| Summary of Significant Accounting Policies | 3.
Summary of
Significant Accounting Policies Principles
of Consolidation The
condensed 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 Use
of Estimates The
preparation of condensed 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 condensed 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. More detail regarding each category of revenue is contained in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2021 filed with the SEC filed on March 24, 2022. 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 condensed 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 condensed consolidated balance sheets. The
following tables present changes in our contract assets during the three months ended March 31, 2022 and 2021: Schedule of Changes in Contract Assets and Liabilities
Balance at Revenue Billings Balance at
Three months ended March 31, 2022
Accounts receivable, unbilled $ 444,782 $ 700,869 $ (671,665 ) $ 473,986
Three months ended March 31, 2021
Accounts receivable, unbilled $ 523,522 $ 466,310 $ (643,681 ) $ 346,151
Balance at Commissions Paid Commissions Recognized Balance at
Three months ended March 31, 2022
Other contract assets $ 78,556 $ 22,136 $ (14,089 ) $ 86,603
Three months ended March 31, 2021
Other contract assets $ 31,283 $ 10,064 $ (9,225 ) $ 32,122 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 been 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 97 33,547 16,835 The
following table presents changes in our contract liabilities during the three months ended March 31, 2022 and 2021:
Balance at Billings Recognized Balance at
Three months ended March 31, 2022
Contract liabilities: Deferred revenue $ 1,194,649 $ 984,117 $ (1,042,700 ) $ 1,136,066
Three months ended March 31, 2021
Contract liabilities: Deferred revenue $ 996,131 $ 684,140 $ (734,459 ) $ 945,812 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. The Company recorded an allowance of $ 24,000 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 seven to ten years 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 test 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
three month periods ended 2022 or 2021. 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 earn-out 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 condensed 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 condensed 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 be measured
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 $ 29,397
were capitalized during the first quarter 2022.
No such costs were capitalized during the first quarter 2021. 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
year s. At March 31, 2022 and December 31, 2020,
our condensed consolidated balance sheets included $ 64,509
and $ 38,305 ,
respectively, in other long-term assets. For
the three months ended March 31, 2022 and 2021, our expensed software development costs were $ 62,751 102,195 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) No
other Accounting Standards Updates that have been issued but are not yet effective are expected to have a material effect on our future
condensed consolidated financial statements. Advertising We
expense the cost of advertising as incurred. Advertising expense for the three months ended March 31, 2022 and 2021 amounted to $ 448 675 (Loss)
Earnings 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.
The three months ended March 31, 2022 reported a net loss, while the three months ended March 31, 2021 reported net income. We
have outstanding warrants and stock options which have not been included in the calculation of diluted net loss per share for the three
months ended March 31, 2022 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 We
file a consolidated federal income tax return with our subsidiaries. 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 March 31, 2022 and December 31, 2021, due to the uncertainty of our ability to realize future taxable income. 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 ASC 280, “Segment Reporting,” 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
Three months Three months
Revenues
Document Management $ 914,950 $ 735,818
Document Conversion 1,788,562 1,899,401
Total revenues $ 2,703,512 $ 2,635,219
Gross profit
Document Management $ 734,906 $ 587,500
Document Conversion 896,931 1,017,404
Total gross profit $ 1,631,837 $ 1,604,904
Capital additions, net
Document Management $ 1,687 $ 38,117
Document Conversion 54,356 193,582
Total capital additions, net $ 56,043 $ 231,699
March 31, 2022 December 31, 2021
Goodwill
Document Management $ 522,711 $ 522,711
Document Conversion 1,800,176 1,800,176
Total goodwill $ 2,322,887 $ 2,322,887
March 31, 2022 December 31, 2021
Total assets
Document Management $ 2,303,195 $ 2,233,419
Document Conversion 9,686,847 9,728,713
Total assets $ 12,000,042 $ 11,962,132 Statement
of Cash Flows For
purposes of reporting cash flows, cash includes cash on hand and demand deposits held by banks. | 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 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 Addition Revenue Billings Balance at
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 16,835 45,323 The
following table presents changes in our contract liabilities during the years ended December 31, 2021 and 2020:
Balance at Addition Billings Recognized Balance at
Year ended December 31, 2021
Contract liabilities: Deferred revenue $ 996,131 $ - $ 3,700,828 $ (3,502,310 ) $ 1,194,649
Year ended December 31, 2020
Contract liabilities: Deferred revenue $ 754,073 $ 198,659 $ 3,038,446 $ (2,995,047 ) $ 996,131 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 65,927 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 15,000 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 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 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 0 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) 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 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 Year ended
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. |
