SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended Commission
September 30, 2000 File No. 0-22405
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Information Analysis Incorporated
(Exact name of Registrant as specified in its charter)
Virginia 54-1167364
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
11240 Waples Mill Road, #400
Fairfax, VA 22030
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number,
including area code) (703)383-3000
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Indicate by check mark whether the Registrant(1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
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State the number of shares outstanding of each of the issuer's classes of common
stock, as of October 31, 2000:
Common Stock, par value $.01, 9,701,473 shares
Transitional small business disclosure format.
Yes No x
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INFORMATION ANALYSIS INCORPORATED
FORM 10-QSB
Index
Page
PART I. FINANCIAL INFORMATION Number
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
September 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations
for the three months and nine months ended
September 30, 2000 and September 30, 1999 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 2000 and
September 30, 1999 5
Notes to Unaudited Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
2
Information Analysis Incorporated and Subsidiaries
Consolidated Balance Sheets
As of As of
September 30, 2000 December 31, 1999
(unaudited) (audited)
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ASSETS
Current assets:
Cash and cash equivalents $ 156,820 $ 133,468
Accounts receivable, net 1,467,992 1,902,244
Employee advance -- 6,230
Prepaid expenses 131,592 129,995
Other receivables 65,366 97,299
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Total current assets 1,821,770 2,269,236
Fixed assets, net 129,453 279,787
Equipment under capital leases, net 7,926 11,553
Capitalized software, net 530,189 463,653
Other receivables 38,142 28,992
Other assets 58,275 58,275
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Total assets $ 2,585,755 $ 3,111,496
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LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,431,731 $ 1,491,179
Accrued payroll and related liabilities 228,470 276,871
Other accrued liabilities 132,594 727,904
Revolving line of credit 655,991 501,500
Current maturities of capital lease obligations 1,105 6,936
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Total current liabilities 2,449,891 3,004,390
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Total liabilities 2,449,891 3,004,390
Common stock, par value $0.01, 30,000,000 shares authorized;
11,206,084 and 10,723,284 shares issued, 9,701,473 and
9,218,673 outstanding at September 30, 2000 and
December 31, 1999, respectively 112,061 107,233
Additional paid in capital 13,915,702 13,763,904
Accumulated Deficit (13,037,586) (12,909,718)
Less treasury stock; 1,504,611 shares at cost (854,313) (854,313)
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Total stockholders' equity 135,864 107,106
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Total liabilities and stockholders' equity $ 2,585,755 $ 3,111,496
============ ============
See accompanying notes
3
Information Analysis Incorporated and Subsidiaries
Consolidated Statements of Operations
Three months ended September 30,
(unaudited) 2000 1999
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Net sales:
Professional services $1,257,921 $ 1,548,178
Software sales 127,701 549,767
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Total sales 1,385,622 2,097,945
Cost of goods sold and services provided:
Cost of professional services 854,137 1,037,233
Cost of software sales 176,788 791,447
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Total cost of goods sold and services provided 1,030,925 1,828,680
Gross margin 354,697 269,265
Operating expenses:
Selling, general and administrative 467,637 702,495
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Total operating expenses 467,637 702,495
Operating loss (112,940) (433,230)
Other (expense) (17,255) (32,301)
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Loss before income taxes (130,195) (465,531)
Provision for income taxes -- --
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Net loss $ (130,195) $ (465,531)
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Net loss per common share:
Basic $(0.01) $(0.07)
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Diluted $(0.01) $(0.07)
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Weighted average common shares outstanding:
Basic 9,589,299 6,918,673
Diluted 9,589,299 6,918,673
Nine months ended September 30,
(unaudited) 2000 1999
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Net sales:
Professional services $3,887,652 $ 6,988,853
Software sales 733,639 1,150,366
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Total sales 4,621,291 8,139,219
Cost of goods sold and services provided:
Cost of professional services 2,792,988 4,713,115
Cost of software sales 464,948 1,528,403
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Total cost of goods sold and services provided 3,257,936 6,241,518
