Company Quick10K Filing
Intellinetics
Price0.10 EPS-0
Shares19 P/E-1
MCap2 P/FCF-2
Net Debt3 EBIT-1
TEV5 TEV/EBIT-6
TTM 2019-09-30, in MM, except price, ratios
S-1 2020-04-16 Public Filing
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10-K 2012-12-31 Filed 2013-04-01
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10-K 2011-12-31 Filed 2012-01-31
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10-K 2010-12-31 Filed 2011-03-17
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8-K 2020-06-29 Officers
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8-K 2020-04-06
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8-K 2019-11-15
8-K 2019-11-14
8-K 2019-08-14
8-K 2019-06-12
8-K 2019-05-15
8-K 2019-04-29
8-K 2019-04-01
8-K 2019-01-04
8-K 2018-11-14
8-K 2018-09-20
8-K 2018-09-14
8-K 2018-08-14
8-K 2018-06-12
8-K 2018-05-15
8-K 2018-05-01
8-K 2018-04-02
8-K 2018-02-19

INLX Filing

Part I Financial Information
Item 1. Financial Statements
Part II
Item 13. Other Expenses of Issuance and Distribution
Item 14. Indemnification of Directors and Officers.
Item 15. Recent Sales of Unregistered Securities
Item 16. Exhibits and Financial Statement Schedules
Item 17. Undertakings
EX-5.1 ex5-1.htm
EX-21.1 ex21-1.htm
EX-23.1 ex23-1.htm

Intellinetics Filing 2020-04-16

S-1 1 forms-1.htm

 

As filed with the United States Securities and Exchange Commission on April 16, 2020

 

Registration No. 333-_____________

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM S-1

 

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

INTELLINETICS, INC.

(Exact name of Registrant as specified in its charter)

 

Nevada   7373   87-0613716
(State or other jurisdiction
of incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

 

2190 Dividend Drive

Columbus, Ohio 43228

(614) 921-8170

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

James F. DeSocio

President and Chief Executive Officer

Intellinetics, Inc.

2190 Dividend Drive

Columbus, Ohio 43228

(614) 921-8170

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

Erin C. Herbst, Esq.

Kegler Brown Hill & Ritter Co., L.P.A.

65 E. State Street, Suite 1800

Columbus, Ohio 43215

Tel No.: (614) 462-5400

Fax No.: (614) 464-2634

 

Approximate date of commencement of proposed sale to the public:

From time to time after the effective date of this Registration Statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X]

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an “emerging growth company.” See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [  ] (Do not check if a smaller reporting company)
Emerging growth company [  ]
Smaller reporting company [X]

 

If an emerging growth company, indicated by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act. [  ]

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of
Securities to be Registered
  Amount
To be
Registered
    Proposed
Maximum
Offering Price
Per Share
    Proposed
Maximum
Aggregate
Offering Price
    Amount of
Registration Fee
 
Common Stock, par value $.001 per share     2,519,490 (1)   $ 3.00 (2)   $ 7,558,470     $ 981.09 (2)

 

(1) This Registration Statement registers for resale 2,519,490 shares of the Registrant’s common stock, par value $0.001 per share, by the selling stockholders identified in this prospectus, consisting of (a) 955,000 shares of common stock, issued to investors in a private placement of securities completed on March 2, 2020, (b) 1,433,740 shares of common stock, issued upon conversion of all the outstanding principal and interest payable by the Registrant pursuant to convertible notes held by noteholders; (c) 35,250 shares of common stock, issued to the placement agent; and (d) up to 95,500 shares of our common stock, issuable upon the exercise of warrants issued to the placement agent. In accordance with Rule 416(a) of the Securities Act, there also are being registered hereunder an indeterminate number of shares that may be issuable with respect to the shares registered hereunder as the result of stock splits, stock dividends or similar transactions.
   
(2)

Estimated pursuant to Rule 457(c) of the Securities Act solely for the purpose of computing the amount of the registration fee based on the average of the high and low prices of the common stock as reported on the OTCQB on April 13, 2020.

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act, or until the Registration Statement shall become effective on such date as the United States Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 

 

 

The information in this prospectus is not complete and may be changed. These securities may not be sold until the Registration Statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED APRIL 16, 2020

 

PROSPECTUS

 

INTELLINETICS, INC.

 

2,519,490 Shares of Common Stock

 

The selling stockholders identified in this prospectus may, from time to time, offer and sell up to 2,519,490 shares of our common stock consisting of:

 

 

955,000 shares of our common stock, issued to investors in a private placement of securities completed on March 2, 2020 (which we refer to as our “2020 private placement”);

     
 

1,433,740 shares of our common stock, issued to noteholders upon conversion of all the outstanding principal and interest payable pursuant to our convertible notes held by such noteholders (which we refer to as the “2020 note conversion”);

     
 

35,250 shares of our common stock, issued to the placement agent in connection with the 2020 note conversion; and

     
 

up to 95,500 shares of our common stock, issuable upon the exercise of warrants issued to the placement agent in connection with the 2020 private placement.

 

We are not selling any shares of our common stock in this offering and will not receive any proceeds from the sale of the shares by the selling stockholders. We may receive proceeds on the exercise for cash of outstanding warrants for shares of our common stock covered by this prospectus.

 

The selling stockholders may offer the shares covered by this prospectus at fixed prices, at prevailing market prices at the time of sale, at varying prices or negotiated prices, in negotiated transactions, or in trading markets for our common stock. We will pay all expenses of the registration of the shares, and the selling stockholders will pay any broker-dealer or underwriter fees, discounts or commissions and other selling expenses of the shares.

 

Our common stock is quoted on the OTCQB under the symbol “INLX.” The closing price of our common stock as reported on the OTCQB on April 13, 2020, was $3.00 per share.

 

Investing in our securities involves a high degree of risk. You should consider carefully the risk factors beginning on page 6 of this prospectus before you consider buying shares of our common stock.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The date of this prospectus is__________ , 2020.

 

 

 

 

TABLE OF CONTENTS

 

 

This prospectus is part of a Registration Statement we filed with the Securities and Exchange Commission (the “SEC.”) Under this registration process, the selling stockholders may, from time to time, offer and sell up to 2,519,490 shares of our common stock, as described in this prospectus, in one or more offerings. This prospectus provides you with a general description of the securities the selling stockholders may offer. You should read this prospectus carefully before making an investment decision.

 

You may only rely on the information contained in this prospectus or that we have referred you to. We have not authorized anyone to provide you with additional or different information. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities other than the shares of our common stock offered by this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any common stock in any circumstances or any jurisdiction in which such offer or solicitation is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front cover of this prospectus regardless of the time of delivery of this prospectus or any sale of our common stock. The rules of the SEC may require us to update this prospectus in the future.

 

The SEC allows us to incorporate by reference information that we file with them, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be a part of this prospectus, and information that we file later with the SEC will automatically update and supersede this information. You should rely only on the information incorporated by reference or set forth in this prospectus or any prospectus supplement.

 

As used in this prospectus, unless the context indicates otherwise:

 

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

 

 2 
 

 

 

PROSPECTUS SUMMARY

 

The following summary highlights selected information contained elsewhere in this prospectus and does not contain all of the information you should consider before investing in our securities. Before deciding to invest in our securities, you should read this entire prospectus, including the discussion of “Risk Factors” and our consolidated financial statements and the related notes.

 

Our Company

 

Our History

 

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

 

Our Company

 

We are a document services and solutions software company serving both the small-to-medium business and governmental sectors. Our software platform allows customers to capture and manage all documents across operations such as scanned hard-copy documents and all digital documents including those from Microsoft Office 365, digital images, audio, video and emails. Our document services offerings provide assistance to clients with document management generally and migration to our software solutions. Our solutions create value for customers by making it easy to connect business-critical documents to the people who need them by making them easy to find, while also being secure and compliant with the customers’ audit requirements.

 

Customers obtain use of our software by either purchasing it for installation onto their equipment, referred to as a “premise” model, or by accessing the platform via the Internet, referred to as a “cloud-based,” “software as a service,” or “SaaS” model. We continue to see increases in its provision of SaaS-based customer activation, and this migration by clients is the most significant strategic part of its revenue growth opportunity. Our SaaS products are hosted with Amazon Web Services, Expedient, and Skynet Managed Technology Services, offering our customers reliable hosting services with best practices in data security.

 

Recent Developments

 

On April 15, 2020, we entered into an unsecured promissory note under the Paycheck Protection Program (the “PPP”), through PNC Bank with a principal amount of $838,700. The PPP was established under the recently congressionally approved Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration (the “SBA”). The term of the PPP loan is two years. The interest rate on each PPP loan is 1.0% per annum, which shall be deferred for the first six months of the term of the loan. After the initial six-month deferral period, the loan requires monthly payments of interest until maturity with respect to any portion the PPP loan which is not forgiven as described below. The Company is permitted to prepay or partially prepay the PPP loan at any time with no prepayment penalties. Under the terms of the CARES Act, PPP loan recipients can apply for, and be granted, forgiveness for all or a portion of loans granted under the PPP. Such forgiveness will be determined, subject to limitations and ongoing rulemaking by the SBA, based on the use of loan proceeds for payroll costs and mortgage interest, rent or utility costs and the maintenance of employee and compensation levels. No assurance is provided that the Company will obtain forgiveness of the PPP loans in whole or in part.

 

On March 2, 2020, Intellinetics acquired all of the issued and outstanding capital stock of Graphic Sciences, a document management company located in Madison Heights, Michigan that provides indexing and scanning services, as well as physical document storage and retrieval services. More details regarding the acquisition of Graphic Sciences are set forth below in Management’s Discussion and Analysis, and in our Current Report on 8-K filed on March 4, 2020.

 

Also on March 2, 2020, we completed a private offering with certain accredited investors to raise aggregate gross proceeds of $2,000,000 in 12% subordinated notes and $3,500,000 in shares of common stock, referred to herein as the 2020 private placement. We used a portion of the net proceeds to finance the acquisition of Graphic Sciences, and intend to use the remaining net proceeds for working capital and general corporate purposes, including potentially other future acquisitions. More details are set forth below in Management’s Discussion and Analysis, and in our Current Report on 8-K filed on March 4, 2020.

 

On March 2, 2020, we amended all of our currently outstanding convertible promissory notes, in order to permit us to convert all of the then-outstanding principal and accrued and unpaid interest payable with respect to the notes into shares of common stock upon the same terms as the 2020 private placement. On the same day, we converted all of the then-outstanding principal and accrued and unpaid interest into shares of common stock. More details are set forth below in Management’s Discussion and Analysis, and in our Current Report on 8-K filed on March 4, 2020.

 

On February 27, 2020, shareholders approved a one-for-fifty (1-for-50) reverse split of our common stock and reduction of the number of authorized shares of common stock to 25,000,000 shares. The reverse split was made effective by OTCQB on March 20, 2020. More details regarding the reverse split and related amendments to our Articles of Incorporation are set forth below in Management’s Discussion and Analysis, and in our Current Report on 8-K filed on March 4, 2020.

 

Corporate Information

 

Our principal executive offices are located at 2190 Dividend Drive, Columbus, Ohio 43228. Our telephone number is (614) 921-8170 and our website address is www.intellinetics.com. The information contained on our website is not part of this prospectus.

 

 

 3 
 

 

 

The Offering

 

Common stock offered by selling stockholders Up to 2,519,490 shares
   
Common stock to be outstanding after the offering

2,906,340 shares, assuming full exercise of all warrants held by selling stockholders

   
Use of proceeds The selling stockholders will receive all of the proceeds from the sale of shares of our common stock. We will not receive any proceeds from the sale of the common stock. To the extent that the selling Stockholders exercise for cash all of the warrants covering the 95,500 shares of common stock issuable upon exercise of all the warrants held by such selling stockholders, we may receive a maximum of $382,000 from such exercises. We intend to use any such proceeds for general corporate and working capital purposes. See “Use of Proceeds” for a complete description.
   
OTCQB Symbol INLX
   
Risk Factors The purchase of our common stock involves a high degree of risk. You should carefully review and consider the “Risk Factors” beginning on page 6.

 

The selling stockholders identified in this prospectus may offer and sell up to 2,519,490 shares of our common stock consisting of:

 

  955,000 shares of our common stock, issued to investors in the 2020 private placement;
     
  1,433,740 shares of our common stock, issued to noteholders in the 2020 note conversion;
     
  35,250 shares of our common stock, issued to the placement agent in connection with the 2020 note conversion; and
     
  up to 95,500 shares of our common stock, issuable upon the exercise of warrants issued to the placement agent in connection with the 2020 private placement.

 

The number of shares of our common stock outstanding after the offering is based on 2,810,840 shares of our common stock outstanding as of April 13, 2020, but this amount excludes the following shares reserved for issuance:

 

  67,330 shares of our common stock reserved for issuance under the 2015 Intellinetics Inc. Equity Incentive Plan
       
  230,032 shares of our common stock, issuable upon exercise of warrants outstanding as of April 13, 2020, all of which are immediately exercisable and consist of the following:
       
    five-year warrants to purchase 32,500 shares of our common stock at an exercise price of $32.50 per share, issued to investors on December 29, 2015, December 31, 2015, and January 25, 2016 in connection with a private placement;
       
    five-year warrants to purchase 43,878 shares of our common stock at an exercise price of $32.50 per share, issued to investors on December 31, 2015, and January 6, 2016, in connection with an exchange of convertible notes;
       
    five-year warrants to purchase 17,752 shares of our common stock at an exercise price of $35.75 per share, issued to the placement agent in connection with both the 2015 private placement and the 2015 note exchange;
       
    five-year warrants to purchase 1,125 shares of our common stock at an exercise price of $34 per share, issued to investors in connection with bridge financing prior to a private placement in 2016;
       
    five-year warrants to purchase 3,076 shares of our common stock at an exercise price of $37.50 per share, issued to the placement agent in connection with a private placement with investors on December 30, 2016, January 6, 2017, and January 31, 2017;
       
    five-year warrants to purchase 3,000 shares of our common stock at an exercise price of $15.00 per share, issued to investors in connection with bridge financing prior to a private placement in 2017;
       
    five-year warrants to purchase 17,200 shares of our common stock at an exercise price of $12.50 per share, issued to the placement agent in connection with a private placement with investors on November 17, 2017, and November 29, 2017;
       
    five-year warrants to purchase 16,000 shares of our common stock at an exercise price of $9.00 per share, issued to the placement agent in connection with a private placement with investors on September 20, 2018, and September 26, 2018; and
       
    five-year warrants to purchase 95,500 shares of our common stock at an exercise price of $4.00 per share, issued to the placement agent in connection with the 2020 private placement.

 

 

 4 
 

 

 

Summary Historical Financial Data

 

The following table summarizes our recent financial data. We have derived the following summary of our statements of operations data for the fiscal years ended December 31, 2019 and 2018, and the following summary of our balance sheet data as of December 31, 2019 and 2018, from our audited consolidated financial statements appearing elsewhere in this prospectus. The following summary of our financial data set forth below should be read together with our financial statements and the related notes to those statements, as well as the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” appearing elsewhere in this prospectus.

 

   Year Ended 
December 31,
 
   Audited 
   2019   2018 
Statement of Operations Data:        
         
Revenues  $2,535,955   $2,381,427 
Cost of Revenues   567,843    742,405 
Gross Profit   1,968,112    1,639,022 
Operating expenses:          
General and administrative   2,131,385    2,106,851 
Sales and marketing   981,618    997,910 
Depreciation   7,701    9,040 
Total operating expenses   3,120,704    3,113,801 
Other income (expenses):          
Interest expense, net   (980,689)   (865,501)
           
Net loss  $(2,133,281)  $(2,340,280)
           
Balance Sheet Data:          
           
Current assets  $872,132   $1,386,864 
Working capital (deficit)   (6,437,382)   143,151 
Total assets   986,574    1,406,279 
Long-term liabilities   53,318    4,693,158 
Total stockholders’ deficit   (20,796,066)   (18,662,785)

 

 

 5 
 

 

RISK FACTORS

 

Investing in our shares involves significant risks. Before making an investment decision, you should consider carefully the risks, uncertainties and other factors and information relating to our business, condition and operating results, including those set forth below and those contained elsewhere in this prospectus. If any of the following risks were to occur, our business, affairs, assets, financial condition, results of operations, cash flows, liquidity and prospects could be materially and adversely affected, the trading price of our shares could decline, and you could lose all or part of your investment in our shares. When we say that something could have a material adverse effect on us or on our business, we mean that it could have one or more of these effects.

 

Risks Relating to Our Business

 

We have been and could continue to be negatively impacted by the recent outbreak of the novel coronavirus disease (COVID-19) and related governmental actions and orders and market effects.

 

In light of the uncertain and rapidly evolving situation relating to the spread of the coronavirus disease (COVID-19), this public health concern could pose a risk to our customers, our employees, our vendors and the communities in which we operate, which could negatively impact our business. The full extent to which COVID-19 may impact our business will depend on future developments, which are highly uncertain and cannot be predicted at this time. At the time of this prospectus, we are obligated to scale back operations in our Graphic Sciences operations in response to the pandemic, under state law in Michigan, where we are processing only those projects which qualify as essential under the state guidance. Should the current shelter-in-place directives continue for an extended period, we expect our business, financial condition and results of operations would be materially adversely affected. We may also be impacted further by decreased customer demand and/or subscription terminations as a result of a reduction in customer spending or as a result of government-imposed restrictions on businesses, shelter-in place orders and temporary restaurant, retail and grocery store closures. Due to the portion of our business that generates subscription-based revenue, the effect of COVID-19 may not be fully reflected in our results of operations until future periods. If the pandemic continues to require governmental orders to shelter-in-place, the disease could have a material adverse effect on our business, results of operations, financial condition and cash flows and adversely impact the trading price of our common stock.

 

Our management expressed going concern issues that note our need for capital and/or revenues to survive as a business.

 

Our ability to continue as a going concern is dependent on our ability to manage cash and further implement our business plan. For the twelve months ended December 31, 2019 and 2018, Intellinetics Ohio had a net loss of $2,133,281 and $2,340,280, respectively, and Graphic Sciences had an unaudited net income of approximately $1,105,000 for the twelve months ended December 31, 2019. Intellinetics Ohio has an accumulated deficit of $20,796,066 as of December 31, 2019. These factors raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our current Independent Registered Public Accounting Firm’s reports on our financial statements for the twelve months ended December 31, 2019 and 2018, contained explanatory paragraphs indicating that there was substantial doubt as to our ability to continue as a going concern. Our going concern qualification is expected to significantly affect our ability to raise capital and have a meaningful negative effect on the cost of capital, if we are able to raise any capital at all. If we are unable to manage cash, generate revenues from operations, or raise capital, we may not be able to continue operations without significant curtailment, especially in light of our reduction in operations in the State of Michigan during that state’s shelter-in-place directives.

 

Our cash reserves may be insufficient, and we may require additional capital to fund our future activities. We may not be able to ensure the survival of the business if we fail to raise additional capital on satisfactory terms and in sufficient amounts when the needs arrive.

 

As of December 31, 2019, we had cash of $404,165. Given the current outbreak of and containment strategies for the novel coronavirus disease (COVID-19) and given our history of operating losses, we believe that, through the next 12 months, the capital requirements to cover our operating costs and fund growth may not be met from cash flows generated by operations. There is no assurance that we will be able to obtain additional capital or debt financing within that time. We will be required to meet our needs from increased internally generated cash flows, debt financings and/or equity financings. We are dependent on our ability to obtain financing to continue operations and to implement our business plan. The type, timing and terms of the additional financing we may select will depend on, among other things, our cash needs, the availability of other financing sources and prevailing conditions in the financial markets. Any financing would be dilutive to our stockholders. There can be no assurance that any of these sources will be available to us at any time. Even if additional capital is available, we may not be able to obtain debt or equity financing on terms favorable to us. If cash generated by operations is not sufficient to meet our capital requirements, the failure to obtain additional financing could result in a reduction or curtailment of our operations.

 

Economic conditions and uncertainty are likely to adversely affect our operating results or financing in ways that are hard to predict or to defend against.

 

Our overall performance depends on economic conditions. The United States economy is currently suffering from uncertainty, volatility, disruption, and other adverse conditions, primarily caused by the current outbreak of and containment strategies for the coronavirus disease (COVID-19), and those conditions will adversely impact the business community and financial markets in ways that are difficult to fully understand at this moment. During adverse economic conditions, many customers delay or reduce technology purchases. Contract negotiations are likely to become more protracted, or conditions could result in reductions in sales of our products, longer sales cycles, pressure on our margins, difficulties in collection of accounts receivable or delayed payments, increased default risks associated with our accounts receivable, slower adoption of new technologies, and increased price competition. In addition, a curtailment of credit markets could adversely impact our ability to complete sales of our products and services, including maintenance and support renewals. Any of these prolonged events are likely to cause a curtailment in government or corporate spending and delay or decrease customer purchases, and adversely affect our business, financial condition, and results of operations.

 

We need to continue to maintain an effective system of internal controls, in order to be able to report our financial results accurately and timely and prevent fraud.

 

Effective internal control is necessary for us to provide reliable financial reports and prevent fraud. We maintain a small accounting and reporting staff, concentrated in a few individuals. Any future weaknesses in our internal controls and procedures over financial reporting could result in material misstatements in our financial statements not being prevented or detected. We may experience difficulties or delays in completing remediation or may not be able to successfully remediate material weaknesses at all. Any material weakness or unsuccessful remediation could affect our ability to file periodic reports on a timely basis and investor confidence in the accuracy and completeness of our financial statements, which in turn could harm our business and have an adverse effect on our stock price and our ability to raise additional funds.

 

 6 
 

 

If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our operating results could fall below expectations of securities analysts and investors,

resulting in a decline in our stock price.

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates” in this Annual Report on Form 10-K, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in our stock price. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, deferred contract costs and commission expense, accounting for business combination, troubled debt restructuring and stock compensation.

 

We may have to issue additional securities at prices which may result in substantial dilution to our stockholders.

 

If we raise additional funds through the sale of equity or convertible debt, our current stockholders’ percentage ownership will be reduced. In addition, these transactions may dilute the value of ordinary shares outstanding. We may have to issue securities that may have rights, preferences, and privileges senior to our common stock. We cannot provide assurance that we will be able to raise additional funds on terms acceptable to us, if at all. If future financing is not available or is not available on acceptable terms, we may not be able to fund our future needs, which would have a material adverse effect on our business plans, prospects, results of operations, and financial condition.

 

We may not be able to generate sufficient cash to service any indebtedness that we may incur from time to time, which could force us to sell assets, cease operations, or take other detrimental actions for our business.

 

Our ability to make scheduled payments on or to refinance any debt obligations that we may incur depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, and other factors beyond our control. We cannot ensure that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on any indebtedness.

 

If our cash flows and capital resources are at any time insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital, restructure or refinance our indebtedness, or reduce or cease operations. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other operating obligations.

 

 7 
 

 

The length of our sales cycle can fluctuate significantly, resulting in significant fluctuations in revenue recognition.

 

The decision by a customer to purchase our products sometimes involves a comprehensive implementation process across the customer’s network or networks. As a result, licenses of these products may entail a significant commitment of resources by prospective customers, accompanied by the attendant risks and delays frequently associated with significant expenditures and lengthy sales cycles and implementation procedures. Given the significant investment and commitment of resources required by an organization to implement the type of software we supply, our sales cycle may be longer compared to other companies within our own industry, as well as companies in other industries. It may take several months, or even several quarters, for marketing opportunities to materialize. If a customer’s decision to license our software is delayed or if the installation of our products takes longer than originally anticipated, the date on which we may recognize revenues from these licenses would be delayed. Such delays could cause our revenues to be lower than expected in a particular period.

 

Any significant reduction in the sales efforts or cooperative efforts from our partners could materially impact our revenues.

