Notes
to Consolidated Financial Statements
1. Business Organization and Nature of Operations
Intellinetics,
Inc., formerly known as GlobalWise Investments, Inc., is a Nevada corporation incorporated in 1997, with two wholly-owned subsidiaries:
Intellinetics, Inc., an Ohio corporation (“Intellinetics Ohio”), and Graphic Sciences, Inc., a Michigan corporation (“Graphic
Sciences”). Intellinetics Ohio was incorporated in 1996, and on February 10, 2012, Intellinetics Ohio became our sole operating
subsidiary as a result of a reverse merger and recapitalization. On March 2, 2020, we purchased all the outstanding capital stock
of Graphic Sciences.
Our
digital transformation products and services are provided through two reporting segments: Document Management and Document Conversion.
Our Document Management segment, which includes the CEO Imaging Systems, Inc. (“CEO Image”) asset acquisition in April 2020,
consists primarily of solutions involving our software platform, allowing customers to capture and manage their documents across operations
such as scanned hard-copy documents and digital documents including those from Microsoft Office 365, digital images, audio, video and
emails. Our Document Conversion segment, which includes and primarily consists of the Graphic Sciences acquisition, provides assistance
to customers as a part of their overall document strategy to convert documents from one medium to another, predominantly paper to digital,
including migration to our software solutions, as well as long-term storage and retrieval services. Our solutions create value for customers
by making it easy to connect business-critical documents to the people who need them by making those documents easy to find and access,
while also being secure and compliant with the customers’ audit requirements. Solutions are sold both directly to end-users and
through resellers.
2. Basis of Presentation
The
accompanying audited consolidated financial statements have been prepared in accordance with United States generally accepted accounting
principles (“U.S. GAAP”). We have evaluated subsequent events through the issuance of this Form 10-K.
3.
Corporate
Actions
On
March 20, 2020, we effected a one-for-fifty
(1-for-50) reverse stock split of our common
stock. All share and per share amounts herein have been adjusted to reflect the reverse stock split.
4.
Summary of
Significant Accounting Policies
Principles
of Consolidation
The
consolidated financial statements accompanying these notes include the accounts of Intellinetics and the accounts of all its subsidiaries
in which it holds a controlling interest. Under GAAP, consolidation is generally required for investments of more than 50% of the outstanding
voting stock of an investee, except when control is not held by the majority owner. We have two subsidiaries: Intellinetics Ohio and
Graphic Sciences. We consider the criteria established under Financial Accounting Standards Board (“FASB”) Accounting Standard
Codification (“ASC”) 810, “Consolidations” in the consolidation process. All significant intercompany balances
and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions. Such
estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of revenues and expenses. By their nature, these estimates
and assumptions are subject to an inherent degree of uncertainty. The impact of COVID-19 has significantly increased economic and demand
uncertainty. Because future events and their effects cannot be determined with precision, actual results could differ significantly from
estimated amounts.
Significant
estimates and assumptions include valuation allowances related to receivables, accounts receivable -unbilled, the recoverability of long-term assets, depreciable lives of property and equipment, purchase
price allocations for acquisitions, fair value for goodwill and intangibles, the lease liabilities, estimates of fair value deferred
taxes and related valuation allowances. Our management monitors these risks and assesses our business and financial risks on a quarterly
basis.
Revenue
Recognition
In
accordance with ASC 606, “Revenue From Contracts With Customers,” 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.
We
categorize revenue as software, software as a service, software maintenance services, professional services, and storage and retrieval
services. We earn the majority of our revenue from the sale of professional services, followed by the sale of software maintenance services
and software as a service. We apply our revenue recognition policies as required in accordance with ASC 606 based on the facts and circumstances
of each category of revenue.
a)
Sale of software
Revenues
included in this classification typically include sales of licenses with professional services to new customers, additional software
licenses to existing customers, and sales of software with or without services to our resellers (See section j) - Reseller Agreements,
below. Our software licenses are functional intellectual property and typically provide customers with the right to use our software
in perpetuity as it exists when made available to the customer. We recognize revenue from software licenses at a point in time upon delivery,
provided all other revenue recognition criteria are met.
b)
Sale of software as a service
Sale
of software as a service (“SaaS”) consists of revenues from arrangements that provide customers the use of our software applications,
as a service, typically billed on a monthly or annual basis. Advance billings of these services are not recorded to the extent that the
term of the arrangement has not commenced and payment has not been received. Revenue on these services is recognized over the contract
period.
c)
Sale of software maintenance services
Software
maintenance services revenues consist of revenues derived from arrangements that provide post-contract support (“PCS”), including
software support and bug fixes, to our software license holders. Advance billings of PCS are not recorded to the extent that the term
of the PCS has not commenced and payment has not been received. PCS are considered distinct services. However, these distinct services
are considered a single performance obligation consisting of a series of services that are substantially the same and have the same pattern
of transfer to the customer. These revenues are recognized over the term of the maintenance contract.
d)
Sale of professional services
Professional
services revenues consist of revenues from document scanning and conversion services, consulting, discovery, training, and advisory services
to assist customers with document management needs, as well as repair and maintenance services for customer equipment. We recognize professional
services revenue over time as the services are delivered using an input or output method (e.g., labor hours incurred as a percentage
of total labor hours budgeted, images scanned, or similar milestones), as appropriate for the contract, provided all other revenue recognition
criteria are met.
e)
Sale of storage and retrieval services
Sale
of document storage and retrieval services consist principally of secured warehouse storage of customer documents, which are typically
retained for many years, as well as retrieval per agreement terms and certified destruction if desired. We recognize revenue from document
storage and retrieval services over the term of the contract for storage and for the retrieval and destructions components, as the services
are delivered. Customers are generally billed monthly based upon contractually agreed-upon terms.
f)
Arrangements with multiple performance obligations
In
addition to selling software licenses, software as a service, software maintenance services, professional services, and storage and retrieval
services on a stand-alone basis, a portion of our contracts include multiple performance obligations. For contracts with multiple performance
obligations, we allocate the transaction price of the contract to each distinct performance obligation, on a relative basis using
its standalone selling price. We determine the standalone selling price based on the price charged for the deliverable when sold
separately.
g)
Contract balances
When
the timing of our delivery of goods or services is different from the timing of payments made by customers, we recognize either a contract
asset (performance precedes contractual due date) or a contract liability (customer payment precedes performance). Customers that prepay
are represented by deferred revenue until the performance obligation is satisfied. Contract assets represent arrangements in which the
good or service has been delivered but payment is not yet due. Our contract assets consisted of accounts receivable, unbilled, which
are disclosed on the consolidated balance sheets, as well as other contract assets which are comprised of employee sales commissions
paid in advance of contract periods ending. Our contract liabilities consisted of deferred (unearned) revenue, which is generally related
to software as a service or software maintenance contracts. We classify deferred revenue as current based on the timing of when we expect
to recognize revenue, which are disclosed on the consolidated balance sheets.