Gross margin 1,363,355 1,897,701
Operating expenses:
Selling, general and administrative 1,467,263 2,943,048
Research and development -- 72,935
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Total operating expenses 1,467,263 3,015,983
Operating loss (103,908) (1,118,282)
Other (expense) (23,960) (104,662)
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Loss before income taxes (127,868) (1,222,944)
Provision for income taxes -- --
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Net loss $ (127,868) $(1,222,944)
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Net loss per common share:
Basic $(0.01) $(0.18)
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Diluted $(0.01) $(0.18)
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Weighted average common shares outstanding:
Basic 9,535,635 6,910,713
Diluted 9,535,635 6,910,713
See accompanying notes
4
Information Analysis Incorporated and Subsidiaries
Consolidated Statement of Cash Flows
For the nine Months Ended September 30,
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(unaudited) 2000 1999
Net (loss) $(127,868) $(1,222,944)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation 150,334 222,819
Amortization 3,627 15,547
Amortization of Capitalized Software 115,911 821,253
Loss on sale of fixed assets -- 25,361
Changes in operating assets and liabilities
Accounts receivable 434,252 1,854,848
Other receivables and prepaid expenses 27,416 (12,238)
Accounts payable and accrued expenses (703,159) (1,167,084)
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Net cash (used) provided by operating activities $ (99,487) $ 562,038
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Cash flows from investing activities
Acquisition of furniture and equipment -- (1,961)
Increase in capitalized software (182,447) --
Proceeds from sale of fixed assets -- 55,566
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Net cash (used) provided in investing activities (182,447) 53,605
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Cash flows from financing activities
Net borrowing (payments) under bank revolving line of credit 154,491 (669,500)
Principal payments on capital leases (5,831) (6,559)
Net Proceeds from private placement 125,000 --
Proceeds from exercise of stock options and warrants 31,626 19,774
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Net cash provided (used) by financing activities 305,286 (656,285)
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Net increase (decrease) in cash and cash equivalents 23,352 (40,642)
Cash and cash equivalents at beginning of the period 133,468 176,399
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Cash and cash equivalents at end of the period $ 156,820 $ 135,757
========= ===========
Supplemental cash flow Information
Interest paid $ 42,617 $ 112,049
See accompanying notes
5
PART I
Item 1. Financial Statements.
INFORMATION ANALYSIS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
The accompanying consolidated financial statements have been prepared by
Information Analysis Incorporated ("IAI" or the "Company") pursuant to the rules
and regulations of the Securities and Exchange Commission. Financial information
included herein is unaudited, however, in the opinion of management, all
adjustments (which include normal recurring adjustments) considered necessary
for a fair presentation have been made. Certain information and footnote
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations, but the Company believes that the
disclosures made are adequate to make the information presented not misleading.
For more complete financial information, these financial statements should be
read in conjunction with the audited financial statements and notes thereto for
the year ended December 31, 1999 included in the Company's annual report on Form
10-KSB. Results for interim periods are not necessarily indicative of the
results for any other interim period or for the full fiscal year.
Cautionary Statement Regarding Forward-Looking Statements
This Form 10-QSB contains forward-looking statements regarding the Company's
business, customer prospects, or other factors that may affect future earnings
or financial results that are subject to the safe harbor created by the Private
Securities Litigation Reform Act of 1995. Such statements involve risks and
uncertainties which could cause actual results to vary materially from those
expressed in the forward-looking statements. Investors should read and
understand the risk factors detailed in the Company's 10-KSB for the fiscal year
ended December 31, 1999 and in other filings with the Securities and Exchange
Commission.
6
Net Income Per Share
Earnings per share are presented in accordance with SFAS No. 128, "Earnings Per
Share." This statement requires dual presentation of basic and diluted earnings
per share on the face of the income statement. Basic earnings per share excludes
dilution and is computed by dividing income available to common shareholders by
the weighted-average number of shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock.
The following is a reconciliation of the amounts used in calculating basic and
diluted net income per common share.
