INLX

INFORMATION STATEMENT

WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.

Effective February 27, 2020

To Our Stockholders:

Intellinetics, Inc., a Nevada corporation (the “Company” or “Intellinetics” or “us” or “we”) is furnishing this Information Statement to notify stockholders that on February 27, 2020, and on March 1, 2020, the Company received written consents, in lieu of a meeting, from the holders of a majority of the then outstanding shares of common stock, par value $0.001 per share (“Common Stock”). Acting by written consent of stockholders that were the record owners of 10,344,307 shares of Common Stock representing 53% of the voting power outstanding as of February 27, 2020, and as of March 1, 2020 (the “Majority Stockholders”), the stockholders approved the following amendments to our Articles of Incorporation, as amended (“Articles”):

1. An amendment to our Articles to effect a reverse stock split of all of the outstanding shares of our Common Stock, at a ratio of 1-for-50 (the “Reverse Split”), to be effective as soon as possible pending regulatory approvals.

2. Amendments to our Articles to increase the number of shares of Common Stock authorized for issuance from 75,000,000 shares to a total of 160,000,000 shares until such time as the Reverse Split was effected, and upon the effectiveness of the Reverse Split, to reduce the number of shares of Common Stock authorized for issuance to 25,000,000 shares (such amendments, collectively, the “Authorized Share Amendments”).

On February 12, 2020, the Board of Directors of the Company (the “Board”) authorized the Reverse Split and a change in the number of shares of Common Stock authorized for issuance from 75,000,000 to 25,000,000. On February 27, 2020, the Majority Stockholders approved the Reverse Split and the reduction of the authorized number of shares of Common Stock to 25,000,000 by written consent in lieu of a meeting, in accordance with Nevada law. Subsequently on March 1, 2020, the Board and the Majority Stockholders approved (i) a delay in effecting the Reverse Split until regulatory approvals had been given, and (ii) an increase in the number of authorized number of shares of Common Stock to a total of 160,000,000 shares, until such time as the Reverse Split was effected. Accordingly, no meeting has been or will be held and your consent is not required and is not being solicited in connection with the approval of the Reverse Split and Authorized Share Amendments.

Pursuant to the consent in writing by the Majority Stockholders and the unanimous approval by the Board, the Authorized Share Amendments were filed with the Secretary of State of Nevada to reflect the foregoing actions on February 27, 2020, March 2, 2020, and March 3, 2020. The Board believes the Reverse Split and Authorized Share Amendments were necessary and advisable in order to complete various corporate actions, including the acquisition of Graphic Sciences, Inc., a Michigan corporation, the conversion of all of the Company’s outstanding convertible promissory notes, the closing of a private offering of the Company’s Common Stock and promissory notes, and the maintenance of the Company’s capital raising ability and its flexibility in today’s competitive and rapidly changing environment. Accordingly, the Board has determined that the Reverse Split and Authorized Share Amendments were in the best interests of the Company, better positioning the Company to attract potential opportunities and enhance stockholder value.

No action is required by you. The accompanying Information Statement is furnished only to inform our stockholders of the actions described above in accordance with Rule 14c-2 promulgated under the Securities Exchange Act of 1934, as amended.

On February 27, 2020, the record date for determining the stockholders entitled to vote on or consent to the actions described herein, the Company was authorized to issue 75,000,000 shares of its Common Stock, of which 19,346,307 shares of its Common Stock were issued and outstanding. The Common Stock constituted the sole outstanding class of voting securities of Intellinetics, Inc. Each share of Common Stock entitled the holder thereof to one vote on all matters submitted to stockholders. This information statement is being first mailed to such stockholders on or about May 14, 2020.