The
following table presents changes in our contract assets during the years ended December 31, 2021, and 2020:
Schedule of Changes in Contract Assets and Liabilities
| |
Balance at Beginning of Period | | |
Addition from acquisition (Note 5) | | |
Revenue Recognized in Advance of Billings | | |
Billings | | |
Balance at End of Period | |
Year ended December 31, 2021 | |
| | | |
| | | |
| | | |
| | | |
| | |
Accounts receivable, unbilled | |
$ | 523,522 | | |
$ | - | | |
$ | 4,213,550 | | |
$ | (4,292,290 | ) | |
$ | 444,782 | |
Other contract assets | |
$ | 31,283 | | |
$ | - | | |
$ | 88,168 | | |
$ | 40,895 | | |
$ | 78,556 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Year ended December 31, 2020 | |
| | | |
| | | |
| | | |
| | | |
| | |
Accounts receivable, unbilled | |
$ | 23,371 | | |
$ | 276,023 | | |
$ | 917,361 | | |
$ | (693,233 | ) | |
$ | 523,522 | |
Other contract assets | |
$ | 19,670 | | |
$ | - | | |
$ | 36,954 | | |
$ | 25,341 | | |
$ | 31,283 | |
h)
Deferred revenue
Amounts
that have been invoiced are recognized in accounts receivable, deferred revenue or revenue, depending on whether the revenue recognition
criteria have been met. 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.
Remaining
performance obligations represent the transaction price from contracts for which work has not been performed or goods and services have
not been delivered. We expect to recognize revenue on approximately 99% of the remaining performance obligations over the next 12 months,
with the remainder recognized thereafter. As of December 31, 2021, the aggregate amount of the transaction price allocated to remaining
performance obligations for software as a service and software maintenance contracts with a duration greater than one year was $16,835.
As of December 31, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations for software as
a service and software maintenance contracts with a duration greater than one year was $45,323. This does not include revenue related
to performance obligations that are part of a contract whose original expected duration is one year or less.
The
following table presents changes in our contract liabilities during the years ended December 31, 2021 and 2020:
i)
Rights of return and customer acceptance
We
do not generally offer variable consideration, financing components, rights of return or any other incentives such as concessions, product
rotation, or price protection and, therefore, does not provide for or make estimates of rights of return and similar incentives. Our
contracts with customers generally do not include customer acceptance clauses.
j)
Reseller agreements
We
execute certain sales contracts through resellers. We recognize revenues relating to sales through resellers when all the recognition
criteria have been met including passing of control. In addition, we assess the credit-worthiness of each reseller, and if the reseller
is undercapitalized or in financial difficulty, any revenues expected to emanate from such resellers are deferred and recognized only
when cash is received and all other revenue recognition criteria are met.
k)
Contract costs
We
capitalize the incremental costs of obtaining a contract with a customer. We have determined that certain sales commissions meet the
requirement to be capitalized, and we amortize these costs on a consistent basis with the pattern of transfer of the goods and services
in the contract. Total capitalized costs to obtain contracts are included in other contract assets on our consolidated balance sheets.
l)
Sales taxes
Sales
taxes charged to and collected from customers as part of our sales transactions are excluded from revenues, as well as the determination
of transaction price for contracts with multiple performance obligations, and recorded as a liability to the applicable governmental
taxing authority.
m)
Disaggregation of revenue
We
provide disaggregation of revenue based on product groupings in our consolidated statements of operations as we believes this best depicts
how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. Revenues from contracts are
primarily within the United States. International revenues were not material to the consolidated financial statements for the years
ended December 31, 2021 and 2020.
n)
Significant financing component
Our
customers typically do not pay in advance for goods or services to be transferred in excess of one year. As such, it is not necessary
to determine if we benefit from the time value of money and should record a component of interest income related to the upfront payment
due to the practical expedient of ASC 606-10-32-18.
Concentrations
of Credit Risk
We
maintain our cash with high credit quality financial institutions. At times, our cash and cash equivalents may be uninsured or in deposit
accounts that exceed the Federal Deposit Insurance Corporation insurance limit.
The
number of customers that comprise our customer base, along with the different industries, governmental entities and geographic regions,
in which our customers operate, limits concentrations of credit risk with respect to accounts receivable, with the exception of the State
of Michigan. In the years ended December 31, 2021 and 2020, our sales to the State of Michigan totaled approximately 47%
of revenues. We have not experienced any losses, nor is not aware of any losses by Graphic Sciences, resulting from nonpayment by the
State of Michigan.
We
do not generally require collateral or other security to support customer receivables; however, we may require customers to provide
retainers, up-front deposits or irrevocable letters-of-credit when considered necessary to mitigate credit risks. We have established
an allowance for doubtful accounts based upon facts surrounding the credit risk of specific customers and past collections history. Credit
losses have been within management’s expectations. At December 31, 2021 and 2020, our allowance for doubtful accounts was $48,783
and $65,927, respectively.
Parts
and Supplies
Parts
and supplies are valued at the lower of cost or net realizable value. Costs are determined using the first-in, first-out method. Parts
and supplies are used for scanning and document conversion services. A provision for potentially obsolete or slow-moving parts and supplies
inventory is made based on parts and supplies levels, future sales forecasted and management’s judgment of potentially obsolete
parts and supplies. We recorded an allowance of $24,000 and $15,000 at December 31, 2021 and 2020, respectively.
Property
and Equipment
Property,
equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Depreciation and
amortization is computed over the estimated useful lives of the related assets on a straight-line basis. Furniture and fixtures,
computer hardware and purchased software are depreciated over three to seven years. Leasehold improvements are
amortized over the life of the lease or the asset, whichever is shorter, generally seven to ten years. Upon retirement or other
disposition of these assets, the cost and related accumulated depreciation and amortization of these assets are removed from the
accounts and the resulting gains and losses are reflected in the results of operations.