Per Share
Income Shares Amount
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(dollars in thousand)
Basic net income per common share for the
nine months ended September 30, 2000:
Income available to common stockholders $ (128) 9,535,635 $(0.01)
Effect of dilutive stock options -- --
Diluted net income per common share for
the nine months ended September 30, 2000: $ (128) 9,535,635 $(0.01)
Basic net income per common share for the
nine months ended September 30, 1999:
Income available to common stockholders $(1,223) 6,910,713 $(0.18)
Effect of dilutive stock options -- --
Diluted net income per common share for
the nine months ended September 30, 1999: $(1,223) 6,910,713 $(0.18)
Basic net income per common share for the
three months ended September 30, 2000:
Income available to common stockholders $ (130) 9,589,299 $(0.01)
Effect of dilutive stock options
Diluted net income per common share for -- --
the three months ended September 30, 2000: $ (130) 9,589,299 $(0.01)
Basic net income per common share for the
three months ended September 30, 1999:
Income available to common stockholders $ (466) 6,918,673 $(0.07)
Effect of dilutive stock options
Diluted net income per common share for -- --
the three months ended September 30, 1999: $ (466) 6,918,673 $(0.07)
7
Item 2. Management's Discussion and Analysis of Financial Condition or Plan of
Operation.
Overview
Prior to mid-1999, the Company was primarily dedicated to solving Year 2000
problems by providing software and services. Since the latter part of 1999 the
Company's main focus has been modernizing client information systems and
developing Web-based solutions. The Company primarily applies its technology,
services and experience to legacy software migration and modernization. The
arrival of the Internet and Intranet technology has offered a different approach
at collecting and processing large volumes of user transactions, processes which
were the forte of older legacy systems. The Company has been using its
expertise in legacy systems to develop solutions that allow these legacy systems
to interface with the Web.
Three Months Ended September 30, 2000 Versus Three Months Ended September 30,
1999
Revenue
IAI's revenues in the third quarter of fiscal 2000 were $1.4 million,
compared to $2.1 million in the third quarter of fiscal 1999, a decrease of
34.0%. Professional services revenues were $1.3 million versus $1.5 million, a
decrease of 18.7%, and product revenues were $0.1 million versus $0.5 a decrease
of 76.8%. The decrease in revenue for services and product continues to be a
result of diminished sales across the board for Year 2K related projects during
the third quarter of fiscal 2000 as compared to the same quarter in 1999.
Gross margin
Gross margins were $0.4 million or 25.6% of sales, in the third
quarter of fiscal 2000 versus $0.3 million, or 12.8% of sales, in the third
quarter of fiscal 1999. Of the $0.4 million in 2000, $0.4 million was
attributable to professional services and ($0.0 million) was due to software
sales. Gross margins as a percentage of sales were 32.1% for professional
services and (38.4%) for software sales. In the third quarter of 1999, the
Company reported gross margins of approximately 33.0% for professional services
and (44.0%) for software. The increase in percentages for gross margins in the
third quarter of fiscal 2000 is primarily attributable to Year 2K fixed price
contracts in 1999 that no longer exist, which contained overall lower margins.
Selling, General & Administrative (SG&A)
SG&A was $0.5 million, or 33.7% of revenues, in the third quarter of
2000 versus $0.7 million, or 33.5% of revenues, in the third quarter of 1999, a
decrease in expenses of 33.4%. The decrease is attributable to the Company's
elimination of its marketing and support expenses associated with Year 2K
services and product.
Profit
The Company reported an operating loss of $0.1 million in the third
quarter of 2000 compared to an operating loss of $0.5 million in the third
quarter of 1999. The primary cause of the improvement was a combination of
higher gross margin percentages, lower SG&A and the discontinued amortization of
UNICAST capitalized software which was fully written-off by year-end 1999.
8
Nine Months Ended September 30, 2000 Versus nine Months Ended September 30, 1999
Revenue
IAI's revenues in the first nine months of fiscal 2000 were $4.6
million, compared to $8.1 million in the first nine months of fiscal 1999, a
decrease of 43.2%. Professional services revenues were $3.9 million versus $7.0
million , a decrease of 44.4%, and product revenues were $0.7 million versus
$1.2 million , a decrease of 36.2%. The decrease in revenues for both
professional services and product sales is a result of diminshed sales for Year
2K related projects.
Gross margin
Gross margins were $1.4 million or 29.5% of sales, in the first nine
months of fiscal 2000 versus $1.9 million, or 23.3% of sales, in the first nine
months of fiscal 1999. Of the $1.4 million in 2000, $1.1 million was
attributable to professional services and $0.3 million was due to software
sales. Gross margins as a percentage of sales were 28.2% for professional
services and 36.6% for software sales for 2000, versus 32.6% for professional
services and (32.9%) for software sales in 1999. The increase in gross margins
as a whole is attributable to the discontinuation of Year 2K related projects
which contained lower overall margins.