 

We rely on close cooperation with our resellers for sales and product development as well as for the optimization of opportunities that arise in our competitive environment. In particular, the success of our reseller program is entirely dependent upon our relationships with resellers of multi-functional devices, which are currently being purchased by current and potential customers in our target markets. Our success will depend, in part, upon our ability to maintain access to existing channels of distribution and to gain access to new channels if and when they develop. We may not be able to retain a sufficient number of our existing partners or develop a sufficient number of future partners. We are unable to predict the extent to which our partners will be successful in marketing and licensing our products. A reduction in partner cooperation or sales efforts, or a decline in the number of channels, could materially reduce revenues.

 

We need to continue to develop new technologically-advanced products that successfully integrate with the software products and enhancements used by our customers.

 

Our success depends upon our ability to design, develop, test, market, license, and support new software products and enhancements of current products on a timely basis in response to both competitive threats and marketplace demands. Recent examples of significant trends in the software industry include cloud computing, mobility, social media, networking, browser, and software as a service. In addition, software products and enhancements must remain compatible with standard platforms and file formats. Often, we must integrate software licensed or acquired from third parties with our proprietary software to create or improve our products. If we are unable to achieve a successful integration with third-party software, we may not be successful in developing and marketing our new software products and enhancements. If we are unable to successfully integrate third-party software to develop new software products and enhancements to existing products, or to complete products currently under development which we license or acquire from third parties, our operating results will materially suffer. In addition, if the integrated or new products or enhancements do not achieve acceptance by the marketplace, our operating results will materially suffer. Also, if new industry standards emerge that we do not anticipate or adapt to, our software products could be rendered obsolete and, as a result, our business and operating results, as well as our ability to compete in the marketplace, would be materially harmed.

 

If our products and services do not gain market acceptance, our operating results may be negatively affected.

 

We intend to pursue our strategy of growing the capabilities of our document solutions software offerings through our proprietary research and the development of new product offerings. In response to customer demand, it is important to our success that we continue: (i) to enhance our products, and (ii) to seek to set the standard for document solutions capabilities in the small-to-medium market. The primary market for our software and services is rapidly evolving, due to the nature of the rapidly changing software industry, which means that the level of acceptance of products and services that have been released recently or that are planned for future release by the marketplace is not certain. If the markets for our products and services fail to develop, develop more slowly than expected or become subject to increased competition, our business may suffer. As a result, we may be unable to: (i) successfully market our current products and services, (ii) develop new software products, services and enhancements to current products and services, (iii) complete customer installations on a timely basis, or (iv) complete products and services currently under development. In addition, increased competition could put significant pricing pressures on our products, which could negatively impact our margins and profitability. If our products and services are not accepted by our customers or by other businesses in the marketplace, our business and operating results will be materially affected.

 

 8 
 

 

If we are unable to continue to attract new customers, our growth could be slower than we expect.

 

We believe that our future growth depends in part upon increasing our customer base. Our ability to achieve significant growth in revenue in the future will depend, in part, upon continually attracting new customers and obtaining subscription renewals to our solutions from those customers. If we fail to attract new customers our revenue may grow more slowly than expected and our business may be harmed.

 

A significant downturn in our business may not be immediately reflected in our operating results because of the way we recognize revenue.

 

We recognize revenue from subscription agreements ratably over the terms of these agreements, which are typically one year. As a result, a significant portion of the revenue we report in each quarter is generated from customer agreements entered into during previous periods, which is reflected as deferred revenue on our balance sheet. Consequently, a decline in new or renewed subscriptions, or a downgrade of renewed subscriptions to less-expensive editions, in any one quarter may not be fully reflected in our revenue in that quarter, and may negatively affect our revenue in future quarters. If contracts having significant value expire and are not renewed or replaced at the beginning of a quarter or are downgraded, our revenue may decline significantly in that quarter and subsequent quarters.

 

If we are unable to increase market awareness of our company and our solutions, our revenue may not continue to grow, or may decline.

 

Market awareness of our capabilities and solutions is essential to our ability to generate new leads for expanding our business and our continued growth. If we fail to sufficiently invest in our marketing programs or they are unsuccessful in creating market awareness of our company and solutions, our business may be harmed.

 

Reduced IT or enterprise software spending may adversely impact our business.

 

Our business depends on the overall demand for IT and enterprise software spend and on the economic health of our current and prospective customers. Any meaningful reduction in IT or enterprise software spending or weakness in the economic health of our current and prospective customers could harm our business in a number of ways, including longer sales cycles and lower prices for our solutions.

 

Security breaches may harm our business.

 

Any security breaches, unauthorized access, unauthorized usage, virus or similar breach or disruption could result in loss of confidential information, damage to our reputation, early termination of our contracts, litigation, regulatory investigations or other liabilities. Our clients may use our products and services to handle personally identifiable information, sensitive personal information, or information that is otherwise confidential. If our security measures or those of our third-party data centers are breached as a result of third-party action, employee error, malfeasance or otherwise and, as a result, someone obtains unauthorized access to customer data, our reputation could be damaged, our business may suffer and we could incur significant liability.

 

The United States has laws and regulations relating to data privacy, security, and retention and transmission of information. We have certain measures to protect our information systems against unauthorized access and disclosure of our confidential information and confidential information belonging to our customers. We have policies and procedures in place dealing with data security and records retention. However, there is no assurance that the security measures we have put in place will be effective in every case.

 

There has been an increase in the number of private privacy-related lawsuits filed against companies in recent years. There has also been an increase in the incidence of data breaches in public companies operating in the US, resulting in unfavorable publicity and high amounts of damages against the breached companies, including the cost of obtaining credit monitoring services for all persons whose information was compromised. In addition, we are unable to predict what additional legislation or regulation in the area of privacy of personal information could be enacted and what effect that could have on our operations and business. Concerns about our practices with regard to the collection, use, disclosure, or security of personal information or other privacy-related matters, even if unfounded and even if we are in compliance with applicable laws, could damage our reputation and harm our business.

 

 9 
 

 

Breaches, or perceived breaches, in security could result in a negative impact for us and for our customers, potentially affecting our business, assets, revenues, brand, and reputation, and resulting in penalties, fines, litigation, and other potential liabilities, in each case depending upon the nature of the information disclosed. These risks to our business may increase as we expand the number of products and services we offer.

 

Any disruption of service at data centers that house our equipment and deliver our solutions could harm our business.

 

Our users expect to be able to access our solutions 24-hours a day, seven-days a week, without interruption. We have computing and communications hardware operations located in data centers owned and operated by third parties. We do not control the operation of these data centers and we are therefore vulnerable to any security breaches, power outages or other issues the data centers experience. We expect that we will experience interruptions, delays and outages in service and availability from time to time.

 

The owners of our data centers have no obligation to renew agreements with us on commercially reasonable terms, or at all. If we are unable to renew these agreements on commercially reasonable terms, we may be required to move to new data centers, and we may incur significant costs and possible service interruption in connection with doing so.

 

These data centers are vulnerable to damage or interruption from human error, malicious acts, earthquakes, hurricanes, tornados, floods, fires, war, terrorist attacks, power losses, hardware failures, systems failures, telecommunications failures and similar events. The occurrence of a natural disaster or an act of terrorism, vandalism or other misconduct, or a decision to close the data centers without adequate notice or other unanticipated problems could result in lengthy interruptions in availability of our solutions.

 

Any changes in third-party service levels at our data centers or any errors, defects, disruptions or other performance problems with our solutions could harm our reputation and may damage our customers’ businesses. Interruptions in availability of our solutions might reduce our revenue, cause us to issue credits to customers, subject us to potential liability, and cause customers to terminate their subscriptions or decide not to renew their subscriptions with us.

 

If our existing customers fail to renew their support agreements, or if customers do not license updated products on terms favorable to us, our revenues could be adversely affected.

 

We currently derive a significant portion of our overall revenues from maintenance services and software subscriptions, and we depend on our installed customer base for future revenue from maintenance services and software subscriptions and licenses of updated products. The IT industry generally has been experiencing increasing pricing pressure from customers when purchasing or renewing support agreements. Moreover, the trend towards consolidation in certain industries that we serve, such as financial services and telecommunications, could result in a reduction of the software and hardware being serviced and put pressure on our maintenance terms with customers who have merged. Given this environment, there can be no assurance that our current customers will renew their maintenance agreements or agree to the same terms when they renew, which could result in our reducing or losing maintenance fees. If our existing customers fail to renew their maintenance agreements, or if we are unable to generate additional maintenance fees through the licensing of updated products to existing or new customers, our business and future operating results could be adversely affected.

 

The loss of a major customer or the failure to collect a large account receivable could negatively affect our results of operations and financial condition.

 

Revenues from a limited number of customers have accounted for a substantial percentage of our total revenues. Our two largest customers account for approximately 6% and 10% of our revenues for the twelve months ending December 31, 2019 and 2018, respectively. In addition, our newly acquired subsidiary, Graphic Sciences, derives over 75% of its revenues from a single customer (the State of Michigan), and another 10% of its revenues from a second customer. For the twelve months ended December 31, 2019 and 2018, government contracts represented approximately 41% and 30% of our net revenues, respectively, without accounting for the recent addition of Graphic Sciences. For the twelve months ended December 31, 2019 and 2018, the most significant of these government contracts represented approximately 6% and 10% of our net revenues, respectively. In addition, Graphic Sciences derives over 75% of its revenues from government contracts. Due to their dependence on state, local and federal budgets, government contracts carry short terms, typically less than 18 months. The loss of a meaningful percentage of government contracts could materially affect our business and operating results

 

 10 
 

 

Our investment in our current research and development efforts may not provide a sufficient, timely return.

 

The development of document solutions software products is a costly, complex, and time-consuming process, and the investment in document solutions software product development often involves a long wait until a return is achieved on such an investment. When cash is available, we make and will continue to make significant investments in software research and development and related product opportunities. Investments in new technology and processes are inherently speculative. Commercial success depends on many factors including the degree of innovation of the products developed through our research and development efforts, sufficient support from our strategic partners, and effective distribution and marketing. Accelerated product introductions and short product life cycles require high levels of expenditures for research and development. These expenditures may adversely affect our operating results if they are not offset by increased revenues. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts in order to maintain our competitive position. However, significant revenues from new product and service investments may not be achieved for a number of years, if at all. Moreover, new products and services may not be profitable, and even if they are profitable, operating margins for new products and businesses may not be as high as the margins we have experienced for our current or historical products and services.

 

Product development is a long, expensive, and uncertain process, and we may terminate one or more of our development programs.

 

We may determine that certain product candidates or programs do not have sufficient potential to warrant the continued allocation of resources. Accordingly, we may elect to terminate one or more of our programs for such product candidates. If we terminate a product in development in which we have invested significant resources, our prospects may suffer, as we will have expended resources on a project that does not provide a return on our investment and we may have missed the opportunity to have allocated those resources to potentially more productive uses, and this may negatively impact our business operating results or financial condition.

 

The use of open-source software in our products may expose us to the risk of having to disclose the source code to our product, rendering our software no longer proprietary and reducing or eliminating its value.

 

Certain open-source software is licensed pursuant to license agreements that require a user who distributes the open-source software as a component of the user’s software to disclose publicly part or all of the source code to the user’s software. This effectively renders what was previously proprietary software open-source software. As competition in our markets increases, we must strive to be cost-effective in our product development activities. Many features we may wish to add to our products in the future may be available as open-source software, and our development team may wish to make use of this software to reduce development costs and speed up the development process. While we carefully monitor the use of all open-source software and try to ensure that no open-source software is used in such a way as to require us to disclose the source code to the related product, such use could inadvertently occur. Additionally, if a third party has incorporated certain types of open-source software into its software but has failed to disclose the presence of such open-source software, and we embed that third-party software into one or more of our products, we could, under certain circumstances, be required to disclose the source code to our product. This could have a material adverse effect on our business.

 

Failure to protect our intellectual property could harm our ability to compete effectively.

 

We are highly dependent on our ability to protect our proprietary technology. We rely on a combination of intellectual property laws, trademark laws, as well as non-disclosure agreements and other contractual provisions to establish and maintain our proprietary rights. We intend to protect our rights vigorously; however, there can be no assurance that these measures will be successful. Enforcement of our intellectual property rights may be difficult or cost prohibitive. While U.S. copyright laws may provide meaningful protection against unauthorized duplication of software, software piracy has been, and is expected to be, a persistent problem for the software industry, and piracy of our products represents a loss of revenue to us. Certain of our license arrangements may require us to make a limited confidential disclosure of portions of the source code for our products, or to place such source code into escrow for the protection of another party. Although we will take considerable precautions, unauthorized third parties, including our competitors, may be able to: (i) copy certain portions of our products, or (ii) reverse engineer or obtain and use information that we regard as proprietary. Also, our competitors could independently develop technologies that are perceived to be substantially equivalent or superior to our technologies. Our competitive position may be adversely affected by our possible inability to effectively protect our intellectual property.

 

 11 
 

 

Any claim that we infringe on a third party’s intellectual property could materially increase costs and materially harm our ability to generate future revenues and profits.

 

Claims of infringement are becoming increasingly common as the software industry develops and as related legal protections, including patents are applied to software products. Although we are not aware of any infringement on the rights of third parties, third parties may assert infringement claims against us in the future. Although most of our technology is proprietary in nature, we do include certain third-party software in our products. In these cases, this software is licensed from the entity holding the intellectual property rights. Although we believe that we have secured proper licenses for all third-party software that is integrated into our products, third parties may assert infringement claims against us in the future. The third parties making these assertions and claims may include non-practicing entities (known as “patent trolls”) whose business model is to obtain patent-licensing revenues from operating companies, such as ours. Any such assertion, regardless of merit, may result in litigation or may require us to obtain a license for the intellectual property rights of third parties. Such licenses may not be available, or they may not be available on reasonable terms. In addition, such litigation could be time-consuming, disruptive to our ability to generate revenues or enter into new market opportunities, and may result in significantly increased costs as a result of our defense against those claims or our attempt to license the intellectual property rights or rework our products to avoid infringement of third-party rights to ensure they comply with judicial decisions. Our agreements with our partners and end-users typically contain provisions that require us to indemnify them, with certain limitations on the total amount of such indemnification, for damages sustained by them as a result of any infringement claims involving our products. Any of the foregoing results of an infringement claim could have a significant adverse impact on our business and operating results, as well as our ability to generate future revenues and profits.

 

The loss of licenses to use third-party software or the lack of support or enhancement of such software could adversely affect our business.

 

We currently depend upon a limited number of third-party software products. If such software products were not available, we might experience delays or increased costs in the development of our products. In certain instances, we rely on software products that we license from third parties, including software that is integrated with internally-developed software, and which is used in our products to perform key functions. These third-party software licenses may not continue to be available to us on commercially reasonable terms, and the related software may not continue to be appropriately supported, maintained, or enhanced by the licensors. The loss by us of the license to use, or the inability by licensors to support, maintain, and enhance any of such software, could result in increased costs or in delays or reductions in product shipments until equivalent software is developed or licensed and integrated with internally-developed software. Such increased costs or delays or reductions in product shipments could adversely affect our business.

 

Current and future competitors could have a significant impact on our ability to generate future revenues and profits.

 

The markets for our products are intensely competitive, and are subject to rapid technological change and other pressures created by changes in our industry. The convergence of many technologies has resulted in unforeseen competitors arising from companies that were traditionally not viewed as threats to our marketplace. We expect competition to increase and intensify in the future as the pace of technological change and adaptation quickens, and as additional companies enter our markets, including those competitors who offer similar products and services to ours, but offer them through a different form of delivery. Numerous releases of competitive products have occurred in recent history and are expected to continue in the future. We may not be able to compete effectively with current competitors and potential entrants into our marketplace. We could lose market share if our current or prospective competitors: (i) introduce new competitive products, (ii) add new functionality to existing products, (iii) acquire competitive products, (iv) reduce prices, or (v) form strategic alliances with other companies. If other businesses were to engage in aggressive pricing policies with respect to competing products, or if the dynamics in our marketplace resulted in increased bargaining power by the consumers of our products and services, we would need to lower the prices we charge for the products we offer. This could result in lower revenues or reduced margins, either of which could materially and adversely affect our business and operating results. Additionally, if prospective consumers choose other methods of document solutions delivery, different from those that we offer, our business and operating results could also be materially and adversely affected.

 

 12 
 

 

Consolidation in the industry, particularly by large, well-capitalized companies, could place pressure on our operating margins which could, in turn, have a material adverse effect on our business.

 

Acquisitions by large, well-capitalized technology companies have changed the marketplace for our goods and services by replacing competitors that are comparable in size to our company with companies that have more resources at their disposal to compete with us in the marketplace. In addition, other large corporations with considerable financial resources either have products that compete with the products we offer, or have the ability to encroach on our competitive position within our marketplace. These companies have considerable financial resources, channel influence, and broad geographic reach; thus, they can engage in competition with our products and services on the basis of sales price, marketing, services, or support. They also have the ability to introduce items that compete with our maturing products and services. The threat posed by larger competitors and their ability to use their better economies of scale to sell competing products and services at a lower cost may materially reduce the profit margins we earn on the goods and services we provide to the marketplace. Any material reduction in our profit margin may have a material adverse effect on the operations or finances of our business, which could hinder our ability to raise capital in the public markets at opportune times for strategic acquisitions or general operational purposes, which may prevent effective strategic growth or improved economies of scale or put us at a disadvantage to our better-capitalized competitors.

 

We must manage our internal resources during periods of company growth, or our operating results could be adversely affected.

 

The document solutions market has continued to evolve at a rapid pace. If we are successful in growing the Company, any growth will place significant strains on our administrative and operational resources, and increase demands on our internal systems, procedures and controls. Our administrative infrastructure, systems, procedures and controls may not adequately support our operations. In addition, our management may not be able to achieve a rapid, effective execution of the product and business initiatives necessary to successfully implement our operational and competitive strategy. If we are unable to manage growth effectively, our operating results will likely suffer which may, in turn, adversely affect our business.

 

If we are not able to attract and retain top employees, our ability to compete may be harmed.

 

Our performance is substantially dependent on the performance of our executive officers and key employees. The loss of the services of any of our executive officers or other key employees could significantly harm our business. Our success is also highly dependent upon our continuing ability to identify, hire, train, retain, and motivate highly-qualified management, technical, sales, and marketing personnel. In particular, the recruitment of top software developers and experienced salespeople remains critical to our success. Competition for such people is intense, substantial, and continuous, and we may not be able to attract, integrate, or retain highly-qualified technical, sales, or managerial personnel in the future. In addition, in our effort to attract and retain critical personnel, we may experience increased compensation costs that are not offset by either improved productivity or higher prices for our products or services.

 

The market price of our common stock may limit the appeal of certain alternative compensation structures that we might offer to the high-quality employees we seek to attract and retain.

 

If the market price of our common stock performs poorly, such performance may adversely affect our ability to retain or attract critical personnel. For example, if we were to offer options to purchase shares of our common stock as part of an employee’s compensation package, the attractiveness of such a compensation package would be highly dependent upon the performance of our common stock.

 

 13 
 

 

In addition, any changes made to any of our compensation practices which are made necessary by governmental regulations or competitive pressures could adversely affect our ability to retain and motivate existing personnel and recruit new personnel. For example, any limit to total compensation which may be prescribed by the government, or any significant increases in personal income tax levels in the United States, may hurt our ability to attract or retain our executive officers or other employees whose efforts are vital to our success.

 

Any unauthorized, and potentially improper, actions of our personnel could adversely affect our business, operating results, and financial condition.

 

The recognition of our revenue depends on, among other things, the terms negotiated in our contracts with our customers. Our personnel may act outside of their authority and negotiate additional terms without our knowledge. We have implemented policies to help prevent and discourage such conduct, but there can be no assurance that such policies will be followed. For instance, in the event that our sales personnel negotiate terms that do not appear in the contract and of which we are unaware, whether the additional terms are written or verbal, we could be prevented from recognizing revenue in accordance with our plans. Furthermore, depending on when we learn of unauthorized actions and the size of the transactions involved, we may have to restate revenue for a previously reported period, which would seriously harm our business, operating results, and financial condition.

 

Unexpected events may materially harm our ability to align our incurrence of expenses with our recognition of revenues.

 

We incur operating expenses based upon anticipated revenue trends. Because a high percentage of these expenses are relatively fixed, a delay in recognizing revenues from transactions related to these expenses (which delay may be due to the factors described elsewhere in this section or may be due to other factors) could cause significant variations in operating results from quarter to quarter, and such a delay could materially reduce operating income. If these expenses are not subsequently matched by revenues, our business, financial condition, or results of operations could be materially and adversely affected.

 

Our products may contain defects that could harm our reputation, be costly to correct, delay revenues, and expose us to litigation.

 

Our products are highly complex and sophisticated and, from time to time, may contain design defects or software errors that are difficult to detect and correct. Errors may be found in new software products or improvements to existing products after delivery to our customers. If these defects are discovered, we may not be able to successfully correct such defects in a timely manner. In addition, despite the tests we conduct on all of our products, we may not be able to fully simulate the environment in which our products will operate and, as a result, we may be unable to adequately detect the design defects or software errors which may become apparent only after the products are installed in an end-user’s network. The occurrence of errors and failures in our products could result in the delay or the denial of market acceptance of our products, and alleviating such errors and failures may require us to make significant expenditure of our resources. The harm to our reputation resulting from product errors and failures may be materially damaging. Because we regularly provide a warranty with our products, the financial impact of fulfilling warranty obligations may be significant in the future. Our agreements with our strategic partners and end-users typically contain provisions designed to limit our exposure to claims. These agreements regularly contain terms such as the exclusion of all implied warranties and the limitation of the availability of consequential or incidental damages. However, such provisions may not effectively protect us against claims and the attendant liabilities and costs associated with such claims. Accordingly, any such claim could negatively affect our business, operating results or financial condition.

 

A claim for damages, regardless of our responsibility for the failure, could expose us to liability.

 

We provide business management solutions that we believe are critical to the operations of our customers’ businesses and provide benefits that may be difficult to quantify. Any failure of a customer’s system installed by us or of the services offered by us could result in a claim for substantial damages against us, regardless of our responsibility for the failure. Although we attempt to limit our contractual liability for damages resulting from negligent acts, errors, mistakes, or omissions in rendering our services, we cannot assure you that the limitations on liability we include in our agreements will be enforceable in all cases, or that those limitations on liability will otherwise protect us from liability for damages. There can be no assurance that any insurance coverage we may have in place will be adequate or that current coverages will remain available at acceptable costs. Successful claims brought in excess of any insurance coverage could seriously harm our business, prospects, financial condition, and results of operations. Even if not successful, large claims against us could result in significant legal and other costs and may be a distraction to our senior management.

 

 14 
 

 

Our products rely on the stability of infrastructure software that, if not stable, could negatively impact the effectiveness or reliability of our products, resulting in harm to our reputation and business.

 

Our development of internet and intranet applications depends and will continue to depend on the stability, functionality, and scalability of the infrastructure software of the underlying internet and intranet. If weaknesses in such infrastructure exist, we may not be able to correct or compensate for such weaknesses. If we are unable to address weaknesses resulting from problems in the infrastructure software such that our products do not meet customer needs or expectations, our reputation and, consequently, our business may be significantly harmed.

 

In addition, our business and operations are highly automated, and a disruption or failure of our systems may delay our ability to complete sales and to provide services. A major disaster or other catastrophic event that results in the destruction or disruption of any of our critical business or information technology systems could severely affect our ability to conduct normal business operations, which may materially and adversely affect our future operating results.

 

We may become involved in litigation that may materially adversely affect us.

 

From time to time in the ordinary course of our business, we may become involved in various legal proceedings, including commercial, product liability, employment, class action, and other litigation and claims, as well as governmental and other regulatory investigations and proceedings. Such matters can be time-consuming, divert management’s attention and resources, and cause us to incur significant expenses. Furthermore, because litigation is inherently unpredictable, the results of any such actions may have a material adverse effect on our business, operating results, or financial condition.