Intangible
Assets
All
intangible assets have finite lives and are stated at cost, net of amortization. Amortization is computed over the useful life of the
related assets on a straight-line method.
Goodwill
The
carrying value of goodwill is not amortized, but is tested for impairment annually as of December 31, as well as on an interim basis
whenever events or changes in circumstances indicate that the carrying amount of a reporting unity may not be recoverable. An impairment
charge is recognized for the amount by which the carrying amount exceeds the recorded fair value.
Impairment
of Long-Lived Assets
We
account for the impairment and disposition of long-lived assets in accordance with ASC 360, “Property, Plant, and Equipment.”
We tests long-lived assets or asset groups, such as property and equipment, for recoverability when events or changes in circumstances
indicate that their carrying amount may not be recoverable.
Circumstances
which could trigger a review include, but are not limited to: significant adverse changes in the business climate or legal factors; current
period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of
the asset; and a current expectation that the asset will more likely than not be sold or disposed of before the end of its estimated
useful life.
Recoverability
is assessed based on comparing the carrying amount of the asset to the aggregate pre-tax undiscounted cash flows expected to result from
the use and eventual disposal of the asset or asset group. Impairment is recognized when the carrying amount is not recoverable and exceeds
the fair value of the asset or asset group. The impairment loss, if any, is measured as the amount by which the carrying amount exceeds
fair value, which for this purpose is based upon the discounted projected future cash flows of the asset or asset group. There was no
impairment of long lived assets in the twelve month periods ended 2021 or 2020.
Purchase
Accounting Related Fair Value Measurements
We
allocate the purchase price, including contingent consideration, of our acquisitions to the assets and liabilities acquired, including
identifiable intangible assets, based on their respective fair values at the date of acquisition. Such fair market value assessments
are primarily based on third-party valuations using assumptions developed by management that require significant judgments and estimates
that can change materially as additional information becomes available. The purchase price allocated to intangibles is based on unobservable
factors, including but not limited to, projected revenues, expenses, customer attrition rates, a weighted average cost of capital, among
others. The weighted average cost of capital uses a market participant’s cost of equity and after-tax cost of debt and reflects
the risks inherent in the cash flows. The approach to valuing the initial contingent consideration associated with the purchase price
also uses similar unobservable factors such as projected revenues and expenses over the term of the contingent earnout period, discounted
for the period over which the initial contingent consideration is measured, and volatility rates. We finalize the purchase price allocation
once certain initial accounting valuation estimates are finalized, and no later than 12 months following the acquisition date.
Leases
We
determine if an arrangement is a lease at inception. Operating leases in which we are the lessee are included in operating lease right-of-use
(“ROU”) assets and operating lease liabilities in the consolidated balance sheets. We do not have any finance leases, as
a lessee, and no long-term leases for which we are the lessor.
ROU
assets represent the right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease
payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present
value of lease payments over the reasonably certain lease term. As our leases do not provide an implicit rate, we use our incremental
borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the
implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and reduced by lease incentives,
such as tenant improvement allowances. Our lease terms include options to extend or terminate the lease only when it is reasonably certain
that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Stock-Based
Compensation
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 values 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.
Software
Development Costs
We
design, develop, test, market, license, and support new software products and enhancements of current products. We continuously monitor
our software products and enhancements to remain compatible with standard platforms and file formats. 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. Once technological feasibility has been established, certain software development costs incurred during the application development
stage are eligible for capitalization. Based on our software development process, technical feasibility is established upon completion
of a working model. Technological feasibility is typically reached shortly before the release of such products. No such costs were capitalized
during the periods presented in this report.
In
accordance with ASC 350-40, “Internal-Use Software,” we capitalize purchase and implementation costs of internal use software.
Once an application has reached development stage, internal and external costs, if direct and incremental, are capitalized until the
software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing.
We also capitalize costs related to specific upgrades and enhancements when it is probable that the expenditure will result in additional
functionality. Such costs in the amount of $38,305
were capitalized during 2021. No such costs
were capitalized in 2020. Such capitalized costs are stated at cost less accumulated amortization. Amortization is computed over
the estimated useful lives of the related assets on a straight-line basis, which is three
years. At December 31, 2021 and 2020,
our consolidated balance sheets included $38,305
and $0, respectively, in other long term
assets.
For
the years ended December 31, 2021, and 2020, our expensed software development costs were $345,697
and $293,092,
respectively.
Recently
Issued Accounting Pronouncements Not Yet Effective
Financial
Instruments – Credit Losses
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which requires entities to measure
all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable
and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial
assets measured at amortized cost. ASC 2016-16 is effective for annual reporting periods beginning after December 15, 2023, including
interim reporting periods within those annual reporting periods. Early adoption is permitted. We are currently evaluating the
impact of the new guidance on its consolidated financial statements and related disclosures.
Reference
Rate Reform
In
March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform
on Financial Reporting” which provides optional relief through specific exceptions and practical expedients for transitioning away
from reference rates that are expected to be discontinued. The relief generally applies to eligible modifications of contractual terms
that change (or have the potential to change) the amount or timing of contractual cash flows related to replacement of a reference rate.
The relief allows such modifications to be accounted for as continuations of existing contracts without additional analysis. The optional
relief is available from March 2020 through December 31, 2022. We do not anticipate any impact on our business from this standard.
No
other Accounting Standards Updates that have been issued but are not yet effective are expected to have a material effect on our
future consolidated financial statements.
Advertising
We
expense the cost of advertising as incurred. Advertising expense for the years ended December 31, 2021 and 2020 amounted to $10,237
and $7,362,
respectively.
Earnings
(Loss) Per Share
Basic
income or loss per share is computed by dividing net income or loss by the weighted average number of shares of common stock outstanding
during the period. Diluted income or loss per share is computed by dividing net income or loss by the diluted weighted average number
of shares of common stock outstanding during the period. The diluted weighted average number of shares gives effect to all dilutive potential
common shares outstanding during the period using the treasury stock method. Diluted earnings per share exclude all diluted potential
shares if their effect is anti-dilutive, including warrants or options which are out-of-the-money and for those periods with a net loss.
We reported a net income for 2021 and a net loss for 2020.
Income
Taxes
Intellinetics
and its subsidiaries file a consolidated federal
income tax return. The provision for income taxes is computed by applying statutory rates to income before taxes.