By Order of the Board of Directors:

APPROVAL OF AN AMENDMENT TO OUR ARTICLES OF INCORPORATION
TO EFFECTUATE A REVERSE STOCK SPLIT AND

CHANGE THE AUTHORIZED NUMBER OF SHARES OF COMMON STOCK

The Board received written consents from the Majority Stockholders to a proposal, which the Board had unanimously approved, to amend the Company’s Articles, adopting the Charter Amendments to: (i) implement the Reverse Split in the ratio of one-for-fifty, (ii) change the number of shares of Common Stock authorized for issuance to 25,000,000 on a post-Reverse Split basis, and (iii) temporarily increase the number of shares of Common Stock authorized for issuance to 160,000,000 until such time as the Reverse Split takes effect (collectively, the “Charter Amendments”).

Reasons for the Reverse Split and Charter Amendments

The Board believes that the Reverse Split and Charter Amendments were necessary and advisable in order to (a) effectuate the acquisition of Graphic Sciences, Inc., a Michigan corporation (the “GSI Acquisition”), the conversion of all of the Company’s outstanding convertible promissory notes (the “Note Conversion”), and a private offering of the Company’s Common Stock and promissory notes (the “Securities Offering”), (b) generally improve the liquidity and marketability of the Company’s Common Stock, and (c) respond to future opportunities which may arise to raise additional capital, based upon future developments in the business affairs of the Company, the market and the economy.

In order to effectuate the GSI Acquisition, Securities Offering, and Note Conversion, the Company issued 126,229,300 additional shares of Common Stock on a pre-Reverse Split basis. Previously, the number of shares of Common Stock authorized by the Company’s Articles was 75,000,000 shares of Common Stock. Of the 75,000,000 authorized shares of Common Stock, 19,346,307 shares were issued and outstanding as of January 24, 2020, and 38,448,784 shares were reserved for issuance for (i) the exercise of warrants, (ii) the conversion of convertible notes outstanding (including conversion of any accrued interest on such notes as of January 24, 2020), and (iii) the 2015 Intellinetics Inc. Equity Incentive Plan. Thus, either a Reverse Split or increase in authorized shares, or both, were required in order to effectuate the GSI Acquisition, Securities Offering, and Note Conversion.

The Board of Directors believes that the relatively low market price per share of the Company’s Common Stock before the Reverse Split had impaired the marketability of the Common Stock to institutional investors and members of the investing public. In theory, the number of shares outstanding should not, in and of itself, affect the marketability of the Common Stock, the nature of investors who purchase the Common Stock, or the Company’s reputation in the financial community. In practice, however, the Company believes many brokerage firms and institutional investors are reluctant to recommend lower-priced stocks to their clients or to hold them in their portfolios because they are perceived to be speculative in nature. This impairment of marketability may affect not only the liquidity and trading price of the Common Stock, but also the Company’s ability to raise additional capital through the sale of equity securities or securities convertible into equity securities. In addition, many brokerage houses have policies and practices that discourage individual brokers within those firms from dealing in lower-priced stocks. Some of those policies and practices involve time-consuming procedures that make the handling of lower-priced stock economically unattractive. The brokerage commission on a sale of lower-priced stock may also represent a higher percentage of the sale price than the brokerage commission on a higher-priced issue. Any reduction in brokerage commission resulting from a Reverse Split could be offset, however, in whole or in part, by increased brokerage commissions required to be paid by stockholders selling “odd lots” created by the Reverse Split.

The Board of Directors believed that the decrease in the number of shares of Common Stock outstanding resulting from the Reverse Split would increase the trading price of the outstanding shares and thus stimulate greater interest in the Common Stock by the financial community and the investing public, promote greater liquidity for the Company’s stockholders, and result in a bid price level for the Common Stock that may in the future permit it to obtain an exchange listing. The Board also believed that the Reverse Split would result in a price level for the Common Stock that would mitigate the reluctance, policies and practices of brokerage firms, and diminish the adverse impact of trading commissions and recommendation restrictions on the potential market for the Company’s Common Stock. Although any increase in the market price of the Common Stock resulting from the Reverse Split may be proportionately less than the decrease in the number of shares outstanding, the Board of Directors believes that the proposed Reverse Split should result in a market price for the shares that would be high enough to overcome the reluctance, policies and practices at brokerage houses and institutional investors referred to above and to diminish the adverse impact of correspondingly high trading commissions on the market for the Common Stock.

