10QSB 1 d10qsb.txt FORM 10-QSB 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 June 30, 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 August 1, 2002: Common Stock, par value $0.01, 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 June 30, 2002 and December 31, 2001 (Audited) 3 Consolidated Statements of Operations for the three months ended June 30, 2002 and June 30, 2001 4 Consolidated Statements of Operations for the six months ended June 30, 2002 and June 30, 2001 5 Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and June 30, 2001 6 Notes to Unaudited Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 11 SIGNATURES 11 CERTIFICATION UNDER SECTION 906 OF THE SARBANES- OXLEY ACT OF 2002 11 INDEX TO EXHIBITS 12 2 INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 30, 2002 December 31, 2001 Unaudited Audited ------------ ----------------- ASSETS Current assets: Cash and cash equivalents $ 35,049 $ 102,640 Accounts receivable, net 1,372,935 1,526,372 Prepaid expenses 63,991 22,255 Note receivable 75,000 75,000 Other receivables 54,226 22,203 ------------ ------------ Total current assets 1,601,201 1,748,470 Fixed assets, net 37,078 34,654 Capitalized software, net 208,617 292,065 Other receivables 11,865 31,865 Other assets 58,275 58,275 ------------ ------------ Total assets $ 1,917,036 $ 2,165,329 ============ ============ LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Revolving line of credit $ 543,000 $ 596,000 Accounts payable 883,482 1,024,717 Accrued payroll and related liabilities 271,004 294,489 Other accrued liabilities 54,662 175,158 Deferred revenue 73,963 157,882 ------------ ------------ Total current liabilities 1,826,111 2,248,246 Long-term liabilities: Notes payable 125,001 125,001 ------------ ------------ Total liabilities 1,951,112 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 June 30,2002 and December 31, 2001 117,881 117,881 Additional paid in capital 14,122,019 14,122,019 Retained earnings (13,419,663) (13,593,505) Less treasury stock; 1,504,611 shares at cost (854,313) (854,313) ------------ ------------ Total stockholders' equity (34,076) (207,918) ------------ ------------ Total liabilities and stockholders' equity $ 1,917,036 $ 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 -------------------------- June 30, ------- 2002 2001 Unaudited Unaudited ----------- ----------- Sales Professional fees $ 1,518,093 $ 986,666 Software sales 134,524 158,672 ----------- ----------- Total sales 1,652,617 1,145,338 Cost of sales Cost of professional fees 1,032,428 750,082 Cost of software sales 96,705 193,653 ----------- ----------- Total cost of sales 1,129,133 943,735 ----------- ----------- Gross profit 523,484 201,603 Selling, general and administrative expenses 477,707 356,134 ----------- ----------- Income (loss) from operations 45,777 (154,531) Other income (expenses), net 2,100 (11,039) ----------- ----------- Income (loss) before provision for income taxes 47,877 (165,570) Provision for income taxes -- -- ----------- ----------- Net income (loss) before extraordinary item 47,877 (165,570) Extraordinary gain - settlement of debt with equity -- 120,595 ----------- ----------- Net income (loss) 47,877 (44,975) =========== =========== Earnings per common share: Basic: Net Income (loss) before extraordinary Item $ 0.00 $ (0.02) Extraordinary gain - settlement of debt with equity 0.00 0.01 ----------- ----------- Net income (loss) $ 0.00 $ (0.01) =========== =========== Diluted: Net Income (loss) before extraordinary Item $ 0.00 $ (0.02) Extraordinary gain - settlement of debt with equity 0.00 0.01 ----------- ----------- Net income (loss) $ 0.00 $ (0.01) =========== =========== Weighted average common shares outstanding: Basic 10,283,515 9,801,522 Diluted 10,962,425 9,801,522
The accompanying notes are an integral part of the consolidated financial statements 4 INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
For the six months ended ---------------------------- June 30, ------- 2002 2001 Unaudited Unaudited ------------ ------------ Sales Professional fees $ 3,357,474 $ 2,244,744 Software sales 255,706 252,713 ------------ ------------ Total sales 3,613,180 2,497,457 Cost of sales Cost of professional fees 2,273,372 1,655,740 Cost of software sales 212,313 303,317 ------------ ------------ Total cost of sales 2,485,685 1,959,057 ------------ ------------ Gross profit 1,127,495 538,400 Selling, general and administrative expenses 948,890 689,901 ------------ ------------ Income (loss) from operations 178,605 (151,501) Other expenses, net (4,763) (23,606) ------------ ------------ Income (loss) before provision for income taxes 173,842 (175,107) Provision for income taxes -- -- ------------ ------------ Net income (loss) before extraordinary item 173,842 (175,107) Extraordinary gain - settlement of debt with equity -- 120,595 ------------ ------------ Net income (loss) 173,842 (54,512) ============ ============ Earnings per common share: Basic: Net Income (loss) before extraordinary Item $ 0.02 $ (0.02) Extraordinary gain - settlement of debt with equity 0.00 0.01 ------------ ------------ Net income (loss) $ 0.02 $ (0.01) ============ ============ Diluted: Net Income (loss) before extraordinary Item $ 0.02 $ (0.02) Extraordinary gain - settlement of debt with equity 0.00 0.01 ------------ ------------ Net income (loss) $ 0.02 $ (0.01) ============ ============ Weighted average common shares outstanding: Basic 10,283,515 9,751,774 Diluted 11,078,683 9,751,774