Deferred
income taxes are recognized for the tax consequences in future years of temporary differences between the financial reporting and tax
bases of assets and liabilities as of each period-end based on enacted tax laws and statutory rates. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be realized. A 100%
valuation allowance has been established on deferred tax assets at December 31, 2021 and 2020, due to the uncertainty of our ability
to realize future taxable income. For 2020 we recovered a net $179,400
of its valuation allowance in conjunction with
the consolidation of the net deferred tax liability of our wholly owned subsidiary, Graphic Sciences.
We
account for uncertainty in income taxes in our financial statements as required under ASC 740, “Income Taxes.” The standard
prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. The standard also provides guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition accounting. Management determined there were no material uncertain positions
taken by us in our tax returns.
Segment
Information
Operating
segments are defined in the criteria established under the FASB ASC 280 as components of public entities that engage in business
activities from which they may earn revenues and incur expenses for which separate financial information is available and which is evaluated
regularly by our chief operating decision maker (“CODM”) in deciding how to assess performance and allocate resources. Our
CODM assesses performance and allocates resources based on two operating segments: Document Management and Document Conversion. These
segments contain individual business components that have been combined on the basis of common management, customers, solutions offered,
service processes and other economic characteristics. We currently have no intersegment sales. We evaluate the performance of our segments
based on gross profits.
The
Document Management Segment provides cloud-based and premise-based content services software. Its modular suite of solutions complements
existing operating and accounting systems to serve a mission-critical role for organizations to make content secure, compliant, and process-ready.
This segment conducts its primary operations in the United States. Markets served include highly regulated, risk and compliance-intensive
markets in healthcare, K-12 education, public safety, other public sector, risk management, financial services, and others. Solutions
are sold both directly to end-users and through resellers.
The
Document Conversion Segment provides services for scanning and indexing, converting images from paper to digital, paper to microfilm,
and microfiche to microfilm, as well as long-term physical document storage and retrieval. This segment conducts its primary operations
in the United States. Markets served include business and federal, county, and municipal governments. Solutions are sold both directly
to end-users and through a reseller distributor.
Information
by operating segment is as follows:
Schedule of Segment Information
| |
Year ended December 31, 2021 | | |
Year ended December 31, 2020 | |
Revenues | |
| | | |
| | |
Document Management | |
$ | 3,089,669 | | |
$ | 2,816,848 | |
Document Conversion | |
| 8,370,596 | | |
| 5,436,543 | |
Total revenues | |
$ | 11,460,265 | | |
$ | 8,253,391 | |
| |
| | | |
| | |
Gross profit | |
| | | |
| | |
Document Management | |
$ | 2,542,135 | | |
$ | 2,160,807 | |
Document Conversion | |
| 4,400,847 | | |
| 2,829,931 | |
Total gross profit | |
$ | 6,942,982 | | |
$ | 4,990,738 | |
| |
| | | |
| | |
Capital additions, net | |
| | | |
| | |
Document Management | |
$ | 44,052 | | |
$ | 6,440 | |
Document Conversion | |
| 546,433 | | |
| 70,414 | |
Total capital additions, net | |
$ | 590,485 | | |
$ | 76,854 | |
|
|
December 31, 2021 |
|
|
December 31, 2020 |
|
Goodwill |
|
|
|
|
|
|
|
|
Document Management |
|
$ |
522,711 |
|
|
$ |
522,711 |
|
Document Conversion |
|
|
1,800,176 |
|
|
|
1,800,176 |
|
Total goodwill |
|
$ |
2,322,887 |
|
|
$ |
2,322,887 |
|
| |
December 31, 2021 | | |
December 31, 2020 | |
Total assets | |
| | | |
| | |
Document Management | |
$ | 2,233,419 | | |
$ | 2,295,165 | |
Document Conversion | |
| 9,728,713 | | |
| 8,049,468 | |
Total assets | |
$ | 11,962,132 | | |
$ | 10,344,633 | |
Statement
of Cash Flows
For
purposes of reporting cash flows, cash includes cash on hand and demand deposits held by banks.
Reclassifications
Certain
amounts reported in prior filings of the consolidated financial statements have been reclassified to conform to current presentation.
5.
Business Acquisitions
On
March 2, 2020, we acquired all of the issued and outstanding stock of Graphic Sciences. The purchase price paid for Graphic Sciences
was $3,906,253
in cash plus potential contingent, or earnout,
payments of up $833,000
annually over a three year period based on a
gross profit level achieved by Graphic Sciences on an annual basis, for maximum total earnout payments over a three year period of $2,500,000,
and with no minimum earnout payments. At the time of this acquisition, management estimated a fair value of the contingent liability—earnout
(“earnout liability”) of $686,200
based on the terms of the earnout, and accordingly,
recorded this amount as our earnout liability at the acquisition date in accordance with GAAP. For the years ended December 31,
2021 and 2020 we recorded a change in fair value of our earnout liabilities in the amount of $123,377
and $1,554,800,
respectively. On June 8, 2021, we paid $769,733
for the first annual period. At December 31,
2021, our consolidated balance sheets reflected an earnout liability for Graphic Sciences in the amount of $1,463,644.
See Note 7 for the estimated fair value of the earnout liability as of December 31, 2021.
On
April 21, 2020, we acquired substantially all of the assets of CEO Image. The purchase price paid for the assets of CEO Image consisted
of $128,832
in cash, $170,000
in installment payments paid during 2020, and
potential contingent, or earnout, payments of up $185,000
annually over a two year period based on a sales
revenue level achieved by certain customers of CEO Image on an annual basis, for maximum total earnout payments over a two year period
of $370,000,
and with no minimum earnout payments. At the time of this acquisition, management estimated a fair value of the contingent liability—earnout
(“earnout liability”) of $203,000
based on the terms of the earnout, and accordingly,
recorded this amount as our earnout liability at the acquisition date in accordance with GAAP. For the year ended December 31,
2021 we recorded a change in fair value of our earnout liabilities in the amount of $18,038
and $0,
respectively. On June 10, 2021, we paid $185,000
for the first annual period. At December 31,
2021, our consolidated balance sheets reflected an earnout liability for CEO Image in the amount of $167,038.
See Note 7 for the estimated fair value of the earnout liability as of December 31, 2021.
