023 over 2022.
For the years ended December 31, 2022 2021 Gross profit: Sale of software $ 94,507 $ 63,622 Software as a service 3,315,976 1,108,682 Software maintenance services 1,308,147 1,268,829 Professional services 3,449,732 3,759,368 Storage and retrieval services 740,796 742,481 Total gross profit $ 8,909,158 $ 6,942,982 Gross profit percentage: Sale of software 59.4 % 81.1 % Software as a service 82.5 % 76.9 % Software maintenance services 94.3 % 94.0 % Professional services 46.9 % 50.3 % Storage and retrieval services 67.7 % 66.2 % Total gross profit percentage 63.6 % 60.6 % Our overall gross profit increased to 64% in 2022 from 61% in 2021.
For the years ended December 31, 2023 2022 Gross profit: Sale of software $ 74,524 $ 94,507 Software as a service 4,244,080 3,315,976 Software maintenance services 1,347,691 1,308,147 Professional services 4,174,602 3,449,732 Storage and retrieval services 723,058 740,796 Total gross profit $ 10,563,955 $ 8,909,158 Gross profit percentage: Sale of software 74.3 % 59.4 % Software as a service 82.7 % 82.5 % Software maintenance services 95.8 % 94.3 % Professional services 45.5 % 46.9 % Storage and retrieval services 67.0 % 67.7 % Total gross profit percentage 62.6 % 63.6 % 27 Our overall gross profit decreased slightly to approximately 63% in 2023 from 64% in 2022.
Costs of Revenues and Gross Profits The following table sets forth our cost of revenues by reportable segment for the periods indicated: For the years ended December 31, 2022 2021 Cost of revenues by segment Document Management $ 1,021,563 $ 547,534 Document Conversion 4,086,207 3,969,749 Total cost of revenues $ 5,107,770 $ 4,517,283 The following table sets forth our cost of revenues, by revenue source, for the periods indicated: For the years ended December 31, 2022 2021 Cost of revenues: Sale of software $ 64,577 $ 14,828 Software as a service 701,433 333,001 Software maintenance services 79,738 81,641 Professional services 3,908,205 3,709,348 Storage and retrieval services 353,817 378,465 Total cost of revenues $ 5,107,770 $ 4,517,283 Our total cost of revenues during 2022 increased by $590,487 or 13%, over 2021.
Costs of Revenues and Gross Profits The following table sets forth our cost of revenues by reportable segment for the periods indicated: For the years ended December 31, 2023 2022 Cost of revenues by segment Document Management $ 1,165,134 $ 1,021,563 Document Conversion 5,157,292 4,086,207 Total cost of revenues $ 6,322,426 $ 5,107,770 The following table sets forth our cost of revenues, by revenue source, for the periods indicated: For the years ended December 31, 2023 2022 Cost of revenues: Sale of software $ 25,736 $ 64,577 Software as a service 889,135 701,433 Software maintenance services 59,373 79,738 Professional services 4,992,826 3,908,205 Storage and retrieval services 355,356 353,817 Total cost of revenues $ 6,322,426 $ 5,107,770 The following tables sets forth our cost of revenues by revenue source and segment for the periods indicated: For the years ended December 31, 2023 2022 Document management segment cost of revenues: Sale of software $ 25,736 $ 64,577 Software as a service 889,135 701,433 Software maintenance services 59,373 79,738 Professional services 190,890 175,815 Total document management segment cost of revenues $ 1,165,134 $ 1,021,563 For the years ended December 31, 2023 2022 Document conversion segment cost of revenues: Professional services $ 4,801,936 $ 3,732,390 Storage and retrieval services 355,356 353,817 Total document conversion segment cost of revenues $ 5,157,292 $ 4,086,207 Our total cost of revenues during 2023 increased by $1,214,656 or 24%, over 2022.
Of our professional services revenues during 2022, $7,082,011 was derived from our Document Conversion operations and $275,926 was derived from our Document Management operations. Our overall professional services revenues decreased by $110,779, or 1%, in 2022 compared to 2021.
Of our professional services revenues during 2023, $8,645,403 was derived from our Document Conversion operations and $522,025 was derived from our Document Management operations. Our overall professional services revenues increased by $1,809,491, or 25%, in 2023 compared to 2022.
Revenues from the sale of software as a service, which are reported as part of our Document Management segment increased by $2,575,726, or 179% in 2022 compared to 2021.
Revenues from the sale of software as a service, which are reported as part of our Document Management segment increased by $1,115,806, or 28% in 2023 compared to 2022. This increase was primarily the result of the Yellow Folder acquisition. Excluding Yellow Folder, software as a service revenues grew by 5% in 2023 compared to 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 decreased by $1,903, or 2%, in 2022 from 2021, due to stable support activity. As a result, our gross margin for software maintenance services remained at 94% in 2022 and 2021.
Cost of software maintenance services decreased by $20,365, or 26%, in 2023 from 2022, due to slightly reduced support activity. As a result, our gross margin for software maintenance services increased to 96% in 2023 from 94% in 2022.
Our gross margin for software revenues decreased to 59% from 81% in 2021. The 2021 margins were unusually strong, driven by license expansions and similar solutions that required fewer costs to deliver the solution.
Our gross margin for software revenues increased to 74% from 59% in 2022. The 2022 margins were unusually weak, driven by more complex third-party bundles and similar solutions that required more costs to deliver the solution. Yellow Folder had no impact to this category.
Net cash provided by operating activities during 2021 was $1,389,966, primarily attributable to net income adjusted for non-cash expenses of $703,883, an increase in operating assets of $393,404 and a decrease in operating liabilities of $278,464. Cash Used in Investing Activities.
Net cash provided by operating activities during 2022 was $1,988,778, primarily attributable to the net income adjusted for non-cash expenses of $1,623,390, an increase in operating assets of $243,527 and an increase in operating liabilities of $584,888. Cash Used in Investing Activities. Net cash used in investing activities in 2023 was $548,077, primarily $436,837 in capitalized internal use software.
The decrease was partially offset by the contribution of $262,461 revenue from Yellow Folder for 2022. 24 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, decreased by $26,333, or 2%, during 2022 compared to 2021.
Revenues from storage and retrieval services, which are reported as part of our Document Conversion segment, decreased by $16,199, or 1%, during 2023 compared to 2022.
Gross margins for our storage and retrieval services, which exclude the cost of facilities rental, maintenance, and related overheads, increased to 68% during 2022 compared to 66% in 2021. Yellow Folder did not have a material impact, contributing costs of $29,187, or 8% of the cost in 2022, at a gross margin of 73%.
The increase was due to additional labor costs in 2023 and slightly eroding transaction volumes, which carry a higher margin than straight storage. Gross margins for our storage and retrieval services, which exclude the cost of facilities rental, maintenance, and related overheads, decreased to 67% during 2023 compared to 68% in 2022.
Our cost of revenues for our Document Management segment increased by $474,029, or 87%, primarily due to the impact of Yellow Folder in that segment. Our cost of revenues for our Document Conversion segment increased by $116,458, or 3%, in 2022 compared to 2021 primarily due an unfavorable project mix, requiring more labor to complete projects.
Our cost of revenues for our Document Management segment increased by $143,571, or 14%, primarily due to the impact of a full year of Yellow Folder in that segment. Our cost of revenues for our Document Conversion segment increased by $1,071,085, or 26%, in 2023 compared to 2022, corresponding with the increase in revenues.
Gross margins related to consulting services may vary widely, depending upon the nature of the consulting project and the amount of labor required to complete a project. Yellow Folder partially offset the overall margin erosion with $87,679 costs in 2022 at 67% margin.
Gross margins may vary in professional services, depending on the type of project, such as paper scanning, micrographics, or consulting services, as well as depending upon the nature of each project and the amount of labor required to complete that project.
Cost of professional services increased in 2022 by $198,857, or 5%, over 2021, primarily due to an unfavorable mix of lower-margin projects combined with the staffing challenges in our Document Conversion segment, driven by inflationary pressures. As a result, our gross margin for professional services decreased to 47% during 2022 compared to 50% in 2021.
Cost of professional services increased in 2023 by $1,084,621, or 28%, over 2022, primarily following the increase in revenues, as well as impact from a significant lower-margin project delivered across the first three quarters of 2023. As a result, our gross margin for professional services decreased to 46% during 2023 compared to 47% in 2022.
This increase was primarily driven by the inclusion of the sales and marketing expenses from Yellow Folder beginning the second quarter 2022, as well as adding two sales representatives. Depreciation and Amortization Depreciation and amortization during 2022 increased by $252,517, or 61%, over 2021 as a result of amortization of new intangible assets related to the Yellow Folder acquisition.
Depreciation and Amortization Depreciation and amortization during 2023 increased by $252,330, or 35%, over 2022, driven by increased amortization on capitalizable software, as well as a full year of amortization of new intangible assets related to the Yellow Folder acquisition. 29 Other Items of Income and Expense Interest Expense Interest expense, net was $588,203 during 2023 as compared with $803,294 during 2022, representing a decrease of $215,091 or 27%.
Removed
Our results for 2022 include the results of Yellow Folder operations for the three quarters. Our 2021 results do not include Yellow Folder operations. Without Yellow Folder, revenues were up $96,189, or 1%, primarily driven by continued strength in software as a service, which, excluding Yellow Folder, grew 34% year over year for 2022.
Added
Our results for 2023 include the results of Yellow Folder operations for the full year of four quarters, while our 2022 results include Yellow Folder operations for three quarters. Additionally, our Document Conversion business delivered record professional services revenue for the 2023 year.
Removed
Our strong software as a service performance was offset by weaknesses in professional services due to staffing issues in the first half of 2022 and softening demand for our storage and retrieval services from a significant customer in the home mortgage lending industry.
Added
Yellow Folder operations included four quarters for 2023 and three quarters for 2022, primarily in the Document Management segment. Professional services revenue increased 25% year over year, driven by strong Document Conversion revenues, as further described below.
Removed
More significantly, general wage inflation in the market has resulted in a slower hiring process as we grew our staff during 2022, particularly for our Document Conversion segment. These hiring and staffing challenges slow our ability to complete project-based work backlog and reduce our revenue.
Added
This increase is primarily driven by returning to full staff after hiring challenges in 2022 and a strong project backlog of work all year, augmented by certain price increases effective in the fourth quarter 2023. 26 Storage and Retrieval Services Revenues We provide document storage and retrieval services to customers, primarily in Michigan.
Removed
However, we ended 2022 with more staff than 2021, and have continued to hire more staff as of the date of this report. We anticipate that the inflationary effect on our wages has stabilized.
Added
The increase in the mix of professional services revenue was the principal driver of the increase, due to the strong performance in the Document Conversion segment. Professional services revenue was 54% of total revenues in 2023 compared to 52% in 2022.
Removed
Yellow Folder added $2,460,474 revenue for 2022. The remaining net increase of 1% in total revenues for 2022 is attributable to strong growth in software as a service, offset by weakness in professional services and storage and retrieval, as further described below.
Added
This increase in the cost of SaaS proportionately followed the increase in associated SaaS revenues, so our gross margin in 2023 remained stable at 83%. Cost of Software Maintenance Services Cost of software maintenance services consists primarily of technical support personnel and related costs.
Removed
This increase was primarily the result of the Yellow Folder acquisition, which contributed $2,091,083, or 81% of the increase, augmenting the underlying new cloud-based solution sales, as well as expanded data storage, user seats, and hosting fees for existing customers. Excluding Yellow Folder, software as a service revenues grew 34% in 2022 compared to 2021.
Added
Increases in 2023 were driven by stock compensation and services increases totaling $241,203, or 57%, as well as investments in scaling our business, including our investment in NetSuite to bring all acquired companies to a single general ledger, and a full year of increased costs after uplisting to NYSE American in the last half of 2022.
Removed
This decrease is primarily the result of COVID Omicron impacts to customers and staff in our Document Conversion segment in the first quarter 2022, and our challenges in hiring staff to fulfill a large backlog of project work during the following quarters of 2022.
Added
Increases from enhancements to our web site and increased trade show activity were partially offset by reductions from partial sales rep vacancies during 2023.
Removed
Revenue contributed from the Yellow Folder acquisition partially offset the decrease by $106,930.
Added
The decrease resulted from partial principal repayments of the 2020 Notes on December 1, 2022 and February 28, 2023, and final payment on August 31, 2023, partially offset by a full year of the 2022 Notes, issued on April 1, 2022. Interest expense, net, included interest income of $29,795 and $15,226 during 2023 and 2022, respectively.
Removed
The increase in the mix of software as a service revenue was the principal driver of the increase, due to the addition of Yellow Folder and overall strong margins in the Document Management segment, partially offset by margin erosion in the Document Conversion segment, driven by lower-margin project work relative to 2021.
Added
In January 2023, we paid $0.7 million in final earnout payments and in February and August 2023 and December 2022 we repaid a total of $2 million in principal, representing full payments on the 2020 Notes.
Removed
This increase in the cost of SaaS was less than the increase in associated SaaS revenues, so our gross margin in 2022 increased to 83% compared to 77% in 2021, as a result of strong margins with and without Yellow Folder, which contributed 85% gross margin.
Added
In addition, subsequent to the balance sheet date, on March 13, 2024, we agreed with the note holders to amend the Unrelated Notes and Related Notes to extend the maturity date to December 31, 2025, for $1,519,500 of the remaining $2,364,500 in 2022 Unrelated Notes and all $600,000 of the 2022 Related Notes.
Removed
The decrease was due to additional labor costs in 2021 associated with our 2021 warehouse consolidation, partially offset by general wage inflation, as well as costs decreasing in proportion to revenue project volume.
Added
Net cash used in financing activities during 2023 amounted to $700,000 in earnout liability payments, $980,450 in repayment of notes payable, $34,954 in the principal portion of finance lease liabilities, and $2,411 in other net changes in finance lease assets and liabilities.
Removed
For 2021, improvements in actual and forecast gross margin and revenue performance drove adjustments in fair value for both the Graphic Sciences and the CEO Image earnout liabilities, totaling $141,414.
Removed
The incremental amortization amounted to $220,375 in 2022, or 87% of the increase.
Removed
Other Items of Income and Expense Gain on Extinguishment of Debt The $845,083 gain on extinguishment of debt during 2021 reflects the full forgiveness of the principal and interest on our PPP Note by the SBA in January 2021. 27 Interest Expense Interest expense was $803,294 during 2022 as compared with $452,120 during 2021, representing an increase of $351,174 or 78%.
Removed
The increase resulted from incremental interest expense on increased net debt following the April 1, 2022 private placement of securities, slightly offset by reduced interest resulting from partial principal repayment of the 2020 Notes on December 1, 2022.
Removed
In June 2022, we paid approximately $1.0 million in earnout liabilities and in December 2022 we prepaid approximately $1.0 million in principal, which was due in February 2023.
Removed
Of our existing debt as of December 31, 2022, approximately $0.3 million was due and paid on February 28, 2023, $0.7 million is due August 31, 2023, and approximately $3 million is due March 30, 2025. We also paid final earnout payments for our Graphic Sciences acquisition of $700,000 subsequent to the balance sheet date, on January 3, 2023.

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