 

Our contracts with government clients subject us to risks including early termination, audits, investigations, sanctions, and penalties.

 

A significant portion of our revenues comes from contracts with state and local governments, and their respective agencies, which may terminate most of these contracts at any time, without cause. The percentage of revenue from governmental contracts as a percentage of total revenue for the periods ended December 31, 2019 and December 31, 2018 were 41% and 30%, respectively. At this time, governments and their agencies are operating under increased pressure to reduce spending. Contracts at the state and local levels are subject to government funding authorizations. Additionally, government contracts are generally subject to audits and investigations that could result in various civil and criminal penalties and administrative sanctions, including termination of contracts, refund of a portion of fees received, forfeiture of profits, suspension of payments, fines and suspensions, or debarment from future government business.

 

We are subject to the reporting requirements of federal securities laws, causing us to make significant compliance-related expenditures that may divert resources from other projects, thus impairing its ability to grow.

 

We are subject to the information and reporting requirements of the Securities Exchange Act of 1934, and other federal securities laws, including the Sarbanes-Oxley Act of 2002. The costs of preparing and filing annual and quarterly reports, proxy statements and other information with the SEC and furnishing audited reports to stockholders causes our expenses to be higher than most other similarly-sized companies that are privately held. As a public company, we expect these rules and regulations to continue to keep our compliance costs high in 2020 and beyond, and to make certain activities more time-consuming and costly. As a public company, we also expect that these rules and regulations may make it more difficult and expensive for us to obtain director and officer liability insurance in the future, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers.

 

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The elimination of monetary liability against our directors, officers, agents and employees under Nevada law, and the existence of indemnification rights to such persons, may result in substantial expenditures by the Company and may discourage lawsuits against our directors, officers, agents and employees.

 

Our articles of incorporation and bylaws contain provisions permitting us to eliminate the personal liability of our directors, officers, agents and employees to the Company and its stockholders for damages for breach of fiduciary duty to the extent provided by Nevada law. We may also have contractual indemnification obligations under our employment agreements with our officers. The foregoing indemnification obligations could result in the Company incurring substantial expenditures to cover the cost of settlement or damage awards against directors, officers, agents and employees, which we may be unable to recoup. These provisions and resultant costs may also discourage us from bringing a lawsuit against certain individuals for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our stockholders against our directors, officers, agents and employees even though such actions, if successful, might otherwise benefit the Company and stockholders.

 

The acquisition of Graphic Sciences may be dilutive to our per share operating results, which may negatively affect the market price of shares of our common stock.

 

We acquired Graphic Sciences in March 2020. While management believes that acquisition will be accretive to our per share operating results, it may be dilutive. In addition, future events and conditions could decrease or delay the accretion that is currently projected or could result in dilution, adverse changes in market conditions, additional transaction and integration-related costs and other factors such as the failure to realize some or all of the anticipated benefits of the acquisition of Graphic Sciences. Any dilution of, decrease in or delay of any accretion to, our operating results per share could cause the price of our common stock to decline.

 

There is a risk that a significant amount of the combined company’s total assets will be related to acquired intangible assets and goodwill, which are subject to annual impairment reviews, or more frequent reviews if events or circumstances indicate that the carrying value may not be recoverable. Because of the significance of these assets, any charges for impairment as well as amortization of intangible assets could have a material adverse effect on the combined company’s results of operations and financial condition.

 

We may be unable to acquire other businesses, technologies or companies or engage in other strategic transactions, and we may not be able to successfully realize the benefits of and may be exposed to a variety of risks from any such strategic transactions.

 

The acquisition of Graphic Sciences is our first strategic business acquisition. As part of our growth strategy, we also expect to continue to evaluate and consider potential strategic transactions, including business combinations, acquisitions and strategic alliances, to enhance our existing businesses and to develop new products and services. At any given time we may be engaged in discussions or negotiations with respect to one or more of these types of transactions, and any of these transactions could be material to our financial condition and results of operations. However, we do not know if we will be able to identify any future opportunities that we believe will be beneficial for us. Even if we are able to identify an appropriate business opportunity, we may not be able to successfully consummate the transaction, and even if we do consummate such a transaction we may be unable to obtain the benefits or avoid the difficulties and risks of such transaction.

 

Any future acquisition involves risks commonly encountered in business relationships, including:

 

  difficulties in assimilating and integrating the operations, personnel, systems, technologies, finance and accounting functions, and products and services of the acquired business;
     
  technologies, products or businesses that we acquire may not achieve expected levels of revenue, profitability, benefits or productivity;
     
  we may not be able to achieve the expected synergies from an acquisition, or it may take longer than expected to achieve those synergies;

 

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   unexpected costs and liabilities and unknown risks associated with the acquisition;
     
  difficulties and inefficiencies in managing and operating businesses in multiple locations or businesses in which we have limited or no direct experience;
     
  difficulties in retaining, training, motivating and integrating key personnel;
     
  diversion of management’s time and resources away from our daily operations;
     
   difficulties in successfully incorporating licensed or acquired technology and rights into our product and service offerings;
     
   difficulties in maintaining uniform standards, controls, procedures and policies within the combined organizations;
     
   difficulties in managing, maintaining and enhancing relationships with customers and suppliers of the acquired business;
     
   risks of entering markets in which we have no or limited direct prior experience;
     
   difficulties in integrating accounting and financial reporting systems;
     
   potential disruptions to our ongoing businesses;
     
  potential need for restructuring operations or reductions in workforce, which may result in substantial changes to our operations;
     
  difficulties in implementing controls, procedures and policies, including disclosure controls and procedures and internal controls over financial reporting, appropriate for a larger public company at companies that, prior to their acquisition, lacked such controls, procedures and policies, which may result in ineffective disclosure controls and procedures or material weaknesses in internal controls over financial reporting;
     
  incurring future impairment charges related to diminished fair value of businesses acquired as compared to the price we paid for them; and
     
  issuing potentially dilutive equity securities, or incurring debt or contingent liabilities, which could harm our financial condition.

 

We cannot assure you that we will make any additional acquisitions, or that any future acquisitions will be successful, will assist us in the accomplishment of our business strategy, or will generate sufficient revenues to offset the associated costs and other adverse effects or will otherwise result in us receiving the intended benefits of the acquisition. In addition, we cannot assure you that any future acquisition of new businesses or technology will lead to the successful development of new or enhanced customer relationships, products, and services, or that any new or enhanced products and services, if developed, will achieve market acceptance or prove to be profitable.

 

Risks Relating to Our Common Stock

 

Shares of our common stock that have not been registered under the Securities Act, regardless of whether such shares are restricted or unrestricted, are subject to resale restrictions imposed by Rule 144.

 

Pursuant to Rule 144 of the Securities Act, a “shell company” is defined as a company that has no or nominal operations, and either no or nominal assets, assets consisting solely of cash and cash equivalents, or assets consisting of any amount of cash and cash equivalents and nominal other assets. As such, we were a shell company pursuant to Rule 144 prior to 2012. Even though we are no longer a shell company, investors may be reluctant to invest in our securities because securities of a former shell company may not be as freely tradable as securities of companies that are not former “shell companies.” In addition, since we are a former shell company, shareholders with restricted securities cannot rely upon Rule 144 for sales of restricted securities in the event that we are not current in its filing obligations under the Exchange Act.

 

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Our shares are quoted on the OTCQB and are subject to limited trading, a high degree of volatility, and liquidity risk.

 

Our common stock is currently quoted on the OTCQB. Shares of our common stock have had very limited and sporadic trading in the past. As such, we believe our stock price to be more volatile and the share liquidity characteristics to be of higher risk than if we were listed on one of the national exchanges. Due to this volatility, our stock price as quoted by the OTCQB may not reflect an actual or perceived value of our common stock. In the past, several days have passed between trades in our common stock, meaning that at any given time, there may be few or no investors interested in purchasing our common stock at or near ask prices. This limited trading, volatility, and liquidity risk is in large part attributable to being a small company relatively unknown to stock analysts, brokers, and institutional or other investors, having a very small number of shares issued and outstanding, especially after the recent 1-for-50 reverse split, and the hesitance of analysts, brokers, and investors may also be hesitant to follow a company such as ours that faces substantial doubt about its ability to continue as a going concern. Finally, if our stock were no longer quoted on the OTCQB, the ability to trade our stock would become even more limited and investors might not be able to sell their shares. Consequently, investors must be prepared to bear the economic risk of holding the securities for an indefinite period of time. There is no assurance that a more active market for our common stock will develop or be sustained, which limits the liquidity of our common stock, and could have a material adverse effect on the price of our common stock and our ability to raise capital.

 

Shares eligible for future sale may adversely affect the market price of our common stock.

 

From time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144 of the Securities Act, subject to certain limitations. Any substantial sale of our common stock pursuant to Rule 144 may have an adverse effect on the market price of our common stock.

 

The price of our common stock may fluctuate significantly.

 

The common stock of public companies can experience extreme price and volume fluctuations. These fluctuations often have been unrelated or out of proportion to the operating performance of such companies. We expect our stock price to be similarly volatile. These broad market fluctuations may continue and could harm our stock price. Any negative change in the public’s perception of the prospects of our business or companies in our industry could also depress our stock price, regardless of our actual results. Factors affecting the trading price of our common stock may include:

 

  Variations in operating results;
  Announcements of technological innovations, new products or product enhancements, strategic alliances, or significant agreements by us or by competitors;
  Recruitment or departure of key personnel;
  Litigation, legislation, regulation, or technological developments that adversely affect our business; and
  Market conditions in our industry, the industries of our customers, and the economy as a whole.

 

Further, the stock market in general, and securities of smaller companies in particular, can experience extreme price and volume fluctuations. Continued market fluctuations could result in extreme volatility in the price of our common stock, which could cause a decline in the value of our common stock. You should also be aware that price volatility might be worse if the trading volume of our common stock is low.

 

The volatility of our stock price could lead to losses by stockholders.

 

The market price of our common stock may be subject to wide fluctuations in response to: (i) quarterly and annual variations in operating results, (ii) announcements of technological innovations or new products that are relevant to our industry, or (iii) other events or factors. In addition, financial markets experience significant price and volume fluctuations that particularly affect the market prices of equity securities of many technology companies. These fluctuations have often resulted from the failure of such companies to meet market expectations in a particular quarter, and thus such fluctuations may or may not be related to the underlying operating performance of such companies. Broad market fluctuations or any failure of our operating results in a particular quarter to meet market expectations may adversely affect the market price of our common stock. Occasionally, periods of volatility in the market price of a company’s securities may lead to the institution of securities class action litigation against a company. Due to the volatility of our stock price, we may be the target of such securities litigation in the future. Such legal action could result in substantial costs to defend our interests and a diversion of management’s attention and resources, each of which would have a material adverse effect on our business and operating results.

 

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Our common stock may be subject to the “penny stock” rules of the SEC, which makes transactions in our common stock more cumbersome and could adversely affect trading in our common stock.

 

Broker-dealer practices in connection with transactions in “penny stocks” are regulated by certain rules adopted by the SEC. Penny stocks generally are equity securities with a market price of less than $5.00 per share, subject to exceptions. The rules require that a broker-dealer, before a transaction in a penny stock not otherwise exempt from the rules, deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in connection with the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, the rules generally require that before a transaction in a penny stock, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the liquidity of penny stocks. Our common stock has never traded above $5.00 per share, and as such the holders of our common stock or other of our securities may find it more difficult to sell their securities.

 

We have outstanding warrants that contain a “cashless exercise” feature.

 

As part of our offerings of equity and debt in the past five years, we issued warrants to purchase an aggregate of 230,032 shares of common stock. The warrants have a cashless exercise feature giving the holders the option of not paying cash to exercise the warrants but gives the holder the right to surrender a portion of the warrants to us as full payment of the exercise price and receive shares equal to the difference between the exercise price and the price of the shares at the time of exercise. We would not receive any proceeds from the exercise of warrants issued to the holder, causing dilution to existing stockholders with no corresponding influx of capital. This may affect our ability to raise additional equity capital.

 

FINRA sales practice requirements may also limit a shareholder’s ability to buy and sell our stock.

 

In addition to the “penny stock” rules described above, the Financial Industry Regulatory Authority, sometimes referred to as “FINRA”, has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative, low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives, and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative, low-priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

 

We have never paid and do not expect to pay any dividends on our common stock for the foreseeable future.

 

We have never paid and do not anticipate that we will pay any cash dividends to holders of our common stock in the foreseeable future. Instead, we plan to retain any earnings to maintain and expand our existing operations. The declaration, payment, and amount of any future dividends, if any, will be made at the discretion of our board of directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors that the board of directors considers relevant. We currently are subject to loan covenants that would require consent from our lenders in order to pay any dividends prior to repayment of certain outstanding loans. In addition, any future credit facilities we enter into may contain terms prohibiting or limiting the amount of dividends that may be declared or paid on our common stock.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

  our prospects, including our future business, revenues, expenses, net income, earnings per share, margins, profitability, cash flow, cash position, liquidity, financial condition and results of operations, backlog of orders and revenue, our targeted growth rate, our goals for future revenues and earnings, and our expectations about realizing the revenues in our backlog and in our sales pipeline;
     
  the effects on our business, financial condition and results of operations of current and future economic, business, market and regulatory conditions, including the current economic and market conditions and their effects on our customers and their capital spending and ability to finance purchases of our products, services, technologies and systems;
     
  the effects of fluctuations in sales on our business, revenues, expenses, net income, earnings per share, margins, profitability, cash flow, capital expenditures, liquidity, financial condition and results of operations;
     
  our products, services, technologies and systems, including their quality and performance in absolute terms and as compared to competitive alternatives, their benefits to our customers and their ability to meet our customers’ requirements, and our ability to successfully develop and market new products, services, technologies and systems;
     
  our markets, including our market position and our market share;
     
   

the impact of the novel coronavirus disease (COVID-19) and related governmental actions and orders and economic effects upon our business, operations, customers, revenues, financial results and prospects;,

     
  our ability to successfully develop, operate, grow and diversify our operations and businesses;
     
  our business plans, strategies, goals and objectives, and our ability to successfully achieve them;
     
  the sufficiency of our capital resources, including our cash and cash equivalents, funds generated from operations, availability of borrowings under our credit and financing arrangements and other capital resources, to meet our future working capital, capital expenditure, lease and debt service and business growth needs;
     
  the value of our assets and businesses, including the revenues, profits and cash flow they are capable of delivering in the future;
     
  industry trends and customer preferences and the demand for our products, services, technologies and systems;
     
  the nature and intensity of our competition, and our ability to successfully compete in our markets;
     
  business acquisitions, combinations, sales, alliances, ventures and other similar business transactions and relationships; and
     
  the effects on our business, financial condition and results of operations of litigation, warranty claims and other claims and proceedings that arise from time to time.

 

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Any forward-looking statements we make are based on our current plans, intentions, objectives, goals, targets, strategies, hopes, beliefs, projections and expectations, as well as assumptions made by and information currently available to management. Forward-looking statements are not guarantees of future performance or events, but are subject to and qualified by substantial risks, uncertainties and other factors, which are difficult to predict and are often beyond our control. Forward-looking statements will be affected by assumptions and expectations we might make that do not materialize or that prove to be incorrect and by known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those expressed, anticipated or implied by such forward-looking statements. These risks, uncertainties and other factors include, but are not limited to, those described in “Risk Factors” as well as other risks, uncertainties and factors discussed elsewhere in this prospectus, in documents that we include as exhibits to or incorporate by reference in this prospectus, and in other reports and documents we from time to time file with or furnish to the SEC. In light of these risks and uncertainties, you are cautioned not to place undue reliance on any forward-looking statements that we make.

 

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

 

USE OF PROCEEDS

 

The selling stockholders are selling shares of common stock covered by this prospectus for their own accounts. We will not receive any proceeds from sale of the shares of common stock covered by this prospectus by the selling stockholders. To the extent that the selling stockholders exercise for cash all of the warrants covering the 95,500 shares of common stock issuable upon exercise of all of the warrants held by such selling stockholders, we may receive $382,000 from such exercises. The warrants may be exercised on a cashless basis, or they may expire without having been exercised. Even if some or all of these warrants are exercised for cash, we cannot predict when they will be so exercised and when we would receive the proceeds. We intend to use any proceeds we receive upon exercise of the warrants for cash general corporate and working capital purposes.

 

MARKET INFORMATION REGARDING Common Stock and dividends

 

Our common stock is quoted on the OTCQB under the symbol “INLX.” The closing price of our common stock as reported on the OTCQB on April 13, 2020, was $3.00 per share.

 

As of April 13, 2020, we had 172 stockholders of record. Such number of record stockholders does not include additional stockholders whose shares are held in street or nominee name by banks, brokerage firms, and other institutions on their behalf.

 

Dividends may be declared and paid out of legally available funds at the discretion of our board of directors (“Board of Directors,” or “Board”). We have never declared or paid any cash dividends on our common stock. We do not anticipate or contemplate paying dividends on our common stock in the foreseeable future. The timing, amount and form of dividends, if any, will depend on, among other things, our results of operations, financial condition, cash requirements and other factors deemed relevant by our Board of Directors. We currently intend to utilize all available funds to develop our business.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

The following management’s discussion and analysis of financial conditions and results of operations of the Company for the fiscal twelve months ended December 31, 2019 and 2018 should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this Annual Report on Form 10-K.

 

We caution you that any forward-looking statements included in this section are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based. Factors that may affect our results include, but are not limited to, the risk factors that are included in this prospectus.

 

Company Overview

 

We are a document solutions software development, sales and marketing company serving both the public and private sectors. Our software platform allows customers to capture and manage all documents across operations such as scanned hard-copy documents and all digital documents including those from Microsoft Office 365, digital images, audio, video and emails. Our solutions create value for customers by making it easy to connect business-critical documents to the processes they drive by making them easy to find, secure and compliant with its customers’ audit requirements.

 

Customers obtain use of the our software by either purchasing it for installation onto their equipment, referred to as a “premise” model, or by accessing the platform via the Internet, referred to as a “cloud-based,” “software as a service,” or “SaaS” model. We anticipate that the provision of SaaS-based customer activation, will increase over time and become the priority in the market and the most significant strategic part of its revenue growth opportunity. Our SaaS products are hosted with Amazon Web Services, Expedient, and Skynet Managed Technology Services, offering our customers reliable hosting services with best practices in data security. Our revenues from cloud-based delivery of our software, including hosting services, as a percentage of total revenue for the twelve months ended December 31, 2019 and 2018, were 34% and 31%, respectively.

 

We operate a predominantly U.S. business with sales that are diversified by customer. 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 sales growth in sales of software as a service and software maintenance services during 2019 reflects market demand for these solutions over traditional sales of on-premise software. We expect to continue to benefit from our select niche leader positions, diversified customer base, innovative product offering, installed base, and the impact of our sales and marketing programs. Examples of these programs include identifying and investing in growth and market penetration opportunities, more effectively pricing our products and services, increasing our sales force effectiveness through improved guidance, and continuing to optimize our lead generation and lead nurturing processes.

 

How We Evaluate our Business Performance and Opportunities

 

The major qualitative and quantitative factors we consider in the evaluation of our operating results include the following:

 

  Our current strategy is to focus on cloud-based delivery of our software products. Historically, our revenues have mostly resulted from premise-based software licensing revenue and professional services revenue. Our observation of industry trends leads us to anticipate that cloud-based delivery will become our principal software business and a primary source of revenues for us, and we are seeing our customers migrate to cloud-based services. Accordingly, when we evaluate our results, we assess whether our cloud-based software revenues are increasing, relative to prior periods and relative to other sources of revenue.

 

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  We are focused upon sales of our software products through resellers and directly to our customers, with a further focus on select vertical markets. We assess whether our sales resulting from relationships with resellers are increasing, relative to prior periods and relative to direct sales to customers, and whether reseller or direct efforts offer the best opportunities for growth in our targeted vertical markets.
     
  Our customer engagements often involve the development and licensing of customer-specific software solutions and related consulting and software maintenance services. When analyzing whether to undertake a particular customer engagement, we often consider the following factors as part of our overall strategy to grow the business: (i) the profit margins the project may yield, and (ii) whether the project would help to develop new product and service features that we could integrate into our suite of products, resulting in an overall product portfolio that better aligns with the needs of our target customers.
     
  Our sales cycle averages 1-2 months; however, large projects can be longer, lasting 3-6 months. Even when a project begins, we often perform pre-installation assessment, project scoping, and implementation consulting. Therefore, when we plan our business and evaluate our results, we consider the revenue we expect to recognize from projects in our late-stage pipeline.
     
  Our research and development efforts and expenses to create new software products are critical to our success. When developing new products or product enhancements, our developers collaborate with our own employees across a wide variety of job functions. We also gather in-depth feedback from our customers and resellers. We evaluate new products and services to determine their likelihood of market success and their potential profitability.
     
  We monitor our costs and capital needs to ensure efficiency as well as an adequate level of support for our business plan.

 

Recent Developments

 

On April 15, 2020, we entered into an unsecured promissory note under the PPP, through PNC Bank with a principal amount of $838,700. The PPP was established under the recently congressionally approved CARES Act and is administered by the SBA. The term of the PPP loan is two years. The interest rate on each PPP loan is 1.0% per annum, which shall be deferred for the first six months of the term of the loan. After the initial six-month deferral period, the loan requires monthly payments of interest until maturity with respect to any portion the PPP loan which is not forgiven as described below. The Company is permitted to prepay or partially prepay the PPP loan at any time with no prepayment penalties. Under the terms of the CARES Act, PPP loan recipients can apply for, and be granted, forgiveness for all or a portion of loans granted under the PPP. Such forgiveness will be determined, subject to limitations and ongoing rulemaking by the SBA, based on the use of loan proceeds for payroll costs and mortgage interest, rent or utility costs and the maintenance of employee and compensation levels. No assurance is provided that the Company will obtain forgiveness of the PPP loans in whole or in part.

 

On March 2, 2020, Intellinetics acquired all of the issued and outstanding capital stock of Graphic Sciences. The initial purchase price for Graphic Sciences consisted of approximately $3.5 million in cash, on a cash-free, debt-free basis, and subject to a post-closing net working capital adjustment. In addition to the initial purchase price, three annual potential earnout payments of up to an aggregate of $2.5 million will be payable to the sellers over three years if certain gross profit levels are achieved. Located in Madison Heights, Michigan, Graphic Sciences is a document management company that provides indexing and scanning services, physical document storage, and retrieval services. Multi-year state and local government contracts account for the majority of Graphic Sciences’ sales. More details regarding the acquisition of Graphic Sciences are set forth in Note 16 to our consolidated financial statements, Subsequent Events.

 

Also on March 2, 2020, we completed the 2020 private placement with certain accredited investors, pursuant to which we issued and sold (i) 875,000 shares of the our common stock, at a price of $4.00 per share, for aggregate gross proceeds of $3,500,000 and (ii) 2,000 units (“Units”), with each Unit consisting of $1,000 in 12% subordinated notes and 40 shares of the our common stock, for aggregate gross proceeds of $2,000,000 in Units and $5,500,000 for the combined private placement. We used a portion of the net proceeds of the 2020 private placement to finance the acquisition of Graphic Sciences described above, and intend to use the remaining net proceeds for working capital and general corporate purposes, including potentially other future acquisitions. More details regarding the 2020 private placement are set forth in Note 16 to our consolidated financial statements, Subsequent Events.