The
purchase price was allocated to assets acquired and liabilities assumed based on the estimated fair value of such assets and liabilities
at the date of acquisitions as follows:
Schedule of Fair Value of Assets Acquired and Liabilities Assumed
| |
Total 2020 | | |
March 2, 2020 | | |
April 21, 2020 | |
Assets acquired: | |
| | | |
| | | |
| | |
Cash | |
$ | 17,269 | | |
$ | 17,269 | | |
$ | - | |
Accounts receivable | |
| 1,122,737 | | |
| 1,071,770 | | |
| 50,967 | |
Accounts receivable, unbilled | |
| 276,023 | | |
| 276,023 | | |
| - | |
Parts and supplies | |
| 91,396 | | |
| 91,396 | | |
| - | |
Prepaid expenses | |
| 73,116 | | |
| 73,116 | | |
| - | |
Other current assets | |
| 5,954 | | |
| 5,954 | | |
| - | |
Right of use assets | |
| 2,885,618 | | |
| 2,885,618 | | |
| - | |
Property and equipment | |
| 735,885 | | |
| 732,372 | | |
| 3,513 | |
Intangible assets (see Note 6) | |
| 1,361,000 | | |
| 1,230,000 | | |
| 131,000 | |
Assets | |
| 6,568,998 | | |
| 6,383,518 | | |
| 185,480 | |
Liabilities assumed: | |
| | | |
| | | |
| | |
Accounts payable | |
| 168,749 | | |
| 129,622 | | |
| 39,127 | |
Accrued expenses | |
| 162,426 | | |
| 155,949 | | |
| 6,477 | |
Lease liabilities | |
| 2,947,684 | | |
| 2,947,684 | | |
| - | |
Federal and state taxes payable | |
| 168,900 | | |
| 168,900 | | |
| - | |
Deferred revenue | |
| 198,659 | | |
| 39,186 | | |
| 159,473 | |
Deferred tax liabilities - Net | |
| 149,900 | | |
| 149,900 | | |
| - | |
Liabilities | |
| 3,796,318 | | |
| 3,591,241 | | |
| 205,077 | |
| |
| | | |
| | | |
| | |
Total identifiable net assets/(liabilities) | |
| 2,772,680 | | |
| 2,792,277 | | |
| (19,597 | ) |
| |
| | | |
| | | |
| | |
Purchase price | |
| 5,095,567 | | |
| 4,592,453 | | |
| 503,114 | |
| |
| | | |
| | | |
| | |
Goodwill - Excess of purchase price over fair value of net assets acquired | |
$ | 2,322,887 | | |
$ | 1,800,176 | | |
$ | 522,711 | |
Acquisition
costs which include legal and other professional fees of approximately $636,440 were expensed as nonrecurring transaction costs and are
included in significant transaction costs for 2020 in the accompanying consolidated statement of
operations.
The
following unaudited pro forma information presents a summary of our consolidated results of operations, as if the acquisitions
of Graphic Sciences and CEO Image had occurred on January 1, 2020.
Schedule of Pro Forma Information
For the year ended December 31, 2020 | |
(unaudited) | |
| |
December 31,
2020 | |
Total revenues | |
$ | 9,686,354 | |
| |
| | |
Net loss | |
$ | (1,993,389 | ) |
| |
| | |
Basic and diluted net loss per share | |
$ | (0.70 | ) |
The
unaudited pro forma consolidated results are based on our historical financial statements and those of Graphic Sciences and CEO
Image and do not necessarily indicate the results of operations that would have resulted had the acquisition actually been completed
at the beginning of the applicable period presented. The pro forma financial information assumes that the companies were combined as
of January 1, 2020.
6.
Intangible
Assets, Net
At
December 31, 2021, intangible assets consisted of the following:
Schedule of Intangible Assets
| |
Estimated | | |
| | |
Accumulated | | |
| |
| |
Useful Life | | |
Costs | | |
Amortization | | |
Net | |
Trade names | |
| 10 years | | |
$ | 119,000 | | |
$ | (21,817 | ) | |
$ | 97,183 | |
Customer contracts | |
| 5-8 years | | |
| 1,242,000 | | |
| (370,687 | ) | |
| 871,313 | |
| |
| | | |
$ | 1,361,000 | | |
$ | (392,504 | ) | |
$ | 968,496 | |
At
December 31, 2020, intangible assets consisted of the following:
| |
Estimated | | |
| | |
Accumulated | | |
| |
| |
Useful Life | | |
Costs | | |
Amortization | | |
Net | |
Trade names | |
| 10 years | | |
$ | 119,000 | | |
$ | (9,917 | ) | |
$ | 109,083 | |
Customer contracts | |
| 5-8 years | | |
| 1,242,000 | | |
| (166,112 | ) | |
| 1,075,888 | |
| |
| | | |
$ | 1,361,000 | | |
$ | (176,029 | ) | |
$ | 1,184,971 | |
Amortization
expense for the years ended December 31, 2021 and 2020, amounted to $216,475
and $176,029,
respectively. The following table represents future amortization expense for intangible assets subject to amortization.
Schedule of Amortization Expense for Intangible Assets
For the Years Ending December 31, | |
Amount | |
2022 | |
$ | 216,475 | |
2023 | |
| 216,475 | |
2024 | |
| 216,475 | |
2025 | |
| 199,008 | |
2026 | |
| 58,608 | |
Thereafter | |
| 61,455 | |
Intangible assets | |
$ | 968,496 | |
7.
Fair Value
Measurements
Under
GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The fair value hierarchy consists of the following three levels. Level 1 inputs
are quoted prices in active markets for identical assets or liabilities. Level 2 inputs consist of quoted prices for similar assets or
liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs
other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable
market data. Level 3 inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.
The
carrying values of cash and equivalents, accounts receivable, accounts payable, accrued expenses, and the PPP loan (prior to forgiveness)
approximate fair value because of its short maturity. Management believes that the carrying value of the 2020 Notes approximate fair
value given the March 2, 2020 transaction proximity to December 31, 2020 in conjunction with the absence of significant net change in
the overall economic environment with regards to availability of credit to Company.
We
have earnout liabilities related to our two 2020 acquisitions which are measured on a recurring basis and recorded at fair value, measured
using probability-weighted analysis and discounted using a rate that appropriately captures the risks associated with the obligation.
The inputs used to calculate the fair value of the earnout liabilities are considered to be Level 3 inputs due to the lack of relevant
market activity and significant management judgment. Key unobservable inputs include revenue growth rates, which ranged from 0% to 7%,
and volatility rates, which were 20% for gross profits. A decrease in future revenues and gross profits may result in a lower estimated
fair value of the earnout liabilities.
