| Summary of Significant Accounting Policies | 5. Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in
conformity with U.S. 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 financial statements and
the reported amounts of revenues and expenses. Actual results could differ from estimated amounts. Significant estimates and assumptions include
valuation allowances related to receivables, the recoverability of long-term assets, depreciable lives of property and equipment,
deferred taxes and related valuation allowances. The Company’s management monitors these risks and assesses its business
and financial risks on a quarterly basis. Concentrations of Credit Risk The Company maintains its cash with high credit
quality financial institutions. At times, the Company’s 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 the Company’s
customer base, along with the different industries, governmental entities and geographic regions, in which the Company’s
customers operate, limits concentrations of credit risk with respect to accounts receivable. The Company does not generally require
collateral or other security to support customer receivables; however, the Company may require its customers to provide retainers,
up-front deposits or irrevocable letters-of-credit when considered necessary to mitigate credit risks. The Company has 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 June 30, 2018 and December 31, 2017, the Company’s allowance
for doubtful accounts was $12,609 and $16,443, 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. Impairment of Long-Lived Assets The Company accounts for the impairment and
disposition of long-lived assets in accordance with Accounting Standards Codification (“ASC”) Topic 360, “Property,
Plant, and Equipment.” The Company 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. Share-Based Compensation The Company accounts for stock-based payments
to employees in accordance with ASC 718, “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. The Company accounts for stock-based payments
to non-employees in accordance with ASC 718 and ASC 505-50, “Equity-Based Payments to Non-Employees,” which requires
that such equity instruments are recorded at their fair value on the measurement date, with the measurement of such compensation
being subject to periodic adjustment as the underlying equity instruments vest. The grant date fair value of stock option awards
is recognized in earnings as share-based compensation cost over the requisite service period of the award using the straight-line
attribution method. The Company estimates 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 the Company’s 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. On January 5, 2018, the Company issued 302,629
new Shares of restricted common stock to directors of the Company in accordance with the 2015 Intellinetics Equity Incentive Plan
(the “2015 Plan”). Stock compensation of $57,500 was recorded on the issuance of the Shares. For the three and six months ended June 30,
2018, the Company recorded Share-based compensation to employees of $66,223 and $124,310, respectively, and to non-employees of
$0 and $57,500, respectively. For the three and six months ended June 30, 2017, the Company recorded Share-based compensation to
employees of $37,303 and $66,186, respectively, and to non-employees of $0 and $57,500, respectively. Software Development Costs Software development costs for software to
be sold or otherwise marketed incurred prior to the establishment of technological feasibility are expensed as incurred. The Company
defines establishment of technological feasibility as the completion of a working model. Software development costs incurred subsequent
to the establishment of technological feasibility through the period of general market availability of the product are capitalized,
if material. To date, all software development costs for software to be sold or otherwise marketed have been expensed as incurred.
In accordance with Accounting Standards Codification (“ASC”) 350-40, “Internal-Use Software,” the Company
capitalizes purchase and implementation costs of internal use software. No such costs were capitalized during the periods presented. Research and Development 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. We expense our software development costs as incurred. For the three
and six months ending June 30, 2018 and 2017, our research and development costs were $100,631 and $207,086, and $80,728 and $127,184,
respectively. Recent Accounting Pronouncements Leases In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842) (“ASU 2016-02”), which modified lease accounting for both lessees and lessors to increase transparency
and comparability by recognizing lease assets and lease liabilities by lessees for those leases classified as operating leases
under previous accounting standards and disclosing key information about leasing arrangements. ASU 2016-02 will be effective for
the Company beginning in its first quarter of 2020, and early adoption is permitted. The Company is currently evaluating the timing
of its adoption and the impact of adopting ASU 2016-02 on its consolidated financial statements. Revenue Recognition Effective January 1, 2018, we adopted Accounting
Standards Codification, Topic 606, Revenue from Contracts with Customers (“ASC 606”), using the full retrospective
transition method. Adoption of the standard using the full retrospective method required us to restate certain previously reported
results. In accordance with ASC 606, revenue is recognized
when a 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. The core principle of the standard is that
we should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which we expect to be entitled in exchange for those goods or services. To achieve that core principle, we should apply the
following five step model:
