10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2015

OR

o	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

(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 þ     No o

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 þ     No o

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.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company þ
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o     No þ

As of November 10, 2015, 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

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited except for the balance sheet as of December 31, 2014)	3
	Balance Sheets as of September 30, 2015 and December 31, 2014	3
	Statements of Operations and Comprehensive (Loss) Income for the three months ended September 30, 2015 and 2014	4
	Statements of Operations and Comprehensive Loss for the nine months ended September 30, 2015 and 2014	5
	Statements of Cash Flows for the nine months ended September 30, 2015 and 2014	6
	Notes to Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	11
Item 4.	Controls and Procedures	14
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	15
Item 1A.	Risk Factors	15
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	15
Item 3.	Defaults Upon Senior Securities	15
Item 4.	Mine Safety Disclosures	15
Item 5.	Other Information	15
Item 6.	Exhibits	15
SIGNATURES		16

2

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

INFORMATION ANALYSIS INCORPORATED

BALANCE SHEETS

	September 30, 2015			December 31, 2014
	(Unaudited)			(see Note 1)
ASSETS
Current assets:
Cash and cash equivalents	$	2,375,326		$	2,450,006
Accounts receivable, net		989,194			970,621
Prepaid expenses and other current assets		305,245			759,982
Notes receivable, current		-			3,896
Total current assets		3,669,765			4,184,505
Property and equipment, net		41,927			53,675
Notes receivable, long-term		-			5,102
Other assets		6,281			6,281
Total assets	$	3,717,973		$	4,249,563
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	264,552		$	32,327
Commissions payable		906,566			1,017,047
Deferred revenue		280,861			737,994
Accrued payroll and related liabilities		251,995			255,703
Other accrued liabilities		194,000			116,097
Total liabilities		1,897,974			2,159,168
Stockholders' equity:
Common stock, par value $0.01, 30,000,000 shares authorized;
12,844,376 shares issued, 11,201,760 shares outstanding as of September 30, 2015 and December 31, 2014		128,443			128,443
Additional paid-in capital		14,621,713			14,613,887
Accumulated deficit		(11,999,946	)		(11,721,724	)
Treasury stock, 1,642,616 shares at cost		(930,211	)		(930,211	)
Total stockholders' equity		1,819,999			2,090,395
Total liabilities and stockholders' equity	$	3,717,973		$	4,249,563

The accompanying notes are an integral part of the financial statements

3

INFORMATION ANALYSIS INCORPORATED

STATEMENTS OF OPERATIONS AND

COMPREHENSIVE (LOSS) INCOME

(Unaudited)

	For the three months ended
	September 30,
	2015			2014
Revenues:
Professional fees	$	1,217,234		$	944,131
Software sales		241,655			413,016
Total revenues		1,458,889			1,357,147
Cost of revenues:
Cost of professional fees		788,066			520,857
Cost of software sales		226,566			232,138
Total cost of revenues		1,014,632			752,995
Gross profit		444,257			604,152
Selling, general and administrative expenses		434,954			407,048
Commissions expense		109,630			171,551
(Loss) income from operations		(100,327	)		25,553
Other income		2,585			2,435
(Loss) income before provision for income taxes		(97,742	)		27,988
Provision for income taxes		-			-
Net (loss) income	$	(97,742	)	$	27,988
Comprehensive (loss) income	$	(97,742	)	$	27,988
Net (loss) income per common share:
Basic	$	(0.01	)	$	0.00
Diluted	$	(0.01	)	$	0.00
Weighted average common shares outstanding:
Basic		11,201,760			11,201,760
Diluted		11,201,760			11,347,107

The accompanying notes are an integral part of the financial statements

4

INFORMATION ANALYSIS INCORPORATED

STATEMENTS OF OPERATIONS AND

COMPREHENSIVE LOSS

(Unaudited)

	For the nine months ended
	September 30,
	2015			2014
Revenues:
Professional fees	$	3,329,766		$	2,608,445
Software sales		915,119			952,819
Total revenues		4,244,885			3,561,264
Cost of revenues:
Cost of professional fees		2,023,609			1,498,436
Cost of software sales		856,561			687,230
Total cost of revenues		2,880,170			2,185,666
Gross profit		1,364,715			1,375,598
Selling, general and administrative expenses		1,301,322			1,278,856
Commissions expense		349,295			335,303
Loss from operations		(285,902	)		(238,561	)
Other income		7,680			7,731
Loss before provision for income taxes		(278,222	)		(230,830	)
Provision for income taxes		-			-
Net loss	$	(278,222	)	$	(230,830	)
Comprehensive loss	$	(278,222	)	$	(230,830	)
Net loss per common share:
Basic	$	(0.02	)	$	(0.02	)
Diluted	$	(0.02	)	$	(0.02	)
Weighted average common shares outstanding:
Basic		11,201,760			11,201,760
Diluted		11,201,760			11,201,760

The accompanying notes are an integral part of the financial statements

5

INFORMATION ANALYSIS INCORPORATED

STATEMENTS OF CASH FLOWS

(Unaudited)