The
following table provides a summary of the changes in fair value of the earnout liabilities for the years ended December 31, 2021
and 2020:
Summary of Changes in Fair Value of Earnout Liabilities
| |
Year
ended
December 31, 2021 | |
Fair value at January 1, 2021 | |
$ | 2,444,000 | |
Payment | |
| (954,733 | ) |
Additions | |
| - | |
Change in fair value | |
| 141,414 | |
Fair value at December 31, 2021 | |
$ | 1,630,681 | |
| |
Year
ended
December 31, 2020 | |
Fair value at January 1, 2020 | |
$ | - | |
Additions | |
| 889,200 | |
Change in fair value | |
| 1,554,800 | |
Fair value at December 31, 2020 | |
$ | 2,444,000 | |
The
fair values of amounts owed are recorded in the current and long-term portions of earnout liabilities in our consolidated balance sheets.
Changes in fair value are recorded in change in fair value of earnout liabilities in our consolidated statements of operations.
8.
Property
and Equipment
Property
and equipment are comprised of the following:
Schedule of Property and Equipment
| |
December 31, 2021 | | |
December 31, 2020 | |
Computer hardware and purchased software | |
$ | 1,494,918 | | |
$ | 1,019,259 | |
Leasehold improvements | |
| 295,230 | | |
| 275,106 | |
Furniture and fixtures | |
| 71,325 | | |
| 82,056 | |
Property and equipment,
gross | |
| 1,861,473 | | |
| 1,376,421 | |
Less: accumulated depreciation | |
| (769,693 | ) | |
| (677,669 | ) |
Property and equipment, net | |
$ | 1,091,780 | | |
$ | 698,752 | |
Total
depreciation expense on our property and equipment for the years ended December 31, 2021 and 2020 amounted to $197,457
and $120,906,
respectively.
9.
Notes Payable
– Unrelated Parties
Summary
of Notes Payable to Unrelated Parties
The
table below summarizes all notes payable at December 31, 2021 and 2020, respectively. See also Note 10 “Notes Payable -
Related Parties.”
Schedule of Notes Payable to Unrelated Parties
| |
December
31, 2021 | | |
December
31, 2020 | |
PPP Note (a) | |
$ | - | | |
$ | 838,700 | |
2020 Notes | |
| 2,000,000 | | |
| 2,000,000 | |
Total notes payable | |
$ | 2,000,000 | | |
$ | 2,838,700 | |
Less unamortized debt issuance costs | |
| (121,029 | ) | |
| (224,767 | ) |
Less unamortized debt discount | |
| (124,444 | ) | |
| (231,111 | ) |
Less current portion | |
| - | | |
| (580,638 | ) |
Long-term portion of notes payable | |
$ | 1,754,527 | | |
$ | 1,802,184 | |
|
(a) |
The
full amount of the principal and interest on the PPP Note was forgiven in its entirety in January 2021. |
Future
minimum principal payments of the 2020 Notes are as follows:
Schedule of Future Minimum Principal Payments of Notes Payable
As of December 31, | |
Amount | |
2023 | |
$ | 2,000,000 | |
Total | |
$ | 2,000,000 | |
As
of December 31, 2021 and 2020, accrued interest for these notes payable with the exception of the related party notes in Note 10,
“Notes Payable - Related Parties,” was $0.
As of December 31, 2021 and 2020, unamortized debt issuance costs and unamortized debt discount were reflected within long term liabilities
on the consolidated balance sheets.
With
respect to all notes outstanding (other than the notes to related parties), interest expense, including the amortization of debt issuance
costs and debt discount for the years ended December 31, 2021 and 2020 was $452,120
and $548,742,
respectively.
We
have evaluated the terms of our convertible notes payable in accordance with ASC 815 – 40, “Derivatives and Hedging - Contracts
in Entity’s Own Stock” and determined that the underlying common stock is indexed to our common stock. We determined that
the conversion feature did not meet the definition of a derivative and therefore did not bifurcate the conversion feature and account
for it as a separate derivative liability. We evaluated the conversion feature for a beneficial conversion feature. The effective conversion
price was compared with the market price on the date of each note. If the conversion price was deemed to be less than the market value
of the underlying common stock at the inception of the note, then we recognized a beneficial conversion feature resulting in a discount
on the note payable, upon satisfaction of the contingency. The beneficial conversion features were amortized to interest expense over
the life of the respective notes, starting from the date of recognition.
2016-18
Unrelated Party Notes and 2020 Note Conversion
In
2016 through 2018, we issued convertible promissory notes to unrelated parties in an aggregate principal amount of $3,535,000. On March
2, 2020, we entered into amendments to these convertible promissory notes, as well as amendments to convertible promissory notes with
related parties (see note 10), that permitted us to convert all of the outstanding principal and accrued and unpaid interest payable
on all outstanding convertible promissory notes into shares of common stock at a reduced conversion rate equal to the purchase price
of our common stock issued in the contemporaneous private placement offering. Pursuant thereto, we converted all of the outstanding principal
and accrued and unpaid interest payable with respect to all convertible promissory notes, with related parties and with unrelated parties,
into a total of 1,433,689 shares of our common stock at a conversion rate of $4.00 per share. Taglich Brothers, Inc. acted as the exclusive
placement agent for the note conversion and received compensation (relating to the conversion of both the related and the unrelated notes)
of 35,250 shares of our common stock, based on a fee valued at $4.00 per share.
2020
Notes
On
March 2, 2020, we sold 2,000
units, at an offering price of $1,000 per unit,
to accredited investors in a private placement offering, with each unit consisting of $1,000 in 12% Subordinated Notes (“2020 Notes”)
and 40
shares of our common stock, for aggregate gross
proceeds of $2,000,000.
The entire outstanding principal and accrued interest
of the 2020 Notes are due and payable on February
28, 2023. Interest on the 2020 Notes accrues
at the rate of 12%
per annum, payable quarterly in cash, beginning on June 30, 2020. Any accrued but unpaid quarterly installment of interest will accrue
interest at the rate of 14.0% per annum. Any overdue principal and accrued and unpaid interest at the maturity date will accrue a mandatory
default penalty of 20%
of the outstanding principal balance and an interest rate of 14% per annum from the maturity date until paid in full. We used a portion
of the net proceeds from the private placement offering to finance the acquisitions of Graphic Sciences and CEO Image and the remaining
net proceeds for working capital and general corporate purposes. We recognized a debt discount of $320,000
for the 80,000
shares issued in conjunction with the units.
