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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2021

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from to 

 

Commission File Number: 000-22405

 

Information Analysis Incorporated


(Exact name of registrant as specified in its charter)

 

Virginia54-1167364
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)

           

12015 Lee Jackson Memorial Highway

Suite 210

Fairfax, Virginia 22033


(Address of principal executive offices, Zip Code)

 

(703) 383-3000


(Registrant’s telephone number, including area code)

 

 


(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

   

 

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 the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☑         No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes ☑         No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ☐Accelerated filer  ☐
Non-accelerated filer  ☐Smaller reporting company  
 Emerging growth company  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes          No ☑

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

13,510,690 shares of common stock, par value $0.01 per share, as of October 28, 2021.

 

 

Information Analysis IncorporatedForm 10-Q September 30, 2021

              

 

INFORMATION ANALYSIS INCORPORATED

FORM 10-Q

 

 

Table of Contents

 

    Page
    Number

PART I.

FINANCIAL INFORMATION

 

     

Item 1.

Financial Statements (unaudited except for the balance sheet as of December 31, 2020)

 
     
 

Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020

3

     
 

Consolidated Statements of Operations and Comprehensive (Loss) Income for the  three months ended September 30, 2021 and 2020

4

     
 

Consolidated Statements of Operations and Comprehensive Income for the nine months ended September 30, 2021 and 2020

5

     
 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020

6

     
 

Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2021 and 2020

7

     
 

Notes to Consolidated Financial Statements

8

     
Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

23

     

Item 4.

Controls and Procedures

28

     

PART II.

OTHER INFORMATION

 
     

Item 1.

Legal Proceedings

29

     

Item 1A.

Risk Factors

29

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

     

Item 3.

Defaults Upon Senior Securities

29

     

Item 4.

Mine Safety Disclosures

29

     

Item 5.

Other Information

29

     

Item 6.

Exhibits

30

     

SIGNATURES

 

31

 

2

 
Information Analysis Incorporated Form 10-Q September 30, 2021

 

 

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

INFORMATION ANALYSIS INCORPORATED

CONSOLIDATED BALANCE SHEETS

 

  

September 30, 2021

  

December 31, 2020

 
  

(Unaudited)

  

(Note 1)

 

ASSETS

        

Current assets

        

Cash and cash equivalents

 $3,682,613  $1,858,160 

Accounts receivable

  2,874,656   1,442,231 

Prepaid expenses

  283,567   142,770 

Other current assets

  5,556   - 

Total current assets

  6,846,392   3,443,161 
         

Intangible assets, net of amortization of $87,912 and $0,

  1,402,088   - 

Goodwill

  785,000   - 

Contract assets - non-current

  -   210,688 

Right-of-use operating lease asset

  285,667   51,405 

Property and equipment, net of accumulated depreciation and amortization of $349,300 and $312,320

  94,965   62,166 

Other assets

  5,707   6,281 

Total assets

 $9,419,819  $3,773,701 
         

LIABILITIES AND STOCKHOLDERS' EQUITY

        

Current liabilities

        

Accounts payable

 $926,643  $103,646 

Revolving line of credit

  402,306   - 

Notes payable - current

  797,295   93,009 

Accrued payroll and related liabilities

  555,483   375,168 

Commissions payable

  236,438   181,626 

Other accrued liabilities

  82,158   54,274 

Contract liabilities

  78,045   946,884 

Operating lease liability - current

  35,805   45,595 

Interest payable

  2,666   3,125 

Total current liabilities

  3,116,839   1,803,327 
         

Note payable - non-current

  400,856   356,991 

Operating lease liability - non-current

  260,141   - 

Total liabilities

  3,777,836   2,160,318 
         

Stockholders' equity

        

Common stock, $0.01 par value, 30,000,000 shares authorized, 15,153,306 and 12,904,376 shares issued, 13,510,690 and 11,261,760 shares outstanding as of September 30, 2021, and December 31, 2020, respectively

  151,532   129,043 

Additional paid-in capital

  18,507,731   14,720,065 

Accumulated deficit

  (12,087,069)  (12,305,514)

Treasury stock, 1,642,616 shares at cost

  (930,211)  (930,211)

Total stockholders' equity

  5,641,983   1,613,383 

Total liabilities and stockholders' equity

 $9,419,819  $3,773,701 

 

The accompanying notes are an integral part of the financial statements

 

3

Information Analysis Incorporated Form 10-Q September 30, 2021

 

 

 

INFORMATION ANALYSIS INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

(Unaudited)

 

   

Three months ended September 30,

 
   

2021

   

2020

 

Revenues

               

Professional fees

  $ 2,798,105     $ 1,580,684  

Software sales

    1,501,820       2,342,062  

Total revenues

    4,299,925       3,922,746  
                 

Cost of revenues

               

Cost of professional fees

    1,832,812       1,051,102  

Cost of software sales

    1,488,238       2,257,317  

Total cost of revenues

    3,321,050       3,308,419  
                 

Gross profit

    978,875       614,327  
                 

Selling, general and administrative expenses

    1,000,880       342,778  

Commissions expense

    23,017       56,643  

Acquisition costs

    39,245       -  
                 

(Loss) income from operations

    (84,267 )     214,906  
                 

Other expense, net

    (11,260 )     (203 )
                 

(Loss) income before provision for income taxes

    (95,527 )     214,703  
                 

Provision for income taxes

    -       -  
                 

Net (loss) income

  $ (95,527 )   $ 214,703  
                 

Comprehensive (loss) income

  $ (95,527 )   $ 214,703  
                 
                 
                 

Net (loss) income per common share - basic

  $ (0.01 )   $ 0.02  
                 

Net (loss) income per common share - diluted

  $ (0.01 )   $ 0.02  
                 

Weighted average common shares outstanding

               

Basic

    12,596,126       11,211,760  

Diluted

    12,596,126       11,837,427  

 

The accompanying notes are an integral part of the financial statements

 

4

 
Information Analysis Incorporated Form 10-Q September 30, 2021

 

 

INFORMATION ANALYSIS INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

 

   

Nine months ended September 30,

 
   

2021

   

2020

 

Revenues

               

Professional fees

  $ 8,565,639     $ 3,353,508  

Software sales

    3,885,828       7,450,389  

Total revenues

    12,451,467       10,803,897  
                 

Cost of revenues

               

Cost of professional fees

    5,698,407       2,232,405  

Cost of software sales

    3,798,607       7,289,321  

Total cost of revenues

    9,497,014       9,521,726  
                 

Gross profit

    2,954,453       1,282,171  
                 

Selling, general and administrative expenses

    2,346,680       1,049,761  

Commissions expense

    176,660       179,560  

Acquisition costs

    192,530       -  
                 

Income from operations

    238,583       52,850  
                 

Other (expense) income, net

    (20,138 )     894  
                 

Income before provision for income taxes

    218,445       53,744  
                 

Provision for income taxes

    -       -  
                 

Net income

  $ 218,445     $ 53,744  
                 

Comprehensive income

  $ 218,445     $ 53,744  
                 
                 
                 

Net income per common share - basic

  $ 0.02     $ -  
                 

Net income per common share - diluted

  $ 0.02     $ -  
                 

Weighted average common shares outstanding

               

Basic

    11,957,878       11,211,760  

Diluted

    12,584,914       11,810,392  

 

The accompanying notes are an integral part of the financial statements

 

5

 
Information Analysis Incorporated Form 10-Q September 30, 2021
 

 

 

INFORMATION ANALYSIS INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

Nine months ended September 30,

 
   

2021

   

2020

 

Cash flows from operating activities:

               

Net income

  $ 218,445     $ 53,744  

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

               

Depreciation and amortization

    111,123       6,821  

Stock option compensation

    220,455       7,171  

Changes in operating assets and liabilities:

               

Accounts receivable

    (820,954 )     (931,517 )

Prepaid expenses and other current assets

    (140,015 )     461,592  

Contract assets

    210,688       (89,404 )

Other assets

    16,663       -  

Accounts payable

    508,408       317,048  

Contract liabilities

    (868,839 )     (132,574 )

Accrued payroll and related liabilities and other accrued liabilities

    63,404       334,325  

Commissions payable

    54,812       11,363  

Net cash (used in) provided by operating activities

    (425,810 )     38,569  
                 

Cash flows from investing activities

               

Acquisition of property and equipment

    (56,010 )     (58,640 )

Acquisition of Tellenger, net of cash acquired

    (2,233,884 )     -  

Net cash used in investing activities

    (2,289,894 )     (58,640 )
                 

Cash flows from financing activities

               
                 

Borrowing under revolving line of credit

    502,306       -  

Repayments under revolving line of credit

    (100,000 )     -  

Proceeds from note payable

    1,000,000       450,000  

Principal payments - long-term note

    (251,849 )     -  

Net proceeds from issuance of stock

    3,294,554       -  

Proceeds from from exercise of stock options

    95,146       -  

Net cash provided by financing activities

    4,540,157       450,000  
                 

Net increase in cash and cash equivalents

    1,824,453       429,929  
                 

Cash and cash equivalents, beginning of the period

    1,858,160       1,039,442  

Cash and cash equivalents, end of the period

  $ 3,682,613     $ 1,469,371  

Supplemental cash flow Information

               

Interest paid

  $ 32,197     $ -  

Non-cash investing and financing activities

               

Value of common stock issued in connection with the acquisition of Tellenger, Inc.

  $ 200,000     $ -  

 

 

The accompanying notes are an integral part of the financial statements

 

6

 
Information Analysis Incorporated Form 10-Q September 30, 2021
 

 

 

INFORMATION ANALYSIS INCORPORATED

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

(Unaudited)

 

   

Nine months ended September 30, 2021

 
           

Additional

                         
   

Common

   

Paid-In

   

Accumulated

   

Treasury

         
   

Stock

   

Capital

   

Deficit

   

Stock

   

Total

 

Balances at December 31, 2020

  $ 129,043     $ 14,720,065     $ (12,305,514 )   $ (930,211 )   $ 1,613,383  

Net income

    -       -       270,815       -       270,815  

Stock option compensation

    -       27,711       -       -       27,711  

Stock issued

    3,306       492,693       -       -       495,999  

Issuance of stock from exercise of options

    250       3,300       -       -       3,550  

Balances at March 31, 2021

    132,599       15,243,769       (12,034,699 )     (930,211 )     2,411,458  

Net income

    -       -       43,157       -       43,157  

Stock option compensation

    -       111,862       -       -       111,862  

Stock issued, net

    683       197,872       -       -       198,555  

Issuance of stock from exercise of options

    3,600       76,395       -       -       79,995  

Balances at June 30, 2021

    136,882       15,629,898       (11,991,542 )     (930,211 )     2,845,027  

Net loss

    -       -       (95,527 )     -       (95,527 )

Stock option compensation

    -       80,882       -       -       80,882  

Stock and warrants issued

    14,000       2,786,000       -       -       2,800,000  

Issuance of stock from exercise of options

    650       10,951       -       -       11,601  

Balances at September 30, 2021

  $ 151,532     $ 18,507,731     $ (12,087,069 )   $ (930,211 )   $ 5,641,983  

 

 

   

Nine months ended September 30, 2020

 
           

Additional

                         
   

Common

   

Paid-In

   

Accumulated

   

Treasury

         
   

Stock

   

Capital

   

Deficit

   

Stock

   

Total

 

Balances at December 31, 2019

  $ 128,543     $ 14,682,937     $ (12,718,893 )   $ (930,211 )   $ 1,162,376  

Net loss

    -       -       (126,339 )     -       (126,339 )

Stock option compensation

    -       450       -       -       450  

Balances at March 31, 2020

    128,543       14,683,387       (12,845,232 )     (930,211 )     1,036,487  

Net loss

    -       -       (34,620 )     -       (34,620 )

Stock option compensation

    -       356       -       -       356  

Balances at June 30, 2020

    128,543       14,683,743       (12,879,852 )     (930,211 )     1,002,223  

Net income

    -       -       214,703       -       214,703  

Stock option compensation

    -       6,365       -       -       6,365  

Balances at September 30, 2020

  $ 128,543     $ 14,690,108     $ (12,665,149 )   $ (930,211 )   $ 1,223,291  

 

The accompanying notes are an integral part of the financial statements

 

7

Information Analysis Incorporated Form 10-Q September 30, 2021

 

INFORMATION ANALYSIS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

1.

Summary of Significant Accounting Policies

 

Organization and Business

 

Information Analysis Incorporated (the “Company” or “IAI”), in conjunction with its subsidiary, is primarily serving the U.S. government as a technology integrator. IAI provides information technology (“IT”) services with a specialized set of capabilities. The Company has a long and successful history of over 40 years. IAI has served many branches of the federal civilian market (Department of Agriculture, Department of Education, Department of Homeland Security, Department of the Treasury, U.S. Small Business Administration), the Department of Defense (U.S. Army and Air Force), and several commercial clients. The Company has performed software development and conversion projects for over 100 commercial and government clients, including the most significant application database modernization undertaking to date by the U.S. Small Business Administration. The Company’s long-standing customer relationships and past performance enable it to apply its expertise to meet customers' mission and provide unique capabilities to the market.

 

On April 7, 2021, IAI completed the acquisition of Tellenger, Inc. (“Tellenger”), which expands the Company’s capabilities in government priority areas of cyber security, cloud services, complex systems integrations, and data analytics. Tellenger expands and enhances IAI’s portfolio of capabilities through new technology-driven offerings and customers. The expanding customer base includes past and current performance in many branches of the federal civilian market (Department of Homeland Security, Department of Health and Human Services, Department of Commerce, United States Department of Agriculture, National Transportation Safety Administration, and Consumer Product Safety Commission), and the Department of Defense (U.S. Marine Corps). Tellenger advances integrated solid project management solutions with its well-defined metrics-based, Capability Maturity Model Integration/Development (CMMI/DEV) Level 3 independently appraised approach for managing projects (a/k/a Tellenger Integrated Quality [T-IQ]). A proven project management approach to support harnessing a first-class quality system that integrates Information Technology Infrastructure Library (ITIL), CMMI, and Project Management Institute (PMI) best practices. This approach is applied to projects in various customer environments and technology solutions.

 

Unaudited Interim Condensed Consolidated Financial Statements

 

The accompanying unaudited consolidated financial statements (“financial statements”) have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, the financial statements include all adjustments necessary (which are of a normal and recurring nature) for the fair and not misleading presentation of the results of the interim periods presented. These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2020 included in the Annual Report on Form 10-K filed by the Company with the SEC on March 31, 2021 (the “Annual Report”), as amended. The accompanying December 31, 2020, balance sheet was derived from the audited financial statements included in the Annual Report. The results of operations for any interim periods are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year.

 

The consolidated financial statements as of September 30, 2021 and for the nine month period ended September 30, 2021 include the accounts of the Company, including the accounts and results of operations of its wholly owned subsidiary, Tellenger, for the period from April 7, 2021 through September 30, 2021. All significant intercompany transactions and balances have been eliminated in consolidation.

 

The following policies were added to Note 1, “Summary of Significant Accounting Policies,” as a result of activity during the quarter ended June 30, 2021: Business Combinations and Intangibles and Goodwill. There have been no additional changes in the Company’s significant accounting policies as of September 30, 2021, as compared to the significant accounting policies disclosed in Note 1, "Summary of Significant Accounting Policies" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020, that was filed with the SEC on March 31, 2021.

 

8

Information Analysis IncorporatedForm 10-Q September 30, 2021

 

Use of Estimates and Assumptions

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results can, and in many cases will, differ from those estimates.

 

Revenue Recognition

 

See Note 2 for a detailed description of revenue recognition under Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”) and its related amendments (collectively known as “ASC 606”).

 

Segment Reporting

 

The Company has assessed its Tellenger subsidiary and has continued to conclude that it operates in one business segment, providing information technology products and services to modernize, secure, and increase functionality of client information systems.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with maturities of ninety days or less at the time of purchase to be cash equivalents. Deposits are maintained with a federally insured bank. Balances at times exceed federally insured limits, but management does not consider this to be a significant concentration of credit risk.

 

Accounts Receivable

 

Accounts receivable consist of trade accounts receivable and do not bear interest. The Company typically does not require collateral from its customers. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company reviews its allowance for doubtful accounts monthly. Accounts with receivable balances past due over 90 days are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers. No allowance for doubtful accounts has been recorded at September 30, 2021 and December 31, 2020.

 

Property and Equipment

 

Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets. Furniture and fixtures are depreciated over the lesser of the useful life or five years, off-the-shelf software is depreciated over the lesser of three years or the term of the license, custom software is depreciated over the least of five years, the useful life, or the term of the license, and computer equipment is depreciated over three years. Leasehold improvements are amortized over the estimated term of the lease or the estimated life of the improvement, whichever is shorter. Maintenance and minor repairs are charged to operations as incurred. Gains and losses on dispositions are recorded in operations.

 

Stock-Based Compensation

 

At December 31, 2020, the Company had the stock-based compensation plans described in Note 6 below. Total compensation expense related to these plans was $80,882 and $6,365 for the three months ended September 30, 2021 and 2020, respectively, and $220,455 and $7,171 for the nine months ended September 30, 2021 and 2020, respectively. The Company estimates the fair value of options granted using a Black-Scholes valuation model to establish the expense. When stock-based compensation is awarded to employees, the expense is recognized ratably over the vesting period. When stock-based compensation is awarded to non-employees, the expense is recognized over the period of performance.

 

9

Information Analysis IncorporatedForm 10-Q September 30, 2021

 

Income Taxes

 

Deferred tax assets and liabilities are computed based on the difference between the financial statement and tax basis of assets and liabilities and are measured by applying enacted tax rates and laws for the taxable years in which those differences are expected to reverse. In addition, a valuation allowance is required to be recognized if it is believed more likely than not that a deferred tax asset will not be fully realized. Authoritative guidance prescribes a recognition threshold of more likely than not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those positions to be recognized in the financial statements. The Company continually reviews tax laws, regulations and related guidance in order to properly record any uncertain tax liabilities.

 

The Company has analyzed its income tax positions using the criteria required by GAAP and concluded that as of September 30, 2021, and December 31, 2020, it has no material uncertain tax positions and no interest or penalties have been accrued. The Company has net operating loss carryforwards of approximately $2.7 million, none of which will expire, if unused, on December 31, 2021. The net operating loss carryforwards are offset by a full valuation allowance.

 

Income (Loss) Per Share

 

The Company’s income (loss) per share calculations are based upon the weighted average number of shares of common stock outstanding. The dilutive effect of stock options, warrants, and other equity instruments are included for purposes of calculating diluted income per share, except for periods when the Company reports a net loss, in which case the inclusion of such equity instruments would be antidilutive. See Note 10 for more details.

 

Business Combinations

 

The Company applies the guidance of Accounting Standards Codification (“ASC”) Topic 805, Business Combinations. The Company recognizes the fair value of assets acquired and liabilities assumed in transactions; establishes the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed; expenses transaction and restructuring costs; and discloses the information needed to evaluate and understand the nature and financial effect of the business combination.  See Note 5 for more details.

 

Intangibles and Goodwill

 

The Company accounts for goodwill and other intangible assets in accordance with ASC Topic 350, Goodwill Intangibles and Other (“ASC 350”). Goodwill and intangible assets with indefinite useful lives are not amortized but are instead tested for impairment (i) on at least an annual basis and (ii) when changes in circumstances indicate that the fair value of goodwill may be below its carrying value. These circumstances include, but are not limited to, (i) a significant adverse change in the business climate, (ii) unanticipated competition or (iii) an adverse action or assessment by a regulator. The Company performs its annual impairment testing as of October 31. Determining impairment involves estimating the fair value of a reporting unit using a combination of (i) the income or discounted cash flows approach and (ii) the market approach that utilizes comparable companies’ data. If the carrying amount of a reporting unit exceeds its fair value, the amount of the impairment loss must be measured. The impairment loss is calculated by comparing the implied fair value of the reporting unit’s goodwill to its carrying amount. In calculating the implied fair value of the reporting unit’s goodwill, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied value of goodwill. See Note 5 for more details.

 

10

 
Information Analysis IncorporatedForm 10-Q September 30, 2021

 

COVID-19

 

The COVID-19 (coronavirus) outbreak has had a notable impact on general economic conditions, including, but not limited to, the temporary closures of many businesses, “shelter in place” and other governmental regulations, and “work from home” directives. There are many unknowns, and many regional inconsistencies. Notable potential effects on the Company include U.S. government procurements may be delayed or cancelled, work on new or existing contracts that require personal interactions may be suspended, payment processing for customer invoices may be delayed, employees and customers or their families may become infected, and personal business development meetings may not be able to take place. The Company continues to monitor the impact of the COVID-19 outbreak closely.

 

To date, the COVID-19 impact on the Company’s existing business has been minimal. The Company had previously implemented the necessary infrastructure for its employees to work remotely, so it did not experience material issues supporting its customers. The Company rapidly adapted to the challenges presented to its administration, including challenges to management, accounting, and information technology infrastructure. The extent to which business development efforts have been hampered by the inability to meet with potential customers in person is indeterminable. The full extent to which the COVID-19 outbreak will impact the Company’s business, results of operations, financial condition, and cash flows over time is uncertain.

 

 

 

2.

Revenue from Contracts with Customers

 

Revenue is recognized when all of the following steps have been taken and criteria met for each contract:

 

 

Identification of the contract, or contracts, with a customer - A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract has commercial substance and the parties are committed to perform and, (iii) it determines that collection of substantially all consideration to which the Company will be entitled in exchange for goods or services that will be transferred is probable based on the customer’s intent and ability to pay the promised consideration.

 

 

Identification of the performance obligations in the contract - Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the goods or service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised goods or services, the Company applies judgment to determine whether promised goods or services are capable of being distinct in the context of the contract. If these criteria are not met, the promised goods or services are accounted for as a combined performance obligation.

 

 

Determination of the transaction price - The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods or services to the customer adjusted for estimated variable consideration, if any. The Company typically estimates the transaction price impact of discounts offered to the customers for early payments on receivables or rebates based on sales target achievements. Constraints are applied when estimating variable considerations based on historical experience where applicable.

 

 

Allocation of the transaction price to the performance obligations in the contract - If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis. The Company determines standalone selling price by taking into account available information such as historical selling prices of the performance obligation, geographic location, overall strategic pricing objective, market conditions and internally approved pricing guidelines related to the performance obligations.

 

 

Recognition of revenue when, or as, the Company satisfies performance obligations - The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. Revenue is recognized at or over the time the related performance obligation is satisfied by transferring a promised good or service to a customer.

 

11

Information Analysis IncorporatedForm 10-Q September 30, 2021

 

Nature of Products and Services

 

The Company generates revenue from the sales of information technology professional services, sales of third-party software licenses and implementation and training services, sales of third-party support and maintenance contracts based on those software products, and incentive payments received from third-party software suppliers for facilitating sales directly between that supplier and a customer introduced by the Company. The Company sells through its direct relationships with end customers and under subcontractor arrangements.

 

Professional services are offered through several arrangements – through time and materials arrangements, fixed-price-per-unit arrangements, fixed-price arrangements, or combinations of these arrangements within individual contracts. Revenue under time and materials arrangements is recognized over time in the period the hours are worked, or the expenses are incurred, as control of the benefits of the work is deemed to have passed to the customer as the work is performed. Revenue under fixed-price-per-unit arrangements is recognized at a point in time when delivery of units have occurred, and units are accepted by the customer or are reasonably expected to be accepted. Generally, revenue under fixed-price arrangements and mixed arrangements is recognized either over time or at a point in time based on the allocation of transaction pricing to each identified performance obligation as control of each is transferred to the customer. For the periods reported herein, the majority of revenue recognized under fixed price and mixed arrangements occurred over time, and the amounts resulting from additional disaggregation would be immaterial. For fixed-price arrangements for which the Company is paid a fixed fee to make itself available to support a customer, with no predetermined deliverables to which transaction prices can be estimated or allocated, revenue is recognized ratably over time.

 

Third-party software licenses are classified as enterprise server-based software licenses or desktop software licenses, and desktop licenses are further classified by the type of customer and whether the licenses are bulk licenses or individual licenses. The Company’s obligations as the seller for each class differ based on its reseller agreements and whether its customers are government or non-government customers. Revenue from enterprise server-based sales to either government or non-government customers is usually recognized in full at a point in time based on when the customer gains use of the full benefit of the licenses, after the licenses are implemented. If the transaction prices of the performance obligations related to implementation and customer support for the individual contract is material, these obligations are recognized separately over time, as performed. Revenue for desktop software licenses for government customers and for non-government customers is usually recognized on a gross basis at a point in time, based on when the customer’s administrative contact gains training in and beneficial use of the administrative portal. For desktop software licenses sold on an individual license basis to non-government customers, where the Company has no obligation to the customer after the third-party makes delivery of the licenses, the Company has determined it is acting as an agent, and the Company recognizes revenue upon delivery of the licenses only for the net of the selling price and its contract costs.

 

Third-party support and maintenance contracts for enterprise server-based software include a performance obligation under the Company’s reseller agreements for it to be the first line of support (direct support) and second line of support (intermediary between customer and manufacturer) to the customer. Because of the support performance obligations, and because the amount of support is not estimable, the Company recognizes revenue ratably over time as it makes itself available to provide the support.

 

Incentive payments are received under reseller agreements with software manufacturers and suppliers where the Company introduces and courts a customer, but the sale occurs directly between the customer and the supplier or between the customer and the manufacturer. Since the transfer of control of the licenses cannot be measured from outside of these transactions, revenue is recognized when payment from the manufacturer or supplier is received.

 

12

Information Analysis IncorporatedForm 10-Q September 30, 2021

 

Disaggregation of Revenue from Contracts with Customers

 

  

Three Months Ended

  

Nine Months Ended

 

Contract

 

September 30,2021

  

September 30,2020

  

September 30,2021

  

September 30,2020

 

Type

 

Amount

  

Percent

  

Amount

  

Percent

  

Amount

  

Percent

  

Amount

  

Percent

 
                                 

Services Time & Materials

 $2,705,099   62.9% $1,403,270   35.8% $7,519,190   60.4% $2,724,653   25.2%

Services Fixed Price

  19,175   0.5%  27,150   0.7%  452,726   3.6%  177,705   1.7%

Services Combination

  47,060   1.1%  133,914   3.4%  506,331   4.1%  382,860   3.5%

Services Fixed Price per Unit

  26,771   0.6%  16,350   0.4%  87,391   0.7%  68,290   0.6%

Third-Party Software

  1,445,757   33.6%  2,248,574   57.4%  3,683,967   29.6%  6,859,994   63.5%

Software Support & Maintenance

  48,421   1.1%  56,290   1.4%  150,696   1.2%  531,983   4.9%

Incentive Payments

  7,642   0.2%  37,198   0.9%  51,166   0.4%  58,412   0.6%
                                 

Total Revenue

 $4,299,925     $3,922,746     $12,451,467     $10,803,897    

 

Contract Balances

 

Accounts Receivable

 

Trade accounts receivable are recorded at the billable amount where the Company has the unconditional right to bill, net of allowances for doubtful accounts. The allowance for doubtful accounts is based on the Company’s assessment of the collectability of accounts. Management regularly reviews the adequacy of the allowance for doubtful accounts by considering the age of each outstanding invoice, each customer's expected ability to pay and collection history, when applicable, to determine whether a specific allowance is appropriate. Accounts receivable deemed uncollectible are charged against the allowance for doubtful accounts when identified. There were no such allowances recognized at September 30, 2021, and December 31, 2020.

 

Contract Assets

 

Contract assets consist of assets resulting when revenue recognized exceeds the amount billed or billable to the customer due to allocation of transaction price, and of amounts withheld from payment of invoices as a financing component of a contract. Changes in contract assets balances in the three months and nine months ended September 30, 2021 and 2020, are as follows:

 

Contract Assets

    

Balance at December 31, 2020

 $210,688 

Contract assets added

  131,923 

Balance at March 31, 2021

  342,611 

Contract assets added

  134,657 

Balance at June 30, 2021

  477,268 
Contract assets added  45,895 

Reduction in contract assets

  (523,163)

Balance at September 30, 2021

 $- 
     
     

Balance at December 31, 2019

 $- 

Balance at March 31, 2020

  - 

Contract assets added

  13,918 

Balance at June 30, 2020

  13,918 

Contract assets added

  75,486 

Balance at September 30, 2020

 $89,404 

 

The contract asset balance was reduced to zero as of September 30, 2021 because the amounts withheld from payment of invoices as a financing component of a subcontract became fully due and billable as the prime contractor met a specific deliverable.

 

13

Information Analysis IncorporatedForm 10-Q September 30, 2021

 

Contract Liabilities

 

Contract liabilities consist of amounts that have been invoiced and for which the Company has the right to bill, but that have not been recognized as revenue because the related goods or services have not been transferred. Changes in contracts liabilities balances in the three months and nine months ended September 30, 2021 and 2020, are as follows:

 

Contract Liabilities

    

Balance at December 31, 2020

 $946,884 

Contract liabilities added

  93,934 

Revenue recognized

  (585,322)

Balance at March 31, 2021

  455,496 

Contract liabilities added

  4,815 

Revenue recognized

  (354,427)

Balance at June 30, 2021

  105,884 

Contract liabilities added

  79,640 

Revenue recognized

  (107,479)

Balance at September 30, 2021

 $78,045 
     
     

Balance at December 31, 2019

 $464,223 

Contract liabilities added

  19,136 

Revenue recognized

  (212,568)

Balance at March 31, 2020

  270,791 

Contract liabilities added

  9,906 

Revenue recognized

  (216,353)

Balance at June 30, 2020

  64,344 

Contract liabilities added

  480,024 

Revenue recognized

  (212,719)

Balance at September 30, 2020

 $331,649 

 

Revenues recognized during the nine months ended September 30, 2021, and 2020, from the balances at December 31, 2020 and 2019, were $946,884 and $464,223, respectively.

 

Costs to Obtain or Fulfill a Contract

 

When applicable, the Company recognizes an asset related to the costs incurred to obtain a contract only if it expects to recover those costs and it would not have incurred those costs if the contract had not been obtained. The Company recognizes an asset from the costs incurred to fulfill a contract if the costs (i) are specifically identifiable to a contract, (ii) enhance resources that will be used in satisfying performance obligations in future and (iii) are expected to be recovered. There were no such assets at September 30, 2021, and December 31, 2020. When incurred, these costs are amortized ratably over the periods of the contracts to which those costs apply.

 

Financing Components

 

In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that one of its subcontracts to a prime contractor includes a significant financing component. The subcontract is invoiced on a time and materials basis, under which 90% of each invoice amount had been paid under regular terms, and the 10% payment balance of each invoice was deferred until the prime contractor met a specific deliverable under its prime contract. The primary purpose of this arrangement was to assist the prime contractor in meeting all of its financial obligations until it could realize the financial benefit of meeting the deliverable. The Company estimated its interest rate of 4.5% based on a small premium over the rate of its revolving line of credit as of the measurement date. The deliverable was met on August 31, 2021, ahead of the original schedule.

 

14

Information Analysis IncorporatedForm 10-Q September 30, 2021

 

Deferred Costs of Revenue

 

Deferred costs of revenue consist of the costs of third-party support and maintenance contracts for enterprise server-based software. These costs are reported under the prepaid expenses and other current assets caption on the Company’s balance sheets. The Company recognizes these direct costs ratably over time as it makes itself available to provide its performance obligation for software support, commensurate with its recognition of revenue. Changes in deferred costs of revenue balances in the three months and nine months ended September 30, 2021, and 2020, are as follows:

 

Deferred Costs of Revenue

    

Balance at December 31, 2020

 $89,068 

Deferred costs added

  17,406 

Deferred costs expensed

  (75,223)

Balance at March 31, 2021

  31,251 

Deferred costs added

  11,188 

Deferred costs expensed

  (16,681)

Balance at June 30, 2021

  25,758 

Deferred costs added

  194,686 

Deferred costs expensed

  (33,118)

Balance at September 30, 2021

 $187,326 
     
     

Balance at December 31, 2019

 $453,607 

Deferred costs added

  181 

Deferred costs expensed

  (207,437)

Balance at March 31, 2020

  246,351 

Deferred costs added

  2,472 

Deferred costs expensed

  (192,548)

Balance at June 30, 2020

  56,275 

Deferred costs added

  - 

Deferred costs expensed

  (54,477)

Balance at September 30, 2020

 $1,798 

 

 

 

3.

Leases

 

The Company has a primary operating lease which is a real estate lease for its headquarters in Fairfax, Virginia. This lease has a fixed lease term of 66 months and commenced July 1, 2021. The Company determines if an arrangement is a lease at inception. Operating leases are included in right-of-use operating lease assets and operating lease liabilities in the Company’s balance sheets as of September 30, 2021, and December 31, 2020. As of September 30, 2021, and December 31, 2020, the Company does not have any sales-type or direct financing leases.

 

The Company’s primary operating lease asset represents its right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Since the lease does not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease asset also includes any lease payments made and excludes lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company’s lease agreement includes rental payments escalating annually for inflation at a fixed rate. These payments are included in the initial measurement of the operating lease liability and operating lease asset. The Company does not have any rental payments which are based on a change in an index or a rate that can be considered variable lease payments, which would be expensed as incurred.

 

15

Information Analysis IncorporatedForm 10-Q September 30, 2021

 

The Company also has an operating lease which is a real estate lease for its Tellenger subsidiary. The original term of the lease expired, and it continues on a month-to-month basis at a fixed rate of $900 per month. Neither a lease asset nor a lease liability is recognized for this lease.

 

The Company’s lease agreements do not contain any material residual value guarantees or material restrictions or covenants.

 

The Company does not sublease any real estate to third parties.

 

The following table provides supplemental balance sheet information related to the Company’s operating lease:

 

Balance Sheet
Classification

 

As of
September 30,
2021

  

As of
December 31,
2020

 
         

Assets:

        

Right-to-use operating lease asset

 $285,667  $51,405 

Liabilities:

        

Operating lease liability - current

 $35,805  $45,595 

Operating lease liability - non-current

  260,141   - 

Total lease liabilities

 $295,946  $45,595 

 

The following table reconciles the undiscounted cash flows to the operating lease liabilities recorded in the Company’s consolidated balance sheet:

 

  

As of
September 30,
2021

 
     

Remainder of 2021

 $- 

2022

  69,334 

2023

  71,210 

2024

  54,699 

2025

  75,111 

2026

  51,327 

Total lease payments

  321,681 

Less: discount

  (25,735)

Present value of lease liabilities

 $295,946 

 

As of September 30, 2021, the Company’s primary operating lease had a lease term of 66 months. The discount rate of the lease is equal to IAI’s estimated incremental borrowing rate at the measurement date of the lease agreement. The weighted average discount rate of the Company’s operating lease is approximately 5.5%. For the three months ended September 30, 2021, and 2020, the Company incurred $15,985 and $26,122 of expense related to its operating leases, and for the nine months ended September 30, 2021 and 2020, the Company incurred $68,229 and $78,365 of expense related to its operating leases.

 

 

 

4.

Accounts Receivable

 

Accounts receivable at September 30, 2021 and December 31, 2020, consist of the following:

 

  

September 30,
2021

  

December 31,
2020

 

Billed federal government

 $2,832,906  $1,425,217 

Unbilled receivables

  41,750   17,014 

Accounts receivable

 $2,874,656  $1,442,231 

 

Billed receivables from the federal government include amounts due from both prime contracts and subcontracts where the federal government is the end customer.

 

 

 

5.

Acquisition

 

On April 7, 2021, the Company executed and closed a stock purchase agreement to purchase all of the issued and outstanding shares of stock of Tellenger, Inc. The adjusted purchase price was approximately $2.3 million in cash and 68,264 unregistered shares of the Company’s stock, valued at $200,000. Legal fees and other costs specifically related to the Tellenger acquisition in the amounts of $18,575 and $171,860 were incurred during the three-month and nine-month periods ended September 30, 2021, respectively, and were classified as acquisition costs in the Company’s consolidated statement of operations. The Company also incurred other acquisition types of costs unrelated to Tellenger.  Included in the cash consideration is $272,000 in amounts held in escrow at Citizens Bank, N.A. Institutional Services Group (as escrow agent) to satisfy any potential post-closing claims.

 

Tellenger is primarily engaged in the businesses of cyber security, cloud services, and data analytics services. Tellenger has access to a range of federal government contract vehicles and subcontracts under federal government agencies which include the Department of Homeland Security, the U.S. Department of Agriculture, the Department of Health and Human Services, the U.S. Marine Corps, and the U.S. Census Bureau, among others. Tellenger also performs cloud services for several national not-for-profits. Tellenger’s processes are appraised at CMMI Level 3, providing assurance to customers of consistency and quality in their efforts.

 

Following the April 7, 2021, Tellenger acquisition, the Company engaged an independent valuation firm to aid in the application of ASC 805 inclusive of the initial measurement of any intangible assets acquired by the Company. The Company’s intangible assets subject to amortization consist of acquired customer relationships and non-compete agreements. The Company amortizes intangible assets over their respective estimate useful lives. Identifiable intangible assets that are subject to amortization are evaluated for impairment and the Company will periodically reassess the carrying value, useful lives, and classifications of all identifiable intangible assets.

 

The purchase price allocation has been prepared on a preliminary basis and changes to the preliminary purchase price allocations may occur as additional information concerning asset and liability valuations is finalized. Under the acquisition method of accounting, the total consideration was first allocated to net tangible assets and identifiable intangible assets based upon their fair values as of the date of completion of the acquisition. As a result of the acquisition, the Company recorded net tangible assets of $240,357, and intangible assets in the form of $1,090,000 for customer relationships with an amortizable useful life of eight years, $280,000 for Tellenger’s trade name / trademarks with an indefinite life, and $120,000 for executed non-compete agreements with a useful life of three years. In accordance with ASC 350, the excess of the total consideration over the fair values of the net tangible and intangible assets of $785,000 was recorded as goodwill on the transaction.

 

The components of the Company’s identifiable intangible assets are as follows:

 

  

September 30, 2021

 
      

Gross

 
  

Useful

  

Carrying

 
  

Lives (years)

  

Amounts

 

Intangible assets with estimated useful lives

        

Customer relationships

  8  $1,090,000 

Non-compete agreements

  3   120,000 

Intangible assets with indefinite lives

        

Trade names

      280,000 

Gross identified intangible assets

      1,490,000 

Accumulated amortization

      (87,912)

Net identifiable intangible assets

      1,402,088 

Goodwill

      785,000 

Intangible assets

     $2,187,088 

 

17

Information Analysis IncorporatedForm 10-Q September 30, 2021

 

Amortization expense related to the amortizable intangible assets was $44,061 and $87,912 for the three months and nine months ended September 30, 2021, respectively. Amortization expense for the remaining three months of 2021 and the five years after 2021 is estimated to be:

 

Remainder of 2021

 $44,061 

2022

  176,244 

2023

  176,244 

2024

  146,259 

2025

  136,248 

2026

  136,248 

Thereafter

  306,784 

Total

 $1,122,088 

 

Supplemental Pro Forma Information

 

The following unaudited pro forma financial information presents combined results of operations for the periods presented as if the acquisition of Tellenger had been completed on January 1, 2020. The pro forma information includes adjustments to amortization expense for the intangible assets acquired and interest expense for the additional debt used to partially fund the acquisition price.

 

The pro forma data are for informational purposes only are not necessarily indicative of the consolidated results of operations of the combined business had the acquisition of Tellenger occurred on January 1, 2020, or the results of future operations of the combined business. For instance, planned or expected operational synergies following the acquisition are not reflected in the pro forma information. Consequently, actual results will differ from the unaudited pro forma information presented below.

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2021

  

2020

  

2021

  

2020

 

Revenue

 $4,299,925  $5,061,260  $13,677,430  $14,058,930 

Income (loss) from operations

 $(84,267) $252,947  $291,508  $(9,425)

 

 

 

6.

Stock-Based Compensation

 

The Company has two shareholder-approved stock-based compensation plans. The 2006 Stock Incentive Plan was adopted in 2006 (“2006 Plan”) and had options granted under it through April 12, 2016. On June 1, 2016, the shareholders ratified the IAI 2016 Stock Incentive Plan (“2016 Plan”), which had been approved by the Board of Directors on April 4, 2016.

 

The Company recognizes compensation costs only for those shares expected to vest on a straight-line basis over the requisite service period of the awards. Such options generally vest over periods of six months to two years. Fair values of option awards granted in the three months and nine months ended September 30, 2021 and 2020, were estimated using the Black-Scholes option pricing model under the following assumptions:

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2021

  

2020

  

2021

  

2020

 

Risk-free interest rate

  0.84%   0.26%   0.46%-0.92%   0.26%-0.33% 

Dividend yield

  0%   0%    0%     0%  

Expected term (in years)

  5   5%    5     5  

Expected volatility

  46.8%   69.6%   47.1%-92.6%   65.8%-69.6% 

 

Given the limited public market for the Company’s stock, the Company has elected to estimate its expected volatility by benchmarking its volatility against the calculated volatility of several public company issuers that operate within its market segment. The first issuance for which this benchmarking was applied was effective with options granted on March 31, 2021.

 

2016 Stock Incentive Plan

 

The 2016 Plan became effective June 1, 2016 and expires April 4, 2026. The 2016 Plan provides for the granting of equity awards to key employees, including officers and directors. The maximum number of shares for which equity awards may be granted under the 2016 Plan is 1,000,000. Options under the 2016 Plan expire no later than ten years from the date of grant or within prescribed periods following cessation of employment, whichever comes first, and vest over periods determined by the Board of Directors. The minimum exercise price of each option is the quoted market price of the Company’s stock on the date of grant. At September 30, 2021, there were unexpired options for 853,500 shares issued under the 2016 Plan, of which 556,000 were exercisable.

 

18

Information Analysis IncorporatedForm 10-Q September 30, 2021

 

2006 Stock Incentive Plan

 

The 2006 Plan became effective May 18, 2006, and expired April 12, 2016. The 2006 Plan provides for the granting of equity awards to key employees, including officers and directors. Options under the 2006 Plan were generally granted at-the-money or above, expire no later than ten years from the date of grant or within three months of within prescribed periods following cessation of employment, whichever comes first, and vest over periods determined by the Board of Directors. The number of shares subject to options available for issuance under the 2006 Plan could not exceed 1,950,000. There were 374,000 unexpired options remaining from the 2006 Plan at September 30, 2021, all of which were exercisable.

 

The status of the options issued under the foregoing option plans as of September 30, 2021 and 2020, and changes during the three months and nine months ended September 30, 2021 and 2020, were as follows:

 

Options outstanding

 
      

Weighted average

 

Weighted average

 

Aggregate

 
      

exercise price

 

remaining

 

intrinsic

 

Incentive Options

 

Shares

  

per share

 

contractual term

 

value

 

Outstanding at December 31, 2020

  1,395,000  $0.31      

Options granted

  145,000   2.62      

Options exercised

  (25,000)  0.14      

Options expired

  -   -      

Options forfeited

  -   -      

Outstanding at March 31, 2021

  1,515,000  $0.53      

Options granted

  127,500   2.85      

Options exercised

  (360,000)  0.22      

Options expired

  (20,000)  0.17      

Options forfeited

  -   -      

Outstanding at June 30, 2021

  1,262,500  $0.86      

Options granted

  30,000   2.80      

Options exercised

  (65,000)  0.18      

Options expired

  -   -      

Options forfeited

  -   -      

Outstanding at September 30, 2021

  1,227,500  $0.94 

5 years, 1 month

 $2,450,068 

Exercisable at September 30, 2021

  930,000  $0.44 

4 years, 5 months

 $2,326,943 
              

Outstanding at December 31, 2019

  1,349,000  $0.23      

Options granted

  -   -      

Options exercised

  -   -      

Options expired

  (129,000)  0.17      

Options forfeited

  -   -      

Outstanding at March 31, 2020

  1,220,000   0.24      

Options granted

  10,000   0.15      

Options exercised

  -   -      

Options expired

  (10,000)  0.19      

Options forfeited

  -   -      

Outstanding at June 30, 2020

  1,220,000   0.24      

Options granted

  210,000   0.66      

Options exercised

  -   -      

Options expired

  -   -      

Options forfeited

  -   -      

Outstanding at September 30, 2020

  1,430,000  $0.30 

4 years, 5 months

 $487,773 

Exercisable at September 30, 2020

  1,208,500  $0.24 

3 years, 5 months

 $482,268 

 

19

Information Analysis IncorporatedForm 10-Q September 30, 2021

 

There were 30,000 options and 210,000 options granted during the three months ended September 30, 2021, and 2020, respectively, and there were 302,500 options and 220,000 options granted during the nine months ended September 30, 2021 and 2020, respectively. There were 65,000 options and no options exercised during the three months ended September 30, 2021, and 2020, respectively, and there were 450,000 options and no options exercised during the nine months ended September 30, 2021, and 2020, respectively. As of September 30, 2021, there was $163,847 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the stock incentive plans; that cost is expected to be recognized over a weighted-average period of seven months.

 

Total compensation expense related to these plans was $80,882 and $6,365 for the three months ended September 30, 2021, and 2020, respectively, and $220,455 and $7,171 for the nine months ended September 30, 2021, and 2020, respectively.

 

Nonvested option awards as of September 30, 2021, and 2020, and changes during the three months and nine months ended September 30, 2021 and 2020, were as follows:

 

  

Nonvested

 
      

Weighted average

 
      

grant date

 
  

Shares

  

fair value

 

Nonvested at December 31, 2020

  235,000  $0.36 

Granted

  145,000   1.22 

Vested

  -   - 

Forfeited

  -   - 

Nonvested at March 31, 2021

  380,000  $0.94 

Granted

  127,500   1.19 

Vested

  (25,000)  1.01 

Forfeited

  -   - 

Nonvested at June 30, 2021

  482,500  $0.81 

Granted

  30,000   1.15 

Vested

  (215,000)  0.41 

Forfeited

  -   - 

Nonvested at September 30, 2021

  297,500  $1.13 
         

Nonvested at December 31, 2019

  23,500  $0.17 

Granted

  -   - 

Vested

  (5,000)  0.21 

Forfeited

  -   - 

Nonvested at March 31, 2020

  18,500  $0.15 

Granted

  10,000   0.08 

Vested

  (15,500)  0.16 

Forfeited

  -   - 

Nonvested at June 30, 2020

  13,000  $0.09 

Granted

  210,000   0.37 

Vested

  (1,500)  0.12 

Forfeited

  -   - 

Nonvested at September 30, 2020

  221,500  $0.36 

 

 

 

7.

Revolving Line of Credit

 

At September 30, 2021, the Company had a revolving line of credit with Summit Community Bank (“Summit”) providing for on-demand or short-term borrowings of up to $1,000,000, subject to a borrowing base calculated using outstanding accounts receivable, in which the bank has a collateral interest. The line expires on April 16, 2022. As of September 30, 2021, $402,306 was outstanding under this line of credit at a variable interest rate of 3.25% (Wall Street Journal prime plus 0% with a floor of 3.25%), and there was no outstanding balance at December 31, 2020.

 

The Company previously had a revolving line of credit with another bank (“prior LOC”) providing for demand or short-term borrowings of up to $1,000,000. The prior LOC originally was due to expire on July 31, 2021. The new Summit line of credit was used to pay off the prior LOC and it was closed on May 3, 2021.

 

 

 

8.

Notes Payable

 

Due to the coronavirus uncertainty and staffing and payroll cuts that were being considered in early 2020 due to liquidity constraints, the Company applied for a Paycheck Protection Program loan, guaranteed by the SBA. The Company was funded by its lender on April 20, 2020, in the amount of $450,000. The loan accrues interest at a fixed rate of 1% and has a term of two years. The first payment is deferred until the date the SBA remits the Company’s loan forgiveness amount to the lender, though interest accrues during the deferral period. The loan has been used exclusively to support maintaining employee payroll and benefits. The Company began making principal and interest payments in August 2021 while also continuing to pursue its application for loan forgiveness. On, October 6, 2021, the Company was notified that its lender had approved the full amount of $450,000 for forgiveness, and the forgiveness package had been submitted to the SBA for final approval. The SBA may take up to 90 days to complete their review of the submission. The Company expects its application for loan forgiveness to be resolved during the fourth quarter of 2021.

 

In conjunction with the Tellenger acquisition, on April 16, 2021, the Company and Tellenger jointly procured a $1 million term loan (“Term Loan”) with Summit Community Bank to assist with post-acquisition cash flow and integration costs. The loan is payable in monthly installments consisting of a fixed principal amount plus accrued interest over the course of two years at a fixed interest rate of 4.89%. The loan is collateralized by a security interest in substantially all the assets of both companies.

 

To provide additional net working capital support, the Company borrowed $150,000 from the sellers of Tellenger for a period of 90 days from the closing date of April 7, 2021, without interest accumulation. The sellers were repaid in July 2021.

 

The following table represents note payable balances at September 30, 2021 and December 31, 2020:

 

  

September 30,
2021

  

December 30,
2020

 

PPP loan

 $406,484  $450,000 

Term loan

  791,667   - 

Total

  1,198,151   450,000 

Less current portion

  (797,295)  (93,009)

Non-current portion

 $400,856  $356,991 

 

  

Notes Payable Payment Schedule

 
  

Term Loan

  

PPP Loan

  

Total

 
             

Remainder of 2021

 $125,000  $74,045  $199,045 

2022

  500,000   298,039   798,039 

2023

  166,667   34,400   201,067 

Total payments

 $791,667  $406,484  $1,198,151 

 

 

 

9.

Private Placement

 

On August 26, 2021, the Company completed a private offering of 1,400,000 units at a price of $2.00 per unit, each unit consisting of one share of common stock and one warrant exercisable at $3.00 for one share of common stock. No commissions were payable in connection with this offering. The warrants expire on August 31, 2026. 1,400,000 shares of common stock issuable upon exercise of warrants in connection with the offering have been reserved for issuance. The net proceeds of the transaction of $2,800,000 will be used for general corporate purposes.

 

The shares are unregistered and are subject to a six-month holding period under SEC Rule 144 before the securities can be sold in the public market. The warrants are also exercisable for unregistered shares and are freely transferable after six months from their issuance. The shares underlying the warrants must be held for a period of at least six months if exercised for cash. If exercised on a cashless basis, the shares can be freely traded once the holding period of the warrants and the shares is at least six months combined. The warrants are freestanding securities that are separately exercisable and legally detachable from the common shares and have been classified as equity in accordance with ASC Topic 480, Distinguishing Liabilities from Equity. The proceeds from the offering were allocated using the relative fair value method as follows:

 

      

Additional

     
  

Common

  

Paid-In

     
  

Stock

  

Capital

  

Total

 

Unregistered shares

 $14,000  $2,142,000  $2,156,000 

Warrants

  -   644,000   644,000 

Total

 $14,000  $2,786,000  $2,800,000 

 

21

Information Analysis IncorporatedForm 10-Q September 30, 2021

 

 

10.

Earnings (Loss) Per Share

 

Basic loss per share excludes dilution and is computed by dividing loss available to common shareholders by the weighted-average number of shares outstanding for the period. Diluted earnings (loss) 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, except for periods when the Company reports a net loss because the inclusion of such items would be antidilutive. The antidilutive effect of 672,373 shares from stock options were excluded from diluted shares for the three months ended September 30, 2021.

 

The following is a reconciliation of the amounts used in calculating basic and diluted net income (loss) per common share:

 

  

Net income

      

Per share

 
  

(loss)

  

Shares

  

amount

 

Basic net loss per common share for the three months ended September 30, 2021:

            

Loss available to common shareholders

 $(95,527)  12,596,126  $(0.01)

Effect of dilutive stock options

  -   -   - 

Diluted net loss per common share for the three months ended September 30, 2021

 $(95,527)  12,596,126  $(0.01)
             

Basic net income per common share for the three months ended September 30, 2020:

            

Income available to common shareholders

 $214,703   11,211,760  $0.02 

Effect of dilutive stock options

  -   625,667   - 

Diluted net income per common share for the three months ended September 30, 2020:

 $214,703   11,837,427  $0.02 

 

 

  

Net income

      

Per share

 
  

(loss)

  

Shares

  

amount

 

Basic net income per common share for the nine months ended September 30, 2021:

            

Income available to common shareholders

 $218,445   11,957,878  $0.02 

Effect of dilutive stock options

  -   627,036   - 

Diluted net income per common share for the nine months ended September 30, 2021

 $218,445   12,584,914  $0.02 
             

Basic net income per common share for the nine months ended September 30, 2020:

            

Income available to common shareholders

 $53,745   11,211,760  $- 

Effect of dilutive stock options

  -   598,632   - 

Diluted net income per common share for the nine months ended September 30, 2020

 $53,745   11,810,392  $- 

 

 

 

11.

Subsequent Events

 

Lease Agreement

 

In October 2021, the Company executed a lease of office space in Annapolis, MD. The lease’s effective date was October 1, 2021. The lease term is 36 months with no renewal options and initial monthly rent of $12,713. Rent for the first three months of the lease term will be abated by 50% and the lease contains 2.5% rent escalations in its second and third years.

 

22

Information Analysis Incorporated Form 10-Q September 30, 2021
 

 

 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Cautionary Statement Regarding Forward-Looking Statements

 

This Form 10-Q contains forward-looking statements regarding our 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (“2020 10-K”) and in other filings with the Securities and Exchange Commission.

 

We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. This list highlights some of the risks which may affect future operating results. These are the risks and uncertainties we believe are most important for you to consider. Additional risks and uncertainties, not presently known to us, which we currently deem immaterial, or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations. If any of the following risks or uncertainties actually occurs, our business, financial condition and operating results would likely suffer. These risks include, among others, the following:

 

 

our failure to generate a sufficient level of professional fees;

 

the loss of one or more material subcontracts under which a material portion of our revenue and income is concentrated;

 

our inability to integrate businesses, products, or technologies we may acquire;

 

the limited public market for our common stock;

 

inaccuracy in our estimates of the cost of services and the timeline for completion of contracts;