	For the nine months ended September 30,
	2015			2014
Cash flows from operating activities:
Net loss	$	(278,222	)	$	(230,830	)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization		22,475			23,662
Stock-based compensation		7,826			12,067
Bad debt expense		107			1,458
Forgiveness of note receivable		7,863			-
Changes in operating assets and liabilities:
Accounts receivable		(18,680	)		573,885
Prepaid expenses and other current assets		454,737			249,824
Accounts payable, accrued payroll and related
liabilities, and other accrued liabilities		306,420			(530,377	)
Commissions payable		(110,481	)		(132,893	)
Deferred revenue		(457,133	)		(243,960	)
Net cash used in operating activities		(65,088	)		(277,164	)
Cash flows from investing activities:
Acquisition of furniture and equipment		(10,727	)		(20,903	)
Payments received on notes receivable		1,135			5,296
Net cash used in investing activities		(9,592	)		(15,607	)
Net decrease in cash and cash equivalents		(74,680	)		(292,771	)
Cash and cash equivalents, beginning of the period		2,450,006			2,359,527
Cash and cash equivalents, end of the period	$	2,375,326		$	2,066,756
Supplemental cash flow information
Interest paid	$	--		$	--
Income taxes paid	$	--		$	--

The accompanying notes are an integral part of the financial statements

6

INFORMATION ANALYSIS INCORPORATED

NOTES TO FINANCIAL STATEMENTS

1. Basis of Presentation

Organization and Business

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

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, 2014 included in the Annual Report on Form 10-K filed by the Company with the SEC on March 20, 2015 (the “Annual Report”).  The accompanying December 31, 2014 financial information was derived from our audited financial statements included in the Annual Report.  The results of operations for any interim period 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, 2015 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. 2014 that was filed with the SEC on March 20, 2015.

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, 2015, 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, 2015.

2. Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board ("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 ("Topic 606"), Revenue from Contracts with Customers (“ASU 2014-09”). This new revenue standard will replace most existing revenue recognition guidance in GAAP. The core principle of ASU 2014-09 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. ASU 2014-09 requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and estimates and changes in those estimates. In July 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date (“ASU 2015-14”). ASU 2015-14 defers the effective date of the new revenue standard by one year to periods beginning after December 15, 2017, and interim periods within those periods. The Company continues to assess the impact of the new revenue standard and expects to adopt the guidance for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017.

7

3. Stock-Based Compensation

At September 30, 2015, the Company had two stock-based compensation plans described in Note 9 of the Annual Report.  Total compensation expense related to these plans was $2,112 and $3,262 for the quarters ended September 30, 2015 and 2014, respectively, none of which related to options awarded to non-employees.  Total compensation expense related to these plans was $7,826 and $12,067 for the nine months ended September 30, 2015 and 2014, 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, 2015 and 2014, were estimated using the Black-Scholes option pricing model using the following assumptions:

	Three Months ended September 30,		Nine Months ended September 30,
	2015	2014	2015	2014
Risk free interest rate	n/a	1.78%	1.61 - 1.97%	1.77-1.78%
Dividend yield	n/a	0%	0%	0%
Expected term	n/a	5 years	5-10 years	5 years
Expected volatility	n/a	43.3%	41.2 - 54.2%	43.3 - 47.3%

The status of the options issued as of September 30, 2015 and changes during the nine months ended September 30, 2015 and 2014 were as follows:

	Options outstanding
	Number of shares			Weighted average exercise price per share
Balance at December 31, 2014		1,264,000		$	0.26
Options granted		20,000			0.20
Options exercised		--			--
Options expired or forfeited		(1,000	)		0.24
Balance at March 31, 2015		1,283,000		$	0.26
Options granted		--			--
Options exercised		--			--
Options expired or forfeited		(5,000	)		0.52
Balance at June 30, 2015		1,278,000		$	0.25
Options granted		--			--
Options exercised		--			--
Options expired or forfeited		(10,000	)		0.38
Balance at September 30, 2015		1,268,000		$	0.25

	Options outstanding
	Number of shares			Weighted average exercise price per share
Balance at December 31, 2013		1,187,000		$	0.26
Options granted		--			--
Options exercised		--			--
Options expired or forfeited		--			--
Balance at March 31, 2014		1,187,000		$	0.26
Options granted		1,000			0.24
Options exercised		--			--
Options expired or forfeited		(3,000	)		0.11
Balance at June 30, 2014		1,185,000		$	0.26
Options granted		20,000			0.17
Options exercised		--			--
Options expired or forfeited		--			--
Balance at September 30, 2014		1,205,000		$	0.26

8

3. Stock-Based Compensation (continued)

The following table summarizes information about options at September 30, 2015:

Options outstanding								Options exercisable
Total shares		Weighted average exercise price		Weighted average remaining contractual life in years		Aggregate intrinsic value		Total shares		Weighted average exercise price		Weighted average remaining contractual life in years		Aggregate intrinsic value
	1,268,000	$	0.25		4.92	$	11,968		1,090,500	$	0.27		4.33	$	8,776

Nonvested stock awards as of September 30, 2015 and changes during the nine months ended September 30, 2015 were as follows:

	Nonvested
	Number of shares			Weighted average grant date fair value
Balance at December 31, 2014		209,500		$	0.07
Granted		20,000			0.11
Vested		(5,000	)		0.08
Expired before vesting		(1,000	)		0.10
Balance at March 31, 2015		223,500		$	0.08
Granted		--			--
Vested		(10,000	)		0.09
Expired before vesting		--			--
Balance at June 30, 2015		213,500		$	0.07
Granted		--			--
Vested		(36,000	)		0.09
Expired before vesting		--			--
Balance at September 30, 2015		177,500		$	0.07

As of September 30, 2015 and 2014, unrecognized compensation cost associated with non-vested share-based compensation totaled $1,846 and $6,156, respectively, which are expected to be recognized over weighted average periods of six months and seven months, respectively.

