Intellinetics, Inc.: Form 10-Q for the period ended Mar 31, 2025

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, 2024. Historical results and percentage relationships among any amounts in the financial statements are not necessarily indicative of trends in operating results for any future periods. Any forward-looking statements in this discussion and analysis should be read in conjunction with the information set forth in “Note Regarding Forward-Looking Statements” elsewhere herein. In this Quarterly Report, we sometimes refer to the three month period ended March 31, 2025 as the first quarter 2025, and to the three month period ended March 31, 2024 as the first quarter 2024.

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. Our digital transformation products and services are provided through two reporting segments: Document Management and Document Conversion. Our Document Management segment 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 micrographics conversions and 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 Corespace, 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 offerings, 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 first quarter 2025 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, 2024.

Executive Overview of Results

Our 2025 results reflected our current strategy to grow our SaaS revenue, including our investments in sales and marketing and related initiatives. Revenue growth in SaaS was more than offset by a shortfall in Professional Services, driven by reduced project work, primarily due to timing of large scanning projects. Cost of revenues contracted more than overall revenues, generating improved gross profits (revenues less cost of revenues) as a percentage of revenue.

Below are our key financial results for the first quarter 2025 (consolidated unless otherwise noted):

• Revenues were $4,247,345, representing a revenue decrease of 5.8% year over year.
• SaaS revenue was $1,542,169, representing revenue growth of 9.8% year over year.
• Cost of revenues was $1,378,145, a decrease of 14.3% year over year.
• Gross profit percentage was 67.6%, compared to 64.3% in the first quarter 2024.
• Operating expenses (excluding cost of revenues) were $3,553,759, an increase of 21.1% year over year. Our sales and marketing initiatives were a key driver of the increase.
• Loss from operations was $684,559, compared to loss from operations of $34,480 in the first quarter 2024.
• Net loss was $727,565 with basic and diluted net loss per share of $0.17, compared to net loss of $174,714 with basic and diluted net loss per share of $0.04 in the first quarter 2024.
• Net cash used in operating activities was $110,353, compared to $611,766 provided by operations in the first quarter 2024.
• Capital expenditures were $223,934 including capitalized software costs of $102,854, compared to $127,932 in the first quarter 2024, including capitalized software costs of $109,621.
• As of March 31, 2025, we had 150 employees, including 18 part-time employees, compared to 180 employees as of March 31, 2024.

Financial Impact of Current Economic Conditions

Our overall performance depends on economic conditions, and our continuing growth will be due in part to continued growth in the US economy and stability of state and local governmental spending in the US. We do not have direct risk exposure to federal spending levels, but we could face exposure indirectly if federal spending reductions have a corresponding effect on state and local budgets, particularly in the K-12 Education sector. Our performance will also continue to be affected by uncertainty with respect to wage inflation, as well as slowing-to-modest global growth rates.

Volatility from increased trade protectionism is likely to have a minimal direct impact on us because we consume relatively little in raw materials. However, we have customers in industries that are likely to be affected, such as homebuilding and construction. Any industry-specific or macroeconomic downturn could affect our customers’ and potential customers’ budgets for technology procurement and stall our growth plans. However, absent 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 our focus on our strategic priorities.

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, 2024. Due to all these factors and the other risks discussed in Part I, Item IA, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2024, 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:

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

The following tables sets forth our revenues by revenue source and segment for the periods indicated:

Our total revenues in the first quarter 2025 decreased by $259,739, or 5.8%, from our first quarter 2024 revenues, driven primarily by project timing in our professional services revenues, which decreased 13.2% year over year for the first quarter 2025, and more than offset our software as a service revenues, which grew 9.8% year over year. Slight erosion in revenues for Software maintenance services and Storage and retrieval services, both in line with expectations, exacerbated the impact of the professional services decrease.

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 $137,016, or 9.8% in the first quarter 2025 compared to 2024. This increase was primarily the result of new payables automation customers.

