WAVEDANCER, INC. - Quarter Report: 2021 March (Form 10-Q)

 

 

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

March 31, 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)

 

Virginia

54-1167364

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

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)

 

 

(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:

12,045,690 shares of common stock, par value $0.01 per share, as of May 12, 2021.

 

 

Information Analysis Incorporated

Form 10-Q First quarter 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)
	Balance Sheets as of March 31, 2021 and December 31, 2020	3
	Statements of Operations and Comprehensive Income (Loss) for the three months ended March 31, 2021 and 2020	4
	Statements of Cash Flows for the three months ended March 31, 2021 and 2020	5
	Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2021 and 2020	6
	Notes to Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19
Item 4.	Controls and Procedures	23
PART II.	OTHER INFORMATION	24
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Mine Safety Disclosures	24
Item 5.	Other Information	24
Item 6.	Exhibits	24
SIGNATURES		25

              

 

Information Analysis Incorporated

Form 10-Q First quarter 2021

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

		March 31, 2021				December 31, 2020
		(Unaudited)				(Note 1)
ASSETS
Current assets
Cash and cash equivalents		$	3,015,943			$	1,858,160
Accounts receivable			1,185,963				1,442,231
Prepaid expenses and other current assets			106,294				142,770
Total current assets			4,308,200				3,443,161
Contract assets - non-current			342,631				210,688
Right-of-use operating lease asset			25,911				51,405
Property and equipment, net of accumulated depreciation and amortization of $317,703 and $312,320			61,395				62,166
Other assets			-				6,281
Total assets		$	4,738,137			$	3,773,701
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable		$	192,213			$	103,646
Revolving line of credit			500,000				-
Contract liabilities			455,496				946,884
Accrued payroll and related liabilities			421,183				375,168
Commissions payable			276,794				181,626
Notes payable - current			149,001				93,009
Operating lease liability - current			18,363				45,595
Other accrued liabilities			8,047				54,274
Interest payable			4,583				3,125
Total current liabilities			2,025,680				1,803,327
Note payable - non-current			300,999				356,991
Total liabilities			2,326,679				2,160,318
Stockholders' equity
Common stock, $0.01 par value, 30,000,000 shares authorized, 13,260,042 and 12,904,376 shares issued, 11,617,426 and 11,261,760 shares outstanding as of March 31, 2021, and December 31, 2020, respectively			132,599				129,043
Additional paid-in capital			15,243,769				14,720,065
Accumulated deficit			(12,034,699	)			(12,305,514	)
Treasury stock, 1,642,616 shares at cost as of March 31, 2021, and December 31, 2020			(930,211	)			(930,211	)
Total stockholders' equity			2,411,458				1,613,383
Total liabilities and stockholders' equity		$	4,738,137			$	3,773,701

 

		For the three months ended March 31,
		2021				2020
Revenues
Professional fees		$	2,439,259			$	844,403
Software sales			980,321				1,217,353
Total revenues			3,419,580				2,061,756
Cost of revenues
Cost of professional fees			1,467,699				579,631
Cost of software sales			932,231				1,203,298
Total cost of revenues			2,399,930				1,782,929
Gross profit			1,019,650				278,827
Selling, general and administrative expenses			545,663				340,813
Commissions expense			134,587				65,621
Acquisition costs			70,530				-
Income (loss) from operations			268,870				(127,607	)
Other income, net			1,945				1,268
Income (loss) before provision for income taxes			270,815				(126,339	)
Provision for income taxes			-				-
Net income (loss)		$	270,815			$	(126,339	)
Comprehensive income (loss)		$	270,815			$	(126,339	)
Net income (loss) per common share - basic		$	0.02			$	(0.01	)
Net income (loss) per common share - diluted		$	0.02			$	(0.01	)
Weighted average common shares outstanding
Basic			11,282,671				11,211,760
Diluted			12,286,216				11,211,760

 

		For the three months ended March 31,
		2021				2020
Cash flows from operating activities:
Net income (loss)		$	270,815			$	(126,339	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			5,383				1,248
Stock option compensation			27,711				450
Changes in operating assets and liabilities:
Accounts receivable			256,268				73,787
Prepaid expenses and other current assets			36,476				208,699
Contract assets			(131,943	)			-
Other assets			31,775				-
Accounts payable			88,567				(191,879	)
Contract liabilities			(491,388	)			(193,432	)
Accrued payroll and related liabilities and other accrued liabilities			(25,986	)			(51,152	)
Commissions payable			95,168				(9,778	)
Net cash provided by (used in) operating activities			162,846				(288,396	)
Cash flows from investing activities
Acquisition of property and equipment			(4,612	)			-
Net cash used in investing activities			(4,612	)			-
Cash flows from financing activities
Borrowing under revolving line of credit			500,000				-
Proceeds from issuance of stock			495,999				-
Proceeds from issuance of stock from exercise of options			3,550				-
Net cash provided by financing activities			999,549				-
Net increase (decrease) in cash and cash equivalents			1,157,783				(288,396	)
Cash and cash equivalents, beginning of the period			1,858,160				1,039,442
Cash and cash equivalents, end of the period		$	3,015,943			$	751,046