4. (Loss) Income Per Share

Basic (loss) income 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 (loss) income 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 (loss) income per common share:

	Net Loss			Shares		Per Share Amount
Basic net loss per common share for the three months ended September 30, 2015:
Loss available to common stockholders	$	(97,742	)		11,201,760	$	(0.01	)
Effect of dilutive stock options		-			-		-
Diluted net loss per common share for the three months ended September 30, 2015	$	(97,742	)		11,201,760	$	(0.01	)
Basic net income per common share for the three months ended September 30, 2014:
Income available to common stockholders	$	27,988			11,201,760	$	0.00
Effect of dilutive stock options		-			145,347		-
Diluted net income per common share for the three months ended September 30, 2014	$	27,988			11,347,107	$	0.00

9

4. (Loss) Income Per Share (continued)

	Net Loss			Shares		Per Share Amount
Basic net loss per common share for the nine months ended September 30, 2015:
Loss available to common stockholders	$	(278,222	)		11,201,760	$	(0.02	)
Effect of dilutive stock options		-			-		-
Diluted net loss per common share for the nine months ended September 30, 2015	$	(278,222	)		11,201,760	$	(0.02	)
Basic net loss per common share for the nine months ended September 30, 2014:
Loss available to common stockholders	$	(230,830	)		11,201,760	$	(0.02	)
Effect of dilutive stock options		-			-		-
Diluted net loss per common share for the nine months ended September 30, 2014	$	(230,830	)		11,201,760	$	(0.02	)

5. Financial Instruments

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 accounts receivable, prepaid expenses, accounts payable, accrued expenses, and other current assets and liabilities) approximate their carrying values because of their short-term nature.

The carrying value of financial instruments including cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate their respective fair values due to the short-term nature of these items. 

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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, 2014 (“2014 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;

●   our failure to adequately integrate businesses we may acquire;

●   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 2014 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.

In the three months ended September 30, 2015, our prime contracts with U.S. government agencies represented 66.6% of our revenue, an additional 21.2% of our revenue came from U.S. government agencies through subcontracts, 11.7% of our revenue came from commercial contracts, and 0.5% of our revenue came from state and local government contracts.  The terms of these contracts and subcontracts vary from single transactions to five years.  Within this group of prime contracts with U.S. government agencies, two individual contracts represented 24.8% and 20.7% of our revenue, respectively.  One company with which we subcontract for providing services and products to U.S. government agencies represented 12.6% of our revenue when all subcontracts under the company are aggregated.  One commercial customer represented 11.2% of our revenue.  In the same period in 2014, our prime contracts with U.S. government agencies represented 51.5% of our revenue, an additional 24.1% of our revenue came from U.S. government agencies through subcontracts, 24.3% of our revenue came from commercial contracts, and less than 0.1% of our revenue came from state and local government 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, one individual contract represented 17.7%of our revenue.  Two companies with which we subcontract for providing services and products to U.S. government agencies represented 11.8% and 11.1% of our revenue, respectively, when all subcontracts under each company are aggregated.  One commercial customer represented 11.5% of our revenue.

11

In the nine months ended September 30, 2015, our prime contracts with U.S. government agencies represented 61.6% of our revenue, an additional 25.8% of our revenue came from U.S. government agencies through subcontracts, 12.3% of our revenue came from commercial contracts, and 0.3% of our revenue came from state and local government contracts.  The terms of these contracts and subcontracts vary from single transactions to five years.  Within this group of prime contracts with U.S. government agencies, two individual contracts represented 21.3% and 17.5% of our revenue, respectively.  One company with which we subcontract for providing services and products to U.S. government agencies represented 13.4% of our revenue when all subcontracts under the company are aggregated.  One commercial customer represented 11.6% of our revenue.  In the same period in 2014, our prime contracts with U.S. government agencies represented 53.5% of our revenue, an additional 26.2% of our revenue came from U.S. government agencies through subcontracts, 20.2% of our revenue came from commercial contracts, and less than 0.1% of our revenue came from state and local government 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, one individual contract represented 19.1%of our revenue.  One company with which we subcontract for providing services and products to U.S. government agencies represented 10.9% of our revenue when all subcontracts under the company are aggregated.  One commercial customer represented 13.3% of our revenue.

Three Months Ended September 30, 2015 versus Three Months Ended September 30, 2014

Revenue

Our revenues in the third quarter of 2015 were $1,458,889 compared to $1,357,147 in 2014, an increase of 7.5%.  Professional fees revenue was $1,217,234 versus $944,131, an increase of 28.9%, and software revenue was $241,655 versus $413,016, a decrease of 41.5%.  The increase in our professional fees revenue is due to some U.S. federal government prime contracts and subcontracts that either had just started or that did not exist in the third quarter of 2014.  The decrease in our software revenue is due to the expiration of some maintenance contracts and to a decrease in referral fees received for facilitating third-party software and maintenance sales.  Software sales and associated margins are subject to considerable fluctuation from period to period, based on the product mix sold.

Gross Profit

Gross profit was $444,257, or 30.5% of revenue in the third quarter of 2015 versus $604,152, or 44.5% of revenue in the third quarter of 2014.  For the quarter ended September 30, 2015, $429,168 of the gross profit was attributable to professional fees at a gross profit percentage of 35.3%, and $15,089 of the gross profit was attributable to software sales at a gross profit percentage of 6.2%.  In the same quarter in 2014, we reported gross profit of $423,274, or 44.8% of sales for professional fees and $180,878, or 43.8% of sales for software sales.  Gross profit as a percentage of professional fees decreased due to the use of high-cost subcontractor labor on one of our contracts that did not exist in the same period in 2014.  Gross profit on software sales decreased in terms of dollars and as a percentage of revenue due to a larger portion of the 2014 revenue having come from referral fees for facilitating third-party sales, for which there were no direct costs incurred by us.  If we exclude these referral fees, the 2015 and 2014 gross profits would be $7,541 and $6,449, respectively and the gross profit percentages would be 3.2% and 2.7%, respectively.  Software product sales and sales referral fees and associated margins are subject to considerable fluctuation from period to period, based on the product mix sold.

