| 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 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. 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. The Company
recognizes current estimated credit losses (“CECL”) for accounts receivable and accounts receivable-unbilled. The CECL for trade receivables are
estimated based on the trade receivable aging category, credit risk of specific customers, past collection history, and
management’s evaluation of accounts receivable. Provisions for CECL are classified within selling, general and administrative
costs. Upon
the adoption of FASB ASU No. 2016-13 (CECL model) effective January 1, 2023, Intellinetics, Inc. has revised its methodology for estimating
expected credit losses on financial instruments, specifically trade receivables. This new model requires the recognition of lifetime
expected credit losses at each reporting date, considering past events, current conditions, and reasonable forecasts. In assessing the
credit quality of our portfolio, management utilizes a provision matrix that classifies trade receivables by customer type and age of
receivable. Government and education sector receivables carry a low risk, while a higher risk is attributed to the remaining receivables
as their aging progresses. For receivables with questionable collectability, a specific reserve is assigned. The estimated credit losses
are a reflection of these factors, with the matrix applying percentages to the receivables based on their risk profile, adjusted for
current and expected future conditions. During
the reporting period, the estimate of credit losses may change due to several factors including payment patterns of customers, changes
in customer creditworthiness, and broader economic conditions. Such changes are captured in the financial statements to ensure they accurately
reflect the company’s assessment of credit risk and expected losses at the end of each reporting period. Credit losses have been within
management’s expectations. At September 30, 2023 and December 31, 2022, our allowance for credit losses was $ 114,235
and $ 88,331 ,
respectively. Changes in the allowance for credit losses for the period ended Sep 30, 2023 were as follows: Schedule of Allowance for Credit Losses
Trade Receivables
As of December 31, 2022 $ (88,331 )
(Provisions) Reductions charged to operating results $ (20,649 )
Accounts write-offs $ 1,640
As of March 31, 2023 $ (107,340 )
(Provisions) Reductions charged to operating results $ (6,878 )
Accounts write-offs $ 0
As of June 30, 2023 $ (114,219 )
(Provisions) Reductions charged to operating results $ (31,957 )
Accounts write-offs $ 31,941
As of September 30, 2023 $ (114,235 ) Contract
balances The
following table present changes in our contract assets during the nine months ended September 30, 2023 and 2022: Schedule
of Changes in Contract Assets
Addition
Balance at from Balance at
Beginning acquisition Recognized End of
of Period (Note 4) Billings Revenue Period
Nine months ended September 30, 2023
Accounts receivable $ 1,121,083 $ - - - - $ 12,405,093 $ (12,201,951 ) $ 1,324,225
Nine months ended September 30, 2022
Accounts receivable $ 1,176,059 $ 68,380 $ 10,715,024 $ (11,105,533 ) $ 853,930
Balance
at Beginning of Period Revenue
Recognized in Advance of Billings Billings Balance
at End of Period
Nine
months ended September 30, 2023
Accounts
receivable, unbilled $ 596,410 $ 3,892,301 $ (3,210,911 ) $ 1,277,800
Nine
months ended September 30, 2022
Accounts
receivable, unbilled $ 444,782 $ 2,573,944 $ (2,526,780 ) $ 491,946
Balance
at Beginning Commissions
Paid Commissions
Recognized Balance
at End of Period
Nine
months ended September 30, 2023
Other
contract assets $ 80,378 $ 157,265 $ (99,581 ) $ 138,062
Nine
months ended September 30, 2022
Other
contract assets $ 78,556 $ 102,321 $ (58,123 ) $ 122,754 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 99 27,367 74,448 The
following table presents changes in our contract liabilities during the nine months ended September 30, 2023 and 2022: Schedule
of Contract Liability
Addition
Balance
at from Balance
at
Beginning
acquisition Recognized End
of
of
Period (Note
4) Billings Revenue Period
Nine
months ended September 30, 2023
Contract
liabilities: Deferred revenue $ 2,754,064 $ - $ 5,997,723 $ (5,619,662 ) $ 3,132,125
Nine
months ended September 30, 2022
Contract
liabilities: Deferred revenue $ 1,194,649 $ 860,456 $ 5,560,018 $ (4,616,476 ) $ 2,998,647 Leases We
have made an accounting policy election to not record a right-of-use asset and lease liability for short-term leases, which are defined
as leases with a lease term of 12 months or less. Instead, the lease payments are recognized as rent expense in the general and administrative
expenses on the statement of operations. 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 nine-month period 2023. Such costs in the amounts of $ 0 43,771 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 $ 139,633 348,051 143,943 315,148 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 September 30, 2023 and December 31, 2022, our condensed consolidated balance sheets
included $ 609,399 402,673 For
the three and nine months ended September 30, 2023 and 2022, our expensed software development costs were $ 120,830 392,576 42,852 157,811 Recently
Issued Accounting Pronouncements In
June 2016, the FASB issued ASU No. 2016-13 “Credit Losses - Measurement of Credit Losses on Financial Instruments.” ASU No.
2016-13 significantly changes how entities measure credit losses for most financial assets, including accounts receivable and held-to-maturity
marketable securities, by replacing today’s “incurred loss” approach with an “expected loss” model under
which allowances will be recognized based on expected rather than incurred losses. ASU No. 2016-13 became effective for us in the first
quarter of 2023. The adoption of ASU No. 2016-13 resulted in an initial reduction in the allowance for doubtful accounts of $ 11,662 Advertising We
expense the cost of advertising as incurred. Advertising expense for the three and nine months ended September 30, 2023 and 2022 amounted
to $ 7,853 20,096 10,371 19,871 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
have outstanding warrants and stock options which have not been included in the calculation of diluted net loss per share for the nine
months ended September 30, 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 that 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 September 30, 2023 and December 31, 2022, 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 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 immaterial 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 businesses 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
2023 2022 2023 2022
For the three months ended September 30, For the nine months ended September 30,
2023 2022 2023 2022
Revenues
Document Management $ 1,871,395 $ 1,693,128 $ 5,549,194 $ 4,180,931
Document Conversion 2,377,034 2,166,499 7,144,498 5,797,851
Total revenues $ 4,248,429 $ 3,859,627 $ 12,693,692 $ 9,978,782
Gross profit
Document Management $ 1,590,314 $ 1,427,696 $ 4,639,866 $ 3,488,947
Document Conversion 1,015,277 1,078,489 3,201,997 2,838,093
Total gross profit $ 2,605,591 $ 2,506,185 $ 7,841,863 $ 6,327,040
Capital additions, net
Document Management $ 140,952 $ 145,581 $ 353,202 $ 321,382
Document Conversion - 43,069 78,851 136,669
Total capital additions, net $ 140,952 $ 188,650 $ 432,053 $ 458,051
September 30, 2023 December 31, 2022
Goodwill
Document Management $ 3,989,645 $ 3,989,645
Document Conversion 1,800,176 1,800,176
Total goodwill $ 5,789,821 $ 5,789,821
September 30, 2023 December 31, 2022
Total assets
Document Management $ 10,254,349 $ 10,284,183
Document Conversion 8,972,071 9,658,959
Total assets $ 19,226,420 $ 19,943,142 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 condensed
consolidated financial statements have been reclassified to conform to current presentation. |
