# Intellinetics, Inc.: Form 10-Q for the period ended Jun 30, 2023

- Company: [Intellinetics, Inc.](/companies/inlx.md) (CIK 1081745)
- Form: 10-Q
- Filed: 2023-08-14
- Accepted by EDGAR: Aug 14, 2023, 20:00 ET
- Period: 2023-06-30
- Accession: 0001493152-23-028383
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1081745/000149315223028383/form10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1081745/000149315223028383/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-04-01 to 2023-06-30 | $4.3m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2023-01-01 to 2023-06-30 | $8.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-04-01 to 2023-06-30 | $1.7m | us-gaap:CostOfRevenue |
| Cost of revenue | 6 months, 2023-01-01 to 2023-06-30 | $3.2m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2023-04-01 to 2023-06-30 | $2.6m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2023-01-01 to 2023-06-30 | $5.2m | us-gaap:GrossProfit |
| Operating income | 3 months, 2023-04-01 to 2023-06-30 | $296.4k | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2023-01-01 to 2023-06-30 | $580.4k | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-04-01 to 2023-06-30 | $160.7k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2023-01-01 to 2023-06-30 | $332.1k | us-gaap:InterestExpense |
| Net income | 3 months, 2023-04-01 to 2023-06-30 | $135.7k | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-01-01 to 2023-06-30 | $248.3k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.03 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-01-01 to 2023-06-30 | $0.06 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.03 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-01-01 to 2023-06-30 | $0.06 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-04-01 to 2023-06-30 | 4,073,757 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-01-01 to 2023-06-30 | 4,073,757 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-01-01 to 2023-06-30 | −$299.6k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2023-01-01 to 2023-06-30 | $82.7k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2023-06-30 | $1.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-06-30 | $4.0m | us-gaap:AssetsCurrent |
| Total assets | at 2023-06-30 | $18.6m | us-gaap:Assets |
| Current liabilities | at 2023-06-30 | $4.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-06-30 | $9.5m | us-gaap:Liabilities |
| Shareholders' equity | at 2023-06-30 | $9.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 37,682 characters.

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

### Company Overview

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

Our digital transformation products and services are provided through two reporting segments: Document Management and Document Conversion. Our Document Management segment, which includes the Yellow Folder, LLC (“Yellow Folder”) asset acquisition in April 2022, consists primarily of solutions involving our software platform, allowing customers to capture and manage their documents across operations such as scanned hard-copy documents and digital documents including those from Microsoft Office 365, digital images, audio, video and emails. Our Document Conversion segment provides assistance to customers as a part of their overall document strategy to convert documents from one medium to another, predominantly paper to digital, including migration to our software solutions, as well as long-term storage and retrieval services. Our solutions create value for customers by making it easy to connect business-critical documents to the people who need them by making those documents easy to find and access, while also being secure and compliant with the customers’ audit requirements. Solutions are sold both directly to end-users and through resellers.

Our customers use our software by one of two methods: purchasing our software and installing it onto their own equipment, which we refer to as a “premise” model, or licensing and accessing our platform via the Internet, which we refer to as a “software as a service” or “SaaS” model and also as a “cloud-based” model. Licensing of our software through our SaaS model has become increasingly popular among our customers, especially in light of the increased deployment of remote workforce policies, and is a key ingredient in our revenue growth strategy. Our SaaS products are hosted with Amazon Web Services, Expedient, and Evocative, providing our customers with reliable hosting services that we believe are consistent with industry best practices in data security and performance.

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

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

### How We Evaluate our Business Performance and Opportunities

There has been no material change during the six-month period 2023 to the major qualitative and quantitative factors we consider in the evaluation of our operating results as set forth in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — *How We Evaluate our Business Performance and Opportunities”* of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

### Executive Overview of Results

The biggest factors in the changes in our results of operations during the six-month period 2023 compared to the six-month period 2022 was our acquisition of Yellow Folder on April 1, 2022. Our results for the second quarter and six-month period 2023 include the results of Yellow Folder operations for the full periods reported, while our six-month period 2022 results include only the second quarter results of Yellow Folder operations. Our strong professional services performance was not impacted meaningfully by the acquisition of Yellow Folder, and the second quarter 2023 continued our strong first quarter growth, at over 40% for the six-month period 2023. This growth was partially offset by lingering softer demand for the transactional portion of our storage and retrieval services from a significant customer in the home mortgage lending industry.