The accompanying notes are an integral part of the consolidated financial statements 5 INFORMATION ANALYSIS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended ------------------------ June 30, -------- 2002 2001 Unaudited Unaudited --------- --------- Net (loss) income $ 173,842 $ (54,512) Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary gain -- (120,595) Depreciation 21,457 46,578 Amortization of capitalized software 83,448 116,039 Gain on sale of fixed assets (3,710) (9,353) Changes in operating assets and liabilities Accounts receivable 153,437 7,096 Other receivables and prepaid expenses (53,759) 133,769 Accounts payable and accrued expenses (285,216) (21,420) Deferred revenue (83,919) -- --------- --------- Net cash provided by operating activities 5,580 97,602 --------- --------- Cash flows from investing activities Purchases of fixed assets (23,881) -- Proceeds from sale of fixed assets 3,710 9,364 --------- --------- Net cash (used) provided by investing activities (20,171) 9,364 --------- --------- Cash flows from financing activities Net borrowing (payments) under bank revolving line of credit (53,000) (88,591) --------- --------- Net cash used by financing activities (53,000) (88,591) --------- --------- Net (decrease) increase in cash and cash equivalents (67,591) 18,375 Cash and cash equivalents at beginning of the period 102,640 42,881 --------- --------- Cash and cash equivalents at end of the period $ 35,049 $ 61,256 ========= ========= Supplemental cash flow Information Interest paid $ 26,256 $ 23,988 ========= ========= Non-cash financing activity: Issuance of common stock to settle debt $ -- $ 130,565 ========= ========= Non-cash operating activity: Reduction of accounts payable through issuance of equity $ -- $ 251,160 ========= =========
The accompanying notes are an integral part of the consolidated financial statements 6 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 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. 7 Net Income (Loss) 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.
Income Before Extraordinary Extraordinary Net Per Share Item Item Income Shares Amount ---------- ------- ---------- --------- -------- Basic net income per common share for the three months ended June 30, 2002: Income available to common stockholders $ 47,877 -- $ 47,877 10,283,515 $ 0.00 Effect of dilutive stock options 70,219 -- Effect of dilutive warrants 108,691 -- Effect of dilutive convertible notes 3,750 -- 3,750 500,000 -- Diluted net income per common share for the three months ended June 30, 2002: $ 51,627 -- $ 51,627 10,962,425 $ 0.00 Basic net loss per common share for the three months ended June 30, 2001: Income available to common stockholders $ (165,570) 120,595 $ (44,975) 9,801,522 $ (0.01) Effect of dilutive stock options and warrants -- -- Diluted net loss per common share for the three months ended June 30, 2001: $ (165,570) 120,595 $ (44,975) 9,801,522 $ (0.01) Basic net income per common share for the six months ended June 30, 2002: Income available to common stockholders $ 173,842 -- $ 173,842 10,283,515 $ 0.02 Effect of dilutive stock options 174,235 -- Effect of dilutive warrants 120,933 -- Effect of dilutive convertible notes 7,500 -- 7,500 500,000 -- Diluted net income per common share for the six months ended June 30, 2002: $ 181,342 -- $ 181,342 11,078,683 $ 0.02 Basic net loss per common share for the six months ended June 30, 2001: Income available to common stockholders $ (175,107) 120,595 $ (54,512) 9,751,774 $ (0.01) Effect of dilutive stock options and warrants -- -- Diluted net loss per common share for the six months ended June 30, 2001: $ (175,107) 120,595 $ (54,512) 9,751,774 $ (0.01)
8 Three Months Ended June 30, 2002 Versus Three Months Ended June 30, 2001 Revenue IAI's revenues in the second quarter of fiscal 2002 were $1,652,617, compared to $1,145,338 in the second quarter of fiscal 2001, an increase of 44.3%. Professional services revenue was $1,518,093 versus $986,666, an increase of 53.9%, and product revenue was $134,524 versus $158,672, a decrease of 15.3%. Gross Margins Gross margin was $523,484, or 31.7% of sales, in the second quarter of fiscal 2002 versus $201,603, or 17.6% of sales, in the second quarter of fiscal 2001. Of the $523,484 in 2002, $485,665 was attributable to services and $37,819 was attributable to software sales. Gross margin, as a percentage of sales, was 32.0% for professional services and 28.1% for software sales for 2002. In the second quarter of 2001, the Company reported gross margins of approximately 24.0% for professional services and (22.0%) 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 second 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 second quarter of 2002, versus no ICONS sales for the same period of 2001. Selling, General and Administrative Selling, general and administrative expenses (SG&A) were $477,707, or 28.9% of revenues, in the second quarter of 2002 versus $356,134, or 31.1% of revenues, in the second quarter of 2001, an increase in expenses of 34.1%. 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 $45,777 in the second quarter of 2002 compared to operating loss before other expenses of $154,531 in the second quarter of 2001. There was a net income of $47,877 for the second quarter of 2002 versus a net loss before extraordinary gain of $165,570 for the same period in 2001. In general, the operating profit and net income increases are a result of increased professional service sales and improved sales margins during 2002. 9 Six Months Ended June 30, 2002 Versus Six Months Ended June 30, 2001 Revenue IAI's revenues in the first six months of fiscal 2002 were $3,613,180, compared to $2,497,457 in the first six months of fiscal 2001, an increase of 44.7%. Professional services revenues were $3,357,474 versus $2,244,744, an increase of 49.6%, and product revenues were $255,706 versus $252,713, an increase of 1.2%. Gross Margins Gross margins were $1,127,495, or 31.2% of sales, in the first six months of fiscal 2002 versus $538,400, or 21.6% of sales, in the first six months of fiscal 2001. Of the $1,127,495 in 2002, $1,084,102 was attributable to professional services and $43,393 was due to software sales. Gross margins as a percentage of sales were 32.3% for professional services and 17.0% for software sales for 2002, versus 26.2% for professional services and (20.0)% for software sales in 2001. The increase in professional services gross margin is a result of better margins on some of the Company's newer projects for 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 2002, versus no ICONS sales for the same period of 2001. Selling, General & Administrative SG&A was $948,890, or 26.3% of revenues, in the first half of 2002 versus $689,901, or 27.6% of revenues, in the first half of 2001, an increase in expenses of 37.5%. The increase is largely attributable to the additional services needed to support the increase in sales of professional services. Profit The Company reported a net operating profit of $173,842 in the first half of 2002 compared to an operating loss before an extraordinary item of $175,107 in the first half of 2001. In general, the operating profit and net income increases are a result of increased professional service sales and improved sales margins during 2002. Liquidity and Capital Resources Through the first six months of 2002, the Company financed its operations from current collections and through its bank line of credit. Cash and cash equivalents at June 30, 2002 were $35,049 compared to $61,256 at June 30, 2001. As of June 30, 2002 the Company had an outstanding balance on its line of credit of $543,000. 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 September 24, 2002. The Company is in negotiations with various organizations to obtain new financing. The Company believes that if revenue continues at current levels and the current line of credit is maintained, 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, 10 are insufficient to provide the additional working capital that is necessary to repay approximately $400,000 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 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: August 12, 2002 By: /S/ Sandor Rosenberg --------------- --------------------- Sandor Rosenberg, Chairman of the Board and President By: /S/ Richard S. DeRose --------------------- Richard S. DeRose, Executive Vice President, Treasurer, and Chief Financial Officer CERTIFICATION UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned certifies that this periodic report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in this periodic report fairly presents, in all material respects, the financial condition and results of operations of Information Analysis Incorporated. Date: August 12, 2002 By: /S/ Sandor Rosenberg --------------- --------------------- Sandor Rosenberg, Chairman of the Board and President By: /S/ Richard S. DeRose ---------------------- Richard S. DeRose, Executive Vice President, Treasurer, and Chief Financial Officer 11