The amortization of the debt discount, which will be recognized over the life of the 2020 Notes as interest expense, for the years
ended December 31, 2021 and 2020 was $106,666
and $88,889,
respectively.
PPP
Note
On
April 15, 2020, we were issued an unsecured promissory note (“PPP Note”) for the PPP loan through PNC Bank with a principal
amount of $838,700.
The term of the PPP Note Payable was two years, with an interest rate of 1.0%
per annum deferred for the first six months. We received notice on January 20, 2021 that the SBA had forgiven the full amount of principal
and interest of the PPP Note, and we have recognized a gain on extinguishment of debt of $845,083
for the years ended December 31, 2021.
10.
Notes Payable
- Related Parties
For
the year ended December 31, 2021, there was no
interest expense in connection with notes payable
– related parties. For the year ended December 31, 2020, interest expense in connection with notes payable – related
parties was $88,941.
2016-19
Related Party Notes and 2020 Note Conversion
In
2016 through 2019, we issued convertible promissory notes to related parties, including 5%
stockholders, executive officers and directors, in an aggregate principal amount of $1,562,728.
On March 2, 2020, we entered into amendments to these convertible promissory notes with related parties, as well as to convertible promissory
notes with unrelated parties (see note 9), that permitted us to convert all of the outstanding principal and accrued and unpaid interest
payable thereon into shares of common stock at a reduced conversion rate equal to the purchase price of our common stock issued in the
contemporaneous private placement offering. Pursuant thereto, we converted all of the outstanding principal and accrued and unpaid interest
payable with respect to all convertible promissory notes (with related parties as well as with unrelated parties) into a total of 1,433,689
shares of our common stock at a conversion rate
of $4.00
per share, with the exception of the 2019 related
party notes. On March 2, 2020, $350,000
of the 2019 related party notes were converted
into equity. On May 15, 2020, we repaid the remaining balance of $47,728
in cash.
11.
Deferred
Compensation
Pursuant
to an employment agreement, we have accrued incentive compensation totaling $100,828
as of December 31, 2021 and 2020 for
one of our founders. We deferred these payment obligations until we reasonably believe we have sufficient cash to make those payments
in cash. We made no deferred incentive compensation payments during 2021. Following the retirement of founder A. Michael Chretien
on December 8, 2017, we made bi-weekly payments until his deferred compensation had been fully paid, which occurred in May 2020. During
the years ended December 31, 2021 and 2020, we paid $0
and $16,338,
respectively, in deferred incentive compensation, which amounts were reflected as a reduction in our deferred compensation liability.
12.
Commitments
and Contingencies
From
time to time we are involved in legal proceedings, claims and litigation related to employee claims, contractual disputes and taxes in
the ordinary course of business. Although we cannot predict the outcome of such matters, currently we have no reason to believe the disposition
of any current matter could reasonably be expected to have a material adverse impact on our financial position, results of operations
or the ability to carry on any of our business activities.
Employment
Agreements
We
have entered into employment agreements with three of our key executives, including one of our founders. Under their respective employment
agreements, the executives are employed on an “at-will” basis and are bound by typical confidentiality, non-solicitation
and non-competition provisions. Deferred compensation for one founder remains outstanding as of December 31, 2021.
Operating
Leases
On
January 1, 2010, we entered into an agreement to lease 6,000
rentable square feet of office space in Columbus,
Ohio. The lease commenced on January 1, 2010
and, pursuant to a lease extension dated September
18, 2021, the lease expires on December
31, 2028. The monthly rental payment is $4,638,
with gradually higher annual increases each January
up to $5,850
for the final year.
Our
subsidiary, Graphic Sciences, uses 36,000 square feet of leased space in Madison Heights, Michigan 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 $41,508, with gradually higher annual increases each September up to $45,828 for the final year, and with
a lease term continuing until August 31, 2026. Graphic Sciences also leases and uses a separate 37,000 square foot building in Sterling
Heights, Michigan for document storage, except approximately 5,000 square feet for production, and a satellite office in Traverse City,
Michigan for production. The monthly Sterling Heights rental payment is $20,452, with gradually higher annual increases each May up to
$24,171 for the final year, and with a lease term continuing to April 30, 2028. The monthly Traverse City rental payment is $4,500, with
a lease term continuing until January 31, 2024. Graphic Sciences also leases and uses four leased vehicles for logistics. The monthly
rental payments for these vehicles total $2,618, with lease terms continuing until October 31, 2024.
Graphic
Sciences also leases and uses an additional temporary storage space in Madison Heights, with a monthly rental payment of $1,605
and a lease term on a month-to-month basis. We
have made an accounting policy election to not record a right-of-use asset and lease liability for short-term leases, which are defined
as leases with a lease term of 12 months or less. Instead, the lease payments are recognized as rent expense in the general and administrative
expenses on the statement of operations. For each of the above listed leases, management has determined it will utilize the base rental
period and have not considered any renewal periods.
The
following table sets forth the future minimum lease payments under these operating leases:
Schedule of Future Rental Payments for Operating Leases
For the period Ending December 31, | |
Amount | |
2022 | |
$ | 931,853 | |
2023 | |
| 936,109 | |
2024 | |
| 879,142 | |
2025 | |
| 880,254 | |
2026 | |
| 713,362 | |
Thereafter | |
| 522,856 | |
Total | |
$ | 4,863,576 | |
Lease
costs charged to operations for the years ended December 31, 2021 and 2020 amounted to $1,043,980
and $743,373,
respectively. Included in the lease costs for the years ended December 31, 2021 and 2020 were short-term lease costs of $97,024
and $71,411,
respectively. The following table sets forth additional information pertaining to our leases:
Schedule of Operating Lease Costs
For the Year Ending December 31, | |
2021 | | |
2020 | |
Operating cash flows from operating leases | |
$ | 729,549 | | |
$ | 482,425 | |
Weighted average remaining lease term – operating leases | |
| 5.4 years | | |
| 5.1 years | |
Weighted average discount rate – operating leases | |
| 7.02 | % | |
| 7.96 | % |
Because
these leases do not provide an implicit rate, we use an incremental borrowing rate based on the information available at the lease commencement
date in determining the present value of lease payments.
13.