 

On March 2, 2020, we entered into amendments to all of our currently outstanding convertible promissory notes, which were issued to various investors in 2016, 2017, and 2018 (collectively, the “2016-2018 Notes”). The Note Amendments permit us, in the event we offer our shares of common stock to investors in any private placement of securities, to convert all of the then-outstanding principal and accrued and unpaid interest payable with respect to the 2016-2018 Notes into shares of common stock upon the same terms as such private placement. Pursuant to the Note Amendments, on March 2, 2020, we completed the 2020 note conversion by converting all of the then-outstanding principal and accrued and unpaid interest payable with respect to the 2016-2018 Notes into the aggregate amount of 1,433,739 shares of common stock at a conversion price of $4.00 per share. More details regarding the 2020 note conversion are set forth in Note 16 to our consolidated financial statements, Subsequent Events.

 

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Effective February 27, 2020, upon recommendation and authorization by the Board of Directors, stockholders holding a majority in interest of the issued and outstanding shares of common stock, acting by written consent, adopted an amendment to the Company’s Articles of Incorporation to (i) effectuate a reverse split at a ratio of one-for-fifty (1-for-50) and (ii) reduce the number of authorized shares of common stock of the Registrant as of the effective date of such amendment to 25,000,000 shares. On March 3, 2020, we filed the amendment with the Nevada Secretary of State, which became effective on March 20, 2020. On March 1, 2020, upon recommendation and authorization by the Board of Directors, stockholders holding a majority in interest of the issued and outstanding shares of common stock of the Company, acting by written consent, adopted an amendment to our Articles of Incorporation to increase the authorized number of shares of common stock to 160,000,000 from 75,000,000, in order to facilitate the acquisition of Graphic Sciences, the 2020 private placement, and the 2020 note conversion. On March 2, 2020, we filed the foregoing amendment, which was effective immediately upon filing. More details regarding the reverse split are set forth in Note 16 to our consolidated financial statements, Subsequent Events.

 

Executive Overview of Results

 

Below are our key financial results for the fiscal year ended December 31, 2019 (consolidated unless otherwise noted):

 

Revenues were $2,535,955, representing revenue growth of 6% year over year.
   
Cost of revenues was $567,843.
   
Operating expenses (excluding cost of revenues) were $3,120,704.
   
Loss from operations was $1,152,592.
   

Net loss was $2,133,281, with a basic and diluted net loss per share of $5.76.

   
Operating cash flow was $(982,169).
   
Capital expenditures were $5,489.
   
Number of employees was 18 as of December 31, 2019, including two part-time.

 

In December 2019, a novel strain of coronavirus (COVID-19) was reported in Wuhan, China. The COVID-19 pandemic has continued to spread and has already caused severe global disruptions. The extent of COVID-19’s effect on our operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. For example, the impact of COVID-19 on any of our channel partners or customers may negatively affect our revenues. In addition, our growth strategy to expand our operations may be impeded. At the time of this prospectus, we are obligated to scale back operations in our Graphic Sciences operations in response to the pandemic, under state law in Michigan, where we are processing only those projects which qualify as essential under the state guidance. Should the current shelter-in-place directives continue for an extended period, we expect our business, financial condition and results of operations would be materially adversely affected. We may also be impacted further by decreased customer demand and/or subscription terminations as a result of a reduction in customer spending or as a result of government-imposed restrictions on businesses, shelter-in place orders and temporary restaurant, retail and grocery store closures. If the pandemic continues to evolve into a severe worldwide health crisis, the disease could have a material adverse effect on our business, results of operations, financial condition and cash flows and adversely impact the trading price of our common stock.

 

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Results of Operations

 

Revenues

 

We reported total revenues of $2,535,955 and $2,381,427 for the twelve months ended December 31, 2019 and 2018, respectively, representing an increase of $154,528 or 6%. The net increase in total revenues year-over-year is primarily attributable to increased professional services and cloud-based software as a service, partially offset by a decrease to lower-margin third party services, as further described below.

 

Sale of Software

 

Revenues from the sale of software principally consist of sales of additional or upgraded software licenses and applications to existing customers and resellers. These software revenues were $189,165 and $173,691, for the twelve months ended December 31, 2019 and 2018, respectively, representing an increase of $15,474, or 9%. The increase year-over-year in sales was due to timing of large direct sales projects, which slightly favored 2019, more than offsetting a market shift toward SaaS in each year.

 

Sale of Software as a Service

 

For customers who wish to avoid the upfront costs and ongoing internal maintenance of typical premise-based software installations, 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. Our software as a service revenues were $859,637 and $748,754, for the twelve months ended December 31, 2019 and 2018, respectively, representing an increase of $110,883 or 15%. The increase in revenue year-over-year was primarily the result of new customers choosing a cloud-based solution, as well as expanded data storage, user seats, and hosting fees for existing customers.

 

Sale of Software Maintenance Services

 

Software maintenance services revenues consist of fees for post contract customer support services provided to license (premise-based) holders. 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 customers to whom we sold software in prior years who have continued to renew their maintenance agreements. The support and maintenance agreements typically have a term of 12 months. Our software maintenance support revenue was $1,011,278 and $995,170, for the twelve months ended December 31, 2019 and 2018, respectively, representing an increase of $16,108, or 2%. The increase in revenue year-over-year was the result of new growth and normal price increases exceeding attrition of existing maintenance agreement renewals.

 

Sales of Professional Services

 

Professional services revenues consist of revenues from consulting, discovery, training, and advisory services to assist customers with document management needs, as well as document scanning services. These revenues include those arrangements where we do not sell software license as an element of the overall arrangement. Professional services revenues were $449,707 and $289,962, for the twelve months ended December 31, 2019 and 2018, respectively, representing an increase of $159,745 or 55%. The increase in revenue was due to growth in our document scanning services, as well as timing of consulting contracts for customers seeking expanded applications for our solutions, project management, and training.

 

Sale of Third Party Services

 

Third party services consist of third party vendor software, hardware and/or services purchases as requested by our customers as needed in conjunction with our core software or services. By classifying these revenues under a separate revenue category, we reduce the extent to which fluctuations in this revenue category impact the other categories of revenues. Third party services revenues were $26,168 and $173,850, respectively, for the twelve months ended December 31, 2019 and 2018, respectively, representing a decrease of $147,682 or 85%. The decrease is due to timing of projects with third party components and a mix shift towards our own software or software as a service solutions, including bringing select document scanning services in house.

 

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Costs of Revenue

 

The cost of revenues during the twelve months ended December 31, 2019 and 2018 were $567,843 and $742,405, respectively, representing a decrease of $174,562, or 24%. The decrease in cost of revenue year-over-year is primarily the result of improvements in margins in software as a service, driven by more standardization, as well as the mix shifts between software license, professional services, and third party services, with the mix shift away from third party services contributing to reduced costs of revenue.

 

Gross Margins

 

Overall gross margin for the twelve months ended December 31, 2019 and 2018 were 78% and 69%, respectively, representing an increase of 9%. The increase in gross margin year-over-year is primarily a result of the revenue mix shift, including the decrease of costs associated with third party services, relative to the revenues, as discussed in Costs of Revenue above.

 

Cost of Software Revenues

 

Cost of software revenues consists primarily of third-party software licenses that are sold in connection with our core software applications and labor costs of our software engineers and implementation consultants. Cost of software revenues was $8,633 and $69,754 for the twelve months ended December 31, 2019 and 2018, respectively, representing a decrease of $61,121 or 88%.

 

Gross margin for this product category increased to 95% for the twelve months ended December 31, 2019 from 60% for the twelve months ended December 31, 2018. The increase is driven by increased sales of standardized products with minimal configuration required, relative to more extensive configuration in 2018.

 

Cost of Software as a Service

 

Cost of software as a service consists primarily of technical support personnel, hosting services, and related costs. Cost of software as a service was $254,999 for the twelve months ended December 31, 2019, as compared with $300,235 for the twelve months ended December 31, 2018, representing a decrease of $45,236, or 15%. The decrease was driven from more standardized solutions as well as a more efficient support process.

 

Gross margins for this product category were 70% and 60% for the twelve months ended December 31, 2019, and 2018, respectively.

 

Cost of Software Maintenance Services

 

Cost of software maintenance services consists primarily of technical support personnel and related costs. Cost of software maintenance services for the twelve months ended December 31, 2019 was $87,280 compared with $100,205 for the twelve months ended December 31, 2018, representing a decrease of $12,925, or 13%, due to a more efficient support process and no turnover in support roles.

 

Gross margins in this product category were 91% and 90% for the twelve months ended December 31, 2019, and 2018, respectively.

 

Cost of Professional Services

 

Cost of professional services consists primarily of the compensation of our software engineers and implementation consultants and related third-party costs. Cost of consulting services was $192,129 for the twelve months ended December 31, 2019, as compared with $120,421 for the twelve months ended December 31, 2018, representing an increase of $71,708 or 60%. The increase year-over-year resulted from higher revenue volume.

 

Gross margins in this product category were 57% and 58% for the twelve months ended December 31, 2019, and 2018, respectively. Gross margins related to consulting services may vary widely, depending upon the nature of the consulting project and the amount of labor it takes to complete a project.

 

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Cost of Third Party Services

 

Cost of third party services consists primarily of third-party software licenses that are sold in connection with our core software applications, and related third-party costs. Cost of third party services was $24,802 for the twelve months ended December 31, 2019, as compared with $151,790 for the twelve months ended December 31, 2018, representing a decrease of $126,988 or 84%. The decrease year-over-year resulted from the timing of projects with large third party services components and the nature of different types of third party products and services provided, bearing different margins.

 

Gross margins in this product category were 5% and 13% for the twelve months ended December 31, 2019, and 2018, respectively. Gross margins related to third party services may vary widely, depending upon the type of the third party services and the timing of the related projects.

 

Operating Expenses

 

General and Administrative Expenses

 

General and administrative expenses were $2,131,385 during the twelve months ended December 31, 2019 as compared with $2,106,851 during the twelve months ended December 31, 2018, representing an increase of $24,534 or 1%. The increase in operating expenses year-over-year was principally related to increased professional fees related the GSI Acquisition and the Offering, as well as a net $52,500 training credit in 2018, partially offset decreased stock compensation costs due to certain option grants vesting in 2019 and other operational savings.

 

Sales and Marketing Expenses

 

Sales and marketing expenses were $981,618 during the twelve months ended December 31, 2019 as compared with $997,910 during the twelve months ended December 31, 2018, representing a decrease of $16,292 or 2%. The relatively flat year-over-year expenses were a result of no headcount changes and the net of several small offsetting factors.

 

Depreciation

 

Depreciation was $7,701 for the twelve months ended December 31, 2019, as compared with $9,040 for the twelve months ended December 31, 2018, representing a decrease of $1,339 or approximately 15%. The decrease year-over-year reflects the impact of fully depreciated assets no longer depreciating.

 

Interest Expense, Net

 

Interest expense, net, was $980,689 during the twelve months ended December 31, 2019 as compared with $865,501 during the twelve months ended December 31, 2018, representing an increase of $115,188 or 13%. The increase year-over-year resulted primarily from increased interest expense associated with our notes payable issued in September 2018.

 

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. As of December 31, 2019, we had $404,165 in cash, and net working capital deficit of $6,437,382. The significant net working capital deficit is a result of our notes payable becoming current as of December 31, 2019. As of the date of this prospectus, substantially all such current notes payable have been converted to equity in the 2020 note conversion described above in Recent Developments.

 

On March 2, 2020, we completed the 2020 private placement and the 2020 note conversion, both as described above in Recent Developments, which provided more liquidity and reduced our outstanding debt to $2,000,000 from the December 31, 2019 balance of $6,019,861. As a result of the 2020 private placement, after payment of the initial purchase price for the acquisition of Graphic Sciences and transaction fees and expenses, we retained approximately $530,000 for working capital and general corporate purposes.

 

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We believe that, through the next 12 months, the capital requirements to cover our operating costs and fund growth may not be met from cash flows generated by operations. Given the current outbreak of and containment strategies for coronavirus (COVID-19) and given our history of operating losses, there is no assurance that we will be able to obtain additional capital or debt financing within that time. Given these conditions, our ability to continue as a going concern is contingent upon successfully managing our cash requirements.

 

From 2012 through March 2, 2020 we raised a total of $18,533,494 through issuance of debt and equity securities. We are also in the process of exploring strategies to increase our existing revenues, including strategic acquisitions such as the recent acquisition of Graphic Sciences. We believe we will be successful in these efforts; however, there can be no assurance we will be successful in raising additional debt or equity financing or finding any other financing source to fund our operations on terms agreeable to us.

 

Equity Capital Resources

 

As of March 26, 2020, we had 2,810,840 shares of common stock issued and outstanding; and 297,362 shares reserved for issuance upon the exercise of outstanding warrants, outstanding stock options, and shares reserved for the 2015 Plan.

 

Our shares are available for quotation on the OTCQB, and we believe this is important for raising capital to finance our growth plan. We intend to deploy any future capital we may raise to expand our sales and marketing capabilities, develop ancillary software products, enhance our internal infrastructure, support the accounting, auditing and legal costs of operating as a public company, and provide working capital.

 

Stockholders holding a majority in interest of the issued and outstanding shares of common stock, acting by written consent, have adopted an amendment to our Articles of Incorporation to (i) effectuate a reverse split at a ratio of one-for-fifty (1-for-50) and (ii) reduce the number of authorized shares of our common stock as of the effective date of such amendment to 25,000,000 shares. The reverse split became effective on March 20, 2020. We believe the reverse split will generally improve the liquidity and marketability of our common stock.

 

Debt Capital Resources

 

We have issued debt in 2020, 2019, and 2018 in order to finance our operations. In November of 2019, we raised $350,000, and in September of 2018, we raised $1,300,000. The November 2019 notes were issued with an original issue discount of 12% and were due to mature on May 15, 2020. The September 2018 notes bore interest at 8% and were due to mature on December 31, 2020. As part of the 2020 private placement and 2020 note conversion, substantially all outstanding promissory notes, including those issued in 2018 and 2019, were converted to equity at a price of $4.00 per share. In addition, we issued an aggregate principal balance of $2,000,000 in 12% promissory notes as part of the 2020 private placement, with a maturity date of February 28, 2023.

 

Summary of Outstanding Indebtedness at December 31, 2019

 

Our outstanding indebtedness at December 31, 2019 is as follows (with all defined terms set forth in Notes 8 and 9 to the Consolidated Financial Statements):

 

The 2016 Unrelated Notes and the 2016 Related Notes issued to accredited investors on December 30, 2016 and on January 5 and January 31, 2017, with an aggregate original principal balance of $1,250,000, a current principal balance of $1,250,000, and accrued interest of $474,497.
   
The 2017 Unrelated Notes and the 2017 Related Notes issued to accredited investors on November 17 and November 30, 2017, with an aggregate original principal balance of $2,150,000, a current principal balance of $2,150,000, and accrued interest of $579,723.

 

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The 2018 Unrelated Notes and the 2018 Related Notes issued to accredited investors on September 20 and September 26, 2018, with an aggregate original principal balance of $1,300,000, a current principal balance of $1,300,000, and accrued interest of $158,278.
   
Promissory note held by accredited investors, dated November 15, 2019, with a principal balance of $397,728, current principal balance of $397,728, and an unamortized original issue discount of $35,796.

 

For more information, please see Note 8 to the Consolidated Financial Statements, titled Notes Payable, and Note 9 to the Consolidated Financial Statements, titled Notes Payable – Related Parties.

 

Cash Provided by Operating Activities.

 

From our inception, we have generated revenues from the sales, implementation, subscriptions, and maintenance of our internally generated software applications. Our uses of cash from operating activities include compensation and related costs, hardware costs, rent for our corporate offices, hosting fees for our cloud-based software services, other general corporate expenditures, and travel costs to client sites and industry events.

 

Our plan is to increase our sales and market share by developing a targeted marketing approach to select vertical markets and an expanded network of resellers through which we expect to sell our expanded software product portfolio, as well as continue to enhance our direct selling results. Further, we will continue to strategically monitor and assess potential acquisition targets which we believe would be accretive. We expect our operations to continue to require additional capital in order to implement direct marketing campaigns and leads management, reseller training and on-boarding, acquisition transition, and to develop additional software integration and customization capabilities. Although management believes that we may have access to additional capital resources, there are currently no commitments in place for new financing, and there is no assurance that we will be able to obtain funds on commercially acceptable terms, if at all.

 

Net cash used in operating activities for the twelve months ended December 31, 2019 and 2018, was $982,169 and $1,157,407, respectively. During the twelve months ended December 31, 2019, the net cash used in operating activities was primarily attributable to the net loss adjusted for non-cash expenses of $631,433, an increase in operating assets of $336,589 and an increase in operating liabilities of $856,268. During the twelve months ended December 31, 2018, the net cash used in operating activities was primarily attributable to the net loss adjusted for non-cash expenses of $743,170, a decrease in operating assets of $167,254 and an increase in operating liabilities of $272,449.

 

Cash Provided/Used by Investing Activities.

 

Net cash used in investing activities for the twelve months ended December 31, 2019, and 2018 amounted to $5,489 and $3,410, respectively, and was related to the purchase of property and equipment.

 

Capital Expenditures

 

There were no material commitments for capital expenditures at December 31, 2019.

 

Cash Provided/Used by Financing Activities.

 

Cash provided/used by financing activities primarily consist of net proceeds from issuance or repayments of debt, or new issuance of equity.

 

Net cash provided by financing activities for the twelve months ended December 31, 2019 amounted to $303,193. New borrowings of $350,000 were partially offset by $46,807 of notes payable repayments to related parties.

 

Net cash provided by financing activities for the twelve months ended December 31, 2018 amounted to $1,123,526. New borrowings of $1,300,000 were partially offset by $45,633 of notes payable repayments to related parties.

 

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Critical Accounting Policies and Estimates

 

These critical accounting policies and estimates by our management should be read in conjunction with Note 5 Summary of Significant Accounting Policies to the Consolidated Financial Statements.

 

The preparation of financial statements in accordance U.S. 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 regularly make estimates and assumptions that affect the reported amounts of assets and liabilities. 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.

 

The actual results experienced by us may differ materially and adversely 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.

 

We consider the following accounting policies and estimates to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment:

 

  Liquidity, Going Concern and Management’s Plans
  Revenue Recognition
  Deferred Revenues
  Allowance for Doubt Accounts
  Accounting for Costs of Computer Software to be Sold, Leased or Marketed and Accounting for Internal Use Software
  Accounting Stock-Based Compensation

 

Liquidity, Going Concern and Management’s Plans

 

We have incurred substantial recurring losses since our inception. The accompanying financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. Thus, the financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

 

Revenue Recognition

 

Effective January 1, 2018, we adopted ASC 606, “Revenue from Contracts with Customers” (“ASC 606”), using the full retrospective transition method. Adoption of the standard using the full retrospective method required us to restate certain previously reported results.

 

In accordance with ASC 606, we follow a five-step model to assess each contract of a sale or service to a customer: identify the legally binding contract, identify the performance obligations, determine the transaction price, allocate the transaction price, and determine whether revenue will be recognized at a point in time or over time. Revenue is recognized when a performance obligation is satisfied and the customer obtains control of promised goods and services. The amount of revenue recognized reflects the consideration to which we expect to be entitled to receive in exchange for these goods and services. In addition, ASC 606 requires disclosures of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers

 

Our contracts with customers often contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price (“SSP”) basis. We determine the SSP based on an observable standalone selling price when it is available, as well as other factors, including, the price charged to customers, our discounting practices, and our overall pricing objectives, while maximizing observable inputs. In situations where pricing is highly variable or uncertain, we estimate the SSP using a residual approach.

 

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Revenue from on-premises licenses is recognized upfront upon transfer of control of the software, which occurs at delivery, or when the license term commences, if later. We recognize revenue from maintenance contracts ratably over the service period. Cloud services revenue is recognized ratably over the cloud service term. Training and professional services are provided either on a time and material basis, in which revenues are recognized as services are delivered, or over a contractual term, in which revenues are recognized ratably. With respect to contracts that include customer acceptance provisions, we recognize revenue upon customer acceptance. Our policy is to record revenues net of any applicable sales, use or excise taxes.

 

Payment terms and conditions vary by contract type, although our terms generally include a requirement of payment within 30 to 60 days. We assess whether payment terms are customary or extended in accordance with normal practice relative to the market in which the sale is occurring. In instances where the timing of revenue recognition differs from the timing of payment, we have determined our contracts do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from our customers or to provide customers with financing.

 

We generally do not offer rights of return or any other incentives such as concessions, product rotation, or price protection and, therefore, do not provide for or make estimates of rights of return and similar incentives.

 

We establish allowances for doubtful accounts when available information causes us to believe that credit loss is probable.

 

Deferred Revenues

 

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

 

Allowance for Doubtful Accounts

 

We maintain an allowance for doubtful accounts which represents estimated losses resulting from the inability, failure or refusal of our clients to make required payments.

 

We analyze historical percentages of uncollectible accounts and changes in payment history when evaluating the adequacy of the allowance for doubtful accounts. We use an internal collection effort, which may include our sales and services groups as we deem appropriate. Although we believe that our allowances are adequate, if the financial condition of our clients deteriorates, resulting in an impairment of their ability to make payments, or if we underestimate the allowances required, additional allowances may be necessary, resulting in increased expense in the period in which such determination is made.

 

Accounting for Costs of Computer Software to be Sold, Leased or Marketed and Accounting for Internal Use Software

 

We design, develop, test, market, license, and support new software products and enhancements of current products.

 

In accordance with ASC 985-20 “Costs of Software to be Sold, Leased or Otherwise Marketed,” we expense software development costs, including costs to develop software products or the software component of products to be sold, leased, or marketed to external users, before technological feasibility is reached. Technological feasibility is typically reached shortly before the release of such products and as a result, development costs that meet the criteria for capitalization were not material for the periods presented in this prospectus.

 

In accordance with ASC 350-40, “Internal-Use Software,” we capitalize purchase and implementation costs of internal use software. No such costs were capitalized during the periods presented in this prospectus.

 

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Stock-Based Compensation

 

As of December 31, 2019, we maintain one stock-based compensation plan. We account for stock-based payments to employees in accordance with ASC 718, “Compensation - Stock Compensation.” Stock-based payments to employees include grants of stock that are recognized in the consolidated statement of operations based on their fair values at the date of grant. We account for stock-based payments to non-employees in accordance with ASC 718, “Compensation - Stock Compensation,” which requires that such equity instruments are recorded at their fair value on the grant date.

 

The grant date fair value of stock option awards is recognized in earnings as stock-based compensation cost over the requisite service period of the award using the straight-line attribution method. We estimate the fair value of the stock option awards using the Black-Scholes-Merton option pricing model. The exercise price of options is specified in the stock option agreements. The expected volatility is based on the historical volatility of our stock for the previous period equal to the expected term of the options. The expected term of options granted is based on the midpoint between the vesting date and the end of the contractual term. The risk-free interest rate is based upon a U.S. Treasury instrument with a life that is similar to the expected term of the options. The expected dividend yield is based upon the yield expected on date of grant to occur over the term of the option.

 

OUR BUSINESS

 

Company Overview

 

We are a document services and solutions software company serving both the small-to-medium business and governmental sectors. Our software platform allows customers to capture and manage all documents across operations such as scanned hard-copy documents and all digital documents including those from Microsoft Office 365, digital images, audio, video and emails. Our document services offerings provide assistance to clients with document management generally and migration to our software solutions. Our solutions create value for our customers by making it easy to connect business-critical documents to the people who need them by making them easy to find, while also being secure and compliant with the customers’ audit requirements.

 

Customers obtain use of our software by either purchasing it for installation onto their equipment, referred to as a “premise” model, or by accessing the platform via the Internet, referred to as a “cloud-based,” “software as a service,” or “SaaS” model. We continue to see increases in its provision of SaaS-based customer activation, and this migration by clients is the most significant strategic part of our revenue growth opportunity. Our SaaS products are hosted with Amazon Web Services, Expedient, and Skynet Managed Technology Services, offering our customers reliable hosting services with best practices in data security.

