Blueprint
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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(Mark One)
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☑
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2017
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OR
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☐
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the transition period from to
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Commission File
Number 000-22405
Information Analysis Incorporated
(Exact name of registrant as specified in its charter)
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Virginia
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54-1167364
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(State or other jurisdiction of incorporation or
organization)
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(I.R.S. Employer Identification No.)
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11240 Waples Mill Road
Suite 201
Fairfax, Virginia 22030
(Address of principal executive offices, Zip Code)
(703) 383-3000
(Registrant’s telephone number, including area
code)
Not applicable
(Former name, former address and former fiscal year, if changed
since last report)
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 and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and
posted 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 and post
such files).
Yes ☑ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange
Act.
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Large accelerated filer ☐
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Accelerated filer ☐
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Non-accelerated filer ☐
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Smaller reporting company ☑
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(Do not check if a smaller reporting company)
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Emerging growth company ☐
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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 ☑
As
of November 9, 2017, 11,201,760 shares of common stock, par value
$0.01 per share, of the registrant were outstanding.
INFORMATION ANALYSIS INCORPORATED
FORM 10-Q
Index
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Page
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PART
I.
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FINANCIAL
INFORMATION
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Number
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Item
1.
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Financial
Statements (unaudited except for the balance sheet as of December
31, 2016)
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Balance
Sheets as of September 30, 2017
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and
December 31, 2016
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3
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Statements
of Operations for the three months
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ended
September 30, 2017 and 2016
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4
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Statements
of Operations for the nine months
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ended
September 30, 2017 and 2016
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5
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Statements
of Cash Flows for the nine months
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ended
September 30, 2017 and 2016
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6
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Notes
to Financial Statements
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7
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Item
2.
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Management's
Discussion and Analysis of
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Financial Condition
and Results of Operations
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13
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Item
4.
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Controls
and Procedures
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17
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PART
II.
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OTHER
INFORMATION
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Item
1.
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Legal
Proceedings
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18
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Item
1A.
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Risk
Factors
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18
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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18
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Item
3.
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Defaults
Upon Senior Securities
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18
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Item
4.
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Mine
Safety Disclosures
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18
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Item
5.
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Other
Information
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18
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Item
6.
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Exhibits
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18
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SIGNATURES
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18
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INFORMATION ANALYSIS INCORPORATED
BALANCE SHEETS
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ASSETS
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Current
assets:
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Cash
and cash equivalents
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$2,550,719
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$1,895,372
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Accounts
receivable, net
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1,809,200
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1,157,387
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Prepaid
expenses and other current assets
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493,523
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663,556
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Notes
receivable, current
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2,489
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2,630
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Total
current assets
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4,855,931
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3,718,945
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Property
and equipment, net
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13,528
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27,198
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Other
assets
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6,281
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6,281
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Total
assets
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$4,875,740
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$3,752,424
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current
liabilities:
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Accounts
payable
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$958,289
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$48,974
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Commissions
payable
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757,672
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853,340
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Other
accrued liabilities
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635,183
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396,081
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Deferred
revenue
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449,466
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615,035
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Accrued
payroll and related liabilities
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268,607
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206,475
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Total
liabilities
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3,069,217
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2,119,905
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Stockholders'
equity:
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Common
stock, par value $0.01, 30,000,000 shares authorized;
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12,844,376
shares issued, 11,201,760 shares outstanding as of September 30,
2017 and December 31, 2016
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128,443
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128,443
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Additional
paid-in capital
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14,637,980
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14,631,362
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Accumulated
deficit
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(12,029,689)
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(12,197,075)
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Treasury
stock, 1,642,616 shares at cost
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(930,211)
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(930,211)
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Total
stockholders' equity
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1,806,523
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1,632,519
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Total
liabilities and stockholders' equity
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$4,875,740
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$3,752,424
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The accompanying notes are an integral part of the financial
statements
INFORMATION ANALYSIS INCORPORATED
STATEMENTS OF OPERATIONS
(Unaudited)
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For the three months
ended
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Revenues:
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Professional
fees
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$1,385,257
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$885,505
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Software
sales
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1,346,537
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1,146,048
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Total
revenues
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2,731,794
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2,031,553
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Cost
of revenues:
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Cost
of professional fees
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776,404
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468,556
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Cost
of software sales
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1,319,499
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1,006,912
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Total
cost of revenues
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2,095,903
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1,475,468
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Gross
profit
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635,891
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556,085
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Selling,
general and administrative expenses
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386,929
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428,852
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Commissions
expense
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140,963
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187,030
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Income
(loss) from operations
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107,999
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(59,797)
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Other
income
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2,285
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2,559
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Income
(loss) before provision for income taxes
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110,284
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(57,238)
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Provision
for income taxes
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-
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-
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Net
income (loss)
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$110,284
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$(57,238)
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Net
income (loss) per common share:
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Basic
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$0.01
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$(0.01)
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Diluted
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$0.01
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$(0.01)
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Weighted
average common shares outstanding:
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Basic
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11,201,760
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11,201,760
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Diluted
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11,510,711
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11,201,760
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The accompanying notes are an integral part of the financial
statements
INFORMATION ANALYSIS INCORPORATED
STATEMENTS OF OPERATIONS
(Unaudited)
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For the nine months ended
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Revenues:
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Professional
fees
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$3,676,730
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$2,655,006
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Software
sales
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4,592,828
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2,667,567
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Total
revenues
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8,269,558
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5,322,573
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Cost
of revenues:
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Cost
of professional fees
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1,990,383
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1,509,281
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Cost
of software sales
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4,506,099
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2,373,788
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Total
cost of revenues
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6,496,482
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3,883,069
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Gross
profit
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1,773,076
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1,439,504
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Selling,
general and administrative expenses
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1,231,863
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1,451,423
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Commissions
expense
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380,267
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408,695
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Income
(loss) from operations
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160,946
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(420,614)
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Other
income
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6,440
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7,349
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Income
(loss) before provision for income taxes
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167,386
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(413,265)
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Provision
for income taxes
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-
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-
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Net
income (loss)
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$167,386
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$(413,265)
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Net
income (loss) per common share:
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Basic
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$0.01
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$(0.04)
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Diluted
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$0.01
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$(0.04)
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Weighted
average common shares outstanding:
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Basic
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11,201,760
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11,201,760
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Diluted
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11,509,202
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11,201,760
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The accompanying notes are an integral part of the financial
statements
INFORMATION ANALYSIS INCORPORATED
STATEMENTS OF CASH FLOWS
(Unaudited)
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For the nine months ended
September 30,
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Cash
flows from operating activities:
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Net
income (loss)
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$167,386
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$(413,265)
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Adjustments
to reconcile net income (loss) to net cash
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provided
by operating activities:
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Depreciation
and amortization
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13,670
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22,044
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Stock-based
compensation, net of forfeitures
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6,618
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8,329
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Bad
debts
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-
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13,781
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Changes
in operating assets and liabilities:
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Accounts
receivable
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(651,813)
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(9,265)
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Prepaid
expenses and other current assets
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170,033
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105,775
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Accounts
payable, accrued payroll and related
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liabilities, and other accrued
liabilities
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1,210,549
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1,086,156
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Deferred
revenue
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(165,569)
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(117,248)
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Commissions
payable
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(95,668)
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(51,528)
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Net
cash provided by operating activities
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655,206
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644,779
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Cash
flows from investing activities:
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Acquisition
of property and equipment
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-
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(11,581)
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Increase
in notes receivable - employees
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(2,500)
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(5,768)
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Payments
received on notes receivable - employees
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2,641
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2,179
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Net
cash provided by (used in) investing activities
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141
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(15,170)
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Net
increase in cash and cash equivalents
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655,347
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629,609
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Cash
and cash equivalents, beginning of the period
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1,895,372
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2,167,928
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Cash
and cash equivalents, end of the period
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$2,550,719
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$2,797,537
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Supplemental
cash flow information
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Interest
paid
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$-
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$-
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Income
taxes paid
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$-
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$-
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The accompanying notes are an integral part of the financial
statements
INFORMATION ANALYSIS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
1.
Summary
of Significant Accounting Policies
Organization and Business
Founded
in 1979, Information Analysis Incorporated (the
“Company”), to which we sometimes refer as IAI, is in
the business of developing and maintaining information technology
(IT) systems, modernizing client information systems, and
performing professional services to government and commercial
organizations. We presently concentrate our technology, services
and experience to developing web-based and mobile device solutions
(including electronic forms conversions), data analytics, cyber
security applications, and legacy software migration and
modernization for various agencies of the federal government. We
provide software and services to government and commercial
customers throughout the United States, with a concentration in the
Washington, D.C. metropolitan area.
Unaudited Interim Financial Statements
The
accompanying unaudited 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 unaudited
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 financial statements should be read in conjunction with
our audited financial statements for the year ended December 31,
2016 included in the Annual Report on Form 10-K filed by the
Company with the SEC on March 31, 2017 (the “Annual
Report”). The accompanying December 31, 2016 balance sheet
and financial information was derived from our 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.
There
have been no changes in the Company’s significant accounting
policies as of September 30, 2017 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, 2016 that was filed with the
SEC on March 31, 2017.
Use of Estimates and Assumptions
The
preparation of financial statements in accordance with 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.
Income Taxes
As of
September 30, 2017, there have been no material changes to the
Company’s uncertain tax position disclosures as provided in
Note 7 of the Annual Report. The Company does not anticipate that
total unrecognized tax benefits will significantly change prior to
September 30, 2018.
The
Company earns revenue from both professional services and sales of
software and related support. The Company recognizes revenue when a
contract has been executed, the contract price is fixed and
determinable, delivery of services or products has occurred, and
collectability of the contract price is considered probable and can
be reasonably estimated. Revenue from professional services is
earned under time and materials and fixed-price contracts. For
sales of third-party software products, revenue is recognized upon
product delivery, with any maintenance related revenues recognized
ratably over the maintenance period.
Revenue
on time and materials contracts is recognized based on direct labor
hours expended at contract billing rates and adding other billable
direct costs.
For
fixed-price contracts that are based on unit pricing, the Company
recognizes revenue for the number of units delivered in any given
reporting period.
For
fixed-price contracts in which the Company is paid a specific
amount to be available to provide a particular service for a stated
period of time, revenue is recognized ratably over the service
period. The Company applies this method of revenue recognition to
renewals of maintenance contracts on third-party software sales and
to separable maintenance elements of sales of third-party software
that include fixed terms of maintenance, such as Adobe and Micro
Focus software, for which the Company is responsible for
“first line support” to the customer and for serving as
a liaison between the customer and the third-party maintenance
provider for issues the Company is unable to resolve.
The
Company reports revenue on both gross and net bases on a
transaction by transaction analysis using authoritative guidance
issued by the Financial Accounting Standards Board (the
“FASB”). The Company considers the following factors to
determine the gross versus net presentation: if the Company (i)
acts as principal in the transaction; (ii) takes title to the
products; (iii) has risks and rewards of ownership, such as the
risk of loss for collection, delivery or return; and (iv) acts as
an agent or broker (including performing services, in substance, as
an agent or broker) with compensation on a commission or fee basis.
Generally, sales of third-party software products such as Adobe and
Micro Focus products are reported on a gross basis with the Company
acting as the principal in these arrangements. This determination
is based on the following: 1) the Company has inventory risk as
suppliers are not obligated to accept returns, 2) the Company has
reasonable latitude, within economic constraints, in establishing
price, 3) the Company, in its marketing efforts, frequently aids
the customer in determining product specifications, 4) the Company
has physical loss and inventory risk as title transfers at the
shipping point, 5) the Company bears full credit risk, and 6) the
amount the Company earns in the transaction is neither a fixed
dollar amount nor a fixed percentage. Generally, revenue derived
for facilitating a sales transaction of Adobe products in which a
customer introduced by the Company makes a purchase directly from
the Company’s supplier or another designated reseller is
recognized on a net basis when the commission payment is received
since the Company is merely acting as an agent in these
arrangements. Since the Company is not a direct party in the sales
transaction, payment by the supplier is the Company’s
confirmation that the sale occurred.
For
software and software-related multiple element arrangements, the
Company must: (1) determine whether and when each element has been
delivered; (2) determine whether undelivered products or services
are essential to the functionality of the delivered products and
services; (3) determine the fair value of each undelivered element
using vendor-specific objective evidence ("VSOE"), and (4) allocate
the total price among the various elements. Changes in assumptions
or judgments or changes to the elements in a software arrangement
could cause a material increase or decrease in the amount of
revenue that the Company reports in a particular
period.
The
Company determines VSOE for each element based on historical
stand-alone sales to third parties or from the stated renewal rate
for the elements contained in the initial arrangement. The Company
has established VSOE for its third-party software maintenance and
support services.
The
Company’s contracts with agencies of the U.S. federal
government are subject to periodic funding by the respective
contracting agency. Funding for a contract may be provided in full
at inception of the contract, ratably throughout the contract as
the services are provided, or subject to funds made available
incrementally by legislators. In evaluating the probability of
funding for purposes of assessing collectability of the contract
price, the Company considers its previous experiences with its
customers, communications with its customers regarding funding
status, and the Company’s knowledge of available funding for
the contract or program. If funding is not assessed as probable,
revenue recognition is deferred until realization is deemed
probable.
Payments received
in advance of services performed are recorded and reported as
deferred revenue. Services performed prior to invoicing customers
are recorded as unbilled accounts receivable and are presented on
the Company’s balance sheets in the aggregate with accounts
receivable.
Prompt
payment discounts taken and expected to be taken by customers in
conjunction with orders received under the Company’s General
Services Administration Multiple Award Schedule (“GSA
Schedule”) are reflected as a reduction in the
Company’s revenue.
2.
Recent
Accounting Pronouncements
From
time to time, new accounting pronouncements are issued by the FASB,
or other standard setting bodies, that the Company adopts as of the
specified effective date.
In May
2014, the FASB issued Accounting Standards Update ("ASU") No.
2014-09, "Revenue from Contracts
with Customers (Topic 606)" (“ASU
2014-09”). In
subsequent ASU’s, the FASB issued ASU 2015-14 “Revenue from Contracts with Customers:
Topic 606”, ASU 2016-08 "Principal versus Agent Considerations
(Reporting Revenue Gross Versus Net), ASU 2016-10
"Identifying Performance
Obligations and Licensing", ASU 2016-12 "Revenue from Contracts with Customers -
Narrow Scope Improvements and Practical Expedients", and ASU
2016-20 “Technical
Corrections and Improvements to Topic 606, Revenue from Contracts
with Customers” (collectively “Topic 606”)
to amend and clarify ASU 2014-09. This new set of standards will
supersede nearly all existing revenue recognition guidance in GAAP.
The core principle of Topic 606 is that an entity should recognize
revenue for the transfer of goods or services equal to the amount
it expects to receive for those goods and services. The standard
defines a five step process to achieve this core principle and, in
doing so, it is possible more judgment and estimates may be
required within the revenue recognition process than are required
under existing GAAP, including identifying performance obligations
in the contract, estimating the amount of variable consideration to
include in the transaction price and allocating the transaction
price to each separate performance obligation. The standard allows
entities to apply either of two adoption methods: (a) retrospective
application to each prior reporting period presented with the
option to elect certain practical expedients as defined within
Topic 606 (“Retrospective Transition;” or (b)
retrospective application with the cumulative effect of initially
applying the standard recognized at the date of initial application
and providing certain additional disclosures as defined per Topic
606. The effective date for Topic 606 is for annual reporting
periods beginning after December 15, 2017, including interim
reporting periods within that reporting period.
We will
adopt the requirements of Topic 606 effective January 1, 2018, most
likely using the Retrospective Transition method, whereby Topic 606
will be applied to the prior year as presented with the use of
certain applicable practical expedients, and any effects on periods
preceding the periods reported will appear as an adjustment to
retained earnings as of the beginning of the earliest period
reported. As the ASU supersedes substantially all existing revenue
guidance affecting us under current GAAP, it will impact revenue
and cost recognition across the whole of our business, as well as
our business processes and our information technology
systems.
We
began our evaluation of the impact of Topic 606 in early 2017 by
evaluating its impact on selected contracts of each type under
which we operate. With this baseline understanding, we developed a
project plan to evaluate the remainder of our contracts, develop
processes and tools to dual-report financial results under both
current GAAP and Topic 606, and assess the internal control
structure in order to adopt Topic 606 on January 1, 2018. We have
briefed our Audit Committee on our progress made towards adoption.
Based on our progress to date, we anticipate being able to estimate
the impacts of adopting Topic 606 on our operating results during
the fourth quarter of 2017.
We
currently operate under time-and-materials, fixed-price,
fixed-price-per-unit, and fixed-term third-party software license
and/or third-party software maintenance contracts. Some of these
contracts involve more than one type of deliverable, which adds
complexity to the application of Topic 606.
Under
Topic 606, revenue will be recognized as the customer obtains
control of the goods and services promised in the contract (i.e.,
performance obligations). Given the nature of our professional
services and the terms and conditions in our contracts, the
customer generally obtains control as we perform work under the
contract. Therefore, we expect to recognize revenue over time for
substantially all of our professional services contracts, while we
expect to recognize revenue over time, at a point in time, or some
of each for our software sales contracts, based on what was sold
and whether we have any continuing performance obligations, such as
the obligation to provide first-line support under a maintenance
contract supporting third-party software.
Under
Topic 606, guidance related to principal versus agent
considerations rely heavily on control of an asset before delivery
over some of the considerations used under previous guidance,
including the negotiation of selling price and credit risk of the
seller. This will likely lead to the reclassification of a
percentage of our software sales transactions to be reported on a
net sales basis, rather than on a gross sales basis, as Topic 606
guidance shifts our responsibility from a principal seller to an
agent. This reclassification will not affect the Company’s
net operating results.
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. The Company does not expect the adoption
of this new standard will have a material impact on its financial
statements. When adopted, 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.
In
August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and
Cash Payments,” to provide additional guidance and
reduce diversity in practice in how certain cash receipts and cash
payments are presented and classified in the statement of cash
flows. This guidance is effective for fiscal years beginning after
December 15, 2017 and early adoption is permitted, including
adoption in an interim period. The Company does not expect the
adoption of this guidance will have a material impact on its
financial statements.
3.
Stock-Based
Compensation
During
the nine months ended September 30, 2017, the Company had 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.
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. Options under the 2016
Plan are generally granted at-the-money or above, expire no later
than ten years from the date of grant or within three months of
when employment ceases, 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 2016 Plan
cannot exceed 1,000,000. At September 30, 2017, there were
unexpired options for 217,000 shares issued under the 2016
Plan.
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
2016 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 when employment ceases, 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 1,071,000 and 1,193,500 unexpired
options remaining from the 2006 Plan at September 30, 2017 and
2016, 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. The fair values of option awards
granted in the three months and nine months ended September 30,
2017 and 2016, were estimated using the Black-Scholes option
pricing model using the following assumptions:
|
|
|
|
Three Months
ended
September
30,
|
|
Nine months
ended
September
30,
|
|
|
|
|
2017
|
2016
|
|
2017
|
2016
|
|
Risk
free interest rate
|
|
|
1.87%
|
n/a
|
|
1.87%
|
0.70% -
1.73%
|
|
Dividend
yield
|
|
|
0%
|
n/a
|
|
0%
|
0%
|
|
Expected
term
|
|
|
5
years
|
n/a
|
|
5
years
|
2-10
years
|
|
Expected
volatility
|
|
|
44.6%
|
n/a
|
|
44.6%
|
34.9% -
50.4%
|
A
summary of the activity under the stock incentive plans as of
September 30, 2017, and changes during the nine months then ended
is presented below.
|
Incentive
Options
|
|
Weighted-Average
Exercise
Price
|
Weighted-Average
Remaining
Contractual
Term
|
Aggregate
Intrinsic
Value
|
|
Outstanding at
January 1, 2017
|
1,313,000
|
$0.22
|
|
|
|
Granted
|
217,000
|
0.35
|
|
|
|
Exercised
|
-
|
-
|
|
|
|
Expired
|
(222,000)
|
0.40
|
|
|
|
Forfeited
|
(20,000)
|
0.13
|
|
|
|
Outstanding at
September 30, 2017
|
1,288,000
|
$0.21
|
5.3
|
$63,528
|
|
Exercisable at
September 30, 2017
|
1,061,000
|
$0.18
|
5.4
|
$62,628
|
There
were 217,000 options granted during the three months and nine
months ended September 30, 2017. The weighted-average grant date
fair value of options granted during both the three months and nine
months ended September 30, 2017, was $0.10, and the
weighted-average grant date fair value of options granted during
both the three months and nine months ended September 30, 2016, was
$0.04. There were no options exercised during the nine months ended
September 30, 2017 and 2016. As of September 30, 2017, there was
$15,009 of total unrecognized compensation cost related to
non-vested share-based compensation arrangements granted under the
stock incentive plans; that cost is expected to be recognized over
a weighted-average period of four months.
Total
compensation expense related to these plans was $6,908 and $2,857
for the quarters ended September 30, 2017 and 2016, respectively,
none of which related to options awarded to non-employees. Total
compensation expense related to these plans was $7,230 and $8,329
for the nine months ended September 30, 2017 and 2016,
respectively, none of which related to options awarded to
non-employees. Compensation expense relating to prior periods in
the amount of $612 was reversed in the nine months ended September
30, 2017, from options that were forfeited prior to vesting, and
are not included in the total compensation expense
above.
Nonvested option
awards as of September 30, 2017 and changes during the nine months
ended September 30, 2017 were as follows:
|
|
|
Weighted
average
grant date fair
value
|
|
Nonvested at
January 1, 2017
|
45,000
|
$0.07
|
|
Granted
|
217,000
|
0.10
|
|
Vested
|
(15,000)
|
0.06
|
|
Forfeited
|
(20,000)
|
0.04
|
|
Nonvested at
September 30, 2017
|
227,000
|
$0.10
|
4.
Revolving
line of Credit
The
Company has a revolving line of credit with a bank providing for
demand or short-term borrowings of up to $1,000,000. The line
expires on May 31, 2018. As of September 30, 2017, no amounts were
outstanding under this line of credit. The Company did not borrow
against this line of credit in the last twelve months.
5.
Income
(Loss) Per Share
Basic
income (loss) per share excludes dilution and is computed by
dividing income (loss) available to common shareholders by the
weighted-average number of shares outstanding for the period.
Diluted income (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
52,655 shares and 26,774 shares from stock options were excluded
from diluted shares for the three months and nine months,
respectively, ended September 30, 2016.
The
following is a reconciliation of the amounts used in calculating
basic and diluted net income (loss) per common share:
|
|
|
|
|
|
Basic
net income per common share for the three months ended September
30, 2017:
|
|
|
|
|
Income
available to common stockholders
|
$110,284
|
11,201,760
|
$0.01
|
|
Effect
of dilutive stock options
|
-
|
308,951
|
-
|
|
Diluted
net income per common share for the three months ended
September 30, 2017
|
$110,284
|
11,510,711
|
$0.01
|
|
|
|
|
|
|
Basic
net loss per common share for the three months ended
September 30, 2016:
|
|
|
|
|
Loss
available to common stockholders
|
$(57,238)
|
11,201,760
|
$(0.01)
|
|
Effect
of dilutive stock options
|
-
|
-
|
-
|
|
Diluted
net loss per common share for the three months ended
September 30, 2016
|
$(57,238)
|
11,201,760
|
$(0.01)
|
|
|
|
|
|
|
Basic
net income per common share for the nine months ended
September 30, 2017:
|
|
|
|
|
Income
available to common stockholders
|
$167,386
|
11,201,760
|
$0.01
|
|
Effect
of dilutive stock options
|
-
|
307,442
|
-
|
|
Diluted
net income per common share for the nine months ended
September 30, 2017
|
$167,386
|
11,509,202
|
$0.01
|
|
|
|
|
|
|
Basic
net loss per common share for the nine months ended
September 30, 2016:
|
|
|
|
|
Loss
available to common stockholders
|
$(413,265)
|
11,201,760
|
$(0.04)
|
|
Effect
of dilutive stock options
|
-
|
-
|
-
|
|
Diluted
net loss per common share for the nine months ended
September 30, 2016
|
$(413,265)
|
11,201,760
|
$(0.04)
|
Fair Value Measurements
Fair
value is defined as the price that would be received to sell an
asset or be paid to transfer a liability in the principal or most
advantageous market in an orderly transaction. To increase
consistency and comparability in fair value measurements, the FASB
established a three-level hierarchy which requires an entity to
maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. The three levels of
fair value measurements are:
●
Level
1—Quoted prices (unadjusted) in active markets that are
accessible at the measurement date for assets or liabilities. The
fair value hierarchy gives the highest priority to Level 1
inputs.
●
Level
2—Observable prices that are based on inputs not quoted on
active markets, but corroborated by market data.
●
Level
3—Unobservable inputs that are used when little or no market
data is available. The fair value hierarchy gives the lowest
priority to Level 3 inputs.
The inputs used in measuring the fair value of cash and cash
equivalents are considered to be Level 1 in accordance with the
three-tier fair value hierarchy. The fair market values are based
on period-end statements supplied by the various banks and brokers
that held the majority of the Company’s funds. The fair value
of short-term financial instruments (primarily cash and cash
equivalents, accounts receivable, accounts payable, and other
current assets and liabilities) approximate their carrying values
because of their short-term nature.
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, 2016 (“2016 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:
●
changes in the
funding priorities of the U.S. federal government;
●
changes in the way
the U.S. federal government contracts with businesses;
●
terms specific to
U.S. federal government contracts;
●
our failure to keep
pace with a changing technological environment;
●
intense competition
from other companies;
●
inaccuracy in our
estimates of the cost of services and the timeline for completion
of contracts;
●
non-performance by
our subcontractors and suppliers;
●
our dependence on
third-party software and software maintenance
suppliers;
●
fluctuations in our
results of operations and the resulting impact on our stock
price;
●
the limited public
market for our common stock;
●
changes in the
economic health of our non U.S. federal government customers;
and
●
our forward-looking
statements and projections may prove to be inaccurate.
In some
cases, you can identify forward-looking statements by terms such as
“may,” “will,” “should,”
“could,” “would,” “expect,”
“plans,” “anticipates,”
“believes,” “estimates,”
“projects,” “predicts,”
“intends,” “potential” and similar
expressions intended to identify forward-looking statements. These
statements reflect our current views with respect to future events
and are based on assumptions and subject to risks and
uncertainties. Given these uncertainties, you should not place
undue reliance on these forward-looking statements. We discuss many
of these risks in greater detail under the heading “Risk
Factors” in Item 1A of our 2016 10-K. Also, these
forward-looking statements represent our estimates and assumptions
only as of the date of this report. Except as required by law, we
assume no obligation to update any forward-looking statements after
the date of this report.
Our Business
Founded
in 1979, IAI is in the business of modernizing client information
systems, developing and maintaining information technology systems,
developing electronic forms, and performing consulting services to
government and commercial organizations. We have performed software
conversion projects for over 100 commercial and government
customers, including Computer Sciences Corporation, IBM, Computer
Associates, Sprint, Citibank, U.S. Department of Homeland Security,
U.S. Treasury Department, U.S. Department of Agriculture, U.S.
Department of Education, U.S. Department of Energy, U.S. Army, U.S.
Air Force, U.S. Department of Veterans Affairs, and the Federal
Deposit Insurance Corporation. Today, we primarily apply our
technology, services and experience to legacy software migration
and modernization for commercial companies and government agencies,
and to developing web-based solutions for agencies of the U.S.
federal government.
At
the end of second quarter 2017, IAI was awarded an ISO 9001:2015
Management System certificate by SRI Quality System Registrar (SRI)
for the provisioning and management of certain services and product
delivery to its customers. This process for certification was
initiated in the latter half of 2016. Many government agencies are
now requiring this certification as a basis for participating in
designated contract solicitations. ISO 9001:2015 is a process-based
certification recognizing organizations that can link business
objectives with operating effectiveness and institutionalize
continual improvement in its operations. In order to achieve
certification, IAI was required to demonstrate through external
audit our ability to consistently provide products and services
that meet customer and applicable statutory and regulatory
requirements set forth in the referenced ISO 9001:2015 standard.
Companies that achieve such certification have demonstrated
effective implementation of documentation and records management,
top management’s commitment to their customers, establishment
of clear policy, good planning and implementation, good resource
management, efficient process control, as well as measurement and
analysis.
In the
three months ended September 30, 2017, our prime contracts with
U.S. government agencies generated 67.4% of our revenue,
subcontracts under federal procurements generated 27.7% of our
revenue, and 4.9% of our 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, one software sale generated 23.9% of
our revenue and one other contract generated 12.0% of our revenue.
One subcontract generated 22.0% of our revenue.
In the
nine months ended September 30, 2017, our prime contracts with U.S.
government agencies generated 72.2% of our revenue, subcontracts
under federal procurements generated 22.1% of our revenue, and 5.7%
of our 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, one non-recurring software sale generated 20.4% of our
revenue, another software sale generated 10.2% of our revenue, and
one professional fees contract generated 12.0% of our revenue. One
subcontract generated 16.6% of our revenue.
In the
three months ended September 30, 2016, our prime contracts with
U.S. government agencies generated 77.2% of our revenue,
subcontracts under federal procurements generated 9.2% of our
revenue, and 13.6% of our revenue came from commercial contracts.
The terms of these contracts and subcontracts varied from single
transactions to five years. Within this group of prime contracts
with U.S. government agencies, three contracts generated 16.2%,
10.4%, and 9.3% of our revenue, respectively.
In the
nine months ended September 30, 2016, our prime contracts with U.S.
government agencies generated 73.7% of our revenue, subcontracts
under federal procurements generated 12.6% of our revenue, and
13.7% of our revenue came from commercial contracts. The terms of
these contracts and subcontracts varied from single transactions to
five years. Within this group of prime contracts with U.S.
government agencies, two contracts generated 18.5% and 11.4% of our
revenue, respectively. One commercial customer accounted for 9.0%
of our revenue.
We sold
third party software and maintenance contracts under agreements
with two major suppliers. These sales accounted for 49.3% of total
revenue in the third quarter of 2017 and 56.4% of revenue in the
third quarter of 2016.
We sold
third party software and maintenance contracts under agreements
with two major suppliers. These sales accounted for 55.5% of total
revenue in the first nine months of 2017 and 50.1% of revenue in
the first nine months of 2016.
Three
Months Ended September 30, 2017 versus Three Months Ended September
30, 2016
Revenue
Our
revenues in the third quarter of 2017 were $2,731,794 compared to
$2,031,553 in the corresponding quarter in 2016, an increase of
$700,241, or 34.5%. Professional fee revenue was $1,385,257 in the
third quarter of 2017 versus $885,505 in the corresponding quarter
in 2016, an increase of $499,752, or 56.4%, and software revenue
was $1,346,537 in the third quarter of 2017 versus $1,146,048 in
the third quarter of 2016, an increase of $200,489, or 17.5%.
Revenue from professional fees increased due primarily to one new
subcontract under a federal procurement, though there were several
minor increases and decreases in activity under our other
professional services contracts. The increase in our software
revenue in 2017 versus the same period in 2016 is due to the
non-recurring nature of many of our software sales transactions.
Software sales and associated margins are subject to considerable
fluctuation from period to period, based on the product mix sold
and referral fees earned. The revenue recognized for the same
volume of software sales activity would be significantly less in
2018 and beyond upon the adoption of Topic 606, discussed above,
wherein revenue from many of our software sales transactions will
be reported net of the direct costs due to a redefinition of
“control” of the software product in the course of the
software sales transactions.
Gross Profit
Gross
profit was $635,891, or 23.3% of revenue in the third quarter of
2017 versus $556,085, or 27.4% of revenue in the third quarter of
2016. For the quarter ended September 30, 2017, $608,853 of the
gross profit was attributable to professional fees at a gross
profit percentage of 44.0%, and $27,038 of the gross profit was
attributable to software sales at a gross profit percentage of
2.0%. In the same quarter in 2016, we reported gross profit for
professional fees of $416,949, or 47.1%, of professional fee
revenue, and gross profit of $139,136, or 12.1% of software sales.
Gross profit from professional fees increased with the increase in
revenue. Gross profit on software sales decreased in terms of
dollars and as a percentage of sales due to a decrease in referral
fees for facilitating third-party sales, for which there were no
direct costs incurred by us. The referral fees for facilitating
third party sales were $7,497 for the third quarter of 2017 versus
$114,686 in the same period of 2016. Software product sales and
associated margins are subject to considerable fluctuation from
period to period, based on the product mix sold and referral fees
earned.
Selling, General and Administrative Expenses
Selling, general
and administrative expenses, exclusive of sales commissions, were
$386,929, or 14.2% of revenues, in the third quarter of 2017 versus
$428,852, or 21.1% of revenues, in the third quarter of 2016. These
expenses decreased $41,923, or 9.8%, from the third quarter of
2016. These decreases are largely from decreases in sales labor
costs, bad debts, technical training costs, and advertising and
promotion. These decreases were offset some by increases in
overhead labor and the cost of obtaining and maintaining our ISO
9001 certification.
Commission expense
was $140,963, or 5.2% of revenues, in the third quarter of 2017
versus $187,030, or 9.2% of revenues, in the third quarter of 2016.
Commissions are driven by varying factors and are earned at varying
rates for each salesperson.
Net income
Net
income for the three months ended September 30, 2017, was $110,284,
or 4.0% of revenue, versus net loss of $57,238, or (2.8%) of
revenue, for the same period in 2016.
Nine
months Ended September 30, 2017 versus Nine months Ended September
30, 2016
Revenue
Our
revenues in the first nine months of 2017 were $8,269,558 compared
to $5,322,573 in the corresponding nine-month period in 2016, an
increase of $2,946,985, or 55.4%. Professional fee revenue was
$3,676,730 in the first nine months of 2017 versus $2,655,006 in
the corresponding nine months in 2016, an increase of $1,021,724,
or 38.5%, and software revenue was $4,592,828 in the first nine
months of 2017 versus $2,667,567 in the first nine months of 2016,
an increase of $1,925,261, or 72.2%. Revenue from professional fees
increased due primarily to one new subcontract under a federal
procurement, though there were several minor increases and
decreases in activity under our other professional services
contracts. The increase in our software revenue in 2017 versus the
same period in 2016 is due to the non-recurring nature of many of
our software sales transactions. One software sales transaction
accounted for $1,686,952 of the increase. Software sales and
associated margins are subject to considerable fluctuation from
period to period, based on the product mix sold and referral fees
earned. The revenue recognized for the same volume of software
sales activity would be significantly less in 2018 and beyond upon
the adoption of Topic 606, discussed above, wherein revenue from
many of our software sales transactions will be reported net of the
direct costs due to a redefinition of “control” of the
software product in the course of the software sales
transactions.
Gross Profit
Gross
profit was $1,773,076, or 21.4% of revenue in the first nine months
of 2017 versus $1,439,504, or 27.0% of revenue in the first nine
months of 2016. For the nine months ended September 30, 2017,
$1,686,347 of the gross profit was attributable to professional
fees at a gross profit percentage of 45.9%, and $86,729 of the
gross profit was attributable to software sales at a gross profit
percentage of 1.9%. In the same nine months in 2016, we reported
gross profit for professional fees of $1,145,725, or 43.2%, of
professional fee revenue, and gross profit of $293,779, or 11.0% of
software sales. Gross profit from professional fees increased with
the increase in revenue, and increased as a percentage of sales due
to the timing of revenue recognition versus the accumulation of
direct costs on a certain fixed price contract, as well as the
timing of revenue recognition versus the accumulation of direct
costs of some at-risk work performed in early 2016. Gross profit on
software sales decreased in terms of dollars and as a percentage of
sales due to a decrease in referral fees for facilitating
third-party sales, for which there were no direct costs incurred by
us. The referral fees for facilitating third party sales were
$19,612 for the first nine months of 2017 versus $239,221 in the
same period of 2016. Software product sales and associated margins
are subject to considerable fluctuation from period to period,
based on the product mix sold and referral fees
earned.
Selling, General and Administrative Expenses
Selling, general
and administrative expenses, exclusive of sales commissions, were
$1,231,863, or 14.9% of revenues, in the first nine months of 2017
versus $1,451,423, or 27.3% of revenues, in the first nine months
of 2016. These expenses decreased $219,560, or 15.1%, from the
first nine months of 2016. These decreases are largely from
decreases in sales labor costs, decreases in technical training
costs, decreases in legal fees, decreases in bad debt expense, and
decreases in advertising and business promotion costs. These
decreases were offset some by increases in overhead labor and the
cost of obtaining and maintaining our ISO 9001
certification.
Commission expense
was $380,267, or 4.6% of revenues, in the first nine months of 2017
versus $408,695, or 7.7% of revenues, in the first nine months of
2016. Commissions are driven by varying factors and are earned at
varying rates for each salesperson.
Net income
Net
income for the nine months ended September 30, 2017, was $167,386,
or 2.0% of revenue, versus net loss of $413,265, or (7.8%) of
revenue, for the same period in 2016.
Liquidity
and Capital Resources
Our
cash and cash equivalents balance, when combined with our cash flow
from operations during the first nine months of 2017, were
sufficient to provide financing for our operations. Our net cash
provided by the combination of our operating and investing
activities in the first nine months of 2017 was $655,347. This net
cash, when added to a beginning balance of $1,895,372, yielded cash
and cash equivalents of $2,550,719 as of September 30, 2017.
Accounts receivable increased $651,813, due primarily to software
sales that occurred just prior to September 30, 2017, the end of
the U.S. federal government’s fiscal year. Prepaid expenses
and other current assets decreased $170,033 due primarily to the
allocation over time of prepaid expenses associated with the
maintenance contracts on software sales. Deferred revenue decreased
$165,569 due primarily to the recognition of revenue over time from
the same maintenance contracts on software sales. Commissions
payable decreased $95,668 due to payouts of existing commissions
payable balances occurring faster than new commissions were
earned.
We have
a revolving line of credit with a bank providing for demand or
short-term borrowings of up to $1,000,000. The line expires on May
31, 2018. As of September 30, 2017, no amounts were outstanding
under this line of credit. We did not borrow against this line of
credit in the last twelve months.
Given
our current cash position and operating plan, we anticipate that we
will be able to meet our cash requirements for at least twelve
months from the date of filing of this Form 10-Q.
We
presently lease our corporate offices on a contractual basis with
certain timeframe commitments and obligations. We believe that our
existing offices will be sufficient to meet our foreseeable
facility requirement. Should we need additional space to
accommodate increased activities, management believes we can secure
such additional space on reasonable terms.
We have
no material commitments for capital expenditures.
We have
no off-balance sheet arrangements.
Item
4.
Controls
and Procedures
Disclosure Controls and Procedures
Our
management, under the supervision and with the participation of our
Chief Executive Officer and Chief Financial Officer, and people
performing similar functions, has evaluated the effectiveness of
the design and operation of our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act), as of September 30, 2017 (the “Evaluation Date”).
Based upon this evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that, as of the Evaluation Date,
our disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in the reports that we
file or submit under the Exchange Act (i) is recorded, processed,
summarized and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms, and
(ii) is accumulated and communicated to management, including our
Chief Executive Officer and Chief Financial Officer, to allow
timely decisions regarding required disclosure.
Changes in Internal Controls over Financial Reporting
There
were no changes in the Company’s internal control over
financial reporting during the quarter ended September 30, 2017,
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting.
Inherent Limitations on Effectiveness of Controls
Because
of the inherent limitations in all control systems, no control
system can provide absolute assurance that all control issues and
instances of fraud, if any, within a company have been detected.
These inherent limitations include the realities that judgments in
decision making can be faulty and that breakdowns can occur because
of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of a person, by collusion of
two or more people or by management override of the control. The
design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Because of the
inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and may not be
detected. Notwithstanding these limitations, we believe that our
disclosure controls and procedures are designed to provide
reasonable assurance of achieving their objectives.
PART II - OTHER INFORMATION
Item
1. Legal
Proceedings
None.
Item
1A. Risk Factors
“Item
1A. Risk Factors” of our annual report on Form 10-K for
the year ended December 31, 2016 includes a discussion of our risk
factors. There have been no material changes from the risk factors
described in our annual report on Form 10-K for the year ended
December 31, 2016.
Item
2. Unregistered Sales of Equity
Securities and Use of Proceeds
None.
Item
3. Defaults Upon Senior
Securities
None.
Item
4. Mine Safety
Disclosures
Not
applicable.
Item
5. Other
Information
None.
Item
6. Exhibits
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10.16
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Eighth
Amendment to Loan Agreement regarding Line of Credit Agreement with
TD Bank, N.A., successor to Commerce Bank, N.A., dated May 28,
2017.
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Certification
of Chief Executive Officer Pursuant to Rules 13a-14(a) and
15d-14(a) of the Securities Exchange Act of 1934
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|
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Certification
of Chief Financial Officer Pursuant to Rules 13a-14(a) and
15d-14(a) of the Securities Exchange Act of 1934
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|
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Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
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|
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Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
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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.
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|
Information
Analysis Incorporated
(Registrant)
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Date: November 13,
2017
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By:
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/s/
Sandor
Rosenberg
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Sandor
Rosenberg, Chairman of the
Board,
Chief Executive Officer,
and
President
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Company Name
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Date: November 13,
2017
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By:
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/s/
Richard S.
DeRose
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Richard
S. DeRose, Executive Vice
President,
Treasurer, and Chief
Name
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Title
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19