1. Identify the contract with the customer;
2. Identify the performance obligation in the contract;
3. Determine the transaction price;
4. Allocate the transaction price to the performance obligation in the contract; and
5. Recognize revenue when (or as) each performance obligation is satisfied.
1) Identify the contract with the customer A contract with a customer exists
when (i) we enter into an enforceable contract with a customer that defines each party’s rights regarding the goods or services
to be transferred and identifies the related payment terms, (ii) the contract has commercial substance, and (iii) we determine
that collection of substantially all consideration for goods and services that are transferred is probable based on the customer’s
intent and ability to pay the promised consideration. We apply judgment in determining the customer’s intent and ability
to pay, which is based on a variety of factors including the customer’s historical payment experience, or in the case of
a new customer, published credit and financial information pertaining to the customer, and other assessment measures. We evaluate contract modifications
for the impact on revenue recognition if they have been approved by both parties such that the enforceable rights and obligations
under the contract have changed. Contract modifications are either accounted for using a cumulative effect adjustment or prospectively
over the remaining term of the arrangement. The determination of which method is more appropriate depends on the nature of the
modification, which we evaluate on a case-by-case basis. We combine two or more contracts
entered into at or near the same time with the same customer and account for them as a single contract if (i) the contracts are
negotiated as a package with a common commercial objective, (ii) the amount of consideration to be paid in one contract depends
on the price or performance of the other contract, or (iii) some or all of the goods or services in one contract would be combined
with some or all of the goods and services in the other contact into a single performance obligation. If two or more contracts
are combined, the consideration to be paid is aggregated and allocated to the individual performance obligations without regard
to the consideration specified in the individual contracts.
2) Identify the performance obligation in the contract Performance obligations promised
in a contract are identified based on the goods and services that will be transferred to the customer that are both capable of
being distinct, whereby the customer can benefit from the good or service either on its own or together with other available resources,
and are distinct in the context of the contract, whereby the transfer of the good or service is separately identifiable from other
promises in the contract. To the extent a contract includes multiple promised goods and services, we apply judgment to determine
whether promised goods and services are capable of being distinct and distinct in the context of the contract. If these criteria
are not met, the promised goods and services are accounted for as a combined performance obligation. To identify performance obligation,
we consider all of the goods or series promised in a contract regardless of whether they are explicitly stated or are implied by
customer business practices.
3) Determine the transaction price The transaction price is determined
based on the consideration to which we expect to be entitled in exchange for transferring promised goods and series to the customer,
excluding amounts collected on behalf of third parties such as sales taxes. Determining the transaction price requires significant
judgment. To the extent the transaction price includes variable consideration, we estimate the amount of variable consideration
that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending
on the nature of the variable consideration. Variable consideration is included in the transaction price if, in our judgment, it
is probable at a significant future reversal of cumulative revenue recognized under the contract will not occur. Any estimates,
including the effect of the constraint on variable consideration, are evaluated at each reporting period. The amount of consideration
is not adjusted for a significant financing component if the time between payment and the transfer of the related good or service
is expected to be one year or less under the practical expedient in ASC 606-10-32-18. Our revenue arrangements are typically accounted
for under such expedient, as payment is typically due within 30 to 60 days. As of June 30, 2018, none of our contracts included
a significant financing component.
4) Allocate the transaction price to the performance obligation in the contract If the contract contains a single
performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain
multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative
standalone selling price (“SSP”) basis unless the transaction price is variable and meets the criteria to be allocated
entirely to a performance obligation or to a distinct service that forms part of a single performance obligation. The consideration
to be received is allocated among the separate performance obligations based on relative SSPs. The SSP is the price at which we
would sell a promised good or service separately to a customer. The best estimate of SSP is the observable price of a good or service
when we sell that good or service separately. A contractually stated price or a list price for a good or service may be the SSP
of that good or service. We use a range of amounts to estimate SSP when we sell each of the goods and services separately and need
to determine whether there is a discount that needs to be allocated based on the relative SSP of the various goods and services.
In the instance where SSP is not directly observable, such as when we do not sell the product or service separately, we typically
determine the SSP using an adjusted market assessment approach using information that may include market conditions and other observable
inputs. We typically have more than one SSP for individual goods and services due to the stratification of those goods and services
by customers and circumstances. In these instances, we may use information such as the nature of the customer and distribution
channel in determining the SSP.