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

- Revenues were $4,258,430, representing revenue growth of 25% year over year.
- Cost of revenues was $1,667,997, an increase of 36% year over year.
- Operating expenses (excluding cost of revenues) were $2,294,045, a decrease of 1% year over year, driven by reduced transaction costs and no fair value adjustments for earnout liabilities compared to second quarter 2022.
- Income from operations was $296,388, compared to loss from operations of $133,699 in second quarter 2022.
- Net income was $135,734 with basic and diluted net income per share of $0.03, compared to net loss of $374,167 in second quarter 2022.
- Second quarter 2022 included $285,230 of transaction costs and $52,301 of earnout fair value adjustments
- Operating cash used was $125,274, compared to $403,522 in second quarter 2022.
- Capital expenditures were $156,532, compared to $213,361 in second quarter 2022.

Below are our key financial results for the six-month period 2023 (consolidated unless otherwise noted):

- Revenues were $8,445,263, representing revenue growth of 38% year over year.
- Cost of revenues was $3,208,991, an increase of 40% year over year.
- Operating expenses (excluding cost of revenues) were $4,655,885, an increase of 21% year over year.

22

- Income from operations was $580,387, compared to loss from operations of $41,224 for the six-month period 2022.
- Net income was $248,297 with basic and diluted net income per share of $0.6, compared to net loss of $394,293 with basic and diluted net loss per share of $0.11 for the six-month period 2022.
- Six-month period 2022 included $355,281 of transaction costs and $116,505 of earnout fair value adjustments.
- Net cash used by operating activities was $299,631, compared to net cash provided by operating activities of $72,649 for the six-month period 2022.
- Capital expenditures were $291,101, compared to $269,404 for the six-month period 2022.
- As of June 30, 2023, we had 170 employees, including 26 part-time employees, compared to 139 employees, including 26 part-time employees, as of June 30, 2022.

### Financial Impact of Current Economic Conditions

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

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

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

### Uncertainties, Trends, and Risks that can cause Fluctuations in our Operating Results

Our operating results have fluctuated significantly in the past and are expected to continue to fluctuate in the future due to a variety of factors, in addition to economic conditions, that are discussed in Part II, Item 7, “*Management’s Discussion and Analysis of Financial Condition and Results of Operations - Uncertainties, Trends, and Risks that can cause Fluctuations in our Operating Results”* of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. Due to all these factors and the other risks discussed in Part II, Item 1 of this Quarterly Report, and Part I, Item IA, “*Risk Factors”* of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, our past results of operations should not be relied upon as an indication of our future performance. Comparisons of our operating results with prior periods is not necessarily meaningful or indicative of future performance.

### Reportable Segments

We have two reportable segments: Document Management and Document Conversion. These 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:

| Revenues by segment | For the three months ended June 30, 2023 | 2022 | For the six months ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Document Management | $1,879,369 | $1,572,854 | $3,705,103 | $2,487,804 |
| Document Conversion | 2,379,061 | 1,842,789 | 4,740,160 | 3,631,351 |
| Total revenues | $4,258,430 | $3,415,643 | $8,445,263 | $6,119,155 |
| Gross profit by segment |  |  |  |  |
| Document Management | $1,536,385 | $1,326,345 | $3,053,746 | $2,012,823 |
| Document Conversion | 1,054,048 | 862,673 | 2,182,526 | 1,808,302 |
| Total gross profit | $2,590,433 | $2,189,018 | $5,236,272 | $3,820,855 |

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

| Revenues: | For the Three Months Ended June 30, 2023 | 2022 | For the Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Sale of software | $63,646 | $11,105 | $78,939 | $75,596 |
| Software as a service | 1,277,918 | 1,158,456 | 2,516,350 | 1,589,677 |
| Software maintenance services | 349,139 | 343,881 | 698,681 | 680,483 |
| Professional services | 2,298,316 | 1,625,765 | 4,597,605 | 3,213,713 |
| Storage and retrieval services | 269,411 | 276,436 | 553,688 | 559,686 |
| Total revenues | $4,258,430 | $3,415,643 | $8,445,263 | $6,119,155 |

Our total revenues in the second quarter 2023 increased by 842,787, or 25%, over our second quarter 2022 revenues, driven primarily by the strong professional services in our Document Conversion segment, as further described below. The increase in total revenues for the six months ended June 30, 2023 is driven by the same factors as well as two quarters of Yellow Folder in 2023 and only one quarter in 2022.