Professional Services Revenues

Professional services revenues primarily consist of revenues from document scanning and conversion services, plus consulting, discovery, training, and advisory services to assist customers with document management needs. These revenues include arrangements that do not involve the sale of software. Of our $2,158,315 in professional services revenues during the first quarter 2025, $2,074,363 was derived from our Document Conversion operations and $83,952 was derived from our Document Management operations. Our overall professional services revenues decreased by $327,142, or 13.2%, in the first quarter 2025 compared to 2024. This decrease is the result of reduced scanning projects in our Document Conversion segment, due to timing of projects.

Costs of Revenues and Gross Profits

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

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

The following tables sets forth our cost of revenues by revenue source and segment for the periods indicated:

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Our total cost of revenues during the first quarter 2025 decreased by $229,295, or 14.3%, from 2024. Our cost of revenues for our Document Management segment decreased by $5,682, or 2.2%, primarily due to higher margin professional services projects, where we expended less in costs to service the increased professional services revenue. Our cost of revenues for our Document Conversion segment decreased by $223,613, or 16.6%, in the first quarter 2025 compared to 2024 primarily due to the decreased demand, and also benefited from higher margin projects.

The following tables sets forth our gross profit by reportable segment and revenue source for the periods indicated:

Our overall gross profit increased to 67.6% in the first quarter 2025 from 64.3% in 2024. The increase in the mix of software as a service revenue was the principal driver of the increase, further enhanced by continued overall strong margins in the Document Management segment, and by margin improvement in the Document Conversion segment, driven by the Professional services mix improvement from higher margin projects.

Cost of Software as a Service

Cost of software as a service, or SaaS, consists primarily of technical support personnel, hosting services, and related costs. Cost of software as a service during the first quarter 2025 decreased by $863, or 0.4%, from the first quarter 2024. Cost of software as a service is impacted by increasing our implementations team and support desk staff, the volume of support calls, and periodic improvements to infrastructure, which did not materially change in the first quarter 2025. Our gross margin in the first quarter 2025 increased to 86.1% compared to 84.6% in the first quarter 2024.

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 decreased in the first quarter 2025 by $249,122, or 19.3% over 2024, due to reduced staffing levels in our Document Conversion segment, to support our corresponding decreased revenues, and higher margin projects requiring less labor. Further, the Document Management projects in the first quarter 2025 required less labor to complete than in 2024. Consolidated, our gross margin for professional services increased to 51.8% during the first quarter 2025 compared to 48.1% in 2024. Gross margins related to consulting services in Document Management and digital transformation services in Document Conversion may vary widely, depending upon the nature of the project and the amount of labor required to complete a project.

Operating Expenses

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

General and Administrative Expenses

General and administrative expenses increased $303,541 or 14.3% in the first quarter 2025, primarily related to investments made in order to scale, primarily our expanded System and Organization Controls 2 (SOC2) process with additional monitoring and controls, plus some timing items such as project-based legal fees and recruiting fees as we expand our team. These increases were reflected in both our Document Management segment, in which our general and administrative expenses increased to $1,347,720 in first quarter 2025 from $1,145,031 in 2024, and also in our Document Conversion segment, in which our general and administrative expenses increased to $1,084,314 in first quarter 2025 from $983,462 in 2024. Additionally, share-based compensation expense, which is non-cash, continues to be a significant portion of general and administrative expenses, amounting to $536,763 in first quarter 2025 and $513,357 in first quarter 2024.

Sales and Marketing Expenses

Sales and marketing expenses during the first quarter 2025 increased by $272,419, or 50.3%, from the first quarter 2024, driven by the expansion of our sales team as part of our investments intended to accelerate our sales revenues, and further amplified by an open position in 2024.

Depreciation and Amortization

Depreciation and amortization during the first quarter 2025 increased by $43,675, or 16.5%, over the first quarter 2024 driven by both increased amortization on capitalized software, which has increased in recent quarters as we bring new functionality to our payables automation solution, and by purchases of server hardware and network routers in late 2024 to update our infrastructure.

Other Items of Income and Expense

Interest Expense, Net

Interest expense was $43,006 during the first quarter 2025, net of $7,692 of interest income, as compared with $140,234 during the first quarter 2024, representing a decrease of $97,228 or 69.3%. The decrease resulted from reduced interest resulting from early principal repayments of the 2022 Notes of $500,000 on March 30, 2024, $325,000 on June 30, 2024, and $800,000 on August 30, 2024.