Selling, General and Administrative Expenses

Selling, general and administrative expenses, exclusive of sales commissions, were $434,954, or 29.8% of revenues, in the third quarter of 2015 versus $407,048, or 30.0% of revenues, in the third quarter of 2014.  These expenses increased $27,906, or 6.9%, due to additional sales staff.

Commissions expense was $109,630, or 7.5% of revenues, in the third quarter of 2015 versus $171,551, or 12.6% of revenues, in the third quarter of 2014.  This decrease of $61,921, or 36.1%, is due to the decreases in gross profits on commissionable professional services contracts, which drive commission earned at varying rates for each salesperson.

Net (Loss) Income

Net (loss) for the three months ended September 30, 2015, was $97,742, or 6.7% of revenue, versus net income of $27,988, or 2.1% of revenue, for the same period in 2014.

12

Nine Months Ended September 30, 2015 versus Nine Months Ended September 30, 2014

Revenue

Our revenues in the nine months ended September 30, 2015 were $4,244,885 compared to $3,561,264 in the first nine months of 2014, an increase of $683,621, or 19.2%.  Professional services revenue was $3,329,766 versus $2,608,445, an increase of 27.7%, and software revenue was $915,119 versus $952,819, a decrease of 4.0%.  The increase in our professional fees revenue is due to some U.S. federal government prime contracts and subcontracts that did not exist in the third quarter of 2014.  The decrease in our software revenue is due to the expiration of some maintenance contracts and to a decrease in referral fees received for facilitating third-party software and maintenance sales.  These larger decreases were offset somewhat by the addition of some new software product and maintenance contracts.  Software sales and associated margins are subject to considerable fluctuation from period to period, based on the product mix sold.

Gross Profit

Gross profit was $1,364,715, or 32.1% of revenue in the first nine months of 2015 versus $1,375,598, or 38.6% of revenue, in the first nine months of 2014.  For the nine months ended September 30, 2015, $1,306,157 of the gross profit was attributable to professional services at a gross profit percentage of 39.2%, and $58,558 of the gross profit was attributable to software sales at a gross profit percentage of 6.4%.  In the same period in 2014, we reported gross profits of $1,110,009, or 42.6% of sales for professional services and $265,589, or 27.9% of revenue for software sales.  Gross profit as a percentage of professional fees decreased due to the use of high-cost subcontractor labor on one of our contracts that did not exist in the same period in 2014.  Gross profit on software sales decreased in terms of dollars and as a percentage of revenue due to a larger portion of the 2014 revenue having come from referral fees for facilitating third-party sales, for which there were no direct costs incurred by us.  If we exclude these referral fees, the 2015 and 2014 gross profits would be $25,616 and $18,922, respectively, and the gross profit percentages would be 2.9% and 2.7%, respectively.  Software product sales and sales referral fees and associated margins are subject to considerable fluctuation from period to period, based on the product mix sold.

Selling, General and Administrative Expenses

Selling, general and administrative expenses, exclusive of sales commissions, were $1,301,322, or 30.7% of revenues, in the first nine months of 2015 versus $1,278,856, or 35.9% of revenues, in the first nine months of 2014.  These expenses increased $22,466, or 1.8%, due largely to increases in overhead labor costs due to periods of downtime for salaried personnel and to additional sales personnel, which were offset considerably by decreases in recruiting fees and the costs of bids and proposals.

Commissions expense was $349,295, or 8.2% of revenues, in the third quarter of 2015 versus $335,303, or 9.4% of revenues, in the third quarter of 2014.  This increase of $13,992, or 4.2%, is due to the increases in revenue and gross profits on commissionable contracts, which drive commission earned at varying rates for each salesperson.

Net Loss

Net loss for the nine months ended September 30, 2015, was $278,222, or 6.6% of revenue, versus $230,830, or 6.5% of revenue, for the same period in 2014.

Liquidity and Capital Resources

Our cash and cash equivalents balance, when combined with our cash flow from operations during the first nine months of 2015, were sufficient to provide financing for our operations.  Our net cash used in the combination of our operating, investing, and financing activities in the first nine months of 2015 was $74,680.  This net cash used, when subtracted from a beginning balance of $2,450,006 yielded cash and cash equivalents of $2,375,326 as of September 30, 2015.  Prepaid expenses and other current assets decreased $454,737 due to the allocation over time of prepaid expenses associated with the maintenance contracts on software sales.  Deferred revenue decreased $457,133 due to the recognition of revenue over time from maintenance contracts on software sales.  Accounts payable and accrued expenses increased $306,420 due to late third quarter product sales and increased use of subcontractor labor for one of our contracts, and commissions payable decreased $110,481.  We had no non-current liabilities as of September 30, 2015.

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 became effective December 20, 2005, and expires on May 31, 2016.  As of September 30, 2015, no amounts were outstanding under this line of credit.

13

Given our current cash position and operating plan, we anticipate that we will be able to meet our cash requirements for the next twelve months.

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, 2015 (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, 2015 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.

14

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, 2014 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, 2014.