 

		For the three months ended March 31, 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

		For the three months ended March 31, 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

 

1.	Summary of Significant Accounting Policies

 

Organization and Business

 

Founded in 1979, Information Analysis Incorporated, which we refer to as the “Company”, “we”, or “IAI”, is in the business of modernizing client information systems, performing professional information technology (IT) services, and developing and maintaining IT systems for government and commercial organizations. IAI’s core competencies lie in legacy system (COBOL) migration and modernization, including developing user-friendly interfaces for complex legacy environments, database conversion and migration, development of electronic fillable forms (e-Forms), including smart forms, Section 508 compliant forms, and web-based and mobile device forms solutions, full life cycle Oracle development, and custom software development. The Company also engages in sales of third-party software for electronic forms development and management, legacy systems modernization, and robotics process automation. IAI’s ultimate customers include federal and state government agencies as well as private sector organizations 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 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.

 

There have been no changes in the Company’s significant accounting policies as of March 31, 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.

 

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 concluded that it operates in one business segment, providing products and services to modernize client information systems.

 

 

Information Analysis Incorporated

Form 10-Q First quarter 2021

 

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 March 31, 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 4 below. Total compensation expense related to these plans was $27,711 and $450 for the three months ended March 31, 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.

 

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 net operating loss carryforwards are offset by a full valuation allowance.

 

The Company has analyzed its income tax positions using the criteria required by GAAP and concluded that as of March 31, 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.

 

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 8 for more details.

 

 

Information Analysis Incorporated

Form 10-Q First quarter 2021

 

Related Party Transactions

 

The Company’s Director of Human Resources is the spouse of Stan Reese, who served as the Senior Vice President and Chief Operating Officer of the Company through December 31, 2020, and now serves as Chief Executive Officer and President. During the three months ended March 31, 2021 and 2020, the Director of Human Resources received wages and paid leave distributions totaling $37,511 and $34,536, respectively, as an employee of the Company.

 

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.

 

 

Information Analysis Incorporated

Form 10-Q First quarter 2021

 

•

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.

 

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 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 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. If the transaction prices of the performance obligations related to implementing the government administrator’s use of the administrative portal and administrator support for the individual contract are material (rare), these obligations are recognized separately over time, as performed. Revenue for bulk desktop software licenses 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.

 

 

Information Analysis Incorporated

Form 10-Q First quarter 2021

 

Disaggregation of Revenue from Contracts with Customers

 

 

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 March 31, 2021, and December 31, 2020. The accounts receivable balance does not include the amount invoiced but withheld from payment as a financing component under one contract with a customer. The present value of the withheld amount is classified as a contract asset.

 

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 ended March 31, 2021 and 2020, are as follows:

 

 

 

There was no balance of contract assets at March 31, 2020.

 

 

Information Analysis Incorporated

Form 10-Q First quarter 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 ended March 31, 2021 and 2020, are as follows:

 

 

Revenues recognized during the three months ended March 31, 2021 and 2020, from the balances at December 31, 2020 and 2019, were $492,494 and $212,568, 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 March 31, 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 is paid under regular terms, and the 10% payment balance of each invoice is deferred until the prime contractor meets a specific deliverable under its prime contract, which is expected to occur approximately June 2022. The primary purpose of this arrangement is to assist the prime contractor in meeting all of its financial obligations until it can realize the financial benefit of meeting the deliverable. The Company has 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.

 

 

Information Analysis Incorporated

Form 10-Q First quarter 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 ended March 31, 2021 and 2020, are as follows:

 

 

 

3.

Leases

 

The Company has an operating lease which is a real estate lease for its headquarters in Fairfax, Virginia. This lease has a fixed lease term of 49 months. 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 March 31, 2021, and December 31, 2020. As of March 31, 2021, and December 31, 2020, the Company does not have any sales-type or direct financing leases.

 

The Company’s 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.

 

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

 

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

 

 

Information Analysis Incorporated

Form 10-Q First quarter 2021

 

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

 

 

The following table reconciles the undiscounted cash flows to the operating lease liabilities recorded in the Company’s balance sheet at March 31, 2021.

 

 

As of March 31, 2021, the Company’s sole operating lease had a lease term of three months. The discount rate of the lease is equal to IAI’s 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 March 31, 2021 and 2020, the Company incurred $26,122 of expense related to its operating leases.

 

4.	Accounts Receivable

 

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

 

 

Billed receivables from the federal government include amounts due from both prime contracts and subcontracts where the federal government is the end customer. Unbilled receivables include short-term contract assets where billing cycles differ from calendar months or a monthly fixed billing amount does not reflect the revenue earned in a given month.

 

5.	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.

 

 

Information Analysis Incorporated

Form 10-Q First quarter 2021

 

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. There were no options granted in the three months ended March 31, 2020. Fair values of option awards granted in the three months ended March 31, 2021, were estimated using the Black-Scholes option pricing model under the following assumptions:

 

 

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 March 31, 2021, there were unexpired options for 751,000 shares issued under the 2016 Plan, of which 371,000 were exercisable.

 

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 764,000 unexpired options remaining from the 2006 Plan at March 31, 2021, all of which were exercisable.

 

 

Information Analysis Incorporated

Form 10-Q First quarter 2021

 

The status of the options issued under the foregoing option plans as of March 31, 2021 and 2020, and changes during the three months ended March 31, 2021 and 2020, were as follows:

 

 

There were 145,000 options granted during the three months ended March 31, 2021, and there were no options granted during the three months ended March 31, 2020. There were 25,000 options exercised during the three months ended March 31, 2021, and there were no options exercised during the three months ended March 31, 2020. As of March 31, 2021, there was $301,242 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 six months.

 

Total compensation expense related to these plans was $27,711 and $450 for the three months ended March 31, 2021 and 2020, respectively.

 

Nonvested option awards as of March 31, 2021 and 2020, and changes during the three months ended March 31, 2021 and 2020, were as follows:

 

 

 

6.	Revolving Line of Credit

 

At March 31, 2021, the Company had a revolving line of credit with a bank providing for on-demand or short-term borrowings of up to $1,000,000. The line was due to expire on July 31, 2021. As of March 31, 2021, $500,000 was outstanding under this line of credit at a variable interest rate of 4.0%, and there was no outstanding balance at December 31, 2020. This line of credit was replaced on April 16, 2021, as referenced in Note 9.

 

 

Information Analysis Incorporated

Form 10-Q First quarter 2021

 

7.	Note Payable

 

Due to the coronavirus uncertainty, and pending staffing and payroll cuts 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, or, if the Company does not apply for forgiveness, until August 5, 2021, though interest accrues during the deferral period. The loan has been used exclusively to support maintaining employee payroll and benefits. The amount of forgiveness for which IAI may be approved is uncertain. As of March 31, 2021, the lender had not yet begun accepting forgiveness applications for loans greater than $150,000. The lender has since begun accepting applications and the Company plans to apply for forgiveness for the full amount of the loan prior to the deadline.  The following table represents note payable balances at March 31, 2021 and December 31, 2020:

 

 

 

8.	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 64,076 shares from stock options were excluded from diluted shares for the three months ended March 31, 2020.

 

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

 

 

9.	Subsequent Events

 

Tellenger, Inc. 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. (“Tellenger”). The purchase price was $2.3 million in cash and 68,264 unregistered shares of the Company’s stock, valued at $200,000 for the purposes of the acquisition. Legal fees and other costs specifically related to the Tellenger acquisition in the amount of $70,530 incurred during the period reported herein were classified as acquisition costs in the Company’s Statement of Operations.

 

 

Information Analysis Incorporated

Form 10-Q First quarter 2021

 

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.

 

Tellenger will continue to operate as a wholly-owned subsidiary until it, with all of its contracts, qualifications, certifications, and clearances, is able to fully integrate into the Company.

 

Credit Facility

 

In conjunction with the Tellenger acquisition, on April 16, 2021, the Company and Tellenger jointly procured a $1 million term loan with Summit Community Bank (“Summit”) to assist with post-acquisition cash flow and integration costs. The loan will be repaid with monthly payments consisting of a fixed principal amount plus accrued interest over the course of two years at a fixed interest rate of 4.89%. The Company and Tellenger also replaced the Company’s prior revolving line of credit discussed in Note 6 with a $1 million revolving line of credit from Summit at a variable rate equal to the Prime Rate published in the Wall Street Journal, which is currently 3.25%, subject to a floor of 3.25%, with an expiration of April 16, 2022.

 

Lease Agreement

 

The Company is in the process of negotiating an agreement to lease office space into which it will move its corporate offices.  The lease is expected to commence on July 1, 2021.

 

 

Information Analysis Incorporated

Form 10-Q First quarter 2021