 

Intellinetics Ohio was incorporated in 1996, and on February 10, 2012, Intellinetics Ohio became the sole operating subsidiary of Intellinetics as a result of a reverse merger and recapitalization. On March 2, 2020, Intellinetics purchased Graphic Sciences, Inc., a Michigan-based company, as described in “Recent Events,” below.

 

Recent Events

 

On March 2, 2020, Intellinetics acquired all of the issued and outstanding capital stock of Graphic Sciences, a document management company located in Madison Heights, Michigan that provides indexing and scanning services, as well as physical document storage and retrieval services. More details regarding the acquisition of Graphic Sciences are set forth above in Management’s Discussion and Analysis, and in our Current Report on 8-K filed on March 4, 2020.

 

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Also on March 2, 2020, we completed a private offering with certain accredited investors to raise aggregate gross proceeds of $2,000,000 in 12% subordinated notes and $3,500,000 in shares of common stock, referred to herein as the 2020 private placement. We used a portion of the net proceeds to finance the acquisition of Graphic Sciences, and intend to use the remaining net proceeds for working capital and general corporate purposes, including potentially other future acquisitions. More details are set forth above in Management’s Discussion and Analysis, and in our Current Report on 8-K filed on March 4, 2020.

 

On March 2, 2020, we amended all of our currently outstanding convertible promissory notes, in order to permit us to convert all of the then-outstanding principal and accrued and unpaid interest payable with respect to the notes into shares of common stock upon the same terms as the 2020 private placement. On the same day, we converted all of the then-outstanding principal and accrued and unpaid interest into shares of common stock. More details are set forth above in Management’s Discussion and Analysis, and in our Current Report on 8-K filed on March 4, 2020.

 

On February 27, 2020, shareholders approved a one-for-fifty (1-for-50) reverse split of our common stock and reduction of the number of authorized shares of common stock to 25,000,000 shares. The reverse split was made effective by OTCQB on March 20, 2020. More details regarding the reverse split and related amendments to our Articles of Incorporation are set forth in Management’s Discussion and Analysis, and in our Current Report on 8-K filed on March 4, 2020.

 

Software and Services

 

Intellinetics Ohio

 

Intellinetics Ohio’s flagship software platform is IntelliCloudTM, reflecting the Company and market focus on growth via cloud-based managed document service delivery. Intellinetics Ohio also provides software-related professional services that include installation, integration, training, consulting services, and scanning, as well as ongoing software maintenance and customer support.

 

The four primary components of the IntelliCloudTM solution are as follows:

 

  Image Processing: includes image processing modules used for capturing, transforming and managing images of paper documents, including support of distributed and high-volume capture, optical character recognition;
     
  Records Management: addresses needs relating to retention of content through automation and policies, ensuring legal, regulatory and industry compliance for our clients;
     
  Workflow: supports business processes, routing content electronically, assigning work tasks and states (e.g., reviews or approvals, including incident case management), and creating related audit trails;

 

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  Extended Components: includes document composition and e-forms (via third party OEM integration partnership), search, content and web analytics (via third party data visualization and advanced OCR engine partnerships), email and information archiving, packaged application integration, and advanced capture for invoice processing.

 

Graphic Sciences

 

Our recently acquired subsidiary, Graphic Sciences, converts images from paper to digital, paper to microfilm, and microfiche to microfilm for business and federal, county, and municipal governments. Graphic Sciences also provides its clients with long-term paper and microfilm storage and retrieval options.

 

The four document service offerings provided by Graphic Sciences, are:

 

  Digital Scanning Services. These services include paper scanning, newspaper and microfilm scanning, microfiche scanning, aperture card scanning, drawing scanning, and book scanning. Most government files must be retained for a long term or permanently, making such clients a prime candidate for digital conversion. There are four production categories for these services, consisting of document prep, scanning, indexing, and delivery.
     
  Microfilm and Microfiche. Graphic Sciences provides microfilming/microfiche, converting scanned images to microfilm or microfiche, and microfilm/microfiche preservation and duplication.
     
  Box Storage Services. Graphic Sciences provides physical document storage and retrieval services for its clients.
     
  Scanning Equipment, Software and Repair. Graphic Sciences sells and services document image software, document scanners, and microfilm scanners, readers and printers. This is a smaller, slowly declining part of Graphic Sciences’ business.

 

Marketing and Sales

 

We have a multi-channel sales model that directs our sales efforts toward both sales through direct sales and through intermediaries, such as software developers and resellers and multi-function device resellers. We have developed marketing programs with resellers and distributors (collectively, “Resellers”) that facilitate their selling and support of our software solutions. We believe that our Reseller strategy improvements have increased the competitive strength of our platform of products. In addition, we have established a set of business solutions templates for specific vertical markets that provide base software configurations which we believe will facilitate our delivery and installation of software to our customers in both our direct and Reseller channels. We believe that these advancements, in the aggregate, will allow us to license and sell our products to a targeted customer base, shortening our sales cycle, making margins more consistent, and allowing us to expand our sales through existing and new Reseller partnerships and direct customers. We continue to devote significant efforts, in both development and marketing, in enhancing all channels to market.

 

Competition and Market Position

 

The market for our products is competitive, and we expect that competition will continue to intensify as the document solutions markets evolve and potentially consolidate.

 

We believe the Intellinetics Ohio primary competitors in our market, primarily the small-to-medium business (SMB) and governmental sectors, are DocuWare, Square 9, M-files, On Base, and Laserfiche. The principal competitive factors affecting the market for our software products and services include: (i) vendor and product reputation; (ii) product quality, performance and price; (iii) the availability of software products on multiple platforms; (iv) product scalability; (v) product integration with other enterprise applications; (vi) software functionality and features; (vii) software ease of use; (viii) the quality of professional services, customer support services and training; and (ix) the ability to address specific customer business problems. We believe that the relative importance of each of these factors depends upon the concerns and needs of each specific customer.

 

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We believe the Graphic Sciences competitors vary from smaller entrepreneur shops to larger entities, including Iron Mountain. The principal competitive factors affecting the market for our software products and services include: (i) vendor and services reputation and (ii) services quality, performance and price. We believe that the relative importance of each of these factors depends upon the concerns and needs of each specific customer, and that, for our current and prospective customers, maintaining secure control over the customers’ information is highly valued.

 

We believe that the consolidated Company has advantages over our competitors in the small-to-medium business market, and particularly organizations in highly regulated, risk and compliance-intensive markets, such as state and local government, non-clinical health care, and K-12 education. In our view, we will remain competitive by remaining a focused niche provider with product offerings aligned with buyer-specific requirements. We anticipate that we will benefit from five specific advantages already in place:

 

  Turnkey cloud or premise document workflow and document conversion solutions targeting specific industry customers with benchmark value-to-price ratio;
     
  Rigorous quality review process and maintenance of customer data confidentiality in document conversions;
     
  Modular solution packaging and rapid customer activation model;
     
  Integrated on-demand solutions library as standard platform feature; and
     
  Proprietary AuditShieldTM compliance management module as a standard platform feature providing customers with a simple way to know if documents required by law or policy are missing.

 

We believe, with these competitive strengths, that we are well positioned as a cloud-based managed document services provider for the small-to-medium business and governmental sectors.

 

Customers

 

Intellinetics Ohio

 

Revenues from Intellinetics Ohio’s services to a limited number of customers have accounted for a substantial percentage of Intellinetics Ohio’s total revenues. For the twelve months ended December 31, 2019, Intellinetics Ohio’s two largest customers, Loffler, Inc. (including their acquisition of Laser Systems, Inc. (“LSI”)), a reseller, and Franklin County Board of Developmental Disabilities, a direct client, accounted for approximately 6%, each, of the Intellinetics Ohio’s revenues for that period. For the twelve months ended December 31, 2018, Intellinetics Ohio’s three largest customers, Tiburon, Inc., a reseller, Mid-Ohio Strategic Technologies, a reseller, and LSI, accounted for approximately 11%, 10%, and 10%, respectively, of Intellinetics Ohio’s revenues for that period.

 

For the twelve months ended December 31, 2019 and 2018, government contracts represented approximately 41% and 30% of Intellinetics Ohio’s net revenues, respectively, including a significant portion of Intellinetics Ohio’s sales to Resellers which represent ultimate sales to government agencies. Due to their dependence on state, local and federal budgets, government contracts carry short terms, typically less than 18 months. Since our inception, our contracts with government customers have generally renewed on the original terms and conditions upon expiration.

 

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Graphic Sciences

 

Graphic Sciences’ has significant customer concentration with the State of Michigan. Graphic Sciences’ contract is for five years from June 1, 2018 to May 30, 2023 with a provision for two, one-year extensions. The contract is issued to Graphic Sciences through the Michigan Department of Management and Budget, Enterprise Procurement and managed through the Department of Management and Budget, Records Management Services Division (RMS).

 

The contract provides local and state government agencies access to digital and micrographic conversion services. These agencies have the option to perform these conversion services internally or go out to bid if they so choose. Typically, they elect to have these services outsourced to Graphic Sciences through RMS, which eliminates the bidding process.

 

All agencies and departments are able to use the services and prices provided under this contract. Mechanically, the work Graphic Sciences performs is invoiced to RMS and the end user is invoiced through the State of Michigan accounting system. Graphic Sciences does not invoice the end user directly. Graphic Sciences has a single point of contact for managing billing and receipt. The state in effect acts as a reseller of Graphic Sciences services to the other agencies and makes a mark-up of what is charged.

 

Intellectual Property

 

Our software and most of the underlying technologies are built on a Microsoft.Net framework. We rely on a combination of copyright, trademark laws, non-disclosure agreements and other contractual provisions to establish and maintain our proprietary intellectual property rights.

 

Customers license the right to use our software products on a non-exclusive basis. We grant to third parties rights in our intellectual property that allow them to market certain of our products on a non-exclusive or limited-scope exclusive basis for a particular application of the product or to a particular geographic area.

 

While we believe that our intellectual property as a whole is valuable and our ability to maintain and protect our intellectual property rights is important to our success, we also believe that our business as a whole is not materially dependent on any particular trademark, license, or other intellectual property right.

 

Government Regulation

 

We are subject to federal, state and local laws and regulations affecting our business. Other than government procurement rules affecting sales to governmental customers, we do not believe that we are subject to any special governmental regulations or approval requirements affecting our products or services. Complying with the regulations and requirements applicable to our business does not entail a significant cost or burden. We believe that we are in compliance in all material respects with all applicable governmental regulations.

 

Software Development

 

We design, develop, test, market, license, and support new software products and enhancements of current products.

 

In accordance with ASC 985-20 “Costs of Software to be Sold, Leased or Otherwise Marketed,” we expense software development costs, including costs to develop software products or the software component of products to be sold, leased, or marketed to external users, before technological feasibility is reached. Technological feasibility is typically reached shortly before the release of such products and as a result, development costs that meet the criteria for capitalization were not material for the periods presented in this prospectus.

 

In accordance with ASC 350-40, “Internal-Use Software,” we capitalize purchase and implementation costs of internal use software. No such costs were capitalized during the periods presented in this prospectus.

 

Employees

 

As of April 13, 2020, we employed a total of 77 individuals, all but 8 of which are full-time employees. We believe that relations with our employees are good. None of our employees are represented by a labor union, and we do not have collective bargaining arrangements with any of our employees.

 

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PROPERTY

 

We lease an office facility measuring approximately 6,000 square feet in Columbus, Ohio, for our headquarters, chief executive offices, and conducting the operations of Intellinetics Ohio. The monthly rental payment is $4,524. The lease term continues until December 31, 2021.

 

Our subsidiary, Graphic Sciences, uses 36,000 square feet of leased space in Madison Heights as its main facility. Graphic Sciences uses about 20,000 square feet for its records storage services, with the remainder of the space used for production, sales, and administration. The monthly rental payment is $40,694, with a lease term continuing until August 31, 2026.

 

Graphic Sciences also leases and uses a separate 20,000 square foot building for document storage in Highland Park, MI. The monthly rental payment is $12,177, with a lease term continuing until August 31, 2021.

 

Graphic Sciences owns and operates an extensive collection of the specialized equipment necessary for scanning images or converting microfilm to digital images. Graphic Sciences’ logistics department includes a fleet of six leased vehicles for pickup and delivery of client materials. Graphic Sciences also has the ability to provide on-site capture operations for clients needing such services.

 

MANAGEMENT

 

Executive Officers and Board of Directors

 

On April 13, 2020, our executive officers and directors included the following:

 

Name   Age   Title
         
James F. DeSocio   64   President, Chief Executive Officer, and Director
         
Matthew L. Chretien   52   Chief Strategy Officer, Chief Technology Officer, Secretary, and Director
         
Joseph D. Spain   52   Chief Financial Officer, Treasurer
         
Rye D’Orazio   65   Director
         
Robert C. Schroeder   53   Director, Chairman of the Board
         
Sophie Pibouin   52   Director
         
Roger Kahn   50   Director

 

James F. DeSocio, President, Chief Executive Officer, and Director. Mr. DeSocio joined the Company on September 25, 2017. Prior to joining the Company, Mr. DeSocio served as Chief Revenue Officer at Relayware, LLC, a global provider of Partner Relationship Management solutions, from January 2015 to September 2017. From January 2013 to November 2014, Mr. DeSocio served as Executive Vice President of Operations for XRS Corporation, a fleet management software solutions provider. From October 2007 to September 2012, Mr. DeSocio served as Executive Vice President of Sales and Business Development for Antenna Software, Inc., a business mobility solutions provider. Mr. DeSocio has extensive experience in sales, marketing, international operations, mergers and acquisitions.

 

Matthew L. Chretien, Chief Strategy Officer, Chief Technology Officer, Director. Mr. Chretien is a co-founder of Intellinetics and has served as Secretary since December 19, 2017, Chief Strategy Officer since September 25, 2017, and Chief Technology Officer since September 2011. Mr. Chretien previously served as Intellinetics’ President and Chief Executive Officer from July 2013 to September 2017, and from January 1999 to September 2011; Executive Vice President from September 2011 to July 2013; Chief Financial Officer from September 2011 to September 2012; Treasurer from September 2011 to December 2016; and Vice President from 1996 until 1999. Prior to joining Intellinetics, Mr. Chretien served as the field sales engineer for Unison Industries, a manufacturer of aircraft ignition systems.

 

Joseph D. Spain, Chief Financial Officer and Treasurer. Mr. Spain joined the Company on October 31, 2016 and was appointed as its Chief Financial Officer on December 1, 2016. Prior to joining the Company, Mr. Spain worked from September 2014 to October 2016 for nChannel, Inc., a software solutions provider for the small-to-medium business retail sector, ultimately serving as Chief Financial Officer of the company. From July 1995 to June 2014, Mr. Spain worked for Mettler-Toledo International, Inc., a global provider of measurement and precision instruments, ultimately serving as Vice President of Finance & Controller for one of the company’s operating units.

 

Rye D’Orazio, Director. Mr. D’Orazio has served as a director of Intellinetics since 2006. Mr. D’Orazio has been a partner at Ray & Barney Group since 2001. From 1995 to 2000, Mr. D’Orazio served as Vice President of Professional Services at Compucom. From 1985 to 1995, Mr. D’Orazio was a partner at NCGroup, which he founded. From 1982 to 1995, Mr. D’Orazio was employed as the Vice President of Professional Services at Triangle Systems, and from 1977 to 1982, Mr. D’Orazio was employed as a systems engineer at Electronic Data Systems.

 

Robert C. Schroeder, Director. Mr. Schroeder was appointed as a member of our board of directors in September 2013, and as Chairman of the Board on October 5, 2017. Mr. Schroeder is Vice President of Investment Banking at Taglich Brothers and specializes in advisory services and capital raising for small public and private companies. Prior to that, Mr. Schroeder served as Senior Equity Analyst publishing sell-side research on publicly traded companies. Prior to joining Taglich Brothers, he served in various positions in the brokerage and public accounting industry. Mr. Schroeder received a B.S. degree in accounting and economics from New York University. He currently serves on the board of directors of publicly traded Air Industries Group, a manufacturer of aerospace parts and assemblies, Decisionpoint Systems, Inc., a leading provider and integrator of Enterprise Mobility, Wireless Applications and RFID solutions, and Akers BioSciences, Inc., a developer and manufacturer of rapid point-of-care diagnostic screening and testing products.

 

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Sophie Pibouin, Director. Ms. Pibouin was appointed as a member of our Board of Directors on March 20, 2015. Ms. Pibouin is currently employed by Resulticks as Head of Sales, U.S. From 2014 to June 2019 Ms. Pibouin served as the worldwide Sales Leader of the IBM Watson marketing brand. Prior to that, Ms. Pibouin served as Chief Operating Officer, from 2012 to 2014, for SDL, PLC, a global provider of customer experience management software and solutions, having previously worked as a General Manager from 2010 to 2012. From 2006 to 2009, she served as Chief Operating Officer at Chronicle Solutions, Inc., a security software company. From 1990 to 2004, she worked for CA, Inc. (formerly Computer Associates), in a variety of positions including ultimately as Senior Vice President/GM for the Mid-Atlantic Region. She graduated with Honors as a Bachelor in International Commerce from the University of Flaubert in Rouen, France.

 

Roger Kahn, Director. Mr. Kahn was appointed as a member of our Board of Directors on October 5, 2017. Mr. Kahn has served as President and Chief Executive Officer of Bridgeline Digital, Inc. (“Bridgeline”), a web content management solutions provider, since May 2016. Mr. Kahn previously served as Co-Interim Chief Executive Officer and President of Bridgeline from December 2015 to May 2016, and as Chief Operating Officer from August 2015 to May 2016. From 2008 to September 2016, Mr. Kahn was a partner at Great Land Holdings, a resort development company. Mr. Kahn received his Ph.D. in Computer Science and Artificial Intelligence from the University of Chicago.

 

Corporate Governance

 

We believe that our corporate governance principles and practices provide an important framework to ensure that our company is managed on a sound basis for the long-term benefit of our stockholders. Our Board of Directors continues to develop its corporate governance policies and practices in light of current operations of the Company to meet laws and regulations, including the rules and regulations of the SEC, the corporate governance requirements of the OTCQB, and best practices in corporate governance.

 

Board Composition

 

Our business and affairs are managed under the direction of our Board of Directors, currently consisting of six members. We believe that our corporate governance principles and practices provide an important framework to ensure that our company is managed on a sound basis for the long-term benefit of our stockholders. Our Board of Directors has developed its corporate governance policies and practices to meet laws and regulations, including the rules and regulations of the SEC, and best practices in corporate governance.

 

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Director Independence

 

Because director independence is not defined by the OTCQB, in accordance with Item 407(a)(1)(ii) of Regulation S-K, we have adopted the definition of independence as set forth in the rules of the Nasdaq Stock Market, which we sometimes refer to as our standards of director independence. Currently, the Board of Directors consists of six directors, of which independent directors constitute 50%. Prior to March 2020, a majority of the members of the Board of Directors were independent. As a result of compensation paid to Taglich Brothers Inc. for Placement Agent services and M&A Advisory services in our financing transactions over the past few months, Robert Schroeder, an affiliate of Taglich Brothers, Inc., no longer meets that definition of an independent director. As a result, a majority of the members of our Board of Directors is no longer independent, so the Board of Directors may recruit additional independent directors to join the Board and also our Board committees.

 

The charters of both our Audit Committee and Nominating and Corporate Governance Committee require that all members of each committee be independent. Mr. Schroeder has been a member of both of those committees. Because of the recent financing transactions as described above, Mr. Schroeder is no longer an independent director, so our Board of Directors is re-evaluating the membership of those committees. Currently, Rye D’Orazio, Roger Kahn, and Sophie Pibouin serve as our independent directors, and we continue to meet the corporate governance standards of the OTCQB.

 

Meetings of the Board of Directors

 

Our Board of Directors, which currently consists of six directors, meets regularly throughout the year and holds special meetings whenever circumstances require. The Board of Directors held a total of five (5) meetings during 2019. During 2019, each director attended at least 88% of the total number of meetings of the Board and of the committees of the Board on which such director served, and our directors in the aggregate attended 98% of the total number of meetings of the Board and committees on which they served.

 

Executive Sessions

 

Executive sessions of independent directors, without any management director or other members of management being present, are held at the request of the independent directors as they deem necessary or appropriate. The sessions may be held in conjunction with a Board committee meeting at which no management director is present. Any independent director can request that additional executive sessions be scheduled.

 

Director Attendance at Annual Meetings of Stockholders

 

The Board of Directors expects all directors to attend each Annual Meeting of Stockholders, either in person or telephonically, except where the failure to attend is due to unavoidable or unforeseeable circumstances. Last year, 50% of the directors attended the Annual Meeting of Stockholders, either in person or telephonically.

 

Committees of the Board of Directors

 

Our Board of Directors has established a standing Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee. The membership of each committee and its functions, duties and responsibilities are discussed below. Each committee operates under a written charter that has been adopted by our Board. Each member of each of these Board committees is an independent director, with the exception of Robert Schroeder, who ceased to meet our definition of independence as of March 2020 as discussed above.

 

Audit Committee

 

Our Board of Directors has established an Audit Committee in accordance with Section 3(a)(58)(A) of the Exchange Act. In 2019, the Audit Committee consisted of Robert Schroeder (Chairman), Rye D’Orazio, and Roger Kahn. The Board of Directors has determined that all members are independent under our standards of director independence, with the exception of Robert Schroeder. Because the charter of the Audit Committee requires all members to be independent directors, our Board of Directors is reevaluating the composition of the Audit Committee. The Board of Directors has determined that each member of the Audit Committee is financially literate and that Robert C. Schroeder qualifies as an “audit committee financial expert,” as that term is defined in Item 407(d) of Regulation S-K under the Exchange Act. The Audit Committee met four times during 2019.

 

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The primary purpose of the Audit Committee is to assist the Board of Directors in fulfilling its oversight and monitoring responsibilities relating to:

 

  the quality and integrity of our financial statements;
     
  our system of internal control over financial reporting and disclosure controls and procedures;
     
  the quality and integrity of our auditing, accounting and financial reporting processes generally;
     
  the audits of our annual financial statements and the appointment, compensation, qualifications, independence and performance of our independent registered public accounting firm;
     
  the design and implementation of the internal audit function; and
     
  our compliance with legal and regulatory requirements.

 

The Audit Committee’s duties and responsibilities include:

 

  reviewing and discussing with management and our independent registered public accounting firm our annual audited and quarterly unaudited consolidated financial statements;
     
  determining whether to recommend to the Board of Directors that our annual consolidated financial statements be included in our Annual Report on Form 10-K;
     
  reviewing with management any earnings announcements or guidance forecasts and other announcements regarding our historical or projected results of operations;
     
  selecting, appointing and, when appropriate, terminating our independent registered public accounting firm;
     
  reviewing and pre-approving the nature, scope and fee arrangements of the annual audit and non-audit services of our independent registered public accounting firm;
     
  reviewing the qualifications, performance and independence of our independent registered public accounting firm;
     
  reviewing the scope and the results of the annual audit of our consolidated financial statements by our independent registered public accounting firm;
     
  reviewing and discussing with management and our independent registered public accounting firm our accounting and financial reporting practices and procedures and the design, implementation, adequacy and effectiveness of our system of internal controls;
     
  preparing the annual Audit Committee report required by the rules of the SEC to be included in our proxy statement for our annual meetings of stockholders;
     
  reviewing any transaction that involves a potential conflict of interest or a related person;
     
  adopting and overseeing procedures for the receipt, retention and treatment of employee concerns and complaints regarding accounting, internal controls or auditing matters; and
     
  providing other assistance to the Board of Directors, as requested, with respect to our financial, accounting and reporting practices.

 

The Audit Committee performs its functions and responsibilities under a written charter adopted by the Board of Directors. A current copy of the Audit Committee Charter is available at http://www.intellinetics.com/corporate-governance.