Selling, General & Administrative
SG&A was $1.5 million, or 31.8% of revenues, for the nine months
ending 2000 versus $3.0 million, or 36.2% of revenues, for the nine months
ending 1999, a decrease in expenses of 50.1%. The decrease is attributable to
the Company's elimination of its marketing and support expenses associated with
Year 2K services and product.
Research and Development
No R&D expenditures were incurred in the first nine months of fiscal
2000 versus $72,935 R&D expenditures in the first nine months of fiscal 1999.
Profit
The Company reported an operating loss of $0.1 million for the first
nine months of fiscal 2000 compared to an operating loss of $1.2 million, for
the first nine months of 1999. In general, the Company experienced a loss
through the third quarter of 2000. The decrease in operating loss over the first
nine months for 2000, versus the same period for 1999 is mainly attributable to
the combination of higher gross margin percentages, lower SG&A and the
discontinued amortization of UNICAST capitalized software which was fully
written-off by year-end 1999.
Liquidity and Capital Resources
Through the first nine months of 2000, the Company financed its operations from
current collections and through its bank line of credit. Cash and cash
equivalents at September 30, 2000 were $156,820 compared to $135,757 at
September 30, 1999. As of September 30, 2000 the Company had an outstanding
balance on its line of credit of $655,991.
The Company is in default with its line of credit with First Virginia Bank as a
result of the Company's failure to meet certain financial tests. However, a
forbearance agreement between the Company and First Virginia Bank is in effect
which effectively extends the line of credit of $1,000,000 to December 31, 2000.
The Company is in negotiations with various organizations to obtain a new line
of credit.
If revenue continues at curent levels the Company believes that it
will derive sufficient cash flow to continue to pay all essential expenses which
are required to operate the business. Any material reduction in revenue could
have a material adverse effect on the Company's operational
9
capabilities. The Company cannot be certain that there will not be a need for
additional cash resources at some point in fiscal 2000. Accordingly, the Company
may from time to time consider additional equity offerings to finance business
expansion. The Company is uncertain that it will be able to raise additional
capital.
The Company has no material commitments for capital expenditures.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not aware of any legal proceedings against it at this time.
Item 2. Changes in Securities
During the third quarter of 2000, the Company issued 100,000 shares of its
common stock as a contingent payment against the outstanding balance of $170,000
owed to Cornell Technical Services for services rendered. The shares have since
been registered under a SB-2 registration statement that has been declared
effective. The issuance was made in order to encourage Cornell Technical
Services to defer collection efforts until the Company was able to make final
payment of this debt. Both companies agreed that any proceeds Cornell
Technical Services realizes from the sale of the shares will be applied against
the amount that the Company owes. There have been no reported sales of any of
these shares. The Company relied upon Section 4(2) of the Securities Act of
1933, as amended, in connection with the issuance of unregistered securities to
Cornell Techncial Services.
During the third quarter of 2000, the Company issued 20,000 shares of its
common stock as a contingent payment against the outstanding balance of $46,000
owed to Brendan Dawson under his previous employment agreement with the Company.
The shares have since been registered under a SB-2 registration statement that
has been declared effective. The issuance was made in order to encourage Mr.
Dawson to defer collection efforts until the Company was able to make final
payment of this debt. The Company and Mr. Dawson have agreed that any proceeds
that Mr. Dawson realizes from the sale of any of the shares will be applied
against the amount owed Mr. Dawson. There have been no reported sales of any of
these shares. The Company relied upon Section 4(2) of the Securities Act of
1933, as amended, in connection with the issuance of unregistered securities to
Mr. Dawson.
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27.1, "Financial Data Schedule" is attached.
(b) No reports on Form 8-K were filed for the quarter for which this report is
filed.
10
SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Information Analysis Incorporated
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(Registrant)
Date: November 14, 2000 By: /s/ Sandor Rosenberg
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Sandor Rosenberg, Chairman of the
Board and President
By: /s/ Richard S. DeRose
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Richard S. DeRose, Executive Vice
President and Treasurer
11
INDEX TO EXHIBITS
Exhibit No. Description Location
27.1 Financial Data Schedule Filed with this Form 10-QSB
12