5) Recognize revenue when or as each performance obligation is satisfied We satisfy performance obligation
either over time or at a point in time as discussed in further detail below. Revenue is recognized over time if 1) the customer
simultaneously receives and consume the benefits provided by our performance, 2) our performance creates or enhances an asset that
the customer controls as the asset is created or enhanced, or 3) our performance does not create an asset with an alternative use
to us and we have an enforceable right to payment for performance completed to date. If we do not satisfy a performance obligation
over time, the related performance obligation is satisfied at a point in time by transferring the control of a promised good or
service to a customer. We categorize revenue as Software, Software
as a Service, Software Maintenance Services, Professional Services, and Third Party Services. In addition to the general revenue
recognition policies described above, specific revenue recognition policies apply to 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 the Company’s 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 the Company’s 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 ratably 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 the
Company’s 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. Software support and bug fixes are considered distinct services. However, these distinct
services are considered a single performance obligation consisting of a series of distinct services that are substantial the same
and have the same pattern of transfer to the customer. These revenues are recognized ratably over the term of the maintenance contract. d) Sale of Professional Services Professional services consist principally of
revenues from consulting, advisory services, training and customer assistance with management and uploading of data into the Company’s
applications. We recognize professional services revenue over time as the services are delivered using an input method (i.e., labor
hours incurred as a percentage of total labor hours budgeted), provided all other revenue recognition criteria are met. e) Sale of Third Party Services Sale of third party services consist principally
of third party software and/or equipment as a pass through of software and equipment purchased from third parties at the request
of customers. We recognize revenue from third party services at a point in time upon delivery, provided all other revenue recognition
criteria are met. f) Arrangements with multiple performance
obligations In addition to selling software licenses, software
as a service, software maintenance services, professional services, and third party services on a stand-alone basis, a significant
portion of our contracts include multiple performance obligations. Various combinations of multiple performance obligations and
our revenue recognition for each are describes as follows:
● Software licenses and software maintenance. When software licenses and software maintenance contracts are sold together, the software licenses and software maintenance are generally considered distinct performance obligations. The transaction price is allocated to the software licenses and the software maintenance based on relative SSP. Revenue allocated to the software licenses is recognized at a point in time upon delivery, provided all other revenue recognition criteria are met. Revenue allocated to the software maintenance is recognized over time on a straight-line basis over the contract period.
● Software licenses, software maintenance, and professional services. When software licenses, software maintenance, and professional services contracts are sold together, we account for the individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations based on relative SSP. Revenue allocated to the software maintenance is recognized over time on a straight-line basis over the contract period. We account for the software licenses and professional services as a combined performance obligation, as the software as a service solution is generally highly dependent on, and interrelated with, the associated professional services and therefore are not distinct performance obligation. Revenue for the combined performance obligation is recognized over time as the services are delivered using an input method (i.e., labor hours incurred as a percentage of total labor hours budgeted).
● Software as a service and professional services. When software as a service and professional services contracts are sold together, we account for the software as a service and professional services as a combined performance obligation, as the software as a service solution is generally highly dependent on, and interrelated with, the associated professional services and therefore are not distinct performance obligation. Revenue for the combined performance obligation is recognized ratably over the contract period. However, when some portion of the professional services are distinct, we account for the such individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations based on relative SSP. Revenue allocated to the software as a service and the interrelated portion of the professional services is recognized ratably over the contract period. The remaining, distinct, professional services performance obligation is recognized over time using an input method (i.e., labor hours incurred as a percentage of total labor hours budgeted).
