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, 2001 File No. 0-22405 ------------------ -------- Information Analysis Incorporated (Exact name of Registrant as specified in its charter) Virginia 54-1167364 -------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 11240 Waples Mill Road, #400 Fairfax, VA 22030 ----------- ----- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (703) 383-3000 -------------- 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 ______ ---------- State the number of shares outstanding of each of the issuer's classes of common stock, as of October 31, 2001: Common Stock, par value $.01, 10,181,015 shares Transitional small business disclosure format. Yes _______ No x . ---------- 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, 2001 and December 31, 2000 3 Condensed Consolidated Statements of Operations for the three months ended September 30, 2001 and September 30, 2000 4 Condensed Consolidated Statements of Operations for the nine months ended September 30, 2001 and September 30, 2000 5 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and September 30, 2000 6 Notes to Unaudited Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II OTHER INFORMATION Item 1. Legal Proceedings 11 Item 2. Changes in Securities 11 Item 3. Exhibits and Reports on Form 8-K 11 SIGNATURES 12 Item 4. Index to Exhibits 13 2 Information Analysis Incorporated and Subsidiaries Consolidated Balance Sheets
As of As of September 30, 2001 December 31, 2000 (unaudited) (audited) ------------------ ---------------- ASSETS Current assets: Cash and cash equivalents $ (5,027) $ 42,881 Accounts receivable, net 1,373,714 1,073,941 Prepaid expenses 50,861 174,875 Other receivables 77,428 57,800 ------------ ------------ Total current assets 1,496,976 1,349,497 Fixed assets, net 41,854 96,139 Equipment under capital leases, net -- 6,717 Capitalized software, net 333,789 491,552 Other receivables 11,865 18,142 Other assets 58,275 58,275 ------------ ------------ Total assets $ 1,942,759 $ 2,020,322 ============ ============ LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Revolving line of credit $ 609,000 $ 598,591 Accounts payable 1,230,677 1,517,897 Accrued payroll and related liabilities 294,106 211,866 Other accrued liabilities 135,302 208,976 ------------ ------------ Total current liabilities 2,269,085 2,537,330 Long Term liabilities Notes payable 70,000 -- ------------ ------------ Total liabilities 2,339,085 2,537,330 Common stock, par value $0.01, 30,000,000 shares authorized; 11,685,626 and 11,206,084 shares issued, 10,181,015 and 9,701,473 outstanding at September 30, 2001 and December 31, 2000, respectively 116,856 112,061 Additional paid in capital 14,104,269 13,915,702 Accumulated Deficit (13,763,138) (13,690,458) Less treasury stock; 1,504,611 shares at cost (854,313) (854,313) ------------ ------------ Total stockholders' equity (396,326) (517,008) ------------ ------------ Total liabilities and stockholders' equity $ 1,942,759 $ 2,020,322 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 3 Information Analysis Incorporated and Subsidiaries Consolidated Statements of Operations
Three months ended Sept 30, (unaudited) 2001 2000 ----------- ---------- Net sales: Professional services $ 1,456,079 $1,257,921 Software sales 94,999 127,701 ----------- ---------- Total sales 1,551,078 1,385,622 Cost of goods sold and services provided: Cost of professional services 983,769 854,137 Cost of software sales 101,989 176,788 ----------- ---------- Total cost of goods sold and services provided 1,085,758 1,030,925 Gross margin 465,320 354,697 Operating expenses: Selling, general and administrative 592,638 467,637 ----------- ---------- Total operating expenses 592,638 467,637 Operating loss (127,318) (112,940) Other income (expense) 1,267 (17,255) ----------- ---------- Loss before income taxes (126,051) (130,195) Provision for income taxes -- -- ----------- ---------- Net loss before extraordinary item (126,051) (130,195) Extraordinary gain - settlement of debt with equity 107,883 -- ----------- ---------- Net loss $ (18,168) $ (130,195) =========== ========== Earnings per common share: Basic: Loss from continuing operations before extraordinary gain ($0.01) ($0.01) Extraordinary gain on settlement of debt with equity $0.01 -- ------ ------ Basic net income per common share ($0.00) ($0.01) ====== ====== Diluted: Loss from continuing operations before extraordinary gains ($0.01) ($0.01) Extraordinary gains on settlement of debt with equity $0.01 -- ------ ------ Diluted net income per common share ($0.00) ($0.01) ====== ====== Weighted average common shares outstanding: Basic 10,087,925 9,589,299 Diluted 10,087,925 9,589,299
The accompanying notes are an integral part of the consolidated financial statements. 4 Information Analysis Incorporated and Subsidiaries Consolidated Statements of Operations
Nine months ended Sept 30, (unaudited) 2001 2000 ---------- ---------- Net sales: Professional services $3,700,823 $3,887,652 Software sales 347,712 733,639 ---------- ---------- Total sales 4,048,535 4,621,291 Cost of goods sold and services provided: Cost of professional services 2,639,509 2,792,988 Cost of software sales 405,306 464,948 ---------- ---------- Total cost of goods sold and services provided 3,044,815 3,257,936 Gross margin 1,003,720 1,363,355 Operating expenses: Selling, general and administrative 1,282,539 1,467,263 ---------- ---------- Total operating expenses 1,282,539 1,467,263 Operating (loss) income (278,819) (103,908) Other expense (22,339) (23,960) ---------- ---------- (Loss) Income before income taxes (301,158) (127,868) Provision for income taxes -- -- ---------- ---------- Net (loss) income before extraordinary item (301,158) (127,868) Extraordinary gain - settlement of debt with equity 228,478 -- ---------- ---------- Net (loss) income $ (72,680) $ (127,868) ========== ========== Earnings per common share: Basic: Loss from continuing operations before extraordinary gain ($0.03) ($0.01) Extraordinary gain on settlement of debt with equity $0.02 -- ------ ------ Basic net income per common share ($0.01) ($0.01) ====== ====== Diluted: Loss from continuing operations before extraordinary gains ($0.03) ($0.01) Extraordinary gain on settlement of debt with equity $0.02 -- ------ ------ Diluted net income per common share ($0.01) ($0.01) ====== ====== Weighted average common shares outstanding: Basic 9,865,056 9,535,635 Diluted 9,865,056 9,535,635
The accompanying notes are an integral part of the consolidated financial statements. 5 Information Analysis Incorporated and Subsidiaries Consolidated Statement of Cash Flows
For the nine Months Ended September 30, --------------------------------------- (unaudited) 2001 2000 Cash flows from operating activities: Net (loss) $ (72,680) $ 127,868 Adjustments to reconcile net loss to Net cash provided by operating activities: Extraordinary gain (228,478) Depreciation 57,364 150,334 Amortization 3,627 3,627 Amortization of Capitalized Software 157,763 115,911 Gain on sale of fixed assets (9,353) -- Changes in operating assets and liabilities Accounts receivable (299,773) 434,252 Other receivables and prepaid expenses 110,663 27,416 Accounts payable and accrued expenses 143,186 (703,159) --------- --------- Net cash used by operating activities $(137,681) $ (99,487) --------- --------- Cash flows from investing activities: Acquisition of furniture and equipment -- -- Increase in capitalized software -- (182,447) Proceeds from sale of fixed assets 9,364 -- --------- --------- Net cash provided (used) in investing activities 9,364 (182,447) --------- --------- Cash flows from financing activities: Net borrowing (payments) under bank revolving line of credit 10,409 154,491 Net proceeds from issuance of notes payable 70,000 -- Principal payments on capital leases -- (5,831) Net Proceeds from private placement -- 125,000 Proceeds from exercise of stock options and warrants -- 31,626 --------- --------- Net cash provided (used) by financing activities: 80,409 305,286 --------- --------- Net (decrease) increase in cash and cash equivalents (47,908) 23,352 Cash and cash equivalents at beginning of the period 42,881 133,468 --------- --------- Cash and cash equivalents at end of the period ($5,027) $ 156,820 ========= ========= Supplemental cash flow Information Interest paid $ 37,566 $ 42,617 Non-Cash Financing Activity: Issuance of common stock to settle debt $ 193,362 ========= Non-Cash Operating Activity: Reduction of accounts payable through issuance of equity $ 421,840 =========
The accompanying notes are an integral part of the consolidated financial statements. 6 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, 2000 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, 2000 and in other filings with the Securities and Exchange Commission. 7 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.
Income Before Extraordinary Extraordianry Net Per Share Item Item Income Shares Amount ------------- ------------- ------ ------ --------- (dollars in thousands) (except per share amounts) Basic net income per common share for the nine months ended September 30, 2001: Income available to common Stockholders $(301) $228 $ (73) 9,865,056 $(0.01) *Effect of dilutive stock options Diluted net income per common Share for the nine months ended September 30, 2001: $(301) $228 $ (73) 9,865,056 $(0.01) Basic net income per common Share for the nine months ended September 30, 2000: Income available to common Stockholders $(128) $000 $(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) $000 $(128) 9,535,635 $(0.01) Basic net income per common share for the three months ended September 30, 2001: Income available to common Stockholders $(125) $108 $ (17) 10,087,925 $(0.00) *Effect of dilutive stock options Diluted net income per common share for the three months ended September 30, 2001: $(125) $108 $ (17) 10,087,925 $(0.00) Basic net income per common share for the three months ended September 30, 2000: Income available to common stockholders $(130) $000 $(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) $000 $(130) 9,589,299 $(0.01) * All Stock Options/Warrants are Anti-Dilutive.
8 Item 2. Management's Discussion and Analysis of Financial Condition or Plan of Operation. Three Months Ended September 30, 2001 Versus Three Months Ended September 30, 2000 Revenue IAI's revenues in the third quarter of fiscal 2001 were $1,551,078, compared to $1,385,622 in the third quarter of fiscal 2000, an increase of 12.0%. Professional services revenues were $1,456,079 versus $1,257,921, an increase of 15.8%, and product revenues were $94,999 versus $127,701 a decrease of 25.6%. Gross margin Gross margins were $465,320 or 30% of sales, in the third quarter of fiscal 2001 versus $354,697, or 25.6% of sales, in the third quarter of fiscal 2000. Of the $465,320 in 2001, $472,310 was attributable to professional services and ($6,990) was attributable to software sales. Gross margins as a percentage of sales were 32.4% for professional services and (7.3%) for software sales. In the third quarter of 2000, the Company reported gross margins of approximately 32.1% for professional services and (38.4%) for software products. Selling, General & Administrative Selling, General & Adminsitrative expenses totaled $592,638, or 38.2% of revenues, in the third quarter of 2001 versus $467,637, or 33.7% of revenues, in the third quarter of 2000, an increase in expenses of 26.7%. The increase is attributable to the Company's taking a bad debt provision for a doubtful account. Profit The Company reported an operating loss of $126,051, before an extraordinary gain in the third quarter of 2001 compared to an operating loss of $130,195 in the third quarter of 2000. 9 Nine Months Ended September 30, 2001 Versus nine Months Ended September 30, 2000 Revenue IAI's revenues in the first nine months of fiscal 2001 were $4,048,535, compared to $4,621,291 in the first nine months of fiscal 2000, a decrease of 12.4%. Professional services revenues were $3,700,823 versus $3,887,652, a decrease of 4.8%, and product revenues were $347,712 versus $733,639, a decrease of 52.6%. The decrease in software sales was mainly attributable to no sales of the Company's ICONS software tool for the first nine months of 2001, versus the first nine months of 2000. ICONS is a software toolset that is used in connection with conversions and migrations from mainframe legacy systems. Gross margin Gross margins were $1,003,720 or 24.8% of sales, in the first nine months of fiscal 2001 versus $1,363,355, or 29.5% of sales, in the first nine months of fiscal 2000. Of the $1,003,720 in 2001, $1,061,314 was attributable to professional services and $(57,594) was due to software sales. Gross margins as a percentage of sales were 28.7% for professional services and (16.5%) for software sales for 2001, versus 28.2% for professional services and 36.6% for software sales in 2000. The decrease in gross margin as a whole is attributable to no sales of the Company's ICONS software tool. Selling, General & Administrative Selling, General & Adminsitrative expenses totaled $1,282,539, or 31.7% of revenues, for the nine months ending September 30, 2001 versus $1,467,263, or 31.8% of revenues, for the nine months ending September 30, 2000, a decrease in expenses of 12.6%. The decrease is attributable to the Company's continued commitment to align Selling, General & Administrative costs to the level of its professional services and software business. Profit The Company reported an operating loss of $301,158 before an extraordinary gain in the first nine months of fiscal 2001 compared to an operating loss of $127,868 for the first nine months of 2000. In general, the net operating loss is a result of lower software sales during the first nine months of 2001, and accounting for a bad debt provision as a result of a doubtful account. Liquidity and Capital Resources Through the first nine months of 2001, the Company financed its operations from current collections and through its bank line of credit. Cash and cash equivalents at September 30, 2001 were ($5,027) compared to $156,820 at September 30, 2000. As of September 30, 2001 the Company had an outstanding balance on its line of credit of $609,000. 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 $800,000 to November 27, 2001. 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 capabilities. Current operations, however, are insufficient to provide the additional working 10 capital that is necessary to repay approximately $500,000 of past due payables. The Company is in the process of negotiating with past due creditors to obtain concessions on their claims. Three creditors accepted 222,448 shares of common stock and one creditor accepted warrants for 12,000 shares of common stock in satisfaction of their claims in the amount of $187,558. The Company received $70,000 from various investors and issued three year convertable notes at 12% APR, with a conversion price of $.25 per share. The Company cannot be certain that there will not be a need for additional cash resources at some point in fiscal 2001. 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 Between July 25, 2001 and August 9, 2001 the Company issued 222,448 shares of common stock to three trade creditors, and warrants, expiring 5 years from issuance date, for 12,000 shares of common stock to one trade creditor to satisfy their claims in the aggregate amount of $187,558. The Company relied upon section 4(2) in issuing these securities without registration under the Securities Act of 1933. The Company also issued to three acredited investors $70,000 of 3 year 12% convertible notes, having a conversion price of $.25 per share. No commissions were paid in connection with the issuance of these notes. The Company relied upon section 4(2) in issuing these notes without registration under the Securities Act of 1933. Item 3. Exhibits and Reports on Form 8-K (a) See the Index to Exhibits attached hereto. (b) No reports on Form 8-K were filed for the quarter for which this report is filed. 11 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 - --------------------------------- (Registrant) Date: November 12, 2001 By: /s/Sandor Rosenberg ----------------- ------------------- Sandor Rosenberg, Chairman of the Board and President By: /s/Richard S. DeRose -------------------- Richard S. DeRose, Executive Vice President and Treasurer 12 INDEX TO EXHIBITS
Exhibit Description Location No. 4.1 Form of 12% 3 year convertible note Filed with this Form 10-QSB 4.2 Form of Warrant issued to trade creditors Filed with this Form 10-QSB who exchanged claims for warrants.
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