Operations

Information Analysis Incorporated (“the Company”) was incorporated under the corporate laws of the Commonwealth of Virginia in 1979 to develop and market computer applications software systems, programming services, and related software products and automation systems. The Company provides services to customers throughout the United States, with a concentration in the Washington, D.C. metropolitan area.

Use of Estimates

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

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). The Company adopted ASU 2014-09 and its related amendments (collectively known as “ASC 606”) effective January 1, 2018, by applying the modified retrospective transition method to all of the Company’s contracts. Comparative information has not been restated and continues to be reported under the accounting standards in effect for the periods presented. Based on the results of the Company’s evaluation, the adoption of ASC 606 did not have a material impact on its revenue recognition policies. In addition, the adoption of ASC 606 did not have a material impact on our financial statements for the years ended December 31, 2018 and 2017. Additionally, the cumulative effect to the opening balance sheet on January 1, 2018, from the adoption of ASC 606 was not material.See Note 2 for a detailed description of revenue recognition under ASC 606.

Segment Reporting

The Company has concluded that it operates in one business segment, providing products and services to modernize 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 December 31, 2018 and 2017. Prompt payment discounts offered and expected to be taken by customers in conjunction with orders received under the Company’s GSA Schedule are reflected as a reduction in the Company’s accounts receivable.

Notes Receivable

The Company had an outstanding note receivable and accrued interest from one non-officer employee at December 31, 2017. It bore interest at 3.5% and was repaid in full in 2018.

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, 2018, the Company had the stock-based compensation plans described in Note 10 below. Total compensation expense related to these plans was $29,600 and $15,044 for the years ended December 31, 2018 and 2017, 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.

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.

In December 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act").  The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to: (i) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (ii) eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized; (iii) creating a new limitation on deductible interest expense;(iv) changing rules related to uses and limitations of net operating carryforwards created in tax years beginning after December 31, 2017; and (v) changing the U.S. federal taxation of earnings of foreign subsidiaries.

As a result, the Company experienced a reduction of approximately $1,870,800 of the deferred tax assets related to net operating losses and other deferred tax assets as of December 31, 2017. Such reduction was offset by a change in the Company’s valuation allowance.

(Loss) Earnings Per Share

The Company’s (loss) earnings 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 earnings per share, except for periods when the Company reports a net loss, in which case the inclusion of such equity instruments would be antidilutive. 452,724 shares representing the dilutive effect of stock options were excluded from diluted loss per share for the year ended December 31, 2018, due to the net loss reported for the period. 381,818 shares representing the dilutive effect of stock options were included in diluted earnings per share for the year ended December 31, 2017.

Concentration of Credit Risk

During the year ended December 31, 2018, the Company’s prime contracts with U.S. government agencies represented 68.8% of revenue, subcontracts under federal procurements represented 26.5% of revenue, 4.7% of revenue came from commercial contracts, and less than 0.05% of revenue came from state and local government contracts. The terms of these contracts and subcontracts vary from single transactions to five years. Within this group of prime contracts with U.S. government agencies, two individual contracts represented 20.5% and 12.4% of revenue, respectively. One subcontract under a federal procurement represented 22.1% of revenue.

In the year ended December 31, 2017, the Company’s prime contracts with U.S. government agencies represented 70.9% of revenue, subcontracts under federal procurements represented 23.2% of revenue, and 5.9% of revenue came from commercial contracts. The terms of these contracts and subcontracts vary from single transactions to five years. Within this group of prime contracts with U.S. government agencies, three individual contracts represented 15.8%, 12.4%, and 8.1% of revenue, respectively. One subcontract under a federal procurement represented 18.8% of revenue.

The Company sold third-party software and maintenance contracts under agreements with one major supplier in 2018 and 2017, accounting for 50.0% and 52.7% of total revenue, respectively.

At December 31, 2018, the Company’s accounts receivable included receivables from prime contracts with two U.S. government agencies that represented 16.6% and 16.3% of the Company’s outstanding accounts receivable, respectively, and receivables from one subcontract under a federal procurement that represented 44.3% of the Company’s outstanding accounts receivable.

At December 31, 2017, the Company’s accounts receivable included receivables from prime contracts with one U.S. government agency that represented 17.8% of the Company’s outstanding accounts receivable, and receivables from two subcontracts under federal procurements that represented 35.2% and 10.6% of the Company’s outstanding accounts receivable, respectively.

Related Party Transactions

The Company’s Director of Human Resources is the spouse of the Senior Vice President and Chief Operating Officer of the Company. During the years ended December 31, 2018 and 2017, she received wages and paid leave distributions totaling $148,932 and $136,705, respectively, as an employee of the Company.

A member of the Company's Board of Directors currently serves as president of an information technology and professional services firm which serves the federal government and commercial markets. Revenues generated from doing business with this company totaled $0 and $14,271 during the years ended December 31, 2018 and 2017, respectively.

Recent Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02, “Leases: Topic 842,” which provided updated guidance on lease accounting. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that annual period, with early adoption permitted. Adoption of this new standard will not have a material impact on the Company’s financial statements. When adopted effective January 1, 2019, the Company’s operating lease for office space will be presented as a right-of-use asset and as an offsetting liability for the present value of the contractual cash flows. The Company does not currently have any other material lease obligations.