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

Exhibit No.	Description
31.1	Certification of Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934
31.2	Certification of Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

15

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: November 13, 2015	By:	/s/ Sandor Rosenberg
		Sandor Rosenberg, Chairman of the Board, Chief Executive Officer, and President
Date: November 13, 2015	By:	/s/ Richard S. DeRose
		Richard S. DeRose, Executive Vice President, Treasurer, and Chief Financial Officer

16

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Sandor Rosenberg, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Information Analysis Incorporated;

2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)   Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)   all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 13, 2015	By:	/s/ Sandor Rosenberg
		Sandor Rosenberg, Chairman of the Board,
		Chief Executive Officer and President

A signed original of this written statement required by Section 302 has been provided to Information Analysis Incorporated and will be retained by Information Analysis Incorporated and furnished to the Securities and Exchange Commission or its staff upon request

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Richard S. DeRose, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Information Analysis Incorporated;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)   Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)   all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 13, 2015	By:	/s/ Richard S. DeRose
		Richard S. DeRose, Executive Vice
		President, Treasurer, Chief Financial Officer

A signed original of this written statement required by Section 302 has been provided to Information Analysis Incorporated and will be retained by Information Analysis Incorporated and furnished to the Securities and Exchange Commission or its staff upon request

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), I, Sandor Rosenberg, Chief Executive Officer of Information Analysis Incorporated, a Virginia corporation (the “Company”), do hereby certify, to the best of my knowledge, that:

1 the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2015, as filed with the Securities and Exchange Commission on the date hereof, (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2 the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company for the periods presented therein.

Date: November 13, 2015	By:	/s/ Sandor Rosenberg
		Sandor Rosenberg, Chairman of the Board,
		Chief Executive Officer and President

A signed original of this written statement required by Section 906 has been provided to Information Analysis Incorporated and will be retained by Information Analysis Incorporated and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), I, Richard S. DeRose, Chief Financial Officer of Information Analysis Incorporated, a Virginia corporation (the “Company”), do hereby certify, to the best of my knowledge, that:

1 the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2015, as filed with the Securities and Exchange Commission on the date hereof, (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2 the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company for the periods presented therein.

Date: November 13, 2015	By:	/s/ Richard S. DeRose
		Richard S. DeRose, Executive Vice
		President, Treasurer, Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to Information Analysis Incorporated and will be retained by Information Analysis Incorporated and furnished to the Securities and Exchange Commission or its staff upon request.

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4. Loss Per Share

9 Months Ended

Sep. 30, 2015

Net (loss) income per common share:

4. Loss Per Share

Basic (loss) income 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 (loss) income 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 (loss) income per common share:

	Net Loss			Shares		Per Share Amount
Basic net loss per common share for the three months ended September 30, 2015:
Loss available to common stockholders	$	(97,742	)		11,201,760	$	(0.01	)
Effect of dilutive stock options		-			-		-
Diluted net loss per common share for the three months ended September 30, 2015	$	(97,742	)		11,201,760	$	(0.01	)
Basic net income per common share for the three months ended September 30, 2014:
Income available to common stockholders	$	27,988			11,201,760	$	0.00
Effect of dilutive stock options		-			145,347		-
Diluted net income per common share for the three months ended September 30, 2014	$	27,988			11,347,107	$	0.00

	Net Loss			Shares		Per Share Amount
Basic net loss per common share for the nine months ended September 30, 2015:
Loss available to common stockholders	$	(278,222	)		11,201,760	$	(0.02	)
Effect of dilutive stock options		-			-		-
Diluted net loss per common share for the nine months ended September 30, 2015	$	(278,222	)		11,201,760	$	(0.02	)
Basic net loss per common share for the nine months ended September 30, 2014:
Loss available to common stockholders	$	(230,830	)		11,201,760	$	(0.02	)
Effect of dilutive stock options		-			-		-
Diluted net loss per common share for the nine months ended September 30, 2014	$	(230,830	)		11,201,760	$	(0.02	)

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3. Stock-Based Compensation

9 Months Ended

Sep. 30, 2015

Stock-based Compensation

3. Stock-Based Compensation

At September 30, 2015, the Company had two stock-based compensation plans described in Note 9 of the Annual Report.  Total compensation expense related to these plans was $2,112 and $3,262 for the quarters ended September 30, 2015 and 2014, respectively, none of which related to options awarded to non-employees.  Total compensation expense related to these plans was $7,826 and $12,067 for the nine months ended September 30, 2015 and 2014, 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, 2015 and 2014, were estimated using the Black-Scholes option pricing model using the following assumptions:

	Three Months ended September 30,		Nine Months ended September 30,
	2015	2014	2015	2014
Risk free interest rate	n/a	1.78%	1.61 - 1.97%	1.77-1.78%
Dividend yield	n/a	0%	0%	0%
Expected term	n/a	5 years	5-10 years	5 years
Expected volatility	n/a	43.3%	41.2 - 54.2%	43.3 - 47.3%

The status of the options issued as of September 30, 2015 and changes during the nine months ended September 30, 2015 and 2014 were as follows:

	Options outstanding
	Number of shares			Weighted average exercise price per share
Balance at December 31, 2014		1,264,000		$	0.26
Options granted		20,000			0.20
Options exercised		--			--
Options expired or forfeited		(1,000	)		0.24
Balance at March 31, 2015		1,283,000		$	0.26
Options granted		--			--
Options exercised		--			--
Options expired or forfeited		(5,000	)		0.52
Balance at June 30, 2015		1,278,000		$	0.25
Options granted		--			--
Options exercised		--			--
Options expired or forfeited		(10,000	)		0.38
Balance at September 30, 2015		1,268,000		$	0.25

	Options outstanding
	Number of shares			Weighted average exercise price per share
Balance at December 31, 2013		1,187,000		$	0.26
Options granted		--			--
Options exercised		--			--
Options expired or forfeited		--			--
Balance at March 31, 2014		1,187,000		$	0.26
Options granted		1,000			0.24
Options exercised		--			--
Options expired or forfeited		(3,000	)		0.11
Balance at June 30, 2014		1,185,000		$	0.26
Options granted		20,000			0.17
Options exercised		--			--
Options expired or forfeited		--			--
Balance at September 30, 2014		1,205,000		$	0.26