However, there is no assurance that the Reverse Split will achieve the desired results, that the price per share of the Common Stock after the Reverse Split will maintain a level that is proportionate with the decrease in the number of shares, that the Common Stock will achieve the desired additional marketability, or that any price increase can be sustained for a prolonged period of time. Also, it is possible that the liquidity of the Common Stock after the Reverse Split may be adversely affected by the reduced number of shares outstanding.

Reasons for the Change in Authorized Shares

As a result of and in conjunction with the Reverse Split, the Majority Stockholders also adopted and approved an amendment to our Articles of Incorporation in order to change the number of shares of Common Stock authorized for issuance to 25,000,000 shares on a post-Reverse Split basis. If the Reverse Split had been completed with no other changes, a total of 75,000,000 shares would have been authorized for issuance, and of those, only 3,113,374 shares would have been either issued and outstanding or reserved for issuance. As a result, we believe that 25,000,000 shares of Common Stock is an appropriate number of authorized shares, which will allow flexibility to use our Common Stock for corporate purposes in the future, including public or private offerings to raise capital, equity-based agreements designed to attract talent, strategic relationships, and for other strategic and general business and financial purposes. In addition, the Majority Stockholders adopted and approved an amendment to our Articles of Incorporation in order to temporarily increase the number of shares of Common Stock authorized for issuance to 160,000,000 shares until such time as the Reverse Split was processed by OTC Capital Markets.

Principal Effects of the Charter Amendments

The increase in the number of authorized shares of Common Stock to 160,000,000 shares became effective on March 2, 2020. The amendments to our Articles effecting the Reverse Split and reduction of the Common Stock to 25,000,000 authorized shares were filed with the Secretary of State with the State of Nevada on March 3, 2020, and were processed by the OTC Capital Markets on March 20 (the “Effective Date”). Upon the Effective Date, each fifty shares of Common Stock then issued and outstanding (“Pre-Split Common Stock”) automatically, without any action on the part of the holders of such Common Stock, were converted into one share of Common Stock (“Post-Reverse Split Common Stock”), subject to the cash payment for fractional shares discussed below. From and after the Effective Date of the Reverse Split, certificates representing shares of Pre-Split Common Stock are deemed to represent only the number of whole shares of Post-Reverse Split Common Stock into which the shares of Pre-Split Common Stock were converted and the right to receive cash in lieu of any fractional share of Post-Reverse Split Common Stock.

Based upon the 145,575,607 shares of Common Stock outstanding at the close of business on March 19, the Reverse Split reduced the number of outstanding shares of Common Stock to 2,810,865 shares, or by 98%. The Reverse Split did not affect the par value of the Common Stock, which was and will remain $0.001 per share. Except for changes resulting from the Reverse Split as described herein, the rights and privileges of holders of shares of Common Stock remain unchanged, and the Reverse Split does not result in any change of the relative equity interest in the Company or the voting power or the rights and privileges of the holders of Common Stock.

After the Reverse Split, each outstanding option or warrant to purchase shares of Common Stock automatically became an option or warrant, as the case may be, to purchase 2% (or 1/50^th) of the number of shares subject to the option or warrant immediately prior to the Reverse Split at an exercise price which is 50 times the exercise price of the option or warrant immediately prior to the Reverse Split, subject to adjustment as a result of the elimination of fractional shares. The aggregate number of shares of Common Stock reserved for issuance upon the exercise of outstanding warrants and options decreased from approximately 38,448,784 shares of Common Stock to approximately 768,975 shares of Common Stock, subject to adjustment as a result of the elimination of fractional shares. The Company has obtained a new CUSIP number for the Common Stock effective at the time of the Reverse Split.

Because one effect of the Charter Amendments is to decrease the number of shares of Common Stock outstanding without any increase in the par value of the Common Stock, the Company’s stated capital is reduced, but the aggregate capital in excess of par value attributable to the outstanding Common Stock is correspondingly increased. Under Nevada law, the Board has the authority, subject to certain limitations, to transfer some or all of such capital in excess of par value from capital to surplus. The Board of Directors has no plans to make such a transfer of capital at this time.