 

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Compensation Committee

 

Our Board of Directors has established a Compensation Committee. In 2019, the members of the Compensation Committee were Rye D’Orazio (Chairman), Robert C. Schroeder, and Sophie Pibouin. The Board of Directors has determined that all members of the Compensation Committee are independent under our standards of director independence, with the exception of Robert Schroeder. In addition, Rye D’Orazio and Sophie Pibouin both meet the definition of a “non-employee director” under Section 16b-3 of the Exchange Act, and of an “outside director” under Section 162(m) of the Internal Revenue Code of 1986, as amended. The Compensation Committee met once during 2019.

 

The primary purposes of the Compensation Committee are to review and approve the compensation of our executive officers and to oversee our compensation plans and policies generally. The Compensation Committee’s duties and responsibilities include:

 

  establishing, reviewing and approving our general compensation philosophy and strategy;
     
  reviewing and approving corporate goals and objectives relevant to the compensation of our executive officers, and evaluating their performance in light of those corporate goals and objectives, and determining and approving their compensation based on that evaluation;
     
  overseeing, evaluating and, as directed by the Board, administering and recommending changes to our incentive compensation plans and programs;
     
  approving employment agreements, severance agreements, change in control agreements and other compensation agreements and arrangements for our executive officers;
     
  reviewing and approving the compensation of directors;
     
  evaluating and assessing any risks and excessive risk-taking activities encouraged by our compensation programs and policies;
     
  reviewing the results of the advisory vote by stockholders on the compensation of our named executive officers;
     
  reviewing, modifying and making recommendations with respect to, and monitoring compliance with, our stock ownership guidelines; and
     
  preparing the annual Compensation Committee report required by the rules of the SEC to be included in our proxy statement for our annual meeting of stockholders.

 

The Compensation Committee does not generally exercise its power to delegate its authority to subcommittees and officers. The Compensation Committee has the authority under its charter to retain, approve fees for and terminate independent experts, consultants and advisors as it deems necessary to assist in the fulfillment of its responsibilities. To date, the Compensation Committee has not engaged an independent compensation consultant.

 

While the Compensation Committee gives significant weight to the recommendations of our Chief Executive Officer, the Compensation Committee is responsible for making the final decisions on executive compensation matters and exercises its discretion and authority in approving, modifying or rejecting these recommendations.

 

The Compensation Committee performs its functions and responsibilities under a written charter adopted by the Board of Directors. A current copy of the Compensation Committee Charter is available at http://www.intellinetics.com/corporate-governance.

 

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Nominating and Corporate Governance Committee

 

Our Board of Directors has established a Nominating and Corporate Governance Committee. In 2019, the members of the Nominating and Corporate Governance Committee were Robert C. Schroeder (Chairman), Rye D’Orazio, and Sophie Pibouin. The Board of Directors has determined that all members of the Nominating and Corporate Governance Committee are independent under our standards of director independence, with the exception of Robert Schroeder. Because the charter of the Nominating and Corporate Governance Committee requires all members to be independent directors, our Board of Directors is reevaluating the composition of the Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee did not meet during 2019 but took action by unanimous written consent.

 

The primary purposes of the Nominating and Corporate Governance Committee are to:

 

  identify and recommend individuals qualified to become members of the Board of Directors and its committees;
     
  determine the Board’s size, composition, procedures, governance and committees;
     
  develop, review and assess, our corporate governance principles and policies;
     
  develop qualification criteria for Board membership;
     
  review and recommend independence determinations with respect to the directors;
     
  recommend Board committee assignments;
     
  oversee our Board’s performance and self-evaluation process;
     
  oversee risks and exposures associated with director nominations and qualifications, corporate governance and overall Board effectiveness; and
     
  review governance-related stockholder proposals and recommend Board responses.

 

The Nominating and Corporate Governance Committee performs its functions and responsibilities under a written charter adopted by the Board of Directors. A current copy of the Nominating and Corporate Governance Committee Charter is available at http://www.intellinetics.com/corporate-governance.

 

Board Leadership Structure

 

Our Board of Directors has determined that at the present time it is in the best interests of our company and our stockholders to separate the roles and offices of the Chairman of the Board from the Chief Executive Officer in recognition of the differences between their roles, thereby allowing our Chief Executive Officer to focus on the day-to-day running of our company. The Board determined that this structure is optimal for us under our current circumstances because it allows James F. DeSocio, our Chief Executive Officer to devote his full attention and energy to setting and executing the strategic plan for our company and to providing day-to-day management and leadership of our company and our business and affairs, while allowing our Chairman to lead and direct Board meetings and to facilitate other Board activities and the flow of information between management and directors. Over the two most recently completed fiscal years, the Chairman of the Board has been Robert Schroeder.

 

We believe that this leadership structure enhances the accountability of the Chief Executive Officer to the Board, strengthens the Board’s independence from management and provides the appropriate leadership to help ensure effective risk oversight by the Board.

 

The offices of Chairman of the Board and Chief Executive Officer have been held by separate persons since 2012. However, the Board of Directors recognizes that circumstances may change over time. Accordingly, the Board of Directors has not adopted a formal policy requiring us to separate the roles of Chairman of the Board and Chief Executive Officer but rather believes it is important to retain its flexibility to allocate the responsibilities of the offices of the Chairman of the Board and the Chief Executive Officer from time to time in a manner that is in the best interests of our company and our stockholders based upon then prevailing circumstances. We believe our current leadership structure is serving the best interests of our company and our stockholders.

 

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Nominations of Directors

 

Identifying and Evaluating Nominees for Director

 

The Nominating and Corporate Governance Committee uses a variety of methods for identifying and evaluating nominees for director. The Nominating and Corporate Governance Committee assesses the appropriate size and composition of the Board of Directors, the needs and the respective committees of the Board, and the qualifications of candidates in light of those needs.

 

In selecting candidates for nomination at an annual meeting of stockholders, the Nominating and Corporate Governance Committee begins by determining whether the incumbent directors whose terms expire at that meeting desire and are qualified to continue their service on the Board of Directors. The Nominating and Corporate Governance Committee believes that the continuing service of qualified incumbents promotes stability and continuity in the boardroom, giving us the benefit of the familiarity and insight into our affairs that our directors have accumulated during their tenure, while contributing to the Board’s ability to work as a collective body. Accordingly, it is the policy of the Nominating and Corporate Governance Committee, absent special circumstances, to nominate qualified incumbent directors who continue to satisfy the criteria for membership on the Board, and who the Nominating and Corporate Governance Committee believes will continue to make important contributions to the Board.

 

If there are Board positions for which the Nominating and Corporate Governance Committee will not be re-nominating a qualified incumbent, the Nominating and Corporate Governance Committee will consider recommendations for director nominees from a wide variety of sources, including Board members, management, business contacts, stockholders and other appropriate sources. In evaluating such recommendations, the Nominating and Corporate Governance Committee seeks to achieve a balance of knowledge, experience and capability on the Board of Directors and to address the criteria for membership set forth below under “Qualifications of Nominees for Director.”

 

Qualifications of Nominees for Director

 

The Nominating and Corporate Governance Committee is responsible for reviewing the requisite qualifications and skills of director candidates in the context of the current composition of the Board, our operating requirements and the long-term interests of our stockholders. While the Nominating and Corporate Governance Committee has not established specific requirements or policies regarding age, education, years of experience, diversity or specific types of skills for potential candidates, it analyzes certain criteria and qualifications that candidates for membership on the Board of Directors should possess. No particular criterion is necessarily applicable to all prospective nominees. Except in limited and exceptional circumstances, each candidate to serve on the Board of Directors should have the following qualifications:

 

  A reputation for high personal and professional integrity, strong moral character and adherence to our high ethical standards and values.
     
  The absence of any conflict of interest (whether due to a business or personal relationship) or legal impediment to, or restriction on, the candidate serving as a director, and no other interests that would materially impair the candidate’s ability to (i) exercise independent judgment, or (ii) otherwise discharge the fiduciary duties owed as a director to us and our stockholders.
     
  Holds or has held a recognized position of leadership in the candidate’s community or the candidate’s field of endeavor, and has demonstrated high levels of achievement in the candidate’s community or field.
     
  Business acumen and experience, inquisitiveness, strong analytical skills and the ability to exercise sound business judgment and common sense in matters that relate to our current and long-term objectives.

 

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  A general level of expertise and experience in our business areas.
     
  The ability to read and understand basic financial statements and other financial information pertaining to us.
     
  A commitment to understanding our company and our business, industry and strategic objectives.
     
  The availability and a commitment to devote adequate time to the Board and its committees and the ability to generally fulfill all responsibilities as a member of our Board of Directors, including to regularly attend and participate in meetings of the Board, Board committees and stockholders, in light of the number of other company boards on which the candidate serves and the candidate’s other personal and professional commitments.
     
  The willingness and ability to represent fairly and to act in the interests of all of our stockholders rather than the interests of any particular stockholder, special interest group or other constituency.
     
  For prospective non-employee directors, independence under SEC rules and regulations.
     
  The willingness to accept the nomination to serve as a member of our Board of Directors.
     
  Whether the prospective nominee will foster a diversity of skills, experiences and backgrounds on the Board.
     
  Whether the prospective nominee possesses the requisite education, training and experience to qualify as “financially literate” or as an “audit committee financial expert” under applicable SEC rules.
     
  For incumbent directors standing for re-election, the incumbent director’s performance during his term, including the number of meetings attended, the level of participation, and overall contribution to the Board.
     
  The composition of the Board and whether the prospective nominee will add to or complement the Board’s existing strengths.

 

From time to time the Nominating and Corporate Governance Committee may identify certain other skills or attributes as being particularly desirable to help meet specific Board needs that have arisen. While our Board has not adopted a specific or formal policy on diversity with respect to directors, they share a commitment to an inclusive culture, endorse equal opportunity principles and practices and seek nominees with a broad diversity of experience, professions, skills, geographic representation and backgrounds. We believe that the backgrounds and qualifications of the members of the Board, considered as a group, should provide a broad mix of experience, knowledge and abilities that will allow the Board to fulfill its responsibilities. The Board is committed to nondiscrimination on the basis of gender, race, religion, national origin, sexual orientation, disability or any other basis proscribed by law in selecting nominees.

 

Recommendations and Nominations by Stockholders

 

The policy of the Nominating and Corporate Governance Committee is to consider properly submitted written nominations from stockholders for nominees for director. In general, persons properly recommended by stockholders as nominees for director are evaluated on the same basis as candidates recommended by other sources. Any stockholder recommendations for consideration by the Nominating and Corporate Governance Committee should include the candidate’s name, biographical information, information regarding any relationships between the candidate and us, personal references, a statement of recommendation of the candidate from the stockholder, a description of the shares beneficially owned by the stockholder, a description of all arrangements between the candidate and the recommending stockholder and any other person pursuant to which the candidate is being recommended, a written indication of the candidate’s willingness to serve on the Nominating and Corporate Governance Committee and a written indication to provide such other information as the Nominating and Corporate Governance Committee may reasonably request.

 

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Nominations by stockholders for director candidates must be addressed to:

 

Intellinetics, Inc.

2190 Dividend Dr.

Columbus, Ohio 43228

Attention: Chief Financial Officer

 

Role of the Board in Risk Oversight

 

Risk is inherent in every business. We face a number of risks, including operational, financial, legal, regulatory, safety, strategic and reputational risks. While management is responsible for the day-to-day management of the risks we face, the role of our Board is to engage in the oversight of risk management and encourage management to promote a culture that actively manages risks as a part of our corporate strategy and operations. The Board’s role in the risk oversight process includes regular communication with members of senior management on areas of material risk to us, which enables the Board to understand our risk identification, assessment and management and our risk mitigation strategies. There is not separate Risk Committee.

 

Each Board committee considers risk within its areas of responsibility and keeps the Board regularly informed through committee reports about such risks. The Audit Committee assists the Board with respect to risk management primarily in the areas of accounting, financial reporting, internal controls and compliance with legal and regulatory requirements. The Compensation Committee assists the Board primarily with respect to the management of risks related to our compensation programs, policies and practices. The Nominating and Corporate Governance Committee assists the Board primarily with respect to the management of risks associated with Board organization, membership and structure and with corporate governance. This allocation of risk oversight responsibilities enables the Board of Directors and its committees to coordinate the risk oversight role. The full Board considers our risk profile and focuses on the most significant risk factors facing us with the goal of ensuring that all material risks are identified and appropriate risk mitigation measures are implemented.

 

We believe that the Board’s leadership structure, as discussed above, is consistent with the roles of the Board and the Board committees in risk oversight. The Board has found that its current structure, with the separation of the roles of the Chairman of the Board and the Chief Executive Officer, supports the Board’s risk oversight activities, because the Chief Executive Officer and other members of senior management have responsibility for the management of risk and our Board, led by our Chairman, provides oversight of that risk management, and because various aspects of risk oversight are allocated among the committees of the Board within their areas of responsibility.

 

Legal Proceedings

 

We are not aware of any material proceedings in which any of our directors, executive officers or affiliates, any owner of record or beneficial owner of more than 5% of our common stock, or any associate of any such director, officer, affiliate or security holder is a party adverse to us or any of our subsidiaries or has a material interest adverse to us.

 

Codes of Ethics

 

We have adopted a Code of Ethics and Conduct, designed to encourage our directors, officers and employees to act with the highest level of integrity. This code is available on the Investor Relations section of our website at www.intellinetics.com/corporate-governance.

 

The Intellinetics, Inc. Code of Ethics and Conduct is a code of conduct that applies to all of our directors, officers and employees. Under the Code of Ethics and Conduct, each officer, director and employee is required to maintain a commitment to high standards of business conduct and ethics. The Code of Ethics and Conduct covers many areas of professional conduct, including conflicts of interest, protection of confidential information, and strict adherence to laws and regulations applicable to the conduct of our business. Directors, officers and employees are required to report any conduct that they believe in good faith to be an actual or apparent violation of the Code of Ethics and Conduct.

 

 45 
 

 

If we make any amendment to, or grant any waiver from a provision of, our code of conduct with respect to any director, executive officer or senior financial officer, we will disclose the nature of such amendment or waiver on our website, in a Current Report on Form 8-K or both.

 

Compensation Committee Interlocks and Insider Participation

 

All members of the Compensation Committee are independent directors, with the exception of Robert Schroeder. No member of the Compensation Committee is or has ever been an officer or employee of us or of any of our subsidiaries. None of our executive officers serves as a member of the board of directors or of the compensation committee of any other entity that has one or more executive officers serving as a member of our Board of Directors or of our Compensation Committee.

 

Access to Management and Outside Advisors

 

Our directors have full and unrestricted access to our management and employees. Our Board of Directors and its committees have the right to retain outside advisors and consultants of their choosing at our expense, without the consent or approval of management.

 

Communications with the Board of Directors

 

While the Board believes that management speaks for our company, any stockholder who wishes to communicate directly with the Board of Directors, any committee of the Board or any individual director may do so by directing a written request addressed to such director or directors as follows:

 

Intellinetics, Inc.

2190 Dividend Dr.

Columbus, OH 43228

Attention: Chief Financial Officer

 

Communications directed to members of the Board will be forwarded to the intended Board members, unless such communications are deemed advertisements or promotional, clearly unrelated to our business or to Board or committee matters, or unduly hostile, threatening, illegal or otherwise unnecessary or inappropriate to forward.

 

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EXECUTIVE COMPENSATION

 

As a “smaller reporting company” under SEC rules, our named executive officers (or NEOs) for our last completed fiscal year consisted of (i) our principal executive officer, and; (ii) our two most highly compensated executive officers, other than the principal executive officer. For the year ended December 31, 2019, our NEOs were the following individuals:

 

  James F. DeSocio, our current President and Chief Executive Officer;
     
  Matthew L. Chretien, our current Secretary and Chief Strategy Officer; and
     
  Joseph D. Spain, our current Chief Financial Officer and Treasurer.

 

Summary Compensation Table

 

The following table sets forth certain information relating to the total compensation earned for services rendered to us in all capacities by our NEOs for 2019.

 

Name & Principal Position  Year  Salary
($)
   Stock Awards
($)
   Option Awards(1)
($)
   All Other Compensation
($)
   Total
($)
 
Matthew L. Chretien  2019   175,000    -    -    16,977(2)   191,977 
Chief Strategy Officer  2018   175,000    -    -    17,815(2)   192,815 
James F. DeSocio  2019   240,000    30,000    -    7,776(3)   277,776 
President and Chief Executive Officer  2018   270,000    -    -    6,588(3)   276,588 
Joseph D. Spain  2019   140,000    -    13,245    7,255(4)   160,500 
Chief Financial Officer and Treasurer  2018   140,000    -    -    7,402(4)   147,402 

 

(1) The amounts in this column reflect the aggregate grant date fair value of stock awards computed in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 718, based on the closing sale price of our common stock on the date of grant. The amounts shown in this column are not necessarily indicative of the actual value that will be realized by the named executive officers with respect to such awards.

 

(2) Mr. Chretien received other compensation in the form of Health and Welfare Related Insurance Premiums ($14,706), Life Insurance Premiums ($55), Short-Term Disability Insurance Premiums ($331), and cell phone allowance ($1,885) in 2019, and Health and Welfare Related Insurance Premiums ($15,685), Life Insurance Premiums ($57), Short-Term Disability Insurance Premiums ($331), and cell phone allowance ($1,741) in 2018.

 

(3) Mr. DeSocio received other compensation in the form of Health and Welfare Related Insurance Premiums ($5,897), Life Insurance Premiums ($55), Short-Term Disability Insurance Premiums ($393), and cell phone allowance ($1,432) in 2019, and Health and Welfare Related Insurance Premiums ($4,965), Life Insurance Premiums ($57), Short-Term Disability Insurance Premiums ($393), and cell phone allowance ($1,172) in 2018.

 

(4) Mr. Spain received other compensation in the form of Health and Welfare Related Insurance Premiums ($6,222), Life Insurance Premiums ($55), Short-Term Disability Insurance Premiums ($318), and cell phone allowance ($660) in 2019, and Health and Welfare Related Insurance Premiums ($6,366), Life Insurance Premiums ($57), Short-Term Disability Insurance Premiums ($318), and cell phone allowance ($660) in 2018.

 

Employment Agreements with our Executive Officers

 

Pension Benefits

 

We do not provide, sponsor or maintain any pension arrangements for our named executive officers or for our employees. Our named executive officers are eligible to participate in our 401(k) defined contribution plan. Joseph Spain and James DeSocio participated in our 401(k) plan during fiscal 2019 and 2018, but no other named executive officers participated in our 401(k) plan during fiscal 2019 or 2018.

 

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Non-Qualified Deferred Compensation

 

We do not provide and we have not adopted any non-qualified deferred contribution plans or other deferred compensation plans. In the future, the Compensation Committee may elect to provide our officers and other employees with non-qualified deferred contribution or deferred compensation benefits if the Compensation Committee determines that doing so is in our best interests.

 

Employment Agreements with our Executive Officers

 

On December 1, 2016, pursuant to an Offer of Employment and Employment Agreement, the Company appointed Joseph D. Spain as the Chief Financial Officer. On September 25, 2017, pursuant to an offer letter agreement, the Company appointed James F. DeSocio as its President and Chief Executive Officer. Intellinetics Ohio is a party to an employment agreement with Matthew L. Chretien, dated as of September 16, 2011.

 

Offer Letter Agreement with James F. DeSocio

 

Under this offer letter agreement, James F. DeSocio (i) receives compensation at the rate of $270,000 per year, (ii) is eligible to receive options to purchase up to 1,250,000 of the Company’s common stock, subject to various approvals, contingencies, and time vesting, (iii) is eligible to participate in certain employee benefit programs, including a 401(k) plan, health insurance, paid vacation, access to an exercise facility, and use of certain company-paid technology, (iv) is eligible for a bonus of up to $135,000, and (v) may become eligible, at the sole discretion of the Company, for profit sharing, and other bonuses. The term of the agreement is indefinite, and James F. DeSocio is an “at will” employee. Under the agreement, James F. DeSocio covenants (i) not to disclose trade secrets or proprietary information of the Company, (ii) not to solicit customers, clients, or employees of the Company for a period of two years after termination of the agreement, and (iii) not to compete with the Company in the State of Ohio for a period of six months after termination of his employment.

 

Employment Agreement with Matthew L. Chretien

 

Under this employment agreement, Matthew L. Chretien agreed to serve as the Interim President and Chief Executive Officer, Principal Accounting Officer, and Treasurer of Intellinetics, and to devote his full-time efforts to his employment with Intellinetics. Pursuant to the agreement, Matthew L. Chretien (i) receives compensation at the rate of $195,000 per year, (ii) is eligible to participate in certain employee benefit programs, including a 401(k) plan, health insurance, paid vacation, access to an exercise facility, and use of certain company-paid technology, (iii) may become eligible, at the sole discretion of Intellinetics, for profit sharing, commissions, and bonuses, and (iv) was entitled to receive deferred compensation in the form of a lump sum payment of $100,828 on March 31, 2015. Mr. Chretien has informally agreed to receive less in salary than he is entitled to receive under his employment agreement at the current time, while the Company is managing available cash and working towards profitability. The Company notified Mr. Chretien on March 31, 2015, that payment of the lump sum amount scheduled for March 31, 2015 is deferred subject to the Company’s available cash flow. The term of the agreement is indefinite, and both parties stipulate and agree that Matthew L. Chretien is an “at will” employee under Ohio law, which governs the agreement. The agreement can also terminate (i) if Intellinetics discontinues the operation of its business, or (ii) at the option of Intellinetics in the event that Matthew L. Chretien becomes permanently disabled. Under the agreement, Matthew L. Chretien covenants (i) not to disclose trade secrets or proprietary information of Intellinetics, (ii) not to solicit customers, clients, or employees of Intellinetics for a period of two years after termination of the agreement, and (iii) not to compete with Intellinetics in the State of Ohio for a period of six months after termination of his employment. Since the date of the agreement, Mr. Chretien has resigned the titles of President, Chief Executive Officer, Principal Accounting Officer, and Treasurer, and currently holds the titles of Secretary, Chief Technology Officer, and Chief Strategy Officer.

 

 48 
 

 

Employment Agreement with Joseph D. Spain

 

Under this employment agreement, Joseph D. Spain (i) receives compensation at the rate of $140,000 per year, (ii) is eligible to participate in certain employee benefit programs, including a 401(k) plan, health insurance, paid vacation, access to an exercise facility, and use of certain company-paid technology, and (iii) may become eligible, at the sole discretion of the Company, for profit sharing and bonuses. The term of the agreement is indefinite, and Joseph D. Spain is an “at will” employee. Under the agreement, Joseph D. Spain covenants (i) not to disclose trade secrets or proprietary information of the Company, (ii) not to solicit customers, clients, or employees of the Company for a period of two years after termination of the agreement, and (iii) not to compete with the Company in the State of Ohio for a period of six months after termination of his employment.

 

Outstanding Equity Awards at 2019 Fiscal Year End

 

The following table sets forth information regarding the outstanding equity awards, consisting of unvested and/or unexercised stock options held by our NEOs as of December 31, 2019:

 

   Option Awards 
Name  Number of securities
underlying unexercised options (#) exercisable
   Equity incentive plan awards: Number of securities underlying unexercised unearned
options (#)
   Option
exercise
price ($)
   Option
expiration
date
Matthew L. Chretien
Chief Strategy Officer
   2,000    0   $6.50   12/31/2025
                   
James F. DeSocio
President and Chief Executive Officer
   25,000          0   $6.50   12/31/2025
                   

Joseph D. Spain
Chief Financial Officer and Treasurer

   1,500    3,500   $6.50   12/31/2025

 

Director Compensation

 

The following table summarizes the total compensation we paid to our non-employee directors for the fiscal year ended December 31, 2019:

 

Name  Fees Earned
or Paid in Cash
   Stock
Awards($)(1)
   Option
Awards($)
   Total ($) 
(a)  (b)   (c)   (d)   (h) 
Sophie Pibouin  $15,000   $10,000    -   $25,000(2)
Rye D’Orazio   7,500    7,500    -    15,000 
Robert C. Schroeder   7,500    32,500    -    40,000 
Roger Kahn   7,500    7,500    -    15,000 

 

(1) Stock awards set forth in column (c) were fully vested at the time of grant.

