| 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 March 31, 2024 and December 31, 2023, our allowance for credit losses was $ 109,515 124,103 Changes
in the allowance for credit losses for the period ended March 31, 2024 and 2023 were as follows: Schedule of Allowance for Credit Losses
Trade Receivables
As of December 31, 2023 $ (124,103 )
(Provisions) Reductions charged to operating results $ 14,588
Accounts write-offs 1,640
As of March 31, 2024 $ (109,515 )
Trade Receivables
As of December 31, 2022 $ (88,331 )
(Provisions) Reductions charged to operating results $ (21,742 )
Accounts write-offs $ 1,640
As of March 31, 2023 $ (108,433 ) Revenue
Recognition 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, 2023 filed with the SEC filed on March 28, 2024. Contract
balances The
following tables present changes in our contract assets during the three months ended March 31, 2024 and 2023: Schedule of Changes in Contract Assets and Liabilities
Balance at Billings Payments Balance at
Three months ended March 31, 2024
Accounts receivable $ 1,850,375 - $ 4,242,590 - $ (4,161,623 ) - - - $ 1,931,342
Three months ended March 31, 2023
Accounts receivable $ 1,121,083 $ 3,341,583 $ (3,280,143 ) $ 1,182,523
Balance at Revenue Billings Balance at
Three months ended March 31, 2024
Accounts receivable, unbilled $ 1,320,837 $ 1,380,300 $ (1,414,680 ) $ 1,286,457
Three months ended March 31, 2023
Accounts receivable, unbilled $ 596,410 $ 1,336,851 $ (1,045,519 ) $ 887,742
Balance at Commissions Commissions Balance at
Three months ended March 31, 2024
Other contract assets $ 140,165 $ 1,336,851 $ (37,518 ) $ 130,829
Three months ended March 31, 2023
Other contract assets $ 80,378 $ 27,792 $ (27,593 ) $ 80,577 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 35,095 72,212 The
following table presents changes in our contract liabilities during the three months ended March 31, 2024 and 2023:
Balance at Billings Recognized Balance at
Three months ended March 31, 2024
Contract liabilities: deferred revenue $ 2,927,808 $ 1,200,998 $ (1,545,599 ) $ 2,583,207
Three months ended March 31, 2023
Contract liabilities: deferred revenue $ 2,754,064 $ 1,146,380 $ (1,718,168 ) $ 2,182,276 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 $ 109,621 112,208 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 March 31, 2024 and December 31, 2023, our condensed consolidated balance sheets included
$ 665,995 630,979 For
the three months ended March 31, 2024 and 2023, our expensed software development costs were $ 159,731 131,743 Recently
Issued Accounting Pronouncements Not Yet Effective In
November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This
ASU improves financial reporting by requiring disclosure of significant segment expenses that are regularly provided to the chief operating
decision maker (“CODM”) and included with each reported measure of significant profit or loss on an annual and interim basis.
This ASU also requires that a public entity disclose the title and position of the CODM and an explanation of how the CODM uses the reported
measures of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources. The ASU is effective
for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early
adoption permitted. This ASU is required to be applied retrospectively for all prior periods presented in the financial statements. We
are evaluating the adoption impact of this ASU on our condensed consolidated financial statements and related disclosures but do not
expect any material impact upon adoption. In
December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures, which amends the guidance in ASC 740, Income
Taxes. The ASU is intended to improve the transparency of income tax disclosures by requiring (1) consistent categories and greater disaggregation
of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. It also includes certain other amendments
to improve the effectiveness of income tax disclosures. The ASU’s amendments are effective for public business entities for annual
periods beginning after December 15, 2024. Entities are permitted to early adopt the standard “for annual financial statements
that have not yet been issued or made available for issuance.” We are currently evaluating the impact of this ASU but do not expect
any material impact upon adoption. There
are no other accounting standards that have been issued but not yet adopted that we believe could have a material impact on our consolidated
financial statements. Advertising We
expense the cost of advertising as incurred. Advertising expense for the three months ended March 31, 2024 and 2023 amounted to $ 5,977 6,120 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 three
months ended March 31, 2024 and 2023 because to do so would be anti-dilutive. For the first quarter 2024 and 2023, certain options and
warrants were in-the-money and others were not. The three months ended March 31, 2024 reported a net loss, while the three months ended
March 31, 2023 reported net income. For the first quarter 2024, the numerator and the denominator used in computing both basic and diluted
net loss per share 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. 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. 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 The
tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented
below: Schedule of Deferred Tax Assets and Liabilities
March 31, 2024 December 31, 2023
Deferred tax assets
Reserves and accruals not currently deductible for tax purposes $ 84,441 $ 69,676
Amortizable assets 120,946 109,612
Net operating loss carryforwards 4,655,024 4,771,762
Deferred tax assets, gross 4,860,411 4,951,050
Deferred tax liabilities
Amortizable assets (203,414 ) (197,579 )
Property and equipment (202,219 ) (214,698 )
Net Deferred tax assets 4,454,778 4,538,773
Valuation allowance (4,454,778 ) (4,538,773 )
Deferred tax assets,
net $ - $ - As
of March 31, 2024 and December 31, 2023, we had federal net operating loss carry forwards of approximately $ 15,498,000 15,972,479 federal and state net operating loss carry forwards
expire at various dates through 2040, and a portion of the net operating loss carry forwards have an indefinite carry forward period 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
Three months Three months
Revenues
Document Management $ 1,820,420 $ 1,769,483
Document Conversion 2,686,664 2,417,350
Total revenues $ 4,507,084 $ 4,186,833
Gross profit
Document Management $ 1,556,893 $ 1,483,108
Document Conversion 1,342,751 1,162,731
Total gross profit $ 2,899,644 $ 2,645,839
Capital additions, net
Document Management $ 110,619 $ 116,041
Document Conversion 17,313 18,528
Total capital additions, net $ 127,932 $ 134,569
March 31, 2024 December 31, 2023
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
March 31, 2024 December 31, 2023
Total assets
Document Management $ 9,618,219 $ 10,104,004
Document Conversion 9,297,967 8,922,256
Total assets $ 18,916,186 $ 19,026,260 Statement
of Cash Flows For
purposes of reporting cash flows, cash includes cash on hand and demand deposits held by banks. |
