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Summary of Significant Accounting Policies | 9 Months Ended
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Sep. 30, 2023
Accounting Policies [Abstract] |
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% of the outstanding voting stock of an investee, except when control is not held by the majority owner. We have two subsidiaries: Intellinetics Ohio and Graphic Sciences. We consider the criteria established under Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 810, “Consolidations” in the consolidation process. All significant intercompany balances and transactions have been eliminated in consolidation. 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 of Period |  |  | 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% of the remaining performance obligations over the next 12 months, with the remainder recognized thereafter. As of September 30, 2023, 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 $27,367. As of December 31, 2022, 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 $74,448. This does not include revenue related to performance obligations that are part of a contract whose original expected duration is one year or less. 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 and $43,771 were capitalized during the three and nine-month period 2022. 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 and $348,051 were capitalized during the three and nine months ended September 30, 2023. Such costs in the amount of $143,943 and $315,148 were capitalized during the three and nine months ended September 30, 2022. 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 and $402,673, respectively, in other long-term assets. For the three and nine months ended September 30, 2023 and 2022, our expensed software development costs were $120,830 and $392,576, respectively, and $42,852 and $157,811, respectively. 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, and the current calculation is reflected in the accompanying condensed consolidated financial statements. 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 and $20,096, respectively, and $10,371 and $19,871, 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 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.

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