#### Sale of Software Revenues

Revenues from the sale of software principally consist of sales of additional or upgraded software licenses and applications to existing customers and resellers. Yellow Folder does not sell revenue in this category. Revenues from the sale of software, which are reported as part of our Document Management segment, increased by $52,541, or 473%, the second quarter 2023 compared to the second quarter 2022, and increased by $3,343, or 4% during the six-month period 2023 compared to the six-month period 2022.

This small increase for the six-month period was as expected, and large increase quarter over quarter was due to timing of direct sales projects. We expect the volatility of this revenue line item to continue as project timing is unpredictable and the frequency of on-premise software solution sales decreases over time.

#### Software as a Service Revenues

We provide access to our software solutions as a service, accessible through the internet. Our customers typically enter into our software as a service agreement for periods of one year or more. Under these agreements, we generally provide access to the applicable software, data storage and related customer assistance and support. Revenues from the sale of software as a service, which are reported as part of our Document Management segment increased by $119,462, or 10%, in the second quarter 2023 compared to the second quarter 2022 and increased by $926,673, or 58% in the six-month period 2023 compared to the six-month period 2022. The six-month period increase was primarily the result of the Yellow Folder acquisition, which contributed $785,481, or 85% of the increase, plus organic growth in our cloud-based solutions, as well as expanded data storage, user seats, and hosting fees for existing customers.

#### Software Maintenance Services Revenues

Software maintenance services revenues consist of fees for post-contract customer support services provided to license (premise-based) holders through support and maintenance agreements. These agreements allow our customers to receive technical support, enhancements and upgrades to new versions of our software products when and if available. A substantial portion of these revenues were generated from renewals of maintenance agreements, which typically run on a year-to-year basis. Yellow Folder does not sell revenue in this category. Revenues from the sale of software maintenance services, which are reported as part of our Document Management segment, increased by $5,258, or 2%, in the second quarter 2023 compared to the second quarter 2022 and increased by $18,198, or 3%, in the six-month period 2023 compared to the six-month period 2022. This small increase in these revenues in 2023 compared to the 2022 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 maintenance and support agreements decreasing and software as a service increasing.

#### Professional Services Revenues

Professional services revenues consist of revenues from document scanning and conversion services, consulting, discovery, training, and advisory services to assist customers with document management needs, as well as repair and maintenance services for customer equipment. These revenues include arrangements that do not involve the sale of software. Of our professional services revenues during the second quarter 2023 and six-month period 2023, $2,143,613 and $4,254,336, respectively, were derived from our Document Conversion operations and $154,703 and $343,269, respectively, were derived from our Document Management operations. Our overall professional services revenues increased by $672,551, or 41%, in the second quarter 2023 compared to the second quarter 2022 and increased by $1,383,892, or 43%, in the six-month period 2023 compared to the six-month period 2022. This increase is primarily the result of the strong recovery in our Document Conversion segment in the six-month period 2023 from the softer demand of early 2022. The six-month period increase includes the contribution of $110,316 in revenue from the Yellow Folder acquisition from the first quarter 2023, which did not contribute in the first quarter 2022.

#### Storage and Retrieval Services Revenues

We provide document storage and retrieval services to customers, primarily in Michigan. Revenues from storage and retrieval services, which are reported as part of our Document Conversion segment, decreased by $7,025, or 3%, in the second quarter 2023 compared to the second quarter 2022 and decreased by $5,998, or 1%, during the six-month period 2023 compared to the six-month period 2022. This decrease was the result of a continued 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. Yellow Folder revenue partially offset the decrease by $35,799 in revenue contribution in the first quarter 2023.

### Costs of Revenues and Gross Profits

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

| Cost of revenues by segment | For the three months ended June 30, 2023 | 2022 | For the six months ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Document Management | $342,984 | $246,509 | $651,357 | $474,981 |
| Document Conversion | 1,325,013 | 980,116 | 2,557,634 | 1,823,319 |
| Total cost of revenues | $1,667,997 | $1,226,625 | $3,208,991 | $2,298,300 |

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

| Cost of revenues: | For the three months ended June 30, 2023 | 2022 | For the six months ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Sale of software | $7,344 | $7,392 | $15,525 | $33,585 |
| Software as a service | 258,382 | 191,188 | 479,022 | 282,437 |
| Software maintenance services | 15,117 | 19,185 | 31,833 | 37,485 |
| Professional services | 1,307,341 | 918,542 | 2,494,457 | 1,766,709 |
| Storage and retrieval services | 79,813 | 90,318 | 188,154 | 178,084 |
| Total cost of revenues | $1,667,997 | $1,226,625 | $3,208,991 | $2,298,300 |