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, we have raised a net total of approximately $21.6 million in cash through issuances of equity securities and a further $5.0 million in cash through issuances of debt securities, of which all but approximately $1.3 million has been repaid.

In recent years 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, containing an estimated net rate increase for all non-fixed pricing projects of approximately 21%, compared to the current rates in effect for the contract period commencing June 1, 2018, (ii) 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 the remaining $807,331 in 2022 Unrelated Notes and $532,169 of the 2022 Related Notes, and (iii) on April 16, 2025 we filed a shelf Registration Statement on Form S-3 with the SEC to facilitate potential future equity capital raising. As of the date of this report, we expect to secure a renewal of our contract with our largest customer, which would be effective from June 1, 2025 through May 31, 2030, but such renewal remains subject to final customer approval.

At March 31, 2025, we had $2.1 million in cash and cash equivalents, working capital deficit of $1.3 million, of which the largest liabilities include $2.9 million in deferred revenues and short-term debt relating to our notes payable of approximately $1.3 million due December 31, 2025. Additionally, at March 31, 2025 and December 31, 2024 we had approximately $0.9 million and $1.3 million, respectively, in unbilled accounts receivable. Due to certain customer terms regarding acceptance for certain projects, we have a number of projects where all of the document conversion work is completed, and the associated revenue has been recognized, but we are unable to invoice until the customer has received and approved the images. The balance is also affected by the timing of completion of major projects. We have initiatives in place to further improve process efficiencies and invoice more promptly. 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 flow needs for at least the next 12 months, including to satisfy our expected working capital needs and our capital and debt service commitments over that period.

Our future cash resources and capital requirements may vary materially from those now planned. For example, from time to time we evaluate opportunities to expand our current offerings or to develop new products and services and technology or to acquire or invest in complementary businesses, which could increase our capital needs. 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 continuing uncertainty regarding inflation and economic growth, the timing of sales, the success of our new business partners expanding our product and service lines, the mix of products and services, unanticipated events over which we have no control increasing our operating costs or reducing our revenues beyond our current expectations, and other factors as discussed in this Quarterly Report.

We believe we could seek additional debt or equity financing on acceptable terms. While we are confident in our ability to satisfy our current debt requirements, we also believe that our capital resources, business operations and financial results would allow us to seek a full or partial refinancing or other appropriate modification of the current notes payable, such as an extension or conversion to equity, if we deem necessary or desirable. However, our ability to obtain additional capital, or to modify our existing debt arrangements, when needed or desired, will depend on many factors, including general economic and market conditions, our operating performance and investor and lender sentiment, and thus cannot be assured.

Indebtedness

As of March 31, 2025, 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 $1,339,500 and accrued interest of $0.

See Note 6 and Note 7 to our condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report for further information on the 2022 Notes.

Capital Expenditures

There were no material commitments for capital expenditures at March 31, 2025.

Cash Provided by and Used in Operating Activities

Net cash used in operating activities during the first quarter 2025 was $110,353, primarily attributable to the net income adjusted for non-cash expenses of $839,743, an increase in operating assets of $44,905 and a decrease in operating liabilities of $177,626. Net cash provided by operating activities during the first quarter 2024 was $611,766, primarily attributable to the net income adjusted for non-cash expenses of $770,617, an increase in operating assets of $40,447 and an increase in operating liabilities of $56,310.

Cash Used in Investing Activities

Net cash used in investing activities in the first quarter 2025 was $223,934, including $102,854 related to capitalized internal use software. Net cash used in investing activities in the first quarter 2024 was $127,932, including $109,621 related to capitalized internal use software.

Cash Used in Financing Activities

Net cash used in financing activities during 2025 amounted to $16,694 in the principal portion of a finance lease liability and $12 related to the exercise of stock warrants. Net cash used in financing activities during 2024 amounted to $500,000 in repayment of notes payable, and $14,138 in the principal portion of finance lease liabilities.

Critical Accounting Policies and Estimates

The preparation of our condensed consolidated financial statements in accordance with 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, 2024. There were no material changes to our critical accounting policies and estimates during the first quarter 2025.

Evaluation of Disclosure Controls and Procedures

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

Based on this evaluation, we concluded that, as of March 31, 2025, 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.

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, 2024.