10QSB 1 d10qsb.txt 10QSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended Commission March 31, 2002 File No. 0-22405 -------------- ---------------- INFORMATION ANALYSIS INCORPORATED (Exact name of Registrant as specified in its charter) Virginia 54-1167364 --------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 11240 Waples Mill Road, Suite 400, Fairfax, VA 22030 ----------------------------------------------- ----- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (703) 383-3000 -------------- Indicate by check mark whether the Registrant(1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- State the number of shares outstanding of each of the issuer's classes of common stock, as of May 8, 2002: Common Stock, par value $.01, 10,283,515 shares Transitional small business disclosure format. Yes No X ----- ----- INFORMATION ANALYSIS INCORPORATED FORM 10-QSB Index Page Number PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001 (Audited) 3 Consolidated Statements of Operations for the three months ended March 31, 2002 and March 31, 2001 4 Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and March 31, 2001 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 PART II. OTHER INFORMATION Item 2. Changes in Securities 9 Item 6. Exhibits and Reports on Form 8-K 9 SIGNATURES 9 INDEX TO EXHIBITS 10 2 INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, 2002 December 31, 2001 Unaudited Audited -------------- ----------------- ASSETS Current assets: Cash and cash equivalents $ 181,160 $ 102,640 Accounts receivable, net 1,591,396 1,526,372 Prepaid expenses 70,521 22,255 Note receivable 75,000 75,000 Other receivables 27,607 22,203 ------------ ------------ Total current assets 1,945,684 1,748,470 Fixed assets, net 42,654 34,654 Capitalized software, net 250,341 292,065 Other receivables 31,865 31,865 Other assets 58,275 58,275 ------------ ------------ Total assets $ 2,328,819 $ 2,165,329 ============ ============ LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Revolving line of credit $ 800,000 $ 596,000 Accounts payable 997,161 1,024,717 Accrued payroll and related liabilities 292,713 294,489 Other accrued liabilities 56,223 175,158 Deferred revenue 139,674 157,882 ------------ ------------ Total current liabilities 2,285,771 2,248,246 Long-term liabilities: Notes payable 125,001 125,001 ------------ ------------ Total liabilities 2,410,772 2,373,247 ------------ ------------ Stockholders' equity: Common stock, par value $0.01, 30,000,000 shares authorized; 11,788,126 shares issued, 10,283,515 outstanding at March 31,2002 and December 31, 2001 117,881 117,881 Additional paid in capital 14,122,019 14,122,019 Retained earnings (13,467,540) (13,593,505) Less treasury stock; 1,504,611 shares at cost (854,313) (854,313) ------------ ------------ Total stockholders' equity (81,953) (207,918) ------------ ------------ Total liabilities and stockholders' equity $ 2,328,819 $ 2,165,329 ============ ============
The accompanying notes are an integral part of the consolidated financial statements 3 INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, --------------------------------- 2002 2001 Unaudited Unaudited --------- --------- Sales Professional fees $ 1,839,381 $ 1,258,078 Software sales 121,182 94,041 ----------- ----------- Total sales 1,960,563 1,352,119 Cost of sales Cost of professional fees 1,240,944 905,658 Cost of software sales 115,608 109,664 ----------- ----------- Total cost of sales 1,356,552 1,015,322 Gross profit 604,011 336,797 Selling, general and administrative expenses 471,183 333,767 ----------- ----------- Income from operations 132,828 3,030 Other expenses, net (6,863) (12,567) ----------- ----------- Income (loss) before provision for income taxes 125,965 (9,537) Provision for income taxes 0 0 ----------- ----------- Net income (loss) $ 125,965 $ (9,537) =========== =========== Earnings per common share: Basic $ 0.01 $ 0.00 =========== =========== Diluted $ 0.01 $ 0.00 =========== =========== Weighted average common shares outstanding: Basic 10,283,515 9,701,473 =========== =========== Diluted 11,107,596 9,701,473 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements 4 INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, ------------------------------------ 2002 2001 Unaudited Unaudited --------- --------- Net (loss) income $ 125,965 $ (9,537) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 9,692 27,939 Amortization 1,209 1,209 Amortization of capitalized software 41,724 38,637 Gain on sale of fixed assets (1,125) (9,353) Changes in operating assets and liabilities Accounts receivable (65,024) (145,032) Other receivables and prepaid expenses (53,670) (9,153) Accounts payable and accrued expenses (148,267) 87,192 Deferred revenue (18,208) -- --------- --------- Net cash used by operating activities (107,704) (18,098) --------- --------- Cash flows from investing activities Purchases of fixed assets (18,901) -- Proceeds from sale of fixed assets 1,125 9,364 --------- --------- Net cash (used) provided by investing activities (17,776) 9,364 --------- --------- Cash flows from financing activities Net borrowing (payments) under bank revolving line of credit 204,000 (6,591) --------- --------- Net cash provided (used) by financing activities 204,000 (6,591) --------- --------- Net increase (decrease) in cash and cash equivalents 78,520 (15,325) Cash and cash equivalents at beginning of the period 102,640 42,881 --------- ---------- Cash and cash equivalents at end of the period $ 181,160 $ 27,556 ========= ========= Supplemental cash flow Information Interest paid $ 11,458 $ 12,640 ========= =========
The accompanying notes are an integral part of the consolidated financial statements 5 PART I Item 1. Financial Statements. INFORMATION ANALYSIS, INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Basis of Presentation The accompanying consolidated financial statements have been prepared by Information Analysis Incorporated ("IAI" or the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission. Financial information included herein is unaudited; however, in the opinion of management, all adjustments (which include normal recurring adjustments) considered necessary for a fair presentation have been made. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted pursuant to such rules and regulations, but the Company believes that the disclosures made are adequate to make the information presented not misleading. For more complete financial information, these financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2001 included in the Company's annual report on Form 10-KSB. Results for interim periods are not necessarily indicative of the results for any other interim period or for the full fiscal year. Item 2. Management's Discussion and Analysis of Financial Condition or Plan of Operation and Cautionary Statement Regarding Forward-Looking Statements This Form 10-QSB contains forward-looking statements regarding the Company's business, customer prospects, or other factors that may affect future earnings or financial results that are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. Such statements involve risks and uncertainties which could cause actual results to vary materially from those expressed in the forward-looking statements. Investors should read and understand the risk factors detailed in the Company's 10-KSB for the fiscal year ended December 31, 2001 and in other filings with the Securities and Exchange Commission. 6 Net Income Per Share Earnings per share are presented in accordance with SFAS No. 128, "Earnings Per Share." This statement requires dual presentation of basic and diluted earnings per share on the face of the income statement. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, except for periods when the Company reports a net loss because the inclusion of such items would be antidilutive. The following is a reconciliation of the amounts used in calculating basic and diluted net income per common share.