The following table summarizes information about options at September 30, 2015:

Options outstanding								Options exercisable
Total shares		Weighted average exercise price		Weighted average remaining contractual life in years		Aggregate intrinsic value		Total shares		Weighted average exercise price		Weighted average remaining contractual life in years		Aggregate intrinsic value
	1,268,000	$	0.25		4.92	$	11,968		1,090,500	$	0.27		4.33	$	8,776

Nonvested stock awards as of September 30, 2015 and changes during the nine months ended September 30, 2015 were as follows:

	Nonvested
	Number of shares			Weighted average grant date fair value
Balance at December 31, 2014		209,500		$	0.07
Granted		20,000			0.11
Vested		(5,000	)		0.08
Expired before vesting		(1,000	)		0.10
Balance at March 31, 2015		223,500		$	0.08
Granted		--			--
Vested		(10,000	)		0.09
Expired before vesting		--			--
Balance at June 30, 2015		213,500		$	0.07
Granted		--			--
Vested		(36,000	)		0.09
Expired before vesting		--			--
Balance at September 30, 2015		177,500		$	0.07

As of September 30, 2015 and 2014, unrecognized compensation cost associated with non-vested share-based compensation totaled $1,846 and $6,156, respectively, which are expected to be recognized over weighted average periods of six months and seven months, respectively.

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BALANCE SHEETS (Unaudited) - USD ($)	Sep. 30, 2015	Dec. 31, 2014
Current assets:
Cash and cash equivalents	$ 2,375,326	$ 2,450,006
Accounts receivable, net	989,194	970,621
Prepaid expenses and other current assets	305,245	759,982
Note receivable, current	0	3,896
Total current assets	3,669,765	4,184,505
Property and equipment, net	41,927	53,675
Note receivable, long term	0	5,102
Other assets	6,281	6,281
Total assets	3,717,973	4,249,563
Current liabilities:
Accounts payable	264,552	32,327
Commissions payable	906,566	1,017,047
Deferred revenue	280,861	737,994
Accrued payroll and related liabilities	251,995	255,703
Other accrued liabilities	194,000	116,097
Total liabilities	1,897,974	2,159,168
Stockholders' equity:
Common stock, par value $0.01, 30,000,000 shares authorized; 12,844,376 shares issued, 11,201,760 shares outstanding as of September 30, 2015 and December 31, 2014	128,443	128,443
Additional paid-in capital	14,621,713	14,613,887
Accumulated deficit	(11,999,946)	(11,721,724)
Treasury stock, 1,642,616 shares at cost	(930,211)	(930,211)
Total stockholders' equity	1,819,999	2,090,395
Total liabilities and stockholders' equity	$ 3,717,973	$ 4,249,563

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1. Basis of Presentation

9 Months Ended

Sep. 30, 2015

Basis Of Presentation

1. Basis of Presentation

Organization and Business

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

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, 2014 included in the Annual Report on Form 10-K filed by the Company with the SEC on March 20, 2015 (the “Annual Report”).  The accompanying December 31, 2014 financial information was derived from our audited financial statements included in the Annual Report.  The results of operations for any interim period 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, 2015 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. 2014 that was filed with the SEC on March 20, 2015.

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, 2015, 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, 2015.

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2. Recent Accounting Pronouncements

9 Months Ended

Sep. 30, 2015

Recent Accounting Pronouncements

2. Summary of Significant Accounting Policies

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board ("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 ("Topic 606"), Revenue from Contracts with Customers (“ASU 2014-09”). This new revenue standard will replace most existing revenue recognition guidance in GAAP. The core principle of ASU 2014-09 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. ASU 2014-09 requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and estimates and changes in those estimates. In July 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date (“ASU 2015-14”). ASU 2015-14 defers the effective date of the new revenue standard by one year to periods beginning after December 15, 2017, and interim periods within those periods. The Company continues to assess the impact of the new revenue standard and expects to adopt the guidance for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017.

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BALANCE SHEETS (Parenthetical) - $ / shares	Sep. 30, 2015	Dec. 31, 2014
Stockholders Equity
Common Stock shares par value	$ 0.01	$ 0.01
Common Stock shares Authorized	30,000,000	30,000,000
Common Stock shares Issued	12,844,376	12,844,376
Common Stock shares Outstanding	11,201,760	11,201,760
Treasury Stock	1,642,616	1,642,616

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3. Stock-Based Compensation (Details 3) - $ / shares	3 Months Ended
	Sep. 30, 2015	Jun. 30, 2015	Mar. 31, 2015
Number of Shares
Nonvested Stock Awards Beginning Balance	213,500	223,500	209,500
Granted	0	0	20,000
Vested	36,000	10,000	5,000
Expired before Vesting	0	0	1,000
Nonvested Stock Awards Ending Balance	177,500	213,500	223,500
Weighted Average Grant Date Fair Value
Nonvested Stock Awards Beginning Balance	$ 0.07	$ 0.08	$ 0.07
Granted	0	0	0.11
Vested	0.09	0.09	0.08
Expired before Vesting	0	0	0.10
Nonvested Stock Awards Ending Balance	$ 0.07	$ 0.07	$ 0.08

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Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2015	Nov. 10, 2015
Document And Entity Information
Entity Registrant Name	INFORMATION ANALYSIS INC
Entity Central Index Key	0000803578
Document Type	10-Q
Document Period End Date	Sep. 30, 2015
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		11,201,760
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2015

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3. Stock-Based Compensation (Details Narrative) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Stock-based Compensation Details Narrative
Total compensation expense for stock options	$ 2,112	$ 3,262	$ 7,826	$ 12,067
Unrecognized compensation cost associated with non-vested share-based compensation	$ 1,846	$ 6,156	$ 1,846	$ 6,156

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STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Revenues
Professional fees	$ 1,217,234	$ 944,131	$ 3,329,766	$ 2,608,445
Software sales	241,655	413,016	915,119	952,819
Total revenues	1,458,889	1,357,147	4,244,885	3,561,264
Cost of revenues
Cost of professional fees	788,066	520,857	2,023,609	1,498,436
Cost of software sales	226,566	232,138	856,561	687,230
Total cost of revenues	1,014,632	752,995	2,880,170	2,185,666
Gross profit	444,257	604,152	1,364,715	1,375,598
Selling, general and administrative expenses	434,954	407,048	1,301,322	1,278,856
Commissions expense	109,630	171,551	349,295	335,303
(Loss) income from operations	(100,327)	25,553	(285,902)	(238,561)
Other income	2,585	2,435	7,680	7,731
(Loss) income before provision for income taxes	(97,742)	27,988	(278,222)	(230,830)
Provision for income taxes	0	0	0	0
Net (loss) income	(97,742)	27,988	(278,222)	(230,830)
Comprehensive (loss) income	$ (97,742)	$ 27,988	$ (278,222)	$ (230,830)
Net (loss) income per common share:
Basic:	$ (0.01)	$ 0	$ (0.02)	$ (0.02)
Diluted:	$ (0.01)	$ 0	$ (0.02)	$ (0.02)
Weighted average common shares outstanding
Basic	11,201,760	11,201,760	11,201,760	11,201,760
Diluted	11,201,760	11,347,107	11,201,760	11,201,760

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3. Stock Based Compensation (Tables)

9 Months Ended

Sep. 30, 2015

Notes to Financial Statements

Black-Scholes option pricing model assumptions

	Three Months ended September 30,		Nine Months ended September 30,
	2015	2014	2015	2014
Risk free interest rate	n/a	1.78%	1.61 - 1.97%	1.77-1.78%
Dividend yield	n/a	0%	0%	0%
Expected term	n/a	5 years	5-10 years	5 years
Expected volatility	n/a	43.3%	41.2 - 54.2%	43.3 - 47.3%

Options outstanding

	Options outstanding
	Number of shares			Weighted average exercise price per share
Balance at December 31, 2014		1,264,000		$	0.26
Options granted		20,000			0.20
Options exercised		--			--
Options expired or forfeited		(1,000	)		0.24
Balance at March 31, 2015		1,283,000		$	0.26
Options granted		--			--
Options exercised		--			--
Options expired or forfeited		(5,000	)		0.52
Balance at June 30, 2015		1,278,000		$	0.25
Options granted		--			--
Options exercised		--			--
Options expired or forfeited		(10,000	)		0.38
Balance at September 30, 2015		1,268,000		$	0.25

	Options outstanding
	Number of shares			Weighted average exercise price per share
Balance at December 31, 2013		1,187,000		$	0.26
Options granted		--			--
Options exercised		--			--
Options expired or forfeited		--			--
Balance at March 31, 2014		1,187,000		$	0.26
Options granted		1,000			0.24
Options exercised		--			--
Options expired or forfeited		(3,000	)		0.11
Balance at June 30, 2014		1,185,000		$	0.26
Options granted		20,000			0.17
Options exercised		--			--
Options expired or forfeited		--			--
Balance at September 30, 2014		1,205,000		$	0.26

Options Summary

Options outstanding								Options exercisable
Total shares		Weighted average exercise price		Weighted average remaining contractual life in years		Aggregate intrinsic value		Total shares		Weighted average exercise price		Weighted average remaining contractual life in years		Aggregate intrinsic value
	1,268,000	$	0.25		4.92	$	11,968		1,090,500	$	0.27		4.33	$	8,776

Nonvested Stock awards

	Nonvested
	Number of shares			Weighted average grant date fair value
Balance at December 31, 2014		209,500		$	0.07
Granted		20,000			0.11
Vested		(5,000	)		0.08
Expired before vesting		(1,000	)		0.10
Balance at March 31, 2015		223,500		$	0.08
Granted		--			--
Vested		(10,000	)		0.09
Expired before vesting		--			--
Balance at June 30, 2015		213,500		$	0.07
Granted		--			--
Vested		(36,000	)		0.09
Expired before vesting		--			--
Balance at September 30, 2015		177,500		$	0.07

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1. Basis of Presentation (Policies)

9 Months Ended

Sep. 30, 2015

Notes to Financial Statements

Organization and Business

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

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, 2014 included in the Annual Report on Form 10-K filed by the Company with the SEC on March 20, 2015 (the “Annual Report”).  The accompanying December 31, 2014 financial information was derived from our audited financial statements included in the Annual Report.  The results of operations for any interim period 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, 2015 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. 2014 that was filed with the SEC on March 20, 2015.

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, 2015, 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, 2015.