Exchange Of Certificates

As soon as practicable after the Effective Date, stockholders had the option, but were not required, to exchange their certificates representing shares of Pre-Split Common Stock (“Pre-Split Certificates”) for certificates representing the number of whole shares of Post-Reverse Split Common Stock (“Post-Reverse Split Certificates”) into which the shares of Pre-Split Common Stock have been converted as a result of the Reverse Split. After the Effective Date, each stockholder received a letter of transmittal from the Company’s transfer agent, Standard Registrar and Transfer (the “Exchange Agent”), who will act as the Exchange Agent in the exchange of stock certificates, containing the necessary materials and instructions. In order to receive Post-Reverse Split Certificates, stockholders must surrender their Pre-Split Certificates pursuant to the Exchange Agent’s instructions, together with properly executed and completed letters of transmittal and such evidence of ownership of such shares as the Company or the Exchange Agent may require, plus the applicable exchange fees. Pre-Split Certificates not presented for surrender after the Effective Date will be exchanged for Post-Reverse Split Certificates the first time they are presented for transfer. From and after the Effective Date, each Pre-Split Certificate will, until surrendered in exchange as described above, be deemed for all corporate purposes after the Effective Date to evidence ownership of the whole number of shares of Post-Reverse Split Common Stock into which the shares evidenced by such Pre-Split Certificate have been converted pursuant to the Reverse Split, plus the right to receive the cash payment in lieu of any fractional shares of Post-Reverse Split Common Stock described below.

Elimination Of Fractional Shares

No fractional shares of Post-Reverse Split Common Stock were issued. In lieu of receiving fractional shares, stockholders who would otherwise be entitled to receive fractional shares of Post-Reverse Split Common Stock, upon surrender of their Pre-Split Certificates, received a cash payment in lieu thereof equal to the fair market value of such fractional share. Holders of less shares of Common Stock than the number of shares of Pre-Split Common Stock which became converted into one share of Post-Reverse Split Common Stock as a result of the Reverse Split on the Effective Date no longer were stockholders of the Company. The fair market value of the Post-Reverse Split Common Stock was based on the last sale price of the Common Stock as reported by the OTCQB on the date immediately preceding the Effective Date, which was $0.08.

No Dissenter’s Rights

Under Nevada law, stockholders were not be entitled to dissenter’s rights with respect to the Charter Amendments, and the Company did not independently provide stockholders with any such right.

Exchange Act Rule 13e-3

The Charter Amendments were not intended to and did not have the effect of a “going private” transaction under Rule 13e-3.

Certain Federal Income Tax Consequences

The following is a summary of the material anticipated federal income tax consequences of the Charter Amendments to stockholders of the Company. This summary is based upon the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), and the applicable treasury regulations promulgated thereunder, judicial authority and administrative rulings and practice, all as in effect on the date hereof. Legislative, judicial or administrative rules and interpretations are subject to change, potentially on a retroactive basis, at any time and therefore could alter or modify the statements and conclusions set forth below. For the purpose of this discussion, it is assumed that the shares of Common Stock are held as capital assets by stockholders who are United States persons (i.e., citizens or residents of the United States or domestic corporations).

This summary does not purport to be complete and does not address all aspects of federal income taxation that may be relevant to a particular stockholder in light of such stockholder’s personal investment circumstances, stockholders holding Common Stock as security for borrowings or those stockholders subject to special treatment under the federal income tax laws (for example, life insurance companies, tax-exempt organizations, foreign corporations and nonresident alien individuals). The summary also does not discuss any consequences of the Charter Amendments under any state, local, foreign, gift or estate tax laws.

No ruling from the Internal Revenue Service or opinion of counsel will be obtained regarding the federal income tax consequences to the stockholders of the Company as a result of the Charter Amendment. ACCORDINGLY, EACH STOCKHOLDER IS ENCOURAGED TO CONSULT HIS/HER TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT TO SUCH STOCKHOLDER, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME TAX LAWS.

The Company believes that the Reverse Split is a tax-free recapitalization to the Company and its stockholders. If the Reverse Split qualifies as a recapitalization described in Section 368(A)(1)(E) of the Code, (i) no gain or loss will be recognized by the Company in connection with the Reverse Split; (ii) no gain or loss will be recognized by holders of Common Stock who exchange their shares of Pre-Split Common Stock for shares of Post-Reverse Split Common Stock, except that holders of Common Stock who receive cash in lieu of fractional shares will be treated as if the fractional shares were distributed to such holders of shares of Pre-Split Common Stock and then redeemed by the Company and will recognize gain or loss for federal income tax purposes on the redemption of the fractional shares equal to the difference, if any, between a holder’s basis in the fractional share and the amount of cash received, which gain or loss will be capital gain or loss and will be a long-term capital gain or loss if the fractional shares were held for more than one year; (iii) the tax basis of the shares of Post-Reverse Split Common Stock received by holders of shares of Pre-Split Common Stock will be the same as the tax basis of the shares of Pre-Split Common Stock exchanged therefor, less the tax basis allocated to fractional share interests; and (iv) the holding period of the shares of Post-Reverse Split Common Stock in the hands of holders of shares of Post-Reverse Split Common Stock will include the holding period of their shares of Pre-Split Common Stock exchanged therefor. The Company expects that less than 5% of the total fair market value of its Common Stock will be converted into cash in lieu of issuing fractional shares of Common Stock.

Interest of Certain Persons In or Opposition to Matters to be Acted Upon

No officer or director has any substantial interest in the Charter Amendments other than in their roles as an officer or director and their ownership of securities issued by the Company and as set forth below.

The Company retained Taglich Brothers, Inc. (the “Placement Agent”) as the Placement Agent for the Securities Offering and Note Conversion, and on an exclusive basis to render financial advisory and investment banking services to the Company in connection with the GSI Acquisition. Compensation for all the foregoing services consisted of a $300,000 success fee for the GSI Acquisition, 1,762,500 shares of Common Stock for the Note Exchange, and $440,000 in cash and warrants to purchase 4,775,000 shares of Common Stock exercisable at $0.08 per share for the Securities Offering. Robert Schroeder, a Director of the Company, is the Vice President of Investment Banking at the Placement Agent.

Householding

Regulations regarding the delivery of copies of information statements to stockholders permit us, banks, brokerage firms and other nominees to send one information statement to multiple stockholders who share the same address under certain circumstances. This practice is known as “householding.” Stockholders who hold their shares through a bank, broker or other nominee may have consented to reducing the number of copies of materials delivered to their address. In the event that a stockholder wishes to revoke a “householding” consent previously provided to a bank, broker or other nominee, the stockholder must contact the bank, broker or other nominee, as applicable, to revoke such consent. If a stockholder wishes to receive a separate information statement, we will promptly deliver a separate copy to such stockholder that contacts us by mail at Intellinetics, Inc., 2190 Dividend Dr., Columbus, Ohio 43228 or on our website at www.intellinetics.com. Any stockholders of record sharing an address who now receive multiple copies of our annual reports, proxy statements and information statements, and who wish to receive only one copy of these materials per household in the future should also contact Investor Relations by mail or telephone as instructed above. Any stockholders sharing an address whose shares of Common Stock are held by a bank, broker or other nominee who now receive multiple copies of our annual reports, proxy statements and information statements, and who wish to receive only one copy of these materials per household, should contact the bank, broker or other nominee to request that only one set of these materials be delivered in the future.

acquisition of graphic sciences, inc.

In accordance with our Articles and Bylaws and the laws of the State of Nevada, our stockholders were not entitled to vote to approve our acquisition of GSI. However, the following information pertaining to the acquisition of GSI is being furnished pursuant to Note A of Schedule 14A and Item 1 of Schedule 14C.

THE COMPANIES

Intellinetics, Inc.

The Company is a document management software and services provider. The Company’s offices are located at 2190 Dividend Dr., Columbus, Ohio 43228, and its telephone number is 614-921-8170. The Company was incorporated in Nevada in 1997. For additional information about the Company and its business, see “Where You Can Find More Information” on the last page of this Information Statement.

Graphic Sciences, Inc.

GSI is a document management company that provides indexing and scanning services, physical document storage, and retrieval services. GSI’s offices are located at 1551 E. Lincoln Ave., Madison Heights, MI 48071, and its telephone number is 248-549-6600.

Services Offered

GSI’s service offerings are as follows:

● 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 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, document scanning, microfilm scanning, and indexing.

● Microfilm and Microfiche. GSI provides microfilming/microfiche, converting scanned images to microfilm or microfiche, and microfilm/microfiche preservation and duplication.

● Box Storage Services. GSI provides physical document storage and retrieval services for its clients.

● Scanning Equipment, Software and Repair. GSI sells and services document image software, document scanners, and microfilm scanners, readers and printers. This is a smaller, slowly declining part of the company’s business.

Employees

GSI operates with 72 full-time employees, including 10 to 15 temps as needed. Labor rates are competitive, and a large portion of employees are lower-paid hourly workers. Document preparation personnel prepare client documents for scanning. GSI operates in two 10-hour shifts, Monday through Friday. Additional hours are possible if workload demands. GSI’s data entry group operates five days a week, 16 hours a day, with expansion as needed by specific projects. Many of GSI’s employees have been with them for many years. GSI’s information technology staff average 25 years of service each. The average length of employment company-wide is 12 years.

Facilities

GSI’s main facility is 36,000 square feet of leased space in Madison Heights. Records storage uses about 20,000 square feet, with the remainder of the space used for production, sales, and administration. In 2016, the company added a second 20,000 square foot building for document storage.

GSI owns and operates an extensive collection of the specialized equipment necessary for scanning images or converting microfilm to digital images. GSI’s digital scanning and image capture devices routinely operate five days per week, 16 hours per day. As needed, operations can be expanded up to 7 days per week, 24 hours per day.

GSI’s logistics department includes a fleet of six vehicles for pickup and delivery of client materials. GSI also has the ability to provide on-site capture operations for clients needing such services.

Customers

While GSI serves both governmental and private customers, governmental contracts generate a majority of its revenues. Over 75% of GSI’s revenues are generated by various municipalities within and subdivisions of the State of Michigan. All such customer relationships are governed by GSI’s contract with the State of Michigan, discussed below. GSI’s second most significant customer accounts for approximately 10% of its revenues.

The State of Michigan Contract

GSI’s contract with the State of Michigan is for five years from June 1, 2018 to May 30, 2023, with a provision for two extensions of one year each. The contract is issued to GSI 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 municipalities, governmental subdivisions, and local and state government agencies access to digital and micrographic conversion services. These entities have the option to perform these conversion services internally if they so choose. Typically, many elect to have these services outsourced to GSI.

All municipalities, subdivisions, and agencies are able to use the services and prices provided under this contract. For billing purposes, the work GSI performs is invoiced to RMS and the end user is invoiced through the State of Michigan accounting system. GSI does not invoice the end user directly, and GSI has a single point of contact for managing billing and receipt for all entities included within the State of Michigan. In effect, the state acts as a reseller of GSI’s services to the other agencies and charges a markup on the amount GSI charges to each municipality, subdivision, or agency.

Market Price and Dividends

Market Information

GSI’s capital stock consists of 3,000 shares of common stock. There has never been any established public trading market for GSI’s stock.

Holders

As of February 27, 2020, there were four (4) holders of GSI’s capital stock. No officers, directors, or other affiliates of the Company were holders of GSI’s capital stock.

Dividends

No dividends on GSI’s common stock were paid in either of the two most recent fiscal years.

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 GSI for the fiscal twelve months ended September 30, 2019, and 2018, and the fiscal three months ended December 31, 2019 and 2018 should be read in conjunction with GSI’s financial statements and the notes to those financial statements that are included elsewhere in this Information Statement.

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.

Company Overview

GSI, with locations in Madison Heights, Oak Park, and Traverse City, Michigan, is a closely held Michigan corporation whose principal business activities consist of providing document imaging services, document storage and retrieval, the sale and service of related document imaging equipment and software to customers located principally in Michigan, Ohio, and Indiana. Multi-year state and local government contracts account for the majority of GSI’s sales. GSI operates a business with sales that are highly concentrated in two customers: the State of Michigan and Quicken Loans.

How We Evaluate GSI’s Performance

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

Recent Developments

In March 2020, the World Health Organization declared the global novel coronavirus disease (COVID-19) outbreak a pandemic. As a result of the spread of COVID-19, economic uncertainties have arisen that are likely to negatively impact the results of operations. Currently, GSI has had to reduce its operations in the State of Michigan to only process those work orders deemed essential by the State of Michigan. However, the Company cannot reasonably estimate at this time the specific extent, duration or full impact that the COVID-19 pandemic will have on its financial condition and operations.

On March 2, 2020, 100% of the Company’s capital stock was sold for a purchase price of approximately $3,500,000 subject to a post-closing net working capital adjustment. In addition to the initial purchase price, three annual potential earn out payments of up to an aggregate of $2,500,000 will be receivable to the sellers over three years if certain gross profit levels are achieved.

Executive Overview of Results

Below are GSI’s key financial results for the fiscal year ended September 30, 2019 (consolidated unless otherwise noted):

Results of Operations

Revenues

GSI reported total revenues of $6,710,309 and $5,356,430 for the twelve months ended September 30, 2019 and 2018, respectively, representing an increase of $1,353,879 or 25%. GSI reported total revenues of $1,837,610 and $1,287,383 for the three months ended December 31, 2019 and 2018, respectively, representing an increase of $550,227 or 43%. The net increase in total revenues year-over-year is primarily attributable to the volume and complexity of work orders received by GSI’s existing customers, including an expansion in sales to its largest customer, the State of Michigan.

Costs of Revenue

The cost of revenues during the twelve months ended September 30, 2019 and 2018 were $3,394,040 and $3,477,929, respectively, representing a slight decrease of $83,889, or 2%. The cost of revenues during the three months ended December 31, 2019 and 2018 were $1,021,316 and $944,601, respectively, representing an increase of $76,715, or 8%. The relative constancy in cost of revenue year-over-year is primarily the result of a relatively unchanged number of production employees and expenses.

Gross Margins

Overall gross margin for the twelve months ended September 30, 2019 and 2018 were 49% and 35%, respectively, representing an increase of 41%. Overall gross margin for the three months ended December 31, 2019 and 2018 were 44% and 27%, respectively, representing an increase of 17%. The increase in gross margin year-over-year is primarily a result of increased efficiency achieved when working on a higher volume of work orders.

Operating Expenses

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $2,273,511 during the twelve months ended September 30, 2019 as compared with $1,781,266 during the twelve months ended September 30, 2018, representing an increase of $492,245 or 28%. The increase in selling, general, and administrative expenses year-over-year was principally related to executive compensation. Selling, general and administrative expenses were $322,610 during the three months ended December 31, 2019 as compared with $268,254 during the three months ended December 31, 2018, representing an increase of $54,354 or 20%. The increase in selling, general, and administrative expenses year-over-year was principally related to professional fees.

Other Expense, Net

Other expense, net, was ($186,604) during the twelve months ended September 30, 2019 as compared with ($141,627) during the twelve months ended September 30, 2018, representing a decrease of $44,977 or 32%. The decrease year-over-year resulted primarily from a gain on lease termination. Other expense, net, was ($26,295) during the three months ended December 31, 2019 as compared with ($44,676) during the three months ended December 31, 2018, representing an increase of $18,381 or 41%.

Liquidity and Capital Resources

GSI has operated with a revolving line of credit and a convertible line of credit. As of September 30, 2019, GSI did not have an outstanding balance with respect to either line of credit.

GSI also operated by issuing notes payable to certain of its shareholders. As of September 30, 2019, GSI had an outstanding balance of $556,401 with respect to shareholder loans. All shareholder loans were paid in full by the Sellers at the time of the closing of the GSI Acquisition.

GSI had no debt as of March 2, 2020, and has not since acquired any.

Cash Provided by Operating Activities.

Net cash provided by or used in operating activities for the twelve months ended September 30, 2019 and 2018, was $673,925 and ($17,951), respectively. During the twelve months ended September 30, 2019, the net cash provided by operating activities was primarily attributable to net income adjusted for net non-cash items of $32,036. During the twelve months ended September 30, 2018, the net cash used in operating activities was primarily attributable to the net loss adjusted for net non-cash items of $25,141. Net cash provided by or used in operating activities for the three months ended December 31, 2019 and 2018, was $139,787 and ($169,862), respectively. During the three months ended December 31, 2019, the net cash provided by operating activities was primarily attributable to net income adjusted for net non-cash items of ($211,167). During the three months ended December 31, 2018, the net cash used in operating activities was primarily attributable to the net loss adjusted for net non-cash items of ($192,212).

Cash Provided/Used by Investing Activities.

Net cash used in investing activities for the twelve months ended September 30, 2019, and 2018 amounted to $91,781 and $13,031, respectively, and was related to the acquisition of property and equipment. Net cash used in investing activities for the three months ended December 31, 2019, and 2018 amounted to $11,923 and $8,511, respectively, and was related to the acquisition of property and equipment.

Capital Expenditures

There were no material commitments for capital expenditures as of September 30, 2019 or December 31, 2019.

Cash Provided/Used by Financing Activities.

Cash provided/used by financing activities consists of proceeds and repayment on GSI’s line of credit and shareholder notes, in addition to payments on capital lease obligations.

Net cash used by financing activities for the twelve months ended September 30, 2019 amounted to $629,730, resulting from payments on the line of credit, shareholder notes, and capital lease obligations. Net cash provided by financing activities for the twelve months ended December 31, 2018 amounted to $56,451, resulting from borrowings from GSI’s line of credit, in addition to smaller payments on shareholder notes and capital lease obligations.

Net cash used by financing activities for the three months ended December 31, 2019 amounted to $20,712 resulting from payments on the shareholder notes, and capital lease obligations. Net cash provided by financing activities for the three months ended December 31, 2018 amounted to $88,132, resulting from borrowings from GSI’s line of credit, in addition to smaller payments on the shareholder notes.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with 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 GSI may differ materially and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, GSI’s future results of operations will be affected.

These critical accounting policies and estimates by our management are set forth in the Notes to the Condensed Financial Statements, Summary of Significant Accounting Policies.

Changes in and Disagreements with Accountants.

Prior to the GSI Acquisition, GSI was not a public reporting company, and it historically engaged Cohen & Company (“Cohen”) as its outside accounting firm. Cohen compiled GSI’s financial statements, but did not audit its financial statements. There were no disagreements between GSI and Cohen on any matter regarding accounting principles or practices during the fiscal years ended September 30, 2019 or 2018, or any subsequent interim period.

There were no reportable events (as that term is used in Item 304(a)(1)(v) of Regulation S-K) between GSI and Cohen occurring during GSI’s fiscal years ended September 30, 2019 or 2018 or any subsequent interim period preceding the date of the GSI Acquisition.

For purposes of the GSI Acquisition, GSI engaged GBQ Partners LLC, the independent registered public accounting firm of the Company, to audit the financial statements of GSI for the two fiscal years ended September 30, 2019 and 2018. There were no disagreements between GSI and GBQ Partners LLC with respect to the preparation of the audited financials.

Graphic Sciences, Inc. Financial Statements

Financial Statements

Graphic Sciences, Inc.

September 30, 2019 and 2018

Contents

To the Board of Directors and Shareholders

Graphic Sciences, Inc.

Madison Heights, Michigan

The accompanying notes are an integral part of the financial statements.

The accompanying notes are an integral part of the financial statements.

The accompanying notes are an integral part of the financial statements.

The accompanying notes are an integral part of the financial statements.

GRAPHIC SCIENCES, INC.