Stockholders’
Equity
Description
of Authorized Capital
We
are authorized to issue up to 25,000,000
shares of common stock with $0.001
par value. The holders of our common stock
are entitled to one vote per share. The holders of common stock are entitled to receive ratably such dividends, if any, as may be declared
by the Board of Directors out of legally available funds. However, the current policy of the Board of Directors is to retain earnings,
if any, for the operation and expansion of the business. Upon liquidation, dissolution or winding-up of Intellinetics, the holders
of common stock are entitled to share ratably in all assets legally available for distribution.
Common
Stock
As
of December 31, 2021, 2,823,072 shares of common stock were issued and outstanding, 131,700 shares of common stock were reserved for
issuance upon the exercise of outstanding warrants, and 497,330 shares of common stock were reserved for issuance under our 2015 Equity
Incentive Plan, as amended (the “2015 Plan”).
On
March 2, 2020, we sold 955,000 shares of our common stock and certain subordinated notes in a private placement to accredited investors
as follows:
|
● |
875,000
shares of our common stock at a purchase price of $4.00 per share, for aggregate gross proceeds of $3,500,000, and |
|
|
|
|
● |
2,000
units at a purchase price of $1,000 per unit, with each unit consisting of $1,000 in 12% Subordinated Notes and 40 shares of our
common stock, for aggregate gross proceeds of $2,000,000. |
In
connection with the private placement offering, we paid the placement agent $440,000
in cash, equal to 8%
of the gross proceeds of the offering, along with 95,500
warrants to purchase shares of our common stock
and reimbursement for the placement agent’s reasonable out of pocket expenses, FINRA filing fees and related legal fees. The warrants
are exercisable at an exercise price at $4.00
per share for a period of five
years after issuance, contain customary cashless
exercise provisions and anti-dilution protection and are entitled to limited piggyback registration rights. Underwriting expense of $236,761
and debt issuance costs of $135,291
were recorded for the issuance of the March 2,
2020 warrants, utilizing the Black-Scholes valuation model. The fair value of warrants issued was determined to be $3.90.
Underwriting expense of $307,867
and debt issuance costs of $175,924
was recorded for the placement agent cash fee
and other related legal fees. For the years ended December 31, 2021 and 2020, interest expense of $103,739
and $86,449,
respectively, was recorded as amortization of the debt issuance costs for this private placement offering.
Reverse
Stock Split
In
February 2020, upon recommendation and authorization by our Board of Directors, our stockholders holding a majority in interest of the
issued and outstanding shares of our common stock, acting by written consent, adopted an amendment to our Articles of Incorporation to
effectuate a reverse split of our issued and outstanding shares of common stock at a ratio of one-for-fifty (1-for-50) (the “Reverse
Split”), and reduce the number of authorized shares of our common stock to 25,000,000 shares (the “25,000,000 Share Amendment”).
The Reverse Split and the 25,000,000 Share Amendment became effective on March 20, 2020.
Effective
March 2, 2020, before the Reverse Split and the 25,000,000 Share Amendment became effective, upon recommendation and authorization by
the Board of Directors, stockholders holding a majority in interest of the issued and outstanding shares of our common stock, acting
by written consent, adopted an amendment to our Articles of Incorporation to increase the authorized number of shares of our common stock
to 160,000,000 shares (representing 3,200,000 shares on a post-split basis) from 75,000,000 shares (representing 1,500,000 shares on
a post-split basis), in order to facilitate the acquisition of Graphic Sciences and certain private placement offerings and note conversions.
Thereafter, on March 20, 2020, when the Reverse Split and the 25,000,000 Share Amendment became effective, our authorized capital stock
became 25,000,000 shares of common stock.
The
Reverse Split did not cause an adjustment to the par value of the common stock. Pursuant to the Reverse Split, we adjusted the amounts
for shares reserved for issuance upon the exercise of outstanding warrants, outstanding stock options, and shares reserved for the 2015
Plan.
All
references to shares of common stock and per share data in the accompanying consolidated financial statements and in these notes related
thereto have been adjusted to reflect the Reverse Split for all periods presented.
Warrants
The
following sets forth the warrants to purchase our common stock that were outstanding as of December 31, 2021:
|
● |
Warrants
to purchase 3,000 shares of common stock at an exercise price of $15.00 per share exercisable until September 22, 2022, issued to
certain 5% stockholders. |
|
|
|
|
● |
Warrants
to purchase 17,200 shares of common stock at an exercise price of $12.50 per share exercisable until November 30, 2022, issued to
the placement agent in connection with private placements of our convertible promissory notes. |
|
|
|
|
● |
Warrants
to purchase 16,000 shares of common stock at an exercise price of $9.00 per share exercisable until September 26, 2023, issued to
the placement agent in connection with private placements of our convertible promissory notes. |
|
|
|
|
● |
Warrants
to purchase 95,500 shares of common stock at an exercise price of $4.00 per share exercisable until February 28, 2025, issued to
the placement agent in connection with private placements of our convertible promissory notes. |
No
warrants were issued during 2021. Warrants to purchase 95,500 shares
of common stock were issued during the 2020 at a fair value determined to be $3.90 per
warrant utilizing the Black-Scholes valuation model. The estimated value of the warrants issued during 2020, as well as the
assumptions that were used in calculating such values, were based on estimates at the issuance date as follows:
Schedule of Estimated Values of Warrants Valuation Assumptions
| |
Warrants Issued March 2, 2020 | |
Risk-free interest rate | |
| 0.88 | % |
Weighted average expected term | |
| 5 years | |
Expected volatility | |
| 130.12 | % |
Expected dividend yield | |
| 0.00 | % |
14.
Stock-Based
Compensation
From
time to time, we issue stock options and restricted stock as compensation for services rendered by our directors and employees.
Restricted
Stock
On
February 15, 2021 and January 2, 2020, we issued 12,207
shares and 16,429
shares, respectively, of restricted common stock
to our directors as part of their annual compensation plan. The grants of restricted common stock were made outside the 2015 Plan and
were not subject to any vesting conditions. Stock compensation of $57,500
was recorded for the years ended December
31, 2021 and 2020.
Stock
Options
We
did not make any stock option grants during 2021. The weighted-average grant date fair value of options granted during 2020
was $3.30.
Stock-based compensation for options was $92,253
and $58,770,
during the years ended December 31, 2021 and 2020, respectively.
A
summary of stock option activity during the years ended December 31, 2021 and 2020 is as follows:
The following represent grants of stock options,
including the fair value recognized or to be recognized over the requisite service period: