XML 32 R21.htm IDEA: XBRL DOCUMENT

Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2025

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

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 estimates a current estimated credit loss (“CECL”) for accounts receivable and accounts receivable-unbilled. The CECL for receivables are estimated based on the receivable aging category, credit risk of specific customers, past collection history, and management’s evaluation of collectability. Provisions for CECL are classified within selling, general and administrative costs.

The CECL 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 June 30, 2025 and December 31, 2024, our allowance for credit losses was $71,517 and $55,907, respectively.

Changes in the allowance for credit losses for the periods ended June 30, 2025 and 2024 were as follows:

Schedule of Allowance for Credit Losses

	Trade Receivables
As of December 31, 2024	$	(55,907	)
(Provisions) Reductions charged to operating results		(44,189	)
Account write-offs		15,063
As of March 31, 2025	$	(85,033	)
(Provisions) Reductions charged to operating results		11,223
Account write-offs		2,293
As of June 30, 2025	$	(71,517	)

	Trade Receivables
As of December 31, 2023	$	(124,103	)
(Provisions) Reductions charged to operating results		14,588
As of March 31, 2024	$	(109,515	)
(Provisions) Reductions charged to operating results		(10,850	)
As of June 30, 2024	$	(120,365	)

Revenue Recognition

Revenue Recognition

We categorize revenue as 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 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, 2024 filed with the SEC on March 24, 2025.

Contract balances

The following table present changes in our contract assets during the six months ended June 30, 2025 and 2024:

	Balance at Beginning of Period		Billings		Payments Received			Balance at End of Period
Six months ended June 30, 2025
Accounts receivable	$	1,111,504	$	2,245,372	$	97,054		$	(92,637	)
Accounts receivable	$	1,111,504	$	7,720,473	$	(8,060,175	)	$	771,802

Six months ended June 30, 2024
Accounts receivable	$	1,850,375	$	8,889,383	$	(9,290,570	)	$	1,449,188

	Balance at Beginning of Period		Revenue Recognized in Advance of Billings		Billings			Balance at End of Period
Six months ended June 30, 2025
Accounts receivable, unbilled	$	1,296,524	$	2,245,372	$	(2,450,002	)	$	1,091,894

Six months ended June 30, 2024
Accounts receivable, unbilled	$	1,320,837	$	2,972,740	$	(2,810,264	)	$	1,483,313

Deferred contract costs

Sales commissions earned by our sales force on new business is considered an incremental and recoverable cost of obtaining a contract with a customer. Sales commissions for new contracts and incremental sales to existing customers are deferred and then amortized on a straight-line basis over an estimated period of benefit of two years. This period of benefit was determined by taking into consideration term lengths of customer contracts, renewals, changes and enhancements in course offerings, and other factors. As of June 30, 2025 and December 31, 2024, deferred contract costs were $144,113 and $139,696, respectively, and are included in prepaid expenses and other current assets on our condensed consolidated balance sheets.

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 98% of the remaining performance obligations over the next 12 months, with the remainder recognized thereafter. As of June 30, 2025, 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 $61,472. As of December 31, 2024, 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 $44,971. 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 six months ended June 30, 2025 and 2024:

	Balance at							Balance at
	Beginning				Recognized			End of
	of Period		Billings		Revenue			Period
Six months ended June 30, 2025
Contract liabilities: Deferred revenue	$	3,411,852	$	2,989,657	$	(3,808,137	)	$	2,593,372

Six months ended June 30, 2024
Contract liabilities: Deferred revenue	$	2,927,808	$	3,953,386	$	(4,126,009	)	$	2,755,185

Software Development Costs

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, technological 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 $106,317 and $209,171 were capitalized during the three and six months ended June 30, 2025. Such costs in the amount of $88,430 and $198,051 were capitalized during the three and six months ended June 30, 2024.

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 June 30, 2025 and December 31, 2024, our condensed consolidated balance sheets included $665,755 and $670,292, respectively, in other long-term assets.

For the three and six months ended June 30, 2025 and 2024, our expensed software development costs were $184,385 and $359,517, respectively, and $170,822 and $330,553, respectively.

Recently Issued Accounting Pronouncements Not Yet Effective

Recently Issued Accounting Pronouncements Not Yet Effective

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. ASU 2023-09 is effective for us for the period ending March 31, 2026. We do not expect a 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

Advertising

We expense the cost of advertising as incurred. Advertising expense for the three and six months ended June 30, 2025 and 2024 amounted to $23,606 and $53,085, respectively, and $9,426 and $15,403, respectively.

Earnings (Loss) Per Share

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.

For the first quarter 2024, certain options and warrants were in-the-money and others were not. For other periods presented, the six months ended June 30, 2024 and the three and six months ended 2025, we have reported a net loss, therefore, the numerator and the denominator used in computing both basic and diluted net loss per share are the same for those net loss periods as to include dilutive shares would have an anti-dilutive effect.

Income Taxes

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 or benefits 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, 2025 and December 31, 2024, due to the uncertainty of our ability to realize future taxable income.

As of June 30, 2025 and December 31, 2024, we had federal net operating loss carry forwards, which can be utilized to offset future federal income tax of approximately $16.6 million and $15.2 million, respectively. Section 382 of the Internal Revenue Code limits the utilization of net operating losses during certain ownership changes. We have performed an analysis of our ownership changes and have determined that approximately $7.2 million of our net operating losses are subject to an annual limitation. We do not expect that Section 382 will limit the utilization of the net operating loss carry forwards in 2025. A portion of the federal and state net operating loss carry forwards expire at various dates through 2037, and a portion of the net operating loss carry forwards have an indefinite carry forward period. We recorded a valuation allowance against all of our deferred tax assets as of both June 30, 2025 and December 31, 2024. We intend to continue maintaining a full valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability that we are able to actually achieve.

Segment Information

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, the President and Chief Executive Officer, assesses performance and allocates resources based on two operating segments: Document Management and Document Conversion.

The Document Management Segment provides cloud-based and premise-based content services software, including document management and payables automation. 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 K-12 education, public safety, other public sector, healthcare, 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 state, county, and municipal governments. Solutions are sold both directly to end-users and through resellers.

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, as well as how our CODM reviews our operating results in assessing performance and allocating resources. We currently have immaterial intersegment sales. Our CODM evaluates the performance of our segments based on revenues and gross profits. Historically, our selling, general and administrative expenses have been stable and predictable, and further, our CODM primarily considers such expenses in consolidation. Accordingly, our CODM has focused on growing the business while preserving or growing our gross margins, with revenues and gross profits evaluated by segment against targets set by management and the board of directors.

Information by operating segment is as follows:

Schedule of Segment Information

	2025		2024		2025		2024
	For the three months ended June 30,				For the six months ended June 30,
	2025		2024		2025		2024
Revenues
Document Management	$	2,000,526	$	1,859,088	$	3,961,838	$	3,679,508
Document Conversion		2,010,287		2,782,505		4,296,320		5,469,169
Total revenues	$	4,010,813	$	4,641,593	$	8,258,158	$	9,148,677

Cost of revenues
Document Management	$	288,849	$	240,151	$	547,094	$	504,078
Document Conversion		995,407		1,398,463		2,115,307		2,741,976
Total cost of revenues	$	1,284,256	$	1,638,614	$	2,662,401	$	3,246,054

Gross profit
Document Management	$	1,711,677	$	1,618,537	$	3,414,744	$	3,175,430
Document Conversion		1,014,880		1,384,442		2,181,013		2,727,193
Total gross profit	$	2,726,557	$	3,002,979	$	5,595,757	$	5,902,623

Capital additions, net
Document Management	$	124,638	$	104,421	$	234,020	$	215,040
Document Conversion		123,332		166,413		237,884		183,726
Total capital additions, net	$	247,970	$	270,834	$	471,904	$	398,766

	June 30, 2025		December 31, 2024
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

	June 30, 2025		December 31, 2024
Total assets
Document Management	$	8,746,641	$	9,641,347
Document Conversion		8,411,744		8,933,609
Total assets	$	17,158,385	$	18,574,956

Statement of Cash Flows

Statement of Cash Flows

For purposes of reporting cash flows, cash includes cash on hand and demand deposits held by banks.

Reclassifications

Reclassifications

Certain amounts reported in prior filings of the condensed consolidated financial statements have been reclassified to conform to current presentation.