(2) At year end, Ms. Pibouin held aggregate stock option awards of 2,560, which were fully vested upon grant.

 

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On December 19, 2017, the Compensation Committee, pursuant to the authority given to it by the Board and under the 2015 Intellinetics Inc. Equity Incentive Plan, approved the following annual compensation for non-employee directors, payable on January 2 of each year beginning with 2018:

 

  $7,500 cash payment ($15,000 for Ms. Pibouin),
     
 

Stock award equal to $7,500 as of the date of grant, in shares of our common stock, pursuant to the 2015 Intellinetics Inc. Equity Incentive Plan ($10,000 for Ms. Pibouin), and

     
 

An additional amount of stock award equal to $25,000 as of the date of grant, in shares of our common stock, pursuant to the 2015 Intellinetics Inc. Equity Incentive Plan, payable to the Chairman of the Board for his additional services in that role.

 

No additional compensation was paid to directors for meetings attended, committee memberships, or committee chairmanships.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table reflects the beneficial ownership of our common stock by all our executive officers and directors, and by each stockholder who beneficially owns more than 5% of our common stock, as of April 13, 2020.

 

The information provided in the table below is based on our records, information filed with the SEC and information provided by our directors and executive officers. Unless otherwise indicated, the address of each beneficial owner listed in the table below is c/o Intellinetics, Inc., 2190 Dividend Dr., Columbus, Ohio 43228.

 

Name of Beneficial Owner  Number of Shares
Beneficially Owned
   Percentage of Shares Outstanding (1) 
DIRECTORS AND OFFICERS          
James F. DeSocio   68,383(2)   2.41%
Matthew L Chretien   30,681(3)   1.09%
Joseph D. Spain   9,320(4)   * 
Rye D’Orazio   8,561    * 
Sophie Pibouin   8,680(5)   * 
Robert Schroeder   114,578(6)   4.06%
Roger Kahn   6,277(7)   * 
           
Officers and Directors as a Group (7 Persons)   246,481(8)   8.73%
           
HOLDERS OF MORE THAN 5% BENEFICIAL OWNERSHIP          
Michael N. Taglich   462,567(9)   16.27%
Robert F. Taglich   313,323(10)   11.03%

 

 

* Represents less than 1% of the outstanding shares of our common stock.
(1) Based upon 2,810,840 shares of common stock issued and outstanding, plus shares beneficially owned but not issued for each respective stockholder.
(2) Beneficial ownership includes 25,000 shares of common stock underlying stock options issued to Mr. DeSocio, exercisable within 60 days of April 13, 2020.
(3) Beneficial ownership includes 2,211 shares of common stock underlying stock options and warrants issued to Mr. Chretien, exercisable within 60 days of April 13, 2020.

 

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(4) Beneficial ownership includes 5,000 shares of common stock underlying stock options issued to Mr. Spain, exercisable within 60 days of April 13, 2020.
(5) Beneficial ownership includes 2,560 shares of common stock underlying stock options issued to Ms. Pibouin, exercisable within 60 days of April 13, 2020.
(6) Beneficial ownership includes 11,301 shares of common stock underlying warrants issued to Mr. Schroeder, exercisable within 60 days of April 13, 2020.
(7) Beneficial ownership includes 568 shares of common stock underlying warrants issued to Mr. Kahn, exercisable within 60 days of April 13, 2020.
(8) Beneficial ownership includes 46,641 shares of common stock underlying stock options and warrants issued to the group, as disclosed in (2) through (6) above, exercisable within 60 days of April 13, 2020.
(9) Beneficial ownership includes 32,738 shares of common stock underlying warrants issued to Mr. Taglich, exercisable within 60 days of April 13, 2020.
(10) Beneficial ownership includes 29,729 shares of common stock underlying warrants issued to Mr. Taglich, exercisable within 60 days of April 13, 2020.

 

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

 

Review, Approval or Ratification of Transactions with Related Persons

 

The written charter for the Audit Committee requires that all transactions between the Registrant and any related person be reviewed, approved, and overseen by the Audit Committee, which is comprised of independent directors. Related person transactions are those transactions covered by Item 404 of Regulation S-K.

 

Certain Relationships and Related Transactions

 

The following is a summary of the related person transactions that Intellinetics has participated in at any time during each of the previous three fiscal years.

 

2016 Convertible Notes.

 

The following convertible notes were issued to affiliates, partly in exchange for a surrender and cancellation of previously issued notes, and partially for cash (the “2016 Notes”). The 2016 Notes were amended on September 14, 2018, to extend their maturity dates to December 31, 2020, reduce their annual rate of interest to 10%, and reduce the conversion price to $20.00. On March 2, 2020, the 2016 Notes were amended to permit their conversion into equity upon the same terms as any simultaneous securities offering. On March 2, 2020, the 2016 Notes were converted into shares of common stock as part of the 2020 note conversion, described below.

 

Name and
Affiliation to
Company
  Date of
Note
  Conversion
Rate per
Share
   Original
Principal
Balance of
Note
   Largest
aggregate
amount of
principal
outstanding
during
2019
   Amount
outstanding as
of April 13, 2020
(principal and
interest)
   Amount
of
principal
paid
during
2019*
   Amount
of
interest
paid
during
2019*
 
Robert Schroeder
Director
  12/30/2016  $20.00    25,000    25,000    0    0    0 
Michael Taglich
5% Stockholder
  12/30/2016  $20.00    250,000    250,000    0    0    0 
Robert Taglich
5% Stockholder
  12/30/2016  $20.00    100,000    100,000    0    0    0 

 

*Converted into shares of common stock on March 2, 2020, as part of the 2020 note conversion, described below.

 

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2017 Bridge Notes

 

The following convertible notes were issued to stockholders holding more than 5% beneficial ownership of our common stock. The terms for all the following notes provided for interest at an annual rate of 8% until maturity on September 21, 2018, and the notes were issued with original issue discounts. Each note holder had a right, in their sole discretion, to convert the notes into securities to be issued in a private placement of equity, equity equivalent, convertible debt or debt financing. The noteholders converted the notes into new convertible notes, as set forth below, on November 29, 2017.

 

Name and
Affiliation to
Company
  Date of
Note
  Conversion
Rate per
Share
   Original
Principal
Balance of
Note
   Largest
aggregate
amount of
principal
outstanding
during 2019
   Amount
outstanding as
of April 13, 2020
(principal and
interest)
   Amount
of
principal
paid
during
2019*
   Amount
of
interest
paid
during
2019*
 
Michael Taglich
5% Stockholder
  09/21/2017  $15.00    77,320    0    0    0    0 
Robert Taglich
5% Stockholder
  09/21/2017  $15.00    77,320    0    0    0    0 

 

*Converted into 2017 Notes as described below.

 

Issuance of Warrants in Connection with Bridge Notes

 

As an inducement for the issuance of the 2017 bridge notes (as described above) to directors and stockholders holding more than 5% beneficial ownership of our common stock, we also issued warrants to purchase shares of common stock to the 2017 bridge note holders in the following amounts:

 

Name and
Affiliation to
Company
  Expiration
Date of
Warrant
  Exercise Price
Per Warrant
   Amount Of
Warrants
 
Michael Taglich
5% Stockholder
  09/22/2022  $15.00    1,500 
Robert Taglich
5% Stockholder
  09/22/2022  $15.00    1,500 

 

2017 Convertible Notes

 

The following convertible notes were issued to directors, officers, and stockholders holding more than 5% beneficial ownership of our common stock, partly in exchange for a surrender and cancellation of the 2017 bridge notes set forth above, and partially for cash. The 2017 notes were amended on September 17, 2018, to extend their maturity dates to December 31, 2020. The 2017 Notes bore interest at an annual rate of interest of 8% and were convertible by the holders into shares of common stock at a price of $10.00 per share. On March 2, 2020, the 2017 notes were amended to permit their conversion into equity upon the same terms as any simultaneous securities offering. On March 2, 2020, the 2017 notes were converted into shares of common stock as part of the 2020 note conversion, described below.

 

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Name and
Affiliation to
Company
  Date of
Note
  Conversion
Rate per
Share
   Original
Principal
Balance of
Note
   Largest
aggregate
amount of
principal
outstanding
during
2019
   Amount
outstanding
as of
April 13, 2020
(principal
and interest)
   Amount
of
principal
paid
during
2019*
   Amount
of
interest
paid
during
2019*
 
Michael Taglich
5% Stockholder
  11/17/2017  $10.00    200,000    200,000    0    0    0 

Michael Taglich
5% Stockholder

  11/29/2017  $10.00    75,000    75,000    0    0    0 
Robert Taglich
5% Stockholder
  12/30/2016  $10.00    75,000    75,000    0    0    0 

James DeSocio
Officer

  11/17/2017  $10.00    40,000    40,000    0    0    0 

 

*Converted into shares of common stock on March 2, 2020, as part of the 2020 note conversion, described below.

 

2018 Convertible Notes

 

The following convertible notes were issued to stockholders holding more than 5% beneficial ownership of our common stock for cash. The 2018 notes bore interest at an annual rate of interest of 8% until maturity on December 31, 2020, and were convertible by the holders into shares of common stock at a price of $6.50 per share. On March 2, 2020, the 2018 Notes were amended to permit their conversion into equity upon the same terms as any simultaneous securities offering. On March 2, 2020, the 2018 notes were converted into shares of common stock as part of the 2020 note conversion, described below.

 

Name and
Affiliation to
Company
  Date of
Note
  Conversion
Rate per
Share
   Original
Principal
Balance of
Note
   Largest
aggregate
amount of
principal
outstanding
during
2019
   Amount
outstanding
as of
April 13, 2020
(principal
and interest)
   Amount
of
principal
paid
during
2019
   Amount
of
interest
paid
during
2019
 
Michael Taglich
5% Stockholder
  9/26/2018  $6.50    200,000    200,000    0    0    0 
Robert Taglich
5% Stockholder
  9/26/2018  $6.50    200,000    200,000    0    0    0 

 

*Converted into shares of common stock on March 2, 2020, as part of the 2020 note conversion, described below.

 

2019 Bridge Notes

 

The following convertible notes were issued to stockholders holding more than 5% beneficial ownership of our common stock. The terms for all the following notes provided for an original issue discount of 12% and maturity on May 15, 2020. Each note holder had a right, in their sole discretion, to convert the notes into securities to be issued in a private placement of equity, equity equivalent, convertible debt or debt financing. The noteholders converted the non-OID portion of the 2019 Bridge Notes into shares of common stock as part of the 2020 private placement, described below.

 

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Name and
Affiliation to
Company
  Date of
Note
  Conversion
Rate per
Share
   Original
Principal
Balance of
Note
   Largest
aggregate
amount of
principal
outstanding
during 2019
   Amount
outstanding as
of April 13, 2020
(principal and
interest)
   Amount
of
principal
paid
during
2019*
   Amount
of
interest
paid
during
2019*
 
Michael Taglich
5% Stockholder
  11/15/2019   N/A    198,864    198,864    23,864    0    0 
Robert Taglich
5% Stockholder
  11/15/2019   N/A    198,864    198,864    23,864    0    0 

 

*Converted the non-OID portion of the 2019 bridge notes into shares of common stock as part of the 2020 note conversion, described below.

 

2020 Private Placement

 

Certain related persons participated as investors in a private placement of securities by the Company, on the same terms as all other investors in such private placement.

 

On March 2, 2020, the Company completed the 2020 private placement by entering into a Securities Purchase Agreement with certain accredited investors, pursuant to which we issued and sold (i) shares of the our common stock, at a price of $4.00 per share and (ii) units, with each unit consisting of $1,000 in 12% subordinated notes and 40 shares. The principal amount of the 12% subordinated notes, together with any accrued and unpaid interest thereon, become due and payable on February 28, 2023.

 

The following related persons participated in such offering, on the same terms as all other investors participating in the offering:

 

Name of Investor  Relationship to the Company  Number of
Shares
Purchased
   Number of
Units Purchased
   Date of
Transaction
Michael N. Taglich  Beneficially owns more than 5% of the common stock of the Company.   148,750    -   03/02/2020
Robert F. Taglich  Beneficially owns more than 5% of the Common Stock of the Company.   118,750    -   03/02/2020
Robert C. Schroeder  Director and Chairman of the Board of the Company   5,000    -   03/02/2020
James F. DeSocio  President and Chief Executive Officer; Director of the Company   7,500    -   03/02/2020
Joseph D. Spain  Chief Financial Officer of the Company   2,000    8   03/02/2020

 

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2020 Note Conversion

 

Certain related persons held convertible promissory notes that were converted in accordance with their terms on March 2, 2020, as part of the 2020 note conversion, on the same terms as all other note holders.

 

On March 2, 2020, we entered into amendments to all of its currently outstanding convertible promissory notes, which were issued to various investors in 2016, 2017, and 2018. As amended, the notes permitted the Company to convert all of the then-outstanding principal and accrued and unpaid interest payable with respect to the notes into shares of common stock upon the same terms those offered to investors in any concurrent private placement of securities. In accordance with the amended terms, we converted all of the then-outstanding principal and accrued and unpaid interest payable with respect to all outstanding convertible promissory notes into shares of common stock at a conversion price of $4.00 per share.

 

The following related persons held convertible promissory notes that were converted into shares of common stock, on the same terms as all other investors participating in the offering:

 

Name of Investor  Relationship to the Company  Outstanding Principal and Interest Converted into Equity   Number of Shares of Common Stock Issued   Date of
Transaction
Michael N. Taglich  Beneficially owns more than 5% of the common stock of the Company  $899,811    224,952   03/02/2020
Robert F. Taglich  Beneficially owns more than 5% of the common stock of the Company  $453,743    113,435   03/02/2020
Robert C. Schroeder  Director and Chairman of the Board of the Company  $34,076    8,518   03/02/2020
James F. DeSocio  President and Chief Executive Officer; Director of the Company  $48,077    12,019   03/02/2020

 

 55 
 

 

Warrant Exercise

 

On January 3, 2017, Matthew L. Chretien exercised warrants to purchase 9,922 shares of common stock of the Company, from the Registrant through a cashless exercise, at an exercise price of $0.35 per share. These warrants were issued as consideration for Matthew L. Chretien returning to treasury 10,000 shares of common stock he owned in 2013.

 

Promoters and Certain Control Persons

 

Robert C. Schroeder, a director of the Company, is the Vice President of Investment Banking at Taglich Brothers, Inc. Robert F. Taglich and Michael N. Taglich, each beneficial owners of more than 5% of the Company’s common stock, are also both principals of Taglich Brothers, Inc.

 

We retained Taglich Brothers, Inc. as the exclusive placement agent for the private placement offering of notes in 2017. In connection with the offering, we paid Taglich Brothers, Inc. a cash payment of $172,000, which represented an 8% commission of the gross proceeds of the private placement, and approximately $35,000 for reimbursement for reasonable out of pocket expenses, FINRA filing fees and related legal fees. In addition, we issued warrants to the designees of Taglich Brothers, Inc. to purchase 17,200 shares of common stock, which represented 8% of the shares of common stock into which the convertible notes sold in the 2017 private placement could be converted. The warrants have an exercise price of $12.50 per share of common stock, will be exercisable for a period of five years, contain customary cashless exercise and anti-dilution protection and are entitled to registration rights.

 

We retained Taglich Brothers, Inc. as the exclusive placement agent for the private placement offering of the notes in 2018. In connection with the offering, we paid Taglich Brothers, Inc. a cash payment of $104,000, which represented an 8% commission of the gross proceeds of the private placement. In addition, we issued warrants to the designees of Taglich Brothers, Inc. to purchase 16,000 shares of common stock, which represented 8% of the shares of common stock into which the convertible notes sold in the 2018 private placement could be converted. The warrants have an exercise price of $9.00 per share of common stock, will be exercisable for a period of five years, contain customary cashless exercise and anti-dilution protection and are entitled to registration rights.

 

We retained Taglich Brothers, Inc. on an exclusive basis to render financial advisory and investment banking services to the Company in connection with our acquisition of Graphic Sciences. Pursuant to an Engagement Agreement, dated April 15, 2019, we paid Taglich Brothers, Inc. a success fee of $300,000 as a result of the successful completion of the acquisition of Graphic Sciences, Inc.

 

We retained Taglich Brothers, Inc., as the exclusive placement agent for the 2020 private placement, as described above, pursuant to a Placement Agent Agreement. In connection with the 2020 private placement, we paid Taglich Brothers, Inc. $440,000, which represented an 8% commission based upon the gross proceeds of the 2020 private placement. In addition, for its services in the 2020 private placement, Taglich Brothers, Inc. was issued warrants to purchase 95,500 shares of common stock, which amount is equal to 10% of the shares and unit shares sold in the 2020 private placement, which have an exercise price of $4.00 per share of common stock, are exercisable for a period of five years, contain customary cashless exercise and anti-dilution protection rights and are entitled to piggy-back registration rights.

 

We retained Taglich Brothers, Inc. as the exclusive placement agent for the 2020 note conversion, as described above, pursuant to the Placement Agent Agreement. In connection with the 2020 note conversion, we issued 35,250 shares of common stock to Taglich Brothers, Inc., which, based on the conversion price of $4.00 per share, was equal to 3% of the original principal amount of the converted notes.

 

 56 
 

 

SELLING STOCKHOLDERS

 

The Selling Stockholders identified in this prospectus may offer and sell up to 2,519,490 shares of our Common Stock, consisting of:

 

  955,000 issued to the investors in a private placement of securities completed on March 2, 2020;
     
  1,433,740 shares of our common stock, issued to the certain noteholders upon conversion of all the outstanding principal and interest payable by the Company pursuant to convertible notes held by such noteholders;
     
  35,250 shares of our common stock, issued to the placement agent in connection with the 2020 note conversion; and
     
  up to 95,500 shares of our common stock, issuable upon the exercise of warrants issued to the placement agent in connection with the 2020 private placement.

 

The 2,519,490 shares of our common stock included in this prospectus were issued to the selling stockholders pursuant to exemptions from the registration requirements of the Securities Act pursuant to Regulation D promulgated thereunder.

 

The selling stockholders named below, or their respective successors, including transferees, may from time to time sell or otherwise dispose of, pursuant to this prospectus, all, some or none of their shares of our common stock being registered hereby. See “Plan of Distribution” below.

 

The following table sets forth, as to each of the selling stockholders:

 

  the name of each of the selling stockholders;
     
  the number of shares of our common stock beneficially owned, based on each selling stockholder’s ownership of shares held of record as of April 13, 2020;
     
  the number of shares of our common stock being offered by such selling stockholder pursuant to this prospectus; and
     
 

the number of shares of our common stock beneficially owned upon completion of the offering and the percentage of beneficial ownership upon completion of the offering based upon 2,810,840 shares of our common stock outstanding as of April 13, 2020, assuming full exercise of all warrants held by the selling stockholders on that date.

 

Information in the table below and the notes thereto has been provided to us by the selling stockholders or by the placement agent. Unless otherwise indicated, to our knowledge, each selling stockholder listed below has sole dispositive and voting power with respect to the shares of our common stock shown below as beneficially owned by such selling stockholder, except to the extent authority is shared by spouses under applicable law. Beneficial ownership and percentage have been determined in accordance with Rule 13d-3 under the Exchange Act and generally includes voting or dispositive power with respect to the securities. The information listed below is not necessarily indicative of beneficial ownership for any other purpose. Except as described in the notes below, none of the selling stockholders has held any position, office or other material relationship with us or any of our affiliates within the past three years.

 

 57 
 

 