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4. (Loss) Income Per Share (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Loss Income Per Share Details
Basic net loss	$ (97,742)	$ 27,988	$ (278,222)	$ (230,830)
Basic shares	11,201,760	11,201,760	11,201,760	11,201,760
Basic net loss per common share	$ (0.01)	$ 0	$ (0.02)	$ (0.02)
Effect of dilutive stock options		145,347
Diluted shares	11,201,760	11,347,107	11,201,760	11,201,760
Diluted earnings per share	$ (0.01)	$ 0	$ (0.02)	$ (0.02)

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3. Stock-Based Compensation (Details 1) - $ / shares	3 Months Ended
	Sep. 30, 2015	Jun. 30, 2015	Mar. 31, 2015	Sep. 30, 2014	Jun. 30, 2014	Mar. 31, 2014
Ending Balance	1,268,000
Weighted average price per share, ending balance	$ 0.25
Options
Beginning Balance	1,278,000	1,283,000	1,264,000	1,185,000	1,187,000	1,187,000
Options granted	0	0	20,000	20,000	1,000	0
Options exercised	0	0	0	0	0	0
Options expired or forfeited	10,000	5,000	1,000	0	3,000	0
Ending Balance	1,268,000	1,278,000	1,283,000	1,205,000	1,185,000	1,187,000
Weighted average price per share, beginning balance	$ 0.25	$ 0.26	$ 0.26	$ 0.26	$ 0.26	$ 0.26
Weighted average price per share, Options granted	0	0	0.20	0.17	0.24	0
Weighted average price per share, Options exercised	0	0	0	0	0	0
Weighted average exercise price per share, Options expired or forfeited	0.38	0.52	0.24	0	0.11	0
Weighted average price per share, ending balance	$ 0.25	$ 0.25	$ 0.26	$ 0.26	$ 0.26	$ 0.26

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4. (Loss) Income Per Share (Tables)

9 Months Ended

Sep. 30, 2015

Notes to Financial Statements

Reconciliation of Loss per Share

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

	Net Loss			Shares		Per Share Amount
Basic net loss per common share for the three months ended September 30, 2015:
Loss available to common stockholders	$	(97,742	)		11,201,760	$	(0.01	)
Effect of dilutive stock options		-			-		-
Diluted net loss per common share for the three months ended September 30, 2015	$	(97,742	)		11,201,760	$	(0.01	)
Basic net income per common share for the three months ended September 30, 2014:
Income available to common stockholders	$	27,988			11,201,760	$	0.00
Effect of dilutive stock options		-			145,347		-
Diluted net income per common share for the three months ended September 30, 2014	$	27,988			11,347,107	$	0.00

	Net Loss			Shares		Per Share Amount
Basic net loss per common share for the nine months ended September 30, 2015:
Loss available to common stockholders	$	(278,222	)		11,201,760	$	(0.02	)
Effect of dilutive stock options		-			-		-
Diluted net loss per common share for the nine months ended September 30, 2015	$	(278,222	)		11,201,760	$	(0.02	)
Basic net loss per common share for the nine months ended September 30, 2014:
Loss available to common stockholders	$	(230,830	)		11,201,760	$	(0.02	)
Effect of dilutive stock options		-			-		-
Diluted net loss per common share for the nine months ended September 30, 2014	$	(230,830	)		11,201,760	$	(0.02	)

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3. Stock-Based Compensation (Details)	3 Months Ended	9 Months Ended
	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Stock-based Compensation Details
Risk free interest rate, minimum	1.78%	1.61%	1.77%
Risk free interest rate, maximum	1.78%	1.97%	1.78%
Dividend yield	0.00%	0.00%	0.00%
Expected term, minimum	5 years	5 years	5 years
Expected term, maximum	5 years	10 years	5 years
Expected volatility, minimum	43.30%	41.20%	43.30%
Expected volatility, maximum	43.30%	54.20%	47.30%

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3. Stock-Based Compensation (Details 2)	9 Months Ended
	Sep. 30, 2015 USD ($) $ / shares shares
Stock-based Compensation Details 2
Options outstanding | shares	1,268,000
Weighted Average Price per share	$ 0.25
Weighted average remaing contractual life in years	4 years 11 months 1 day
Aggregate intrinsic value | $	$ 11,968
Options exercisable | shares	1,090,500
Options exercisable weighted average exercise price	$ 0.27
Options exercisable weighted average remaining contractual life	4 years 3 months 29 days
Options exercisable aggregate intrinsic value | $	$ 8,776

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STATEMENTS OF CASH FLOWS (Unaudited) - USD ($)	9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014
Cash flows from operating activities:
Net loss	$ (278,222)	$ (230,830)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	22,475	23,662
Stock-based compensation	7,826	12,067
Bad debt expense	107	1,458
Forgiveness of note receivable	7,863	0
Changes in operating assets and liabilities
Accounts receivable	(18,680)	573,885
Prepaid expenses and other current assets	454,737	249,824
Accounts payable, accrued payroll and related liabilities, and other accrued liabilities	306,420	(530,377)
Commissions payable	(110,481)	(132,893)
Deferred revenue	(457,133)	(243,960)
Net cash used in operating activities	(65,088)	(277,164)
Cash flows from investing activities:
Acquisition of furniture and equipment	(10,727)	(20,903)
Payments received on note receivable	1,135	5,296
Net cash used in investing activities	(9,592)	(15,607)
Net decrease in cash and cash equivalents	(74,680)	(292,771)
Cash and cash equivalents, beginning of the period	2,450,006	2,359,527
Cash and cash equivalents, end of the period	2,375,326	2,066,756
Supplemental cash flow information
Interest paid	0	0
Income taxes paid	$ 0	$ 0

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5. Financial Instruments

9 Months Ended

Sep. 30, 2015

Financial Instruments

Financial Instruments

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 accounts receivable, prepaid expenses, accounts payable, accrued expenses, and other current assets and liabilities) approximate their carrying values because of their short-term nature.

The carrying value of financial instruments including cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate their respective fair values due to the short-term nature of these items.