INTELLINETICS, INC.

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, the remaining balance of $47,728 was repaid by the Company in cash.

The following discussion and analysis of our financial conditions and results of operations should be read together with our condensed consolidated financial statements and notes thereto included in Part I, Item 1, “Financial Statements,” of this Quarterly Report on Form 10-Q, and with the condensed consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. Historical results and percentage relationships among any amounts in the financial statements are not necessarily indicative of trends in operating results for any future periods. Any forward-looking statements in this discussion and analysis should be read in conjunction with the information set forth in “Note Regarding Forward-Looking Statements” elsewhere herein. In this Quarterly Report, we sometimes refer to the three month period ended March 31, 2021 as the first quarter 2021, and to the three month period ended March 31, 2020 as the first quarter 2020.

Looking ahead, the ongoing impact of COVID-19 on our business continues to evolve and be unpredictable. For example, to the extent the pandemic continues to disrupt economic activity we, like other businesses, are not immune to continued adverse impacts to our business, operations and financial results from decreases in customer spending, the adverse impact on the liquidity of our customers, depressed economic activity, or volatility in capital markets. The extent of the impact will depend on a number of factors, including the duration and severity of the pandemic; the uneven impact to certain industries; advances in testing, treatment and prevention; the macroeconomic impact of government measures to contain the spread of the virus and related government stimulus measures. To address the potential impact to our business, we have engaged, and continue to assess and engage, in aggressive efforts to reduce expenses and preserve cash flow in order to address the effects of COVID-19 on our business, operations and results. Additionally, we have instituted safe distancing practices and additional cleaning procedures for all our company offices, as well as established work-from-home policies wherever feasible, in order to prevent or mitigate future outbreaks and disruptions to our business. At the same time, we believe the current environment is accelerating digital transformation and we remain focused on innovating and investing in the services we offer to our customers. Accordingly, the ongoing impact of COVID-19 and the extent of these measures we may implement could have a material impact on our financial results.  

Professional Services Revenues

Professional services revenues consist of revenues from document scanning and conversion services, consulting, discovery, training, and advisory services to assist customers with document management needs, as well as repair and maintenance services for customer equipment. These revenues include arrangements that do not involve the sale of software. Revenues from our professional services offerings were enhanced with our acquisition of Graphic Sciences. Of our professional services revenues during the first quarter 2021, $1,590,411 were derived from our Document Conversion operations and $62,052 were derived from our Document Management operations. Our overall professional services revenues increased by $1,092,434, or 195% in the first quarter 2021 compared to the first quarter 2020. Graphic Sciences accounted for $1,534,231 of the total sales of professional services during the first quarter 2021, compared to $483,956 of such total sales of professional services during the first quarter 2020. Excluding Graphic Sciences, our professional services revenues were $340,446 in the first quarter 2021, an increase of 30% compared to $261,243 in the first quarter 2020. The increase in revenue excluding Graphic Sciences was due to an increase in our Document Conversion services in Columbus, Ohio of $16,821, as well as an increase in our Document Management professional services primarily from projects for the CEO Image customer base.

Our total cost of revenues during the first quarter 2021 increased by $582,776, or 130%, over first quarter 2020 primarily due to the acquisition of Graphic Sciences at the end of the first quarter 2020. Excluding costs of revenue attributable to Graphic Sciences, our cost of revenues decreased during the first quarter 2021 by $15,334, or 8%, over first quarter 2020 primarily due to increased sales revenues. Our cost of revenues for our Document Management segment decreased by $35,028, or 19%, in the first quarter 2021 compared to the first quarter 2020 primarily due to increased sales revenues in that segment. Our cost of revenues for our Document Conversion segment increased by $617,804, or 234%, in the first quarter 2021 compared to the first quarter 2020 primarily due to the acquisition of Graphic Sciences at the end of the first quarter 2020.