Our total cost of revenues during the second quarter 2023 increased by $441,372, or 36%, over second quarter 2022 and increased by $910,691, or 40%, during the six-month period 2023 over the six-month period 2022. Our cost of revenues for our Document Management segment increased by $96,475, or 39%, in the second quarter 2023 compared to the second quarter 2022 and increased $176,376, or 37%, in the six-month period 2023 compared to the six-month period 2022 primarily due to the six-month impact of Yellow Folder in that segment. Our cost of revenues for our Document Conversion segment increased by $344,897, or 35%, in the second quarter 2023 compared to the second quarter 2022 and increased by $734,315, or 40%, during the six-month period 2023 compared to the six-month period 2022 primarily due to the staffing ramp up to accommodate more work volume.

| Gross profit: | For the three months ended June 30, 2023 | 2022 | For the six months ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Sale of software | $56,302 | $3,713 | $63,414 | $42,011 |
| Software as a service | 1,019,536 | 967,268 | 2,037,328 | 1,307,240 |
| Software maintenance services | 334,022 | 324,696 | 666,848 | 642,998 |
| Professional services | 990,975 | 707,223 | 2,103,148 | 1,447,004 |
| Storage and retrieval services | 189,598 | 186,118 | 365,534 | 381,602 |
| Total gross profit | $2,590,433 | $2,189,018 | $5,236,272 | $3,820,855 |
| Gross profit percentage: |  |  |  |  |
| Sale of software | 88.5% | 33.4% | 80.3% | 55.6% |
| Software as a service | 79.8% | 83.5% | 81.0% | 82.2% |
| Software maintenance services | 95.7% | 94.4% | 95.4% | 94.5% |
| Professional services | 43.1% | 43.5% | 45.7% | 45.0% |
| Storage and retrieval services | 70.4% | 67.3% | 66.0% | 68.2% |
| Total gross profit percentage | 60.8% | 64.1% | 62.0% | 62.4% |

26

Our overall gross profit decreased to 60.8% in the second quarter 2023 from 64.1% in the second quarter 2022, and decreased to 62.0% in the second quarter 2023 from 62.4% for the six-month period 2023 and the six-month period 2022. The increase in the mix of professional services revenue was the principal driver of the decrease, due to the significant growth in our Document Conversion segment, and exacerbated by a slight erosion in software as a service margins due to staffing increases to accommodate growth at Yellow Folder.

#### Cost of Software Revenues

Cost of software revenues consists primarily of labor costs of our software engineers and implementation consultants and third-party software licenses that are sold in connection with our core software applications. Cost of software revenues during the second quarter 2023 decreased by $48, or 1%, from the second quarter 2022, and decreased by $18,060, or 54%, from the six-month period 2022, due to stronger margin projects sold in 2023. Our gross margin for software revenues increased to 88.5% from 33.4% in the second quarter 2022 and increased to 80.3% from 55.6% the six-month period 2022. The increase in margin percent in the second quarter 2023 was driven by favorable changes in the software solution mix with stronger margin solutions, and impacted by larger percentage swings on small dollar values. Yellow Folder had no impact to this category.

#### Cost of Software as a Service

Cost of software as a service, or SaaS, consists primarily of technical support personnel, hosting services, and related costs. Cost of software as a service during the second quarter 2023 increased by $67,194, or 35%, over the second quarter 2022 and increased by $196,585, or 70%, during the six-month period 2023 over the six-month period 2022. This increase in the cost of SaaS was due to increased staffing allocations, so our gross margin in the second quarter 2023 decreased to 79.8% compared to 83.5% in the second quarter 2022 and to 81.0% in the six-month period 2022 compared to 82.2% during the six-month period 2022.

#### Cost of Software Maintenance Services

Cost of software maintenance services consists primarily of technical support personnel and related costs. Cost of software maintenance services during the second quarter 2023 decreased by $4,068, or 21%, over the second quarter 2022 and decreased by $5,652, or 15%, in the six-month period 2023 over the six-month period 2022, due primarily to reduced support activity. As a result, our gross margin for software maintenance services increased to 95.7% and 95.4% in the second quarter 2023 and the six-month period 2022, respectively, compared to 94.4% and 94.5% in the second quarter 2022 and the six-month period 2022, respectively.

#### Cost of Professional Services

Cost of professional services consists primarily of compensation for employees performing the document conversion services, compensation of our software engineers and implementation consultants and related third-party costs. Cost of professional services during the second quarter 2023 increased by $388,799, or 42%, over the second quarter 2022 and increased in the six-month period 2023 by $727,748, or 41%, over the six-month period 2022, primarily due to growing the Document Conversion staff to meet the growing backlog of orders. Our gross margins in professional services decreased to 43.1% in the second quarter 2023 compared to 43.5% in the second quarter 2022 and increased to 45.7% during the six-month period 2023 compared to 45.0% in the six-month period 2022. Gross margins related to consulting services may vary widely, depending upon the nature of the digital conversion or consulting project and the amount of labor it takes to complete a project. During 2023, improvements in our Document Management professional services consulting efficiencies largely deterioration in our Document Conversion professional services related to digital conversion, as a result of staffing up and training new hires.

#### 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 $10,505, or 12%, in the second quarter 2023 compared to the second quarter 2022, and increased by $10,070, or 6%, during the six-month period 2023 compared to the six-month period 2022. The decrease was due to a reduction in transaction events in the second quarter 2023 compared to 2022, offset for the six-month period by general wage inflation and fuel cost increases. Gross margins for our storage and retrieval services, which exclude the cost of facilities rental, maintenance, and related overheads, increased to 70.4% in the second quarter 2023 compared to 67.3% in the second quarter 2022 and decreased to 66% during six-month period 2023 compared to 68.2% in the six-month period 2022. Yellow Folder did not have a material impact to this category in 2023 or 2022.

### Operating Expenses

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

| Operating expenses: | For the Three Months Ended June 30, 2023 | 2022 | For the Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| General and administrative | $1,561,939 | $1,260,504 | $3,116,550 | $2,199,387 |
| Change in fair value of earnout liabilities | - | 52,301 | - | 116,505 |
| Transaction costs | - | 285,230 | - | 355,281 |
| Sales and marketing | 492,303 | 529,405 | 1,071,814 | 881,519 |
| Depreciation and amortization | 239,803 | 195,277 | 467,521 | 309,387 |
| Total operating expenses | $2,294,045 | $2,322,717 | $4,655,885 | $3,862,079 |

#### General and Administrative Expenses

General and administrative expenses during the second quarter 2023 increased by $307,077, or 24%, over the second quarter 2022, and increased in the six-month period 2023 by $925,997, or 42%, over the six-month period 2022, principally related to the addition of Yellow Folder expenses in the first quarter 2023, resulting in six months of expenses in 2023 compared to three months of expenses in 2022. This was primarily reflected in our Document Management segment, in which our general and administrative expenses increased to $794,718 and $1,597,846 in the second quarter 2023 and the six-month period 2023, respectively, from $688,861 and $1,083,124 in the second quarter 2022 and the six-month period 2022, respectively. In our Document Conversion segment, our general and administrative expenses increased to $767,221 in the second quarter 2023 compared to $571,643 in the second quarter 2022, and increased to $1,518,704 in the six-month period 2023 compared to $1,116,263 in the six-month period 2022.

#### Change in Fair Value of Earnout Liabilities

The final earnout liabilities were paid in January 2023 and there were no changes in fair value in 2023. Fair value adjustments amounted to $52,301 in the second quarter 2022 and $116,505 for the six-month period 2022. The fair value adjustments were driven by updated assumptions to reflect the improved performance of the affected acquisitions against their threshold targets and the decreasing impact of present value discounting.

#### Transaction Costs

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

#### Sales and Marketing Expenses

Sales and marketing expenses during the second quarter 2023 decreased by $37,102, or 7%, from the second quarter 2022 and increased by $190,295, or 22%, during the six-month period 2023 over the six-month period 2022. The six-month increase was primarily driven by the inclusion of the sales and marketing expenses Yellow Folder during the full six-month period 2023, compared to only the second quarter 2022.

#### Depreciation and Amortization

Depreciation and amortization during the second quarter 2023 increased by $38,884, or 19%, over the second quarter 2022 and increased by $149,300, or 47%, during the six-month period 2023 over the six-month period 2022 as a result of amortization of new intangible assets related to the Yellow Folder acquisition, as well as increased amortization of capitalized software costs.

### Other Items of Income and Expense

#### Interest Expense, Net

Interest expense decreased by $79,814, or 33%, in the second quarter 2023 as compared to the second quarter 2022, and decreased by $20,979, or 6% during the six-month period 2023 as compared to the six-month period 2022. The decrease resulted from partial principal repayment of the 2020 Notes on December 1, 2022 and February 28, 2023.