● Third party services and other performance obligations. When third party services are sold together with other performance obligations, we account for the performance obligations related to third party services separately, as they are distinct. We recognize revenue from third party services at a point in time upon delivery, provided all other revenue recognition criteria are met. Other performance obligations are recognized as noted above. 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
the deferred revenue below 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 unbilled receivables, which are included
in prepaid expenses and other assets. 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 or noncurrent based on the
timing of when we expect to recognize revenue. The following table present changes in our
contract assets and liabilities during the six months ended June 30, 2018 and 2017:
Balance at Beginning of Period
Revenue Recognized in Advance of Billings Billings
Balance at End of Period
Six months ended June 30, 2018
Contract assets: Unbilled receivables $ 89,847 $ 147,126 $ (168,436 ) $ 68,537
Six months ended June 30, 2017
Contract assets: Unbilled receivables $ 94,153 $ 208,316 $ (195,089 ) $ 107,380
Balance at Beginning of Period Billings Recognized Revenue
Balance at End of Period
Six months ended June 30, 2018
Contract liabilities: Deferred revenue $ 708,130 $ 1,294,906 $ (1,395,045 ) $ 607,991
Six months ended June 30, 2017
Contract liabilities: Deferred revenue $ 666,288 $ 1,478,524 $ (1,559,799 ) $ 585,013 h) Remaining performance obligations 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 75% of the remaining performance obligations over the next 12 months, with the remainder
recognized thereafter. As of June 30, 2018, 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 $144,884. This does not
include revenue related to performance obligations that are part of a contract whose original expected duration is one year or
less. i) Rights of return and customer acceptance The Company does not generally offer 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 The Company executes certain sales contracts
through resellers and distributors (collectively, “Resellers”). The Company recognizes revenues relating to sales through
Resellers on the sell-through method (when reseller executes sale to end customer) when all the recognition criteria have been
met. In addition, the Company assesses 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 The Company recognizes an “other asset”
for 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 a contract were immaterial during the periods presented and are included in other
current and long-term assets on our consolidated balance sheets. l) Impact of ASC 606 adoption to reported
results Adoption of the new revenue standard impacted
our reported results as follows:
For the Three Months Ended June, 2017
As Reported New Revenue Standard Adjustment As Adjusted
Condensed Consolidated Statements of Operations:
Revenues $ 737,354 $ (85 ) $ 737,269
Operating expenses 685,319 3,152 688,471
Net loss (299,282 ) (3,237 ) (302,519 )
Basic and diluted net loss per share (0.02 ) - (0.02 )
For the Six Months Ended June, 2017
As Reported New Revenue Standard Adjustment As Adjusted
Condensed Consolidated Statements of Operations:
Revenues $ 1,447,748 $ (2,862 ) $ 1,444,886
Operating expenses 1,505,447 1,860 1,507,307
Net loss (747,990 ) (4,722 ) (752,712 )
Basic and diluted net loss per share (0.04 ) - (0.04 )
For the Twelve Months Ended December 31, 2017
As Reported
New Revenue Standard Adjustment As Adjusted
Condensed Consolidated Statements of Operations:
Revenues $ 2,623,441 $ (3,334 ) $ 2,620,107
Operating expenses 3,031,555 2,694 3,034,249
Net loss (1,359,337 ) (6,028 ) (1,365,365 )
Basic and diluted net loss per share (0.08 ) - (0.08 )
June 30, 2017
As Reported
New Revenue Standard Adjustment As Adjusted
Condensed Consolidated Balance Sheets:
Accounts payable and accrued expenses $ 703,422 $ 3,426 $ 706,848
Deferred revenue 581,323 3,690 585,013
Accumulated deficit (15,702,740 ) (7,116 ) (15,709,856 )
December 31, 2017
As Reported
New Revenue Standard Adjustment As Adjusted
Condensed Consolidated Balance Sheets:
Accounts payable and accrued expenses $ 471,200 $ 4,259 $ 475,459
Deferred revenue 703,971 4,159 708,130
Accumulated deficit (16,314,087 ) (8,418 ) (16,322,505 ) Advertising The Company expenses the cost of advertising
as incurred. Advertising expense for the three and six months ended June 30, 2018 and 2017 amounted to approximately $10,425 and
$13,926, and $7,255 and $19,255, respectively. Earnings (Loss) Per Share Basic earnings per share is computed by dividing
net income by the weighted average number of shares of common stock outstanding during the period. The Company has outstanding
stock options which have not been included in the calculation of diluted net loss per share because to do so would be anti-dilutive.
As such, the numerator and the denominator used in computing both basic and diluted net loss per share for each period are the
same. Income Taxes The Company and its subsidiary 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 June 30, 2018 and 2017, due to the uncertainty of our ability to realize future taxable income. The Company accounts for uncertainty in income
taxes in its financial statements as required under ASC 740, Accounting for Uncertainty in Income Taxes. The Tax Cuts and Jobs Act (The Act) was enacted
on December 22, 2017. The Act reduces the US federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition
tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced
earnings. There are other provisions of the Act that will affect the determination of income tax for the Company in future years. The Company has remeasured certain deferred
tax assets and liabilities as of the enactment date of the Act based on the rates at which they are expected to reverse in the
future, which is generally 21%. The amount recorded related to the remeasurement of our deferred tax balance was approximately
$1,840,000, which was offset by a reduction in the valuation allowance. Statement of Cash Flows For purposes of reporting cash flows, cash
includes cash on hand and demand deposits held by banks. Reclassifications Certain amounts in the 2017 consolidated financial
statements have been reclassified to conform to current year presentation. |