Per Share Income Shares Amount ------ ------ --------- Basic net income per common share for the three months ended March 31, 2002: Income available to common stockholders $ 125,965 10,283,515 $ 0.01 Effect of dilutive stock options 202,403 -- Effect of dilutive warrants 121,678 -- Effect of dilutive convertible notes 3,750 500,000 -- Diluted net income per common share for the three months ended March 31, 2002: $ 129,715 11,107,596 $ 0.01 Basic net (loss) per common share for the three months ended March 31, 2001: Income available to common stockholders $ (9,537) 9,701,473 $ 0.00 Effect of dilutive stock options and warrrants -- -- Diluted net (loss) per common share for the three months ended March 31, 2001: $ (9,537) 9,701,473 $ 0.00
7 Three Months Ended March 31, 2002 Versus Three Months Ended March 31, 2001 Revenue IAI's revenues in the first quarter of fiscal 2002 were $1,960,563, compared to $1,352,119 in the first quarter of fiscal 2001, an increase of 45.0%. Professional services revenue was $1,839,381 versus $1,258,078, an increase of 46.2%, and product revenue was $121,182 versus $94,041, an increase of 28.9%. The increase in software sales was mainly attributable to new sales of the Company's ICONS software tool for the first quarter of 2002, versus no ICONS sales for the first quarter of 2001. ICONS is a software toolset that is used in connection with conversions and migrations from mainframe legacy systems. Gross Margins Gross margin was $604,011, or 30.8% of sales, in the first quarter of fiscal 2002 versus $336,797, or 24.9% of sales, in the first quarter of fiscal 2001. Of the $604,011 in 2002, $598,437 was attributable to services and $5,574 was attributable to software sales. Gross margin, as a percentage of sales, was 32.5% for professional services and 4.6% for software sales for 2002. In the first quarter of 2001, the Company reported gross margins of approximately 28.0% for services and (16.6%) for software sales. The increase in professional services gross margin is a result of better margins on some of the Company's newer projects for the first quarter of 2002 that were not present during the same period for 2001. The increase in software sales gross margin was mainly attributable to sales of the Company's ICONS software tool for the first quarter of 2002, versus no sales of the same for the first quarter of 2001. Selling, General and Administrative Selling, general and administrative expenses (SG&A) were $471,183, or 24.0% of revenues, in the first quarter of 2002 versus $333,767, or 24.7% of revenues, in the first quarter of 2001, an increase in expenses of 41.2%. The increase is largely attributable to the additional services needed to support the increase in sales of professional services. Profits The Company generated an operating profit before other expenses of $132,828 in the first quarter of 2002 compared to $3,030 in the first quarter of 2001. There was a net income of $125,965 for 2002 versus a net loss of $9,537 in 2001. In general, the operating profit and net income increases are a result of increased professional service sales and sales margins during the first quarter of 2002. Liquidity and Capital Resources Through the first three months of 2002, the Company financed its operations from current collections and through its bank line of credit. Cash and cash equivalents at March 31, 2002 were $181,160 compared to $27,556 at March 31, 2001. As of March 31, 2002 the Company had an outstanding balance on its line of credit of $800,000. The Company is in default with its line of credit with First Virginia Bank as a result of the Company's failure to meet certain financial tests. However, a forbearance agreement between the Company and First Virginia Bank is in effect which effectively extends the line of credit of $800,000 to May 21, 2002. The Company is in negotiations with the bank to extend the forbearance agreement. The bank has consistently approved the Company's requests to 8 continue the forbearance, and it is anticipated that that the agreement will be extended for at least one hundred twenty days. If revenue continues at current levels the Company believes that it will derive sufficient cash flow to continue to pay all essential expenses which are required to operate the business. Any material reduction in revenue could have a material adverse effect on the Company's operational capabilities. Current operations, however, are insufficient to provide the additional working capital that is necessary to repay approximately $500,000 of past due payables. The Company cannot be certain that there will not be a need for additional cash resources at some point in fiscal 2002. Accordingly, the Company may from time to time consider additional equity offerings to finance business expansion. The Company is uncertain that it will be able to raise additional capital. The Company has no material commitments for capital expenditures. PART II - OTHER INFORMATION Item 2. Changes in Securities Item 6. Exhibits and Reports on Form 8-K (a) No reports on Form 8-K were filed for the quarter for which this report is filed. SIGNATURES In accordance with the requirements of the Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Information Analysis Incorporated --------------------------------- (Registrant) Date: May 9, 2002 By: /s/ Sandor Rosenberg ----------- -------------------- Sandor Rosenberg, Chairman of the Board and President By: /s/ Richard S. DeRose --------------------- Richard S. DeRose, Executive Vice President and Treasurer 9