### Liquidity and Capital Resources

We have financed our operations primarily through a combination of cash on hand, cash generated from operations, borrowings from third parties and related parties, and proceeds from private sales of equity. Since 2012, and including our private offering in April 2022, we have raised a total of approximately $25.2 million in cash through issuances of debt and equity securities, net of $1.3 million in debt repayments. As of June 30, 2023, we had approximately $1.1 million in cash and cash equivalents, net working capital deficit of $0.4 million, and an accumulated deficit of $21.4 million. In January 2023, we paid $0.7 million in final earnout payments and in February 2023 and December 2022 we prepaid approximately $1.3 million in principal, which was due in February 2023.

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

- acquiring the positive cash flow generated by Yellow Folder,
- receiving aggregate gross proceeds of approximately $5.7 million from the private placement of our common stock (all which was used to acquire Yellow Folder), and
- receiving approximately $3.0 million in proceeds from the issuance of 12% subordinated promissory notes due March 30, 2025, which we refer to as the 2022 Notes (some of which was used to acquire Yellow Folder, with the remainder used for general working capital).

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

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

Based on our current plans and assumptions, we believe our capital resources, including our cash and cash equivalents, along with funds expected to be generated from our operations and potential financing options, will be sufficient to meet our anticipated cash needs arising in the ordinary course of business for at least the next 12 months, including to satisfy our expected working capital needs and capital and debt service commitments.

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

### Indebtedness

As of June 30, 2023, our outstanding long-term indebtedness consisted of:

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

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

### Capital Expenditures

There were no material commitments for capital expenditures at June 30, 2023.

### Cash Used in and Provided by Operating Activities

Net cash used in operating activities during the six-month period 2023 was $299,631, primarily attributable to the net income adjusted for non-cash expenses of $856,555, an increase in operating assets of $702,381 and a decrease in operating liabilities of $702,102. Net cash provided by operating activities during the six-month period 2022 was $72,649, primarily attributable to the net loss adjusted for non-cash expenses of $764,638, a decrease in operating assets of $225,852 and a decrease in operating liabilities of $523,548.

### Cash Used by Investing Activities

Net cash used in investing activities in the six-month period 2023 was $291,101, including $208,417 in capitalized software. Net cash used in investing activities in the six-month period 2022 was $6,652,673, primarily $6,383,269 related to cash paid to acquire Yellow Folder, as well as $171,205 in capitalized software.

### Cash Used in and Provided by Financing Activities

Net cash used by financing activities during the six-month period 2023 amounted to $700,000 in earnout liability payments, $262,950 in repayment of notes payable, and $12,312 in the principal portion of a finance lease liability. Net cash provided by financing activities during the six-month period 2022 amounted to $6,940,583, as the result of cash generated from the sale of common stock of $5,740,758 and from new borrowings of $2,964,500, partially offset by issuance costs of $746,342, as well as a further offset of $1,018,333 in earnout liability payments.

### Critical Accounting Policies and Estimates

The preparation of our condensed consolidated financial statements in accordance GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period. We monitor and analyze these items for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. The actual results experienced by us may differ materially from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected.

Our critical accounting policies and estimates are set forth in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. There were no material changes to our critical accounting policies and estimates during the second quarter 2023.

## Controls and procedures

As filed, 2,156 characters.

### Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) at the end of the period covered by this Quarterly Report.

Based on this evaluation, we concluded that, as of June 30, 2023, our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls system, no matter how well designed and operated, can provide only reasonable assurance of achieving its desired objectives. In addition, the design of disclosure controls and procedures must reflect resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

### Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).

We regularly review our internal control over financial reporting and, from time to time, we have made changes as we deemed appropriate to maintain and enhance the effectiveness of our internal controls over financial reporting, although these changes do not have a material effect on our overall internal control.

## Risk factors

As filed, 458 characters.

Our business and operating results are subject to many risks, uncertainties and other factors. If any of these risks were to occur, our business, affairs, assets, financial condition, results of operations, cash flows and prospects could be materially and adversely affected. There have been no material changes to the risk factors set forth in Part I, Item 1A, “*Risk Factors,”* of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Filed Aug 14, 2023.
Source: SEC EDGAR, the filing index for accession 0001493152-23-028383. Last ingested by Listed: Oct 24, 2026, 15:02 ET. No prices; not investment advice.