INTELLINETICS, INC.

Previous wording

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, 2023. 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 nine-month periods ended September 30, 2024 as the third quarter 2024 and the nine-month period 2024 respectively, and to the three and nine-month periods ended September 30, 2023 as the third quarter 2023 and the nine-month period 2023.

Current wording

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.

Previous wording

There has been no material change during the nine-month period 2024 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, 2023.

Current wording

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.

Previous wording

Below are our key financial results for the third quarter 2024 (consolidated unless otherwise noted):

Current wording

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

Previous wording

Our overall performance depends on economic conditions, and our continuing growth will be due in part to continued growth in the US economy and continued stability of state and local governmental spending in the US. Our performance will also continue to be affected by uncertainty in the inflationary environment and uncertainty in interest rates, as well as slowing-to-modest global growth rates.

Current wording

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.

Previous wording

Other volatility, particularly from global supply chain disruptions, has had and is expected to continue to have a minimal impact on us as we consume relatively little in raw materials. Any macroeconomic downturn could affect our customers’ and potential customers’ budgets for technology procurement. 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 that our focus on our strategic priorities will deliver consistent growth.

Current wording

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.

Previous wording

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, 2023. Due to all these factors and the other risks discussed Part I, Item IA, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, and Part II, Item IA,“Risk Factors” of our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2024 filed on May 14, 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.

Current wording

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.

Previous wording

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

Current wording

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

Previous wording

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 $110,197, or 8.5%, in the third quarter 2024 compared to the third quarter 2023 and increased by $399,591, or 10.5% in the nine-month period 2024 compared to the nine-month period 2023. This increase was primarily the result of new cloud-based solution sales, primarily our IntelliCloud Payables Automation Solution, as well as expanded data storage, user seats, and hosting fees for existing customers. Those growth areas were partially offset by weakness in the YellowFolder growth in K-12, which was impacted by higher than normal churn rate in those customers.

Current wording

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.

Previous wording

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 professional services revenues during the third quarter 2024 and nine-month period 2024, $2,456,456 and $7,457,389, respectively, were derived from our Document Conversion operations and $143,774 and $284,877, respectively, were derived from our Document Management operations. Our overall professional services revenues increased by $267,140, or 11.5%, in the third quarter 2024 compared to the third quarter 2023 and increased by $811,571, or 11.7%, in the nine-month period 2024 compared to the nine-month period 2023. This increase is the result of a significant project in our Document Conversion segment, along with realized price increases in late 2023, more than offsetting fewer projects in our Document Management segment, which can be more volatile with its significantly smaller volumes. However, we believe that our largest Document Conversion customer intends to renegotiate, and accordingly reduce, our pricing on a significant portion of our work for this customer, which could have a significant adverse impact on our future professional services revenues as well as our overall revenues, margins, net income and cash flows next year.

Current wording

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.

Previous wording

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

Current wording

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

Previous wording

Cost of professional services consists primarily of compensation for employees performing the document conversion services, compensation of our software engineers and implementation consultants and related third-party costs. Cost of professional services during the third quarter 2024 increased by $92,715, or 6.9%, over the third quarter 2023 and increased in the nine-month period 2024 by $226,862, or 5.9%, over the nine-month period 2023, primarily due to growing the Document Conversion staff to process the growing revenues. Our gross margins in professional services increased to 45.0% in the third quarter 2024 compared to 42.6% in the third quarter 2023 and increased to 47.6% during the nine-month period 2024 compared to 44.7% in the nine-month period 2023. Price increases in the Document Conversion segment offset a less profitable project mix in professional services within that segment in the third quarter 2024, and was strengthened by an overall solid project mix in the segment for the nine month period 2024. Gross margins related to professional services projects 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.

Current wording

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.

Previous wording

Sales and marketing expenses during the third quarter 2024 increased by $206,211, or 41.6%, over the third quarter 2023 and increased by $206,457, or 13.2%, during the nine-month period 2024 compared to the nine-month period 2023. The increases were primarily driven by the expansion of our sales team as part of our investments intended to accelerate our sales. Additionally, these increases resulted from an increased focus on our marketing efforts, such as an increase in our marketing expense on select campaigns and increased travel and trade show materials and attendance.

Current wording

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.

Previous wording

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 $22.9 million in cash through issuances of debt and equity securities, net of $3.6 million in debt repayments. In March, June and August 2024, we prepaid an aggregate of $1.65 million of the principal balances of the 2022 Notes, respectively.

Current wording

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.

Previous wording

In 2024 and 2023, 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, 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, and (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. However, we believe that our largest customer intends to renegotiate our pricing on a significant portion of our work for this customer, which could have an adverse impact on our overall revenues, cash flows, liquidity and capital resources.

Current wording

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.

Previous wording

At September 30, 2024, we had $2.5 million in cash and cash equivalents, working capital deficit of $0.2 million, and long-term debt relating to our notes payable of approximately $1.3 million due December 31, 2025. 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.

Current wording

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.

Previous wording

However, 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 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 impact of contract renegotiations with our largest customer, 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 discussed in this Quarterly Report.

Current wording

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.

Previous wording

Net cash provided by operating activities during the nine-month period 2024 was $3,652,417, primarily attributable to the net income adjusted for non-cash expenses of $2,203,699, a decrease in operating assets of $780,011 and an increase in operating liabilities of $1,161,221. Net cash provided by operating activities during the nine-month period 2023 was $1,128,314, primarily attributable to the net income adjusted for non-cash expenses of $1,312,276, an increase in operating assets of $1,037,575 and an increase in operating liabilities of $395,985.

Current wording

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.

Previous wording

Net cash used by financing activities during the nine-month period 2024 amounted to $1,625,000 in repayment of notes payable and $45,577 in the principal portion of a finance lease liability. Net cash used by financing activities during the nine-month period 2023 amounted to $700,000 in earnout liability payments, $980,450 in repayment of notes payable, and $23,167 in the principal portion of a finance lease liability.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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, 2023. There have been no material changes to our critical accounting policies and estimates since our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

Current wording

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.