   Shares Beneficially Owned Before Offering       Shares Beneficially Owned After Offering 
Name of Selling Stockholder(1)  Shares   Warrants   Options   Percent (2)   Shares Included in Prospectus # Included   Number (3)   Percent (2) 
AJAMB LLC (PAUL SEID)   71,950    833    -    3%   71,950    833    * 
ALBERT F SNOLIS JR & TARA SNOLIS JTTEN   600    -    -    *    600    -    * 
ALLISON BIBICOFF   10,811    169    -    *    10,811    169    * 
ALVIN R BONNETTE REV TRUST UA DTD 1/31/85 ALVIN R BONNETTE TTEE   16,975    -    -    *    16,975    -    * 
ANDERS C ALLEN RESIDUARY TRUST U/A SUSAN M ALLEN UAD 4/29/08 ROBERT W ALLEN TRUSTEE   7,500    -    -    *    7,500    -    * 
ANDREW K LIGHT   52,760    1,666    -    2%   52,760    1,666    * 
ANDREW M SCHATZ & BARBARA F WOLF JT WROS   16,632    -    -    1%   16,632    -    * 
ANGUS BRUCE & LAURALEE BRUCE JTWROS   6,624    -    -    *    6,624    -    * 
ANN B OLDFATHER   21,980    -    -    *    21,980    -    * 
ASHOK KUMAR NARANG   2,714    -    -    *    2,000    714    * 
BARKTONES LLC (SARA PENN)   6,000    -    -    *    6,000    -    * 
BERIT M ALLEN RESIDUARY TRUST U/A SUSAN M ALLEN UAD 4/29/08 ROBERT W ALLEN TRUSTEE   7,500    -    -    *    7,500    -    * 
C MARK CASEY   400    133    -    *    400    133    * 
CHARLES S BRAND & PEGGY ANN BRAND JT TEN   47,999    -    -    2%   47,999    -    * 
CIBREO LLC (JEFFREY TWEEDY)   9,172    -    -    *    9,172    -    * 
DAVID A RANDOM   71,904    1,666    -    3%   68,510    5,060    * 
DAVID FRANK RIOS & MARGARET JO RIOS 1999 TRUST DTD 06/22/99 (DAVID FRANK RIOS, TRUSTEE)   13,591    1,000    -    *    11,591    3,000    * 
DAVID L ALLEN   16,693    1,000    -    *    16,693    1,000    * 
DENIS MCEVOY TOD DTD 3/19/2013   -    3,370    -    *    1,500    1,870    * 
DONATA RANDOM   9,740    250    -    *    9,740    250    * 
DOUGLAS HAILEY   571    6,640    -    *    2,000    5,211    * 
EMBRY FAMILY LIVING TRUST DTD 12/15/94 LLOYD BERTIS EMBRY & KIM THU NGO EMBRY CO-TTEES   30,341    -    -    1%   30,341    -    * 
GLENN R HUBBARD   76,167    3,333.00    -    3%   68,786    10,714    * 
H PHILIP HOWE TRUST UAD 11/15/02 H PHILIP & MARGARET VIRGINIA HOWE TTEES   17,465    416.00    -    *    16,632    1,249    * 
HARVEY BIBICOFF AND JACQUELINE BIBICOFF TRUSTEES OF THE BIBICOFF FAMILY TRUST DTD 5/16/00   28,044    679    -    1%   13,985    14,738    * 
HOWARD A KALKA & SUSAN KALKA   21,274    -    -    *    21,274    -    * 
JAMES C ROBERTSON   29,950    -    -    1%   29,950    -    * 
JAMES DESOCIO (4)   24,973    -    25,000    2%   19,519    30,454    1%
JAMES TADYCH AND PATRICIA TADYCH REVOCABLE TRUST UAD 09/23/93 JAMES L TADYCH & PATRICIA A TADYCH TTEES   11,600    -    -    *    11,600    -    * 
JANET SAU - HAN HO   31,854    -    -    1%   31,854    -    * 
JEFFREY G HIPP & MARY ANN HIPP JTWROS   22,908    -    -    *    22,908    -    * 
JEFFREY L SADAR   1,000    -    -    *    1,000    -    * 
JENNIFER DENDEKKER   -    2,330    -    *    2,000    330    * 
JOHN CROW   600    -    -    *    600    -    * 
JOHN J RESICH JR TTEE JOHN J RESICH JR RET TRUST   26,274    -    -    *    26,274    -    * 
JOHN R BERTSCH TRUST DTD 12/04/2004 JOHN R BERTSCH TRUSTEE   25,024    2,500    -    *    25,024    2,500    * 
JOSEPH A RUGGIERO & JOANN RUGGIERO JTTEN   13,394    -    -    *    13,394    -    * 
JOSEPH DOMINIC SPAIN (5)   2,320    -    5,000    *    2,320    5,000    * 
Joseph Vosilla   18,249    -    -    *    18,249    -    * 
JOSHUA M ALLEN RESIDUARY TRUST U/A SUSAN M ALLEN UAD 4/29/08 (ROBERT W ALLEN, TRUSTEE)   7,500    -    -    *    7,500    -    * 
Junge Revocable Trust UAD 12/09/91 Jeffrey A. Junge TTEE AMD 07/09/19   93,808    1,666    -    3%   93,808    1,666    * 
KEITH BECKER   20,280    500    -    *    20,280    500    * 
KEITH SCHROEDER   7,250    -    -    *    7,250    -    * 
KENNETH M CLEVELAND   1,000    -    -    *    1,000    -    * 
KIEFER LIGHT   11,615    -    -    *    11,615    -    * 
KTMC INC (BRENDAN MCCARROLL, PRESIDENT)   2,000    -    -    *    2,000    -    * 
KYLE G BUCHAKJIAN   5,344    -    -    *    5,344    -    * 
LARRY V LOWRANCE   7,344    -    -    *    7,344    -    * 
Legendcap Opportunity Fund (EVAN GREENBERG, MANAGER)   12,643    -    -    *    12,643    -    * 
LEONARD SCHLEICHER   -    8,850    -    *    7,200    1,650    * 
LIAN CHANG   2,995    -    -    *    2,995    -    * 
LIGHTHOUSE CAPITAL LLC (LLOYD EMBRY, MANAGING MEMBER)   11,591    -    -    *    11,591    -    * 
LINDA TAGLICH   -    2,643    -    *    2,000    643    * 
MARVIN J LOUTSENHIZER   5,080    180    -    *    4,900    360    * 
MARY MARGUERITE SCHNURER FAMILY TRUST UAD 12/08/05 MARY MARGUERITE SCHNURER TTEE   9,512    -    -    *    9,512    -    * 
MAURICE SOLOMON   1,400    -    -    *    1,200    200    * 
MERLE F STOCKLEY JR   1,039    209    -    *    800    448    * 
MICHAEL N TAGLICH (6)   132,995    54,019    -    7%   110,942    76,072    * 
MICHAEL N TAGLICH CLAUDIA TAGLICH JTWROS (6)   199,127    -    -    7%   195,699    3,428    * 
MICHAEL N TAGLICH CUST FOR LUCY TAGLICH UTMA NY UNTIL AGE 21 (6)   6,000    500    -    *    5,000    1,500    * 
MICHAEL N TAGLICH KEOGH ACCOUNT (6)   87,500    -    -    3%   87,500    -    * 
MONICA BERTSCH   9,646    -    -    *    9,646    -    * 
NICHOLAS TAGLICH & JULIANA TAGLICH JTWROS   7,500    -    -    *    7,500    -    * 
NINA LISA BERTSCH   25,573    -    -    *    25,573    -    * 
J NUTIE DOWDLE   35,382    -    -    1%   35,382    -    * 
NUVIEW IRA FBO JUANA LEON   1,000    -    -    *    1,000    -    * 
NUVIEW IRA FBO ROBERT F TAGLICH (8)   131,889    -    -    5%   131,889    -    * 
NUVIEW IRA FBO TIMOTHY FITZPATRICK   5,105    -    -    *    5,105    -    * 
Nuview IRA Inc FBO Lawrence Kane IRA   3,562    250    -    *    3,312    500    * 
Nuview IRA Inc FBO Luisa Kane IRA   3,562    250    -    *    3,312    500    * 
P KENNETH NITZ   23,676    500    -    *    18,046    6,130    * 
PAUL R WINTER   29,246    -    -    1%   29,246    -    * 
PAUL SEID   28,597    2,624    -    1%   21,478    9,743    * 
RAYMOND M BEEBE & JOAN P BEEBE JT TEN   31,632    -    -    1%   31,632    -    * 
RICHARD BUCHAKJIAN   14,243    -    -    *    14,243    -    * 
RICHARD MOLINSKY   1,600    -    -    *    1,600    -    * 
RICHARD OH   0    6,000    -    *    6,000    -    * 
ROBERT BROOKS   27,105    850    -    *    27,105    850    * 
ROBERT F TAGLICH (8)   150,498    53,628    -    7%   125,735    78,391    3%
ROBERT L DEBRUYN TRUST UAD 10/5/94 ROBERT L DEBRUYN & TRACEY H DEBRUYN TTEES   33,774    -    -    1%   33,774    -    * 
ROBERT M DELUCA REVOCABLE LIVING TRUST UAD 12/14/10 ROBERT M DELUCA & NICHOL M DELUCA TRUSTEES   2,000    -    -    *    2,000    -    * 
ROBERT ROMANET & MAUREEN L ROMANET JT TEN   2,752    -    -    *    2,752    -    * 
ROBERT SCHROEDER (7)   36,491    26,827    -    2%   29,044    34,274    1%
ROBERT W ALLEN III RESIDUARY TRUST U/A SUSAN M ALLEN UAD 4/29/08 ROBERT W ALLEN TRUSTEE   7,500    -    -    *    7,500    -    * 
ROBERT W ALLEN JR   18,490    1,000    -    *    18,490    1,000    * 
ROBERT W ALLEN TRUST UAD 04/29/08 ROBERT W ALLEN TTEE   65,024    -    -    2%   65,024    -    * 
ROGER W LUNSTRA AND JOYCE M LUNSTRA LIVING TRUST DTD 6/15/07 ROGER W LUNSTRA AND JOYCE M LUNSTRA CO-TTEES   4,094    833    -    *    2,000    2,927    * 
RONALD D BOWMAN TRUST (RONALD D. BOWMAN, TRUSTEE)   100,000    -    -    4%   100,000    -    * 
RONALD JOHNSON   7,488    -    -    *    7,488    -    * 
RUSSELL BERNIER   -    2,620    -    *    1,200    1,420    * 
SAMUEL E LEONARD TRUST UAD 2/5/90 SAMUEL E LEONARD TTEE   8,257    -    -    *    8,257    -    * 
SANDRA L BRECHER   4,000    -    -    *    4,000    -    * 
SANDRA P NITZ   10,573    -    -    *    10,573    -    * 
SCOT HOLDING INC (Patrick R. Gordon, President)   12,000    333    -    *    12,000    333    * 
SHADOW CAPITAL LLC (B KENT GARLINGHOUSE, MANAGER)   48,288    416    -    2%   48,288    416    * 
STEPHEN MCCALLEY   5,267    -    -    *    5,267    -    * 
STERLING FAMILY INVESTMENT LLC (ARTHUR STERLING, MANAGER)   50,304    -    -    2%   50,304    -    * 
TAD WILSON   19,321    -    -    *    18,750    571    * 

TAGLICH BROTHERS INC (Michael N. Taglich)

   35,732    225    -    1%   35,250    707    * 
THE ANTOINETTE PORCO REVOCABLE LIVING TRUST UAD 11/16/92 ANTOINETTE PORCO TTEE AMD 2/23/18   1,600    -    -    *    1,600    -    * 
THE CAROLYN L FOUTCH LIVING TRUST UAD 05/17/13 CAROLYN L FOUTCH TTEE   7,493    833    -    *    7,493    833    * 
THE CORBET L CLARK JR LIVING TRUST UAD 2/14/13 CORBET L CLARK JR TTEE   6,790    -    -    *    6,790    -    * 
THE DENIS FORTIN REVOCABLE TRUST UAD 4/30/14 VIRGINIA FORTIN TTEE   78,798    1,666    -    3%   75,465    4,999    * 
THE HILLARY BIBICOFF REVOCABLE TRUST DTD 4/19/07 HILLARY BIBICOFF TRUSTEE   6,226    -    -    *    6,226    -    * 
The Paul A Seid Irrevocable Trust FBO Andrew Seid (PAUL SEID, TRUSTEE)   13,735    -    -    *    13,478    257    * 
The Paul A Seid Irrevocable Trust FBO Lauren Seid (PAUL SEID, TRUSTEE)   13,735    -    -    *    13,478    257    * 
THOMAS J LEONARD   16,632    -    -    *    16,632    -    * 
TRACEY H DEBRUYN TRUST UAD 10/5/94 TRACEY H DEBRUYN & ROBERT L DEBRUYN TTEES   33,774    -    -    1%   33,774    -    * 
VAHAN BUCHAKJIAN   2,844    -    -    *    2,844    -    * 
WALTER T PARKES   12,782    -    -    *    12,782    -    * 
WEEDIE TRUST UAD 7/20/16 WENDY H TWEEDY & JEFFREY C TWEEDY TTEES   6,193    -    -    *    6,193    -    * 
WILLIAM C STEELE LIVING TRUST UAD 5/11/98 WILLIAM C STEELE TTEE   3,000    -    -    *    3,000    -    * 
WILLIAM M COOKE   -    9,070    -    *    7,200    1,870    * 

 

* indicates less than 1%

 

(1)

For entity stockholders, the natural person holding voting and dispositive power over the shares appears in parentheses.

   
(2) Percentages are based on 2,810,840 shares of common stock outstanding as of April 13, 2020.
   
(3) There is no assurance that the selling stockholders will sell all or any portion of the shares being registered for sale. For purposes of this table, we have assumed that, upon completion of the offering, the selling stockholders will have sold all of the shares covered by this prospectus and will not have acquired beneficial ownership of any additional shares.
   
(4) James F. DeSocio is the President, CEO, and a director of the Company.
   
(5) Joseph D. Spain is the Treasurer and Chief Financial Officer of the Company.
   
(6) Michael N. Taglich is a beneficial owner of more than 5% of the Company’s shares of common stock.
   
(7) Robert C. Schroeder is a director and Chairman of the Board of the Company.
   
(8) Robert F. Taglich is a beneficial owner of more than 5% of the Company’s shares of common stock.

 

 58 
 

 

PLAN OF DISTRIBUTION

 

Each selling stockholder of the common stock and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of Common Stock on the OTCQB or any other stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. A selling stockholder may use any one or more of the following methods when selling shares:

 

  ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
     
  block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
     
  purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
     
  an exchange distribution in accordance with the rules of the applicable exchange;
     
  privately negotiated transactions;
     
  settlement of short sales entered into after the effective date of the Registration Statement of which this prospectus is a part;
     
  broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share;
     
  through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;
     
  a combination of any such methods of sale; or
     
  any other method permitted pursuant to applicable law.

 

The selling stockholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus.

 

Broker-dealers engaged by the selling stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this prospectus, in the case of an agency transaction not in excess of a customary brokerage commission in compliance with FINRA Rule 2440; and in the case of a principal transaction a markup or markdown in compliance with FINRA IM-2440.

 

In connection with the sale of the common stock or interests therein, the selling stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume. The selling stockholders may also sell shares of the common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The selling stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).

 

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The selling stockholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Each selling stockholder has informed us that it does not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute the common stock. In no event shall any broker-dealer receive fees, commissions and markups which, in the aggregate, would exceed eight percent (8%).

 

We are required to pay certain fees and expenses incurred by the Company incident to the registration of the shares. We have agreed to indemnify the selling stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.

 

Because selling stockholders may be deemed to be “underwriters” within the meaning of the Securities Act, they will be subject to the prospectus delivery requirements of the Securities Act including Rule 172 thereunder. In addition, any securities covered by this prospectus which qualify for sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather than under this prospectus. There is no underwriter or coordinating broker acting in connection with the proposed sale of the resale shares by the selling stockholders.

 

We agreed to keep this prospectus effective until the earlier of (i) the date on which the shares may be resold by the selling stockholders without registration and without regard to any volume or manner-of-sale limitations by reason of Rule 144, without the requirement for the Company to be in compliance with the current public information under Rule 144 under the Securities Act or any other rule of similar effect or (ii) all of the shares have been sold pursuant to this prospectus or Rule 144 under the Securities Act or any other rule of similar effect. The resale shares will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the resale shares may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.

 

Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the resale shares may not simultaneously engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution. In addition, the selling stockholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of shares of the common stock by the selling stockholders or any other person. We will make copies of this prospectus available to the selling stockholders and have informed them of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale (including by compliance with Rule 172 under the Securities Act).

 

Penny Stock

 

The SEC has adopted Rule 15g-9 which establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:

 

  that a broker or dealer approve a person’s account for transactions in penny stocks; and
     
  the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

 

In order to approve a person’s account for transactions in penny stocks, the broker or dealer must:

 

  obtain financial information and investment experience objectives of the person; and
     
  make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

 

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form:

 

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  sets forth the basis on which the broker or dealer made the suitability determination; and
     
  that the broker or dealer received a signed, written agreement from the investor prior to the transaction.

 

Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.

 

Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock.

 

DESCRIPTION OF SECURITIES

 

Authorized Capital Stock

 

Our Articles of Incorporation, as amended, authorize the issuance of 25,000,000 shares of common stock.

 

As of April 13, 2020, we had issued and outstanding:

 

  an aggregate of 2,810,840 shares of common stock;
     
  an aggregate of 230,032 shares of our common stock issuable upon exercise of warrants with expiration dates between December 2020 and February 2025 at exercise prices ranging from $4.00 to $35.75 per share;
     
  an aggregate of 67,330 shares of our common stock reserved for issuance under the 2015 Intellinetics Inc. Equity Incentive Plan; and

 

As of April 13, 2020, we had no options issued to purchase any capital stock or other securities convertible into capital stock, other than stock options issued pursuant to the 2015 Intellinetics Inc. Equity Incentive Plan and reserved for under that Plan.

 

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Description of Common Stock

 

Holders of shares of common stock are entitled to one vote per share on all matters submitted to a vote of the stockholders. Shares of common stock do not have cumulative voting rights. Holders of record of shares of common stock are entitled to receive dividends when and if declared by the Board of Directors. To date, we have not paid cash dividends. We intend to retain any earnings for the operation and expansion of our business and do not anticipate paying cash dividends in the foreseeable future.

 

Any future determination as to the payment of cash dividends will depend on future earnings, results of operations, capital requirements, financial condition and such other factors as the Board of Directors may consider. Upon liquidation, dissolution or winding-up, the holders of our common stock are entitled to share ratably in all assets that are legally available for distribution.

 

Holders of our common stock do not have pre-emptive rights to subscribe for or to purchase any stock, obligations or other securities.

 

Warrants

 

The warrants outstanding as of April 13, 2020, to purchase 230,032 shares of our common stock are immediately exercisable and consist of the following:

 

five-year warrants to purchase 32,500 shares of our common stock at an exercise price of $32.50 per share, issued in December of 2015 and January of 2016;
five-year warrants to purchase 43,878 shares of our common stock at an exercise price of $32.50 per share, issued to investors in December of 2015 and January of 2016;
five-year warrants to purchase 17,752 shares of our common stock at an exercise price of $35.75 per share, issued in January 2016;
five-year warrants to purchase 1,125 shares of our common stock at an exercise price of $34 per share issued in November of 2016;
five-year warrants to purchase 3,076 shares of our common stock at an exercise price of $37.50 per share, issued in January of 2017;
five-year warrants to purchase 3,000 shares of our common stock at an exercise price of $15.00 per share, issued in September of 2017;
five-year warrants to purchase 17,200 shares of our common stock at an exercise price of $12.50 per share, issued in November of 2017;
five-year warrants to purchase 16,000 shares of our common stock at an exercise price of $9.00 per share, issued in September of 2018; and
 five-year warrants to purchase 95,500 shares of our common stock at an exercise price of $4.00 per share, issued to the placement agent in connection with the 2020 private placement.

 

DILUTION

 

The shares of common stock offered under this prospectus are already issued and outstanding, other than 95,500 shares of common stock issuable upon the exercise of outstanding warrants that are offered under this prospectus. Thus, the issuance of shares of common stock hereunder will not cause any additional dilution other than any dilution that occurs if any of these outstanding warrants are exercised. Any dilution due to the exercise of warrants by the selling stockholders would not result in material dilution.

 

Out of the 25,000,000 authorized shares of our common stock, 21,891,798 shares, or approximately 88% of authorized shares, remain available for future issuances. We may issue some or all of these available shares in any attempt by us to raise additional funds through the sale of equity or convertible debt, and this will result in further dilution for existing stockholders. In addition, if we issue all of the authorized shares of our common stock, we may seek stockholder approval in the future to authorize additional stock, and this would also result in further dilution for existing stockholders.

 

SHARES ELIGIBLE FOR FUTURE SALE

 

Upon completion of this offering, and assuming the exercise of all warrants covered by this prospectus, we will have 2,906,340 shares of our common stock issued and outstanding, representing approximately 12% of the 25,000,000 authorized shares of our common stock. Furthermore, if all of our other outstanding warrants and options were exercised, we will have 3,108,202 shares of our common stock issued and outstanding, still representing approximately 12% of the 25,000,000 authorized shares of our common stock. The number of shares of our common stock outstanding after the offering is based on 2,810,840 shares of our common stock outstanding as of April 13, 2020, but this amount excludes 230,032 shares of our common stock issuable upon exercise of warrants outstanding as of April 13, 2020, and 67,330 shares reserved for issuance under the 2015 Intellinetics Inc. Equity Incentive Plan.

 

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The selling stockholders identified in this prospectus may, from time to time, offer and sell up to 2,519,490 shares of our common stock consisting of (a) 955,000 issued to investors in a private placement of securities completed on March 2, 2020; and (b) 1,433,740 shares of our common stock, issued upon conversion of all the outstanding principal and interest payable pursuant to convertible notes held by certain noteholder; (c) 35,250 shares of our common stock, issued to the placement agent in connection with the 2020 note conversion; and (d) up to 95,500 shares of our common stock, issuable upon the exercise of warrants issued to the placement agent in connection with the 2020 private placement.

 

Sales of substantial amounts of our common stock in the public market, or the perception that future sales may occur, could materially and adversely affect the prevailing market price of our common stock.

 

Registration Rights

 

In connection with the 2020 private placement, we entered into a registration rights agreement with certain selling stockholders who now own an aggregate of 955,000 shares of common stock, under which such selling stockholders are entitled to certain registration rights, and this prospectus is a part of the Registration Statement that we filed pursuant to our obligations under that registration rights agreement. Under the terms of the registration rights agreement, we have agreed to prepare and, as soon as practicable, but in no event later than April 16, 2020, file with the SEC a registration statement covering the resale under the Securities Act of all of the shares, and to use commercially reasonable efforts to have such registration statement declared effective by the SEC as soon as practicable, but in no event later than July 15, 2020 (or 90 days after filing).

 

EXPERTS

 

The consolidated financial statements as of December 31, 2019 and 2018 included in this Prospectus and in the Registration Statement have been so included in reliance on the report of GBQ Partners, LLC, an independent registered public accounting firm (the report on the financial statements contains an explanatory paragraph regarding the Company's ability to continue as a going concern) appearing elsewhere herein and in the Registration Statement, given on the authority of said firm as experts in auditing and accounting.

 

LEGAL MATTERS

 

The validity of our common stock offered hereby will be passed upon for us by McDonald Carano LLP, Reno, Nevada.

 

AVAILABLE INFORMATION

 

This prospectus is part of a Registration Statement on Form S-1 we have filed with the SEC. We have not included in this prospectus all of the information contained in the Registration Statement and you should refer to our Registration Statement and its exhibits for further information. You can obtain a copy of the Registration Statement, including the exhibits filed with it, from the SEC as indicated below.

 

We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any materials we file with the SEC at their Public Reference Room at 100 F Street, NE, Washington, DC 20549, on official business days during the hours of 10 a.m. to 3 p.m. You may obtain information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our filings are also available to the public from commercial document retrieval services and at the website maintained by the SEC at www.sec.gov.

 

We make available, free of charge, on our website located at www.intellinetics.com, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file them with or furnish them to the SEC. The contents of and the information on or accessible through our corporate website and our investor relations website are not a part of, and are not incorporated into, this prospectus and the accompanying prospectus or any report or document we file with or furnish to the SEC and any references to these websites are intended to be inactive textual references only.

 

Our website address is www.intellinetics.com. The information on our website is not incorporated into this prospectus.

 

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INCORPORATION OF DOCUMENTS BY REFERENCE

 

The SEC allows us to “incorporate by reference” into this prospectus the information contained in documents that we file with the SEC. This means that we can disclose important information to you by referring you to those documents filed separately by us with the SEC. The information that we incorporate by reference is considered to be a part of this prospectus, except for any information that is superseded by information that is included directly in this prospectus or incorporated by reference from information contained in documents that we file later with the SEC, which will automatically update and supersede this information.

 

We incorporate by reference into this prospectus information contained in any reports and other documents that we file with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act on or after the effective date of this prospectus and prior to the completion or termination of the offering of the securities covered by this prospectus, other than information that is furnished but not filed with the SEC under those filings.

 

Any statement contained in a document incorporated by reference into this prospectus will be deemed to be modified or superseded for purposes of this prospectus to the extent that a statement contained in this prospectus or in any subsequently filed document which is also incorporated or deemed to be incorporated by reference in this prospectus modifies or supersedes that previous statement. Any statement so modified or superseded will not be deemed, except as so modified or superseded, to constitute a part of this prospectus.

 

The information relating to us contained in this prospectus should be read together with the information in the documents incorporated or deemed to be incorporated by reference in this prospectus.

 

Documents incorporated by reference are available from the SEC as described above or from us without charge, excluding any exhibits to those documents unless the exhibit is specifically incorporated by reference as an exhibit in this prospectus. We will provide to each person, including any beneficial owner, to whom this prospectus is delivered, upon written or oral request, at no cost, a copy of any and all of the information that is incorporated by reference in this prospectus. Requests for such documents shall be directed to:

 

Intellinetics, Inc.

2190 Dividend Dr.

Columbus, OH 43228

Attention: Chief Financial Officer

 

You should rely only on the information contained in, or incorporated by reference into, this prospectus and any prospectus supplement. We have not authorized any person to provide you with any information that is different from that contained in this prospectus or incorporated by reference in this prospectus.

 

We are not making an offer to sell or seeking an offer to buy these securities in any jurisdiction in which such an offer, sale or solicitation is not permitted. You should not assume that the information in this prospectus is accurate as of any date other than the date on the front of this prospectus, regardless of the time of delivery of this prospectus or any sale of the securities.

 

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Index to Financial Statements

 

Intellinetics, Inc.

 

Annual Financial Statements

 

 

 F-1 
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Stockholders and Board of Directors of

Intellinetics, Inc. and Subsidiary

Columbus, Ohio

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of Intellinetics, Inc. and Subsidiary (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the years then ended, and related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

 

Continuation as a Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has recurring losses and negative cash flows from operations that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Subsequent Event - Significant Acquisition

 

As described in Note 16 to the consolidated financial statements, the Company acquired 100% of the Graphic Sciences capital stock, pursuant to a Stock Purchase Agreement on March 2, 2020. Our opinion is not modified with respect to this matter.

 

/s/ GBQ Partners LLC  
We have served as the Company’s auditor since 2012.  
Columbus, Ohio  
March 30, 2020  

 

 F-2 
 

 

Part I Financial Information

 

Item 1. Financial Statements

 

INTELLINETICS, INC. and SUBSIDIARY

Consolidated Balance Sheets

 

   December 31,   December 31, 
   2019   2018 
         
ASSETS          
           
Current